Federal Realty Investment Trust Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 17 speakers on the call.

Operator

Good day, and welcome to the Federal Realty Investment Trust First Quarter 2023 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Leah Brady.

Operator

Please go ahead.

Speaker 1

Good afternoon. Thank you for joining us today for Federal Realty's Q1 2023 earnings conference call. Joining me on the call are Don Wood, Dan Gee, Jeff Perkis, Wendy Seher, John Sweetnam and Melissa Solis. They will be available to take your questions at the conclusion of our prepared remarks. A reminder that certain matters discussed on this call may be deemed to be forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Speaker 1

Forward looking statements include any annualized or Although Federal Realty believes these expectations reflected in such forward looking statements are based on reasonable assumptions, Federal Realty's future operations and its Actual performance may differ materially from the information in our forward looking statements and we can give no assurance that these expectations can be attained. The earnings release and supplemental reporting package that we issued this afternoon, our annual report filed on Form 10 ks and our other financial And with that, I will turn the call over to Don Wood to begin our discussion of our Q1 results. Don?

Speaker 2

Thanks, Leah, and good afternoon, everybody. Strong start to 2023 here with $1.59 1st quarter FFO per share result, ahead of both consensus and internal expectations And 6% growth over last year's Q1 also happens to be the best Q1 result we've ever posted. Here's the best part. We signed 101 comparable leases for more than 500,000 square feet at $34.72 a foot, 11% higher than the cash basis rent the previous tenant was paying in the final year of their lease, 24% on a straight line basis. Demand was exceptional with momentum encouragingly strong at the end of the quarter, late March.

Speaker 2

As you know, I've been expecting the inevitable tail off of leasing activity for months months now as the portfolio leases up. These activity levels exceed historical levels by 20% to 30%. We just plainly haven't seen that tail off yet. The retail demand for the product that we offer is in lockstep with what today's consumers and retailers demand in these affluent first ranked suburbs of major metropolitan areas. 1 of the larger drivers of that leasing performance this quarter was the signing of 4 grocery deals, Three new deals and one renewal.

Speaker 2

The renewal was a Dedham Plaza in the Boston suburb with Star Market and Albertsons brand. The new deals included Giant Food replacing Shoppers Food Warehouse, parent Plaza in suburb Baltimore, A growth that I'm not allowed to announce yet replacing Michaels at Fresh Meadows in Queens and Aldi replacing Barnes and Noble on Long Island. Together, these four deals turned $3,300,000 in base rent or $17.81 a foot to $4,400,000 in base rent or $23.40 per foot. Strong rents and rent growth in proven productive centers in Northeast densely populated suburbs. The timing of them all getting done in the Q1 bodes well for the future.

Speaker 2

The Bed Bath bankruptcy filing news, while not exactly welcome, was inevitable and frankly better that the band aid is being ripped off so that we can get on with creating incremental value in our shopping centers. There are many more productive retailers than this one that should be serving our customers. Deals are in the works for all of our Bed Bath boxes And replacement rent should start to ramp up in late 2024. With average Bed Bath base rent at $15 a foot, Rest assured that Federal's portfolio will be more valuable not less once these locations are retentended. Dan will provide more detail on what we've assumed in our numbers.

Speaker 2

The natural lease expiration of a large format Bed Bath and Beyond store at Wynwood Shopping Center in Suburban Philly Closed in January as expected and was the primary cause of a modest 20 basis point drop in occupancy in the quarter. That closure Along with the Tuesday morning in suburban Boston that also closed when the lease expired in January, barely overshadowed the many store openings elsewhere throughout the portfolio. Meanwhile, small shop occupancy gains continued unabated during the quarter and increased 50 basis points. That's a total increase in small shop occupancy of 2 70 basis points since Q1 2022. The quality of our shop tenants And the discerning way that we choose them at our properties is where we create a ton of value.

Speaker 2

All small shop tenancy is not created equal. As much as I love the grocery deals I mentioned earlier, it's the retail side of the big 4 mixed use communities that I find most impressive. Taken together, Assembly Row, Bethesda Row, Pike and Rose and Santana Row are a real company differentiator from Federal and more in demand than ever before. With retail leased occupancy at 98% and tenant sales well above 2019 levels, These properties are homing with estimated foot traffic in excess of 28,000,000 shoppers in the trailing 12 months. That's a big number and comes from the database of Placer AI.

