Federal Realty Investment Trust held their Second Quarter 2023 Earnings Conference Call, with Leah Brady, Don Wood, Jeff Berkes, Dan G., Jan Sweetnam, Wendy Seher, and Dawn Becker all present to answer questions. The call discussed forward-looking statements that may affect the company's financial condition and results of operation, and the earnings release and supplemental reporting package from the day before provided a more in-depth discussion of risk factors.

Federal Realty had a record-setting quarter, with $1.67 FFO per share, 5% higher than last year's second quarter. There was strong demand for their leasing, with 107 comparable leases of 576,000 square feet at $35.34 a foot, and 135 non-comparable leases for 652,000 square feet. They lost one of their nine remaining Bed Bath leases during the quarter.

Bed Bath & Beyond leases have been rejected and replaced with Dream on Me, resulting in a 1% occupancy decrease and $2.5 million in lost rent for the remainder of 2023. Leased and physical occupancy have improved from the previous quarter and year, with small shop occupancy increasing 310 basis points since Q1 2022. Leasing productivity and rate have exceeded expectations at recently acquired and redeveloped properties, suggesting that Bed Bath & Beyond may have been overly conservative in their underwriting.

Don is proud to report that the mixed-use properties are 98% leased, and that the residential portfolio provided 11% more property operating income this quarter than last year's. He also reports that inquiries and tours have increased at Santana West, and that the Northern California press has seen a resurgence in investment and hiring. Don believes that the mixed-use communities outside of San Jose, Boston, Washington D.C., and Miami will remain in high demand.

Don's comment that the quarter last year exceeded expectations was supported by higher property-level POI and lower operating expenses, offset by higher interest costs. Comparable POI growth was 4.6%, excluding the impacts of term fees and prior period rent, and occupancy showed continued progress with an overall occupied metric of 92.8% and a lease percentage of 94.3%. Small shop momentum was up 90 basis points with a targeted lease rate of 92%.

Federal Realty Investment Trust had a signed non-occupied percentage of 3% and a total comparable leasing volume of 576,000 square feet for the quarter. They have a total available liquidity of $1.3 billion, including $1.2 billion from their revolver and $100 million in cash. They also issued a $350 million green bond, and their net debt-to-EBITDA ratio is expected to be back to their targeted level of mid-five times in 2024. They have a $750 million pipeline of active redevelopments and expansions with $220 million remaining to spend.

Federal Realty Investment Trust has managed through bankruptcies in the retail sector well, with low exposure to retailer foldouts. Occupancy is expected to dip next quarter due to lost Bed Bath locations, but is forecasted to be in the low to mid-92% range by the end of the year. FFO per share is forecasted to be between $6.46 and $6.58 for 2023, with a growth of 2-4% over 2022. G&A forecast has been lowered from $54 million to $52 million and contributions from redevelopments and expansions have been increased from $15 million to $19 million. The Board of Directors has increased the dividend for the 56th consecutive year.

Dan and Don Wood discussed the success of Federal Realty's real estate dividend, which has had a 7% CAGR over 56 years. Don Wood then discussed the strength of the company's four mixed-use communities, which have a retail leased occupancy of 98% and estimated foot traffic of over 30 million shoppers in the trailing 12 months. Despite bankruptcies and higher interest rates, the company has increased guidance this quarter.

Alexander Goldfarb asked Don Wood about adding residential units to their shopping center portfolio. Don Wood mentioned that they had recently received approval for apartments at Federal Plaza West and that they had 500 units that were ready to be built. He also mentioned that they were looking into the capital allocation and numbers to decide how much they needed to do in order to make the projects successful.

Donald Wood explains the company's approach to funding their growth, which includes using their own capital when the numbers make sense and getting entitlements for properties, such as Friendship Heights, the Avenue side of Baltimore, and Hoboken in New Jersey, to increase the value of the land. He also mentions the differentiating factor of having a lot of equity tied up in the big four properties.

Federal Realty Investment Trust is proud of the work they have done at Assembly Row and plan to use the value of that work to acquire a lower cost of capital over the medium term. In the near term, they plan to use all their resources to fund their company. In regards to Santana Row, the company is having conversations with tenants about how they plan to return to office in a mixed-use setting versus a traditional office setting, which may be driving momentum.

Don Wood believes that there is a stabilization happening in the Silicon Valley and that there are advanced negotiations with tenants for space at Santana Row due to the brand-new product that is fully amenitized. Jan Sweetnam adds that they are seeing more than their fair share of looks in the marketplace as tenants want to bring people back into the office.

Jeff Berkes and Dan G. discussed the acquisition opportunities in the market, with a handful of trades in the West Coast market at cap rates starting with a five and a few more in the marketing process with expectations of sub six. They are looking at a lot of stuff but are selective, and they expect to be able to capitalize interest on the Santana West property through 2024 with income starting as they bring the capitalized interest down.

Dan G. reports that the watch list is doing well, with the exception of Bed Bath. Wendy Seher states that they are constantly reevaluating the list and managing what it means in the long term. Dan G. also reports that bankruptcies such as David's Bridal, Party City, and Tuesday Morning have had successful outcomes with leases being assumed or backfilled. Samir Khanal inquires about the watch list and the general reserve of 50 to 75 bps.

Dan G. explains that the company had a 50-basis point credit reserve impact in the first half of the year, with an expected 31-basis point impact for the full year due to Bed Bath & Beyond. In the second half of the year, the company expects a 50-75 basis point credit reserve impact, but is aiming for 80-100 basis points. The $0.06 sequential dip in FFO from 2Q to 3Q is largely due to the refinancing of a bond in the second quarter and the Fed's rate hikes.

Wood commented that the 7% spread on their leases is the equivalent of a 16% spread for companies without the contractual bumps, and he believes there is no deceleration in the trend. He also noted that three out of four of their leases have 3% or better bumps, which makes the economics of the leases significantly better. In response to a question about the lowered equity issuance guidance, Wood noted that it had an impact on their FFO guidance and questioned whether issuing $100 million was realistic given the stock price.

Dan G. and Don Wood discuss the potential of buying back stock or acquiring opportunities. They agree that buying back stock is not a particularly attractive use of capital right now, and they would rather focus on acquisitions and redevelopments. They also suggest selling assets in the market to obtain more attractive pricing than what their stock is currently trading at.

Dan G. discussed the refinancing options for the $600 million due in January and noted that the market is not particularly opportunistic today, but they have access to the market and would be in the upper 5s if they were to access the market today. Mike Mueller asked about the average portfolio escalator and the bump on leases for the first half of the year, to which Dan G. responded with a blended rate of 2.25 across the entire portfolio, with the quarter being in line with that. Don Wood congratulated Mike on his Oreos cap.

Michael's company is one of two shopping center companies that raised their guidance to a point above consensus. Dan G. explains that they do green bonds to enhance execution and showcase their commitment to ESG, but they don't do it for the incremental pricing. The green bonds also expand the universe of potential investors who may look at the bonds and potentially give them better pricing.

Dan G. and Don Wood from the company answer a question from Paulina Rojas of Green Street regarding the company's capital expenditures, which have been lower than last year. Dan G. explains that the total capital expenditure is $34 million, with $17 million in the existing portfolio and $17 million in the non-comparable portfolio. The lion's share of the $19 million will come online in 2024, with 45% or $15 million scheduled to commence this year. However, they cannot answer the specific question Paulina has asked and offer to follow up with more information later.

Leah Brady thanked the attendees for joining the conference and wished them a good rest of the summer, before the operator concluded the presentation, thanking everyone for attending and giving them permission to disconnect.

This summary was generated with AI and may contain some inaccuracies.