Speaker 2

Roughly 2 thirds of tenants report sales at the Big 4, so the numbers are representative. Overall sales per foot totaled $700 with total food and beverage sales per foot in excess of $1,000 In our estimation, this is the product and the markets that consumers in a post COVID world want the most. I know you've heard me say it many, many times before, but it bears repeating. Demographics matter, Especially in times of economic pressure and especially now that the $5,500,000,000,000 of government stimulus that propped up the economy during the pandemic years is waning. Past cycles have convinced us that families simply have to have money to spend For retail real estate cash flow to grow.

Speaker 2

68,000 households with average annual household income $150,000 sit within 3 miles of Federal Realty Centers. That's $10,200,000,000 of family income Generated within a 3 mile radius and more than half of those people have a 4 year college degree or better. I know of no other significantly sized retail portfolio that can say that. It was a light quarter on the transaction front where we sold a small grocery anchored shopping center in the quarter for $13,000,000 Not coincidentally, that center located in very suburban New Britain, Pennsylvania has one of the lightest 3 mile population demos in our portfolio with an obvious candidate for sale. More interesting was our acquisition of the fee interest And the anchor tenant leases at Huntington Square Shopping Center on Long Island from Surrogate Realty Trust for $35,500,000 Back in 2010, we had purchased a leasehold interest in the shop tenants with the hopes of someday finding a way to consolidate the anchors and the fee.

Speaker 2

With this Q1 transaction, we now fully control this 18 acre parcel in affluent East Northport Long Island. As I mentioned earlier, we just replaced Barnes and Noble with an Aldi grocery store here creating another grocery anchored property in the portfolio. With a $5,000,000 plus annual income stream on our $56,000,000 all in investment, we've created a much more valuable property with an unlevered IRR in the low teens and arguably $20,000,000 plus of immediate incremental value. You might have also noticed that after the quarter's end, we refinanced our $275,000,000 in bonds coming due June 1st With a new 5 year $350,000,000 green bond at 5.375 percent, the offering was significantly over The demand helped by our lead gold or better investments. Next up will be the financing or the refinancing of our $600,000,000 bonds coming due next year.

Speaker 2

We would expect to be opportunistically in the market at 400 points in the second half of this year. For an additional source of growth in 2024 and beyond, You only need to look at the $600,000,000 plus of construction and process on the quarter end balance sheet to identify a large source Future income on capital already invested, much of it least not yet reflected in the results. What was reflected in the quarterly results With a $10,000,000 property operating income contribution from the latest completed phases of some of our mixed use operating properties, namely Assembly Row, Phase 3, 909 Rose at Python Rose and a full quarter of stabilized CocoWalk, which contributed. And finally, our floor by floor build out at Santana West seems to be attracting more interest in the marketplace As inquiries and property tours have

Speaker 3

seen renewed life in the

Speaker 2

last 30 to 60 days. Tech sector in Silicon Valley is far from settled, But the increased activity is certainly welcome. We continue to see our fully amenitized office space on our mixed use communities to be the product of choice in their respective markets. Okay. That's about it for my prepared remarks this morning and I'll turn it over to Dan before opening it up to your questions.

Speaker 3

Thank you, Don, and hello, everyone. Our $1.59 per share of reported FFO was a 1st quarter record for federal And solidly above our expectations in last year's $1.50 result, representing a 6% annual increase. That our performance again was broad based as all facets of our business continue to contribute. Specific drivers which deserve mention, Overage percentage rent continues to outpace expectations as tenant sales demonstrate strength and resiliency. Marketing revenues also saw gains above forecast as customer traffic at our large mixed use assets continues to drive higher.

Speaker 3

Small shop occupancy again showed gains and we saw lower expenses both at the property and corporate level. This was offset modestly by higher collectibility impact for bad debt expense than was forecasted. Our GAAP based comparable POI growth metric was 3.6% coming in the upper end of the range of our 2% to 4% Initial guidance. On a cash basis, comparable excluding prior period rent term fees is 5.2%. Cash basis comparable minimum rent grew by 4%.

Speaker 3

Term fees in the comparable pool this quarter Essentially flat to Q1 2022 at $1,400,000 in each period.

Speaker 2

Prior period rent this quarter was $1,300,000

Speaker 3

versus $2,400,000 in the Q1 last year. Please note that we have added all of these figures to Pages 1011 of our 8 ks supplemental disclosure. You're welcome, Steve. Year over year occupancy results were also solid With our overall occupied metric growing 140 basis points year over year from 91.2 percent to 90 Sequentially, we took a small but anticipated step backward given 1Q seasonality and 2 known anchor departures in January at lease expiration, which were reflected in our guidance. Our signed non occupied spread And the existing portfolio stands at 160 basis points as we continue to show progress in getting tenants open and rent paying.

Speaker 3

The spread represents roughly $18,000,000 of incremental total rent. Our sign not occupied in our non comparable pool stands at $18,000,000 as well of total rent, bringing total signs not occupied to 36,000,000 This effectively brings our S and O percentage to a total of 3%. These executed leases will continue to drive bottom line results Over the next 2 years with roughly 65% coming online over the remainder of 2023 and the balance primarily in 2024. When you include new lease deals in our pipeline for currently unoccupied space, this increases the S and O figure even higher. Rollover for the quarter was 11% on a cash basis and 24% on a straight line basis.

Speaker 3

The 2nd consecutive quarter to have cash number in double digits and the straight line number up into the low to mid-20s. I highlight the straight line number as it reflects sector leading contractual annual Rent increases embedded in our leases. Both anchor and small shop blended at roughly 2.25% across the portfolio. Year to date, small shop rent bumps have averaged about 3%. Now to the balance sheet.

Speaker 3

We ended the Q1 with $1,300,000,000 of total available liquidity at quarter end comprised of $1,200,000,000 available under our revolver and $100,000,000 of cash. As many of you saw, we successfully accessed the unsecured market subsequent Quarter end with $350,000,000 of 5 3eight green bond and as a result, no maturities until early 2024. Also keep in mind that for our term loan, whose initial maturity is also in 2024, we have 2 1 year extensions At our option, taking that maturity into 2026. With respect to our leverage metrics, our net debt to EBITDA ratio is roughly times as adjusted and we fully expect to be back to our targeted level in the mid five times in 2024. Additionally, we are targeting free cash flow after dividends and maintenance capital to return to pre COVID levels by next year.

Speaker 3

Our in process pipeline of active redevelopments and expansions now stands at 740,000,000 With only $250,000,000 remaining spend against our $1,300,000,000 of available liquidity. Now on to guidance. With initial guidance to start the year showing FFO growth of 2.5% at the midpoint and 4% at the top of the range and a solid first quarter under our belts, we are affirming guidance for 2023 at 6.38 to $6.58 per share. While we continue to see strength and resiliency in our business with 3 quarters left for the year, it is rare that we would modify guidance at For the first time in almost 2 years, we are seeing tenant bankruptcies in retail. As selected businesses struggle to compete in a challenging economic environment of higher interest rates and diminished government subsidies from the pandemic.

Speaker 3

Despite the bankruptcies to date where we have very manageable exposure, we still feel comfortable with our initial 100 basis points to 135 basis points of Total credit reserve comprised of roughly a 75 basis points general reserve and a 25 basis points to 60 basis Points of specified bed bath reserve. Now given where we started May and the expected range of outcomes, this bed bath reserve has now been reduced to 20 basis points to 45 basis points given the cash rents we've already received on 8 of our 9 anchor boxes that have not yet been projected including May rent. That range will depend on the timing of the bankruptcy process Which leases are affirmed and or assumed if any? From a comparable growth perspective given a solid first quarter metric,

Speaker 2

We are

Speaker 3

affirming the 2% to 4% range for comparable POI growth as well as our 3% to 5% range On a cash basis, adjusting for prior period rents and term fees. Page 27 in our 8 ks provides an updated summary of the key assumptions for our guidance. Now in addition to the expanded disclosure on term fees and prior period rent that I previously highlighted, You'll also notice several other additions to our 8 ks relating to revenues, comparable POI growth, debt, occupancy and leasing metrics, Demonstrating our commitment to continuing to expand our disclosure to provide the information we believe is most relevant for investors to analyze our business effectively and efficiently. And with that operator, you can open up the line for questions.

Operator

Thank you. We will now begin the question and answer session. In the interest of time, please limit yourself to one question. At this time, we will pause momentarily to assemble our roster. Our first question comes from Juan Sanabriya with BMO Capital Markets.

Operator

Please go ahead.

Speaker 4

Hi. Thank you for the time. Just curious on the renewals, those popped up in the Q4, if you look relative to the trailing 12, You also had lower TIs. Is that a mix or is that kind of a new norm? I know you mentioned some anchor leasing.

Speaker 4

Just curious if you can comment on that. Thank you.

Speaker 3

Yes. It was essentially a mix with regards to just what got done during the quarter. One of them was the grocer renewal that we had a vendetta, but also just a broader mix. And obviously, The TIs, again, a mix of the leases that got done.

Operator

The next question comes from Craig Schmidt with Bank of America. Please go ahead.

Speaker 5

Yes, thank you. I kind of wanted to talk about mixed use and added resi. I noticed on your future development opportunity page, you've gone from 6 Mixed use projects that could add residential, now we have 14. What I'm wondering is, I've heard you say that a third of your properties are mixed use now. Where do you think you might be in 5 years' time?

Speaker 5

And the second is, will mixed use assets grow faster in their rents than strictly retail ones? And what are retailers telling you about mixed use? And what are the resi people telling you about mixed use?

Speaker 2

Craig, that's pretty funny. I love how we limited to one question. You have a whole white paper in that question there. You're the best. So a couple of things.

Speaker 2

I apologize upfront. Don't at all. Don't apologize at all. I'm just having a little fun. Listen, the what you see in the 8 ks It is a continuation of what we believe and that is the ability wherever we can to maximize the use of the real estate That we own, especially when we're talking about successful retail shopping centers with And you know, ours are on bigger pieces of plant.

Speaker 2

And so the ability to add other uses is something that It's just part of our DNA and something we'd like to be able to do. Now, I don't I would not you should not expect us To be running and putting shovels into the ground over the next 9, 12 months at those projects because the economics don't make any sense today. I do expect them to make some sense in the future and that's what that is supposed to convey. Now with respect to the overall mixed use properties, What we have clearly found, clearly found is that the demand for lots of uses Both office and retail and resi and hotel frankly at a really well done mixed use property It's a real differentiator. It's where people want to be.

Speaker 2

It's why in the comments I made, I'm talking about Traffic counts that are really enormous. These are a lot of there's a lot of visits there, a lot of sales. They also seem to have the ability to raise their prices In places like that more than that more value oriented properties. And I guess you would expect that Apple and areas, the Lululemon's of the world, etcetera, they can raise prices. And as a result, we see the ability to So charge higher rents there.

Speaker 2

Now if we did that right on the ground floor, then we should also see outsized returns both in the form of occupancy and the rates that we're getting Upstairs in the other uses. That's been our experience frankly since COVID. I think it's even stronger than it was before COVID.

Operator

The next question comes from Steve Sakwa with Evercore ISI. Please go ahead.

Speaker 6

Yes, thanks. Don or maybe Wendy, just on the leasing side, I mean, I know the strength is Probably surprised to Don things have remained healthy, consumer spending has held up. I'm just wondering what you guys are hearing from tenants and You mentioned maybe bankruptcy is picking up. I'm just wondering how you feel about the 75 basis point general reserve and Might you not use all of that as you sit here today just as you survey the landscape?

Speaker 7

Steve, let me just kind of add some color first before Dan talks about the numbers. But you're right, we're seeing great demand on the retail leasing side, specifically in the small shops. As it relates to people's ability to fund projects and make decisions, they're making decisions for the long term And they're understanding that with these recession discussions that these headwinds that we're facing that the decisions that they're making are critical to their livelihood, especially for the mom and pop. So there's a flight to quality that continues to happen in our portfolio. So I'm feeling very bullish about what I see in our pipeline.

Speaker 7

Again, it's I honestly, I was expecting it to level off a little bit And it has not. It is as robust as ever. So I'm very encouraged.

Speaker 2

And I guess Steve, I would only add to that. Yes, there might be some room in the 75 basis points, but I read the same things in the newspapers that you do and it's May 5 or Quarter, whatever day it is. By the way, Steve, my 25th anniversary, at least happy anniversary, Don, right? It makes me laugh though because the power of the small shop tenants and that Wendy mentioned is I really want to make sure that you understand a little bit. We don't do the kind of first time mom and pops.

Speaker 2

We don't have those type of businesses here. They are almost always adding a store or adding a food use From a place that from strong cash flow in another location whereby they're expanding into the 3rd or the 4th or the 5th. There is that flight to quality that's a critical component. So if this is anything like whatever happens this year

Speaker 3

and next year is anything like

Speaker 2

Prior recessions, this is going to be one of the strongest parts of our Portfolio and the place that differentiates us.

Operator

The next question comes from Greg McGinnis with Scotiabank. Please go ahead.

Speaker 8

Hey, good evening. Happy 25th Don.

Speaker 2

Thanks, Greg.

Speaker 8

Yes, you're welcome. To celebrate, let's talk about office demand. Can you just talk a little bit more about the interest you're seeing in Santana West? This feels like serious inquiries. Is it all tech, whole building or by floor?

Speaker 8

And So any additional color is helpful there. And then we'd also appreciate updated info on 9/19 lease up and initial rent contribution expectations. Thanks.

Speaker 3

Sure.

Speaker 9

Yes. Hey, Greg, it's Jeff. Let me start off on the West Coast office leasing and then Dan or Dawn can jump in on the 2nd part of your question. So the business decision we made late last year to allow the building to be leased 4 by 4 And to start building out the building, so we were a great alternative to the sublease space that's coming on the market that I'm sure you've heard about, It is working out for us. That combined I think with a little bit more of a Settling at least in the call it midsized tenant market as what they're going to need in the way of the office space has caused Tours to tick up and we have paper going back and forth with a couple of tenants.

Speaker 9

So they're not full building tenants, but they're multi floor tenants. And I don't know whether we'll get any of them done, of course, at this point, but there is activity and I would call the activity very good and Really happy when we made the decision that we made to start building out 4 by 4.

Speaker 2

Yes. And Greg, just to say the obvious, that is a difference. That is a difference in feeling. I don't think we could have said that, in

Speaker 3

fact we didn't say it

Speaker 2

on the February call or maybe last November. So Really happy about that decision at this point too. Hopefully, it bears fruit. Time will tell. And with respect to 919, 919, It's really interesting, not 919.

Speaker 2

915. 915. We haven't done 919 yet. On 915, we turned the building over the floors over to Choice. Then they are building out their space.

Speaker 2

We will have Contribution from them starting next year? End of the year. End of this year. Yes. So, Dexo also, which as you know signed the lease, we're Almost ready to turn the space over to them.

Speaker 2

That is going really well. And then so that's the 60 some odd percent of the building that It's completely leased. We have serious back and forth on a number of tenants from most of the rest of the building at this point. So it's pretty interesting at a time when as you know, there can't be a dirtier word than office in the country. Is it possible that a subcomponent of office is actually undersupplied?

Speaker 2

And that subcomponent, could that be Mixed use properties where you have a new building in a 1st ring suburb, which is obviously all we have. So I'm pretty encouraged By what we're seeing here, Pike and Rose certainly the same up in Assembly Row. And with new activity at Santana West, I hope we have something to tell you.

Operator

The next question comes from Connor Mitchell with Piper Sandler. Please go ahead.

Speaker 10

Hey, thanks for taking my question. So now that you've entered Hoboken Phoenix and I know you've mentioned you're not rushing to start digging anytime soon, but as you deploy more capital, do you see more urban infill or population growth areas. So maybe just how you think about these 2 different market types?

Speaker 2

Yes, Connor. It certainly wouldn't be areas with big population growth. The problem with big population growth means that there's usually room For a lot more supply to be added and we want to be in supply constrained areas. Nothing more supply constrained than Washington Street and Hoboken. And love the investment that we've made there.

Speaker 2

We're just getting into on the one redevelopment there whether we can Effectively make the numbers work. I'm very encouraged by that fact. I would not again expect to see us Under construction in the next month or 2 or something like that. But that project is going to is very likely to pencil and make some sense. To the extent we can find more and have it make sense in Markets where we already are like that, we'll look at it all day long.

Speaker 2

But that's the type of thing that's far more Attractive to us than chasing headcount.

Operator

The next question comes from Craig Mailman with Citi. Please go ahead.

Speaker 11

Hi. This is Seth on for Craig. The active mixed use redevelopments all have 6% projected returns. How are you thinking about Return thresholds for incremental project starts given the elevated cost of capital?

Speaker 2

Yes. No, it's a very good question. And I think I've answered this a couple of times before, but think about it this way. We need incremental Returns or incremental returns on top of our cost of capital in terms of development of at least 150 basis points from an IRR perspective, More like 200 basis points from an IRR perspective. The reason I keep saying IRR perspective is because of the stuff that we do in those projects, We won't do unless they grow faster.

Speaker 2

Our experience has shown us that those projects with our we are able to increase rents faster. The residential component is important with respect to that. But incrementally, once we get comfortable with what our Cost of capital is going to be, I'd like a little more clarity from the Fed. Maybe we're getting there, getting a little bit closer that way on the debt side. On top of that add $150,000,000 to $200,000,000 depending on the risk of the particular project from an IRR perspective.

Speaker 2

Okay, that's helpful.

Operator

The next question comes from Floris Von Diadem with Compass Point. Please go ahead.

Speaker 12

Hey, good evening. I guess, could I Ask about your shop occupancy at 90% leased. What is the gap between Occupied and leased and how much more will that number can you drive that over the 2 years and how much more do you think that will increase maybe even this year?

Speaker 3

The occupied percentage Small shop is 88 and

Speaker 2

we would expect

Speaker 3

to be able to drive both of those up higher. I think that's a real opportunity and By up towards the occupied percentage above 90 and up towards 90 north of 92 on the lease side. I think there's still more room to run on that in our portfolio.

Operator

The next question comes from Derek Johnston with Deutsche Bank. Please go ahead.

Speaker 13

Hi, good afternoon everybody. Wanted to touch on capital recycling primarily because it's such an important Growth tool for REITs and really it's been hampered as you know, especially this year. But Don, with the Fed Striking a pause here and some calling for perhaps a first round of cuts and maybe Q1 'twenty four or somewhere around that timeframe, do you think there's visibility in rates and somewhat of a stability in rates Can you know, can you know, condense or narrow, what must be a wide bid ask spread, so you know, you can Maybe do some accretive acquisitions and reignite that growth engine later

Speaker 2

in the year? I do, Derek. I mean, you said the word In your question, there has to be some level of stability. There has to be predictability. And without that as there hasn't been as you know, it's sure the bid ask is very different.

Speaker 2

That will change. Now it'll change over time and there are other things than just Fed policy That dictate whether there is or is a acquisition market that makes

Speaker 3

sense or a disposition market that makes

Speaker 2

sense, Position market that makes sense, but it's not going to stay the way it is. So yes, I mean, we run this business. We've run this business for a long time, Long time, we'll continue to do that. And during those cycles, there will be a reversion to some level of stability that allows us To get stuff done, no question.

Operator

The next question comes from Michael Goldsmith with UBS. Please go ahead.

Speaker 14

Good evening. Thanks a lot for taking my question. Dan, you had a slight beat on FFO Relative to the consensus, you're not touching guidance because it's still earlier in the year. I guess, what are you looking for Over the next 3 months or when we next speak on an earnings call, would that would give you more confidence That you can take the year's expectations higher. And then separately, like what are you looking for, which would maybe give you a little bit more caution in terms of The outlook for the year?

Speaker 14

Thanks.

Speaker 3

Look, I think the biggest driver would be continued strong leasing volumes. Our pipeline is as Strong is large in terms of what's been executed to date this quarter and what's in the pipeline of executed LOIs. It's never been higher. And so that continues and we can see that continue. I think that obviously we'll have some confidence.

Speaker 3

On the flip side, Look, I think the market is got some risk out there, particularly with regards to tenants And whether or not tenants will be able to weather this difficult economic environment, whether or not we see a Continued uptick in bankruptcy. I think that balance, we've done very well balancing that. I think that we've managed to have very little On a relative basis certainly, but just in absolute terms, in terms of our exposure to those bankruptcies, we hope that continues.

Operator

The next question comes from Haendel St. Juste with Mizuho. Please go ahead.

Speaker 15

Hi. This is Ravi Vaidya on the

Speaker 3

line for Haendel. Hope you guys are doing well. I just wanted to comment and ask about the Snow spread, you currently are at 160 bps. Would you view this as a long term steady state for what snow could be? Look, we've done an exceptional job, I think of bringing our S and O Metric down from north of 300 basis points in our existing portfolio down to 160 basis points.

Speaker 3

We'd like to get that tighter. We'd like to get that down to 100 basis points to 125 basis points. One of our differentiators though is that we have an S and O in space that is yet to be delivered from our large Redevelopment and expansion pipeline that is equal to that size. So we have $18,000,000 in the existing portfolio, $18,000,000 of total rent in our redevelopment and expansion pipeline and that equates to over 300 basis points. I think that's pretty compelling and I don't think anybody has redevelopment pipeline that has the pre leasing that's been done Where it's something that is a real differentiator because we got scale and that truly I think the equivalent of What's in the existing portfolio and what's in the redevelopment portfolio is effectively 300 basis points or more.

Operator

The next question comes from Hong Jiang with JPMorgan. Please go ahead.

Speaker 11

Yes. Hey, guys. Just a quick question on occupancy. I think last quarter you talked about potentially pushing economic occupancy Above 93%, maybe in the mid-93s by year end. Just wondering if that's changed given the Bed Bath Announcement and your views on near term bankruptcy risk in general?

Speaker 3

Yes. I think, look, it depends on so far of our Anchor boxes, we've only had one lease rejected. We'll see how it plays out. Obviously, if there's a full liquidation, then we're not going to be At 93% unoccupied percentage. We'll be probably closer to 92%.

Speaker 3

But we'll see how that all plays out, what gets In terms of what leases get purchased in their liquidation. And from that perspective, we Yes. We'd hope to have a clearer sense from that number as the Bankruptcy unfolds.

Operator

The next question comes from Paulina Rajesh Schmidt with Green Street. Please go ahead. Hello.

Speaker 16

And Don, you have talked about how you believe your Folior outperformed peers in an economic downturn. And you have highlighted how Good demographics are a key driver behind that. But an area perceived Perhaps as vulnerability is your slightly higher exposure to more cyclical categories, restaurants A little bit more of Full Price Apparel. So could you please provide a little bit of a history lesson on how these segments have performed historically in downturns in your portfolio. To have a better understanding of how the overlap between high demographics and cyclical categories perform?

Speaker 2

Hi, Ken, Paulina. Thanks for asking that. It's kind of why in my Prepared remarks, I wanted to make a distinction of how those mixed use properties with generally Higher end tenants, how effectively they do. And what we have found and look retail sorry, real estate is local. So in the specific markets where they are operating both historically and currently, What we're seeing is increased sales and importantly, very importantly in a period of inflation, Those tenants have the ability to raise prices.

Speaker 2

When I sit and I think about, and I don't know the answer to this, but I ask you to Consider something like this. If you take aspirational tenants, the Lululemon's of the world, people like that affect And imagine how much they've been able to increase prices over the next last 2 years of inflation and compare that More to maybe the big lots of the world or something that is aiming for a lower demographic. It's harder to press, it's harder to push price increases. That's a really important thing for us in all parts that includes restaurants, Etcetera. Now I don't know whether, I've told you this before or not, I don't remember, but Everybody was worried about Federal Realty going into the 2,008, 2009 great financial Crisis, because we had more restaurants, because we had more lifestyle, if you will, everybody was worried about federal And it turned out that those were the best performing categories in the company during that.

Speaker 2

And when I look today at our company. And I look at the restaurant performance in the mixed use properties. They are generating over $1,000 a foot of sales. And part of that is because they've been able to Raise prices, part of that is because there's a huge amount of volume that goes through there, but that gives them the ability to certainly cover the rents that we are charging them And more. And when you think about that in those type of areas, we would expect that to continue to happen.

Speaker 2

The conversations we have and we are very tight. We're a smaller company in terms of number of properties than our competitors. We have very close relationships with our tenants. We understand what it is that they are doing to be able to work through difficult more difficult economic times. And so those things give me confidence Because we have been doing this a long time and there are cycles and I expect it to behave Similar to the way it's behaved historically.

Speaker 2

I hope that's helpful.

Operator

The next question comes from Tayo Okusanya with Credit Suisse. Please go ahead.

Speaker 15

Hi, yes. Good afternoon, everyone. Congrats on a solid quarter. Dawn, last quarter when you kind of talked about dispositions, Tim, it sounds like there was a pipeline of kind of a little bit of $100,000,000 or so you were working on. I think this quarter you kind of announced $13,000,000 of it done.

Speaker 15

Could you talk about like the rest of the pipeline and what's kind of happening there? Whether it's kind of taking a little bit longer to close deals because of the shakeout on the debt market. So just give us a sense of maybe what's kind of happening on that front?

Speaker 2

Yes. We have and continue to have a list of assets that we would recycle as a component of our business plan. And frankly, we have that list in good times and bad times In terms of what it is, those are not a lot of properties, but it's a few that we look at. That's what we talked about last quarter, last year, etcetera. And we got to get comfortable that we're going to get paid well.

Speaker 2

And so in going through that process, we couldn't get comfortable on as many of those assets as we thought we could. That doesn't mean they come off the table. That just means pursuant to the question that was asked a little bit earlier, once there's some stability and some understanding of The general market conditions, you'll see a pickup in the disposition side of our business. I don't know Dan or Justin, anything to answer that. I think that's it.

Operator

The next question comes from Linda Tsai with Jefferies. Please go ahead.

Speaker 1

Hi. I'm not sure if you look at it this way, but I think one of your peers talked about the average rents in their S and O pipeline. I was just Wondering if you had a number for that for yours?

Speaker 3

Probably on a total rent basis in the kind of the low to mid-40s and probably in the upper 30s on a Mid to upper 30s on

Speaker 2

a base rent basis. But we can come back to you with more precise numbers.

Speaker 3

I don't have them exactly here.

Operator

Our next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.

Speaker 12

Thank you. Good evening. Don, can you number of years ago, you guys expanded into the Hispanic Centers out in California, and just sort of looking for an update on that. And then also The Korean like the H Marts of the world seems to also be a pretty powerful anchor And those shopping centers also seem to have that cult type following. So do you see expanding into more In the Asian Hispanic Centers or is your experience so far with what you bought a number of years ago maybe not panned out the way you thought?

Speaker 2

Yes. Thanks, Alex. It has panned out the way we thought. In fact, probably better than we thought in terms of given the We didn't consider a global pandemic and those properties performed exceptionally well during the pandemic. The answer to your question really depends on the right local partner.

Speaker 2

It really depends on the market of course that we need to be comfortable with And a partner that we would need to be aligned with respect to our Views and the way we can manage a property. PrimeStore has been that. It's been a very good partnership. We've Had trouble adding more to it. We would have liked to have added more to it, but those are individual deal by deal and they've got to make some sense and We didn't find any of that made sense, but those assets performed real well.

Speaker 2

I'll actually be out there on Monday of next week with PrimeStore. So that part's worked out really well. In terms of any other Property type with a demographic that we're not as comfortable with. As I say, we need the right partner because these are real estate decisions that Have to be operated and have to be leased and have to be grown specific to a market that if we're not familiar with, we will get hurt. So we better have the right partner and we've not found that at this time.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Leah Brady for any closing remarks.

Speaker 1

We look forward to seeing many of you in the coming weeks. Thanks for joining us today.

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Earnings Conference Call
Federal Realty Investment Trust Q1 2023
00:00 / 00:00