The operator introduces the Federal Realty Investment Trust Third Quarter 2023 Earnings Conference Call and explains the format of the call. Leah Brady, Vice President of Investor Relations, introduces the Federal Realty executive team and reminds participants that certain statements made during the call may be considered forward-looking. She also directs participants to the company's financial documents for more information on potential risks.

The speaker, Don Wood, discusses the strong demand for high quality retail real estate and the company's record-breaking third quarter results. He mentions that 95% of deals done during the quarter were comparable leases, leading to a 30 basis point decline in overall occupancy. He also notes that small shop occupancy has been steadily increasing for two and a half years and expects further increases in both small shop and anchor occupancy in the future.

The article discusses the positive outlook for a business that focuses on leasing high quality retail properties in first ring suburbs of major cities. Despite the higher cost of capital, the business fundamentals remain strong and rents are expected to adjust upwards over time, particularly in affluent areas. The third quarter saw strong leasing activity and an increase in rents, with a weighted average lease term of 8.8 years and a CAGR of 2.5%. The article also addresses the criticism that the company's rents are high, stating that this is a result of having better properties with higher tenant sales and profitability. Overall, the sustained leasing volume and strong economics bode well for the future.

The company had a strong third quarter with FFO per share exceeding expectations and last year's third quarter. They have been active in acquisitions and their post-acquisition leasing has exceeded expectations. They have also seen strong leasing production in properties that have undergone redevelopment. The company has been able to invest over $120 million at a blended IRR above 10% through strategic acquisitions. The mixed-use properties have been performing even better, with high occupancy rates and strong traffic and tenant sales. These properties are seen as the center of their communities and attract customers from a wider area.

The company's multi-tenant leasing strategy at Santana West has generated significant interest from potential tenants, and negotiations for more than half of the building are in advanced stages. The company's business is supported by strong demographics, with a large number of high-income households near their properties. Tenant sales were up in the third quarter, particularly at properties with higher average incomes surrounding them. The company's FFO has seen strong growth in the third quarter and first nine months of 2023, despite higher interest costs.

In the third quarter, the company exceeded consensus expectations with earnings of $1.65 per share, which was $0.03 higher than expected. This was due to higher property level POI, overage percentage rent, specialty leasing, and term fees, as well as lower expenses. Comparable POI grew by 3.8% on a cash basis, and year-to-date growth stands at 4.6%. This will result in an increase in the 2023 outlook. Term fees and prior period rent were up this quarter, but occupancy was still at 92.3% and leased percentage at 94.0%. The company's efforts to get tenants open and paying rent have led to a 50 basis point increase in occupancy and a 70 basis point increase in leased percentage.

The company's sign not occupied percentage stands at over 250 basis points for 27 million, with a strong quarter of comparable retail leasing and less capital needed for new leases. The company also included option exercises in their disclosure, resulting in a reported capital number of $70 per square foot. This expanded disclosure can be found on page 23 of the 8-K supplement.

The company has a strong balance sheet with $1.3 billion of available equipment and a net debt to EBITDA ratio of six times. Their active pipeline of redevelopments and expansions, totaling $750 million, is expected to drive incremental POIs through 2026. The company has increased their FFO per share forecast for 2023 and has managed retailer bankruptcies well, with small exposure to near-term fallout. Their credit reserves are expected to be lower than previously forecasted, and occupancy was better than expected due to strong leasing volumes and rent commencements.

The company is increasing its growth range for comparable POI and cash basis, and will continue to capitalize interest expense for Santana West. They have also refined their G&A assumption and will provide guidance for 2024 on their 2023 year-end call. The company has sold one of its Third Street Promenade assets in Santa Monica, but this is not indicative of a larger trend. The company does not plan to sell any other assets and does not foresee any major changes in the portfolio due to population shifts.

The speaker discusses their success with a property on Third Street and the impact of COVID on the area. They caution against extrapolating this success to other assets in their portfolio and do not see a need to acquire larger format assets at this time. They also mention the potential for buying opportunities in the future.

Juan Sanabria asked about the signed but not occupied pipeline and the mix of developments and redevelopments in the same store pool. Donald Wood responded that about 10% of the 27 million will come in the fourth quarter and the rest in 2024, with a slightly front-loaded first half of the year. The next question from Greg McGinnis was about the implied Q4 FFO per share guidance range and the funding of developments at year-end and into 2024. Donald Wood narrowed the range to 1.59 to 1.67 and mentioned the exceptional job of getting rents started faster than expected and keeping tenants in place for longer.

The speaker discusses the expected occupancy growth in the fourth quarter and mentions that the reported earnings may be slightly off from the predicted midpoint. They attribute this to fine-tuning their G&A and delivering choice hotels early. They also mention the potential impact of interest rates and their plans for development and funding. The speaker notes their strong financial position with a remaining development pipeline of $750 million and $1.3 billion in liquidity. The next question is about the updated credit reserve guidance and how it compares to historical levels.

The speaker discusses the expected increase in small shop and anchor occupancy over the next 18 months to two years. They also mention the importance of being selective in leasing and not rushing to fill vacancies in order to maximize profits.

The speaker cannot provide any updates on office leases at One Santana, including the possibility of PwC leasing space there. They are optimistic about progress, but cannot name any specific tenants at this time.

A question was asked about the potential for leasing at Santana West and whether the capitalized interest would fully burn off or be proportional. The response was that they expect to continue capitalizing interest until 2024 and that there would be a reduction in capitalized interest as rent starts. There was no change in expectations for this policy. The next question was about the early read for 2024 same-store NOI and the possibility of achieving above-average levels. The response was that guidance for 2024 will be given in February and that they will be growing POI. The final question was about the performance of the residential piece of the business and the response was positive.

The speaker discusses the success of their residential properties in four key locations, which have high rents and strong growth. They also mention their business model of renting fully amenitized, well-located properties. The speaker then addresses a question about the company's average lease term, stating that it varies depending on the deal and mix of properties, but they prioritize locking in strong starting rents and contractual bumps.

Alexander Goldfarb from Piper Sandler asks a follow-up question about whether tenants are giving in on traditional lease items such as optionality on renewals and co-tenancy due to dwindling availability. Don Wood defers to Wendy Seher who confirms that there is a big demand for Bethesda Row and that they have a waiting list of 10-12 tenants trying to get in. She also mentions a new deal with Bloomingdale's that was completed in just 40 days, showing a strong desire from the tenant. Jeff Berkes also chimes in to confirm the trend.

The speaker states that they are tough on waste terms and are not giving away many things. They mention that the leverage has shifted to landlords due to a shortage of space and their tendency to be tough on all terms in the lease. They also mention cutting good deals with great tenants and a positive environment. When asked about the implied fourth quarter guide, the speaker says that they may be a little conservative and that increased G&A in the final quarter could impact the numbers. The next question is about plans for Mercer Mall, and the speaker says they have acquired the fee interest and will turn it over to Wendy to discuss potential expansion or conversion plans.

The acquisition of the fee for Mercer was planned 20 years ago and does not affect the current plans for the property. The property is being rebranded as Mercer on One and there are new tenants moving in. The investment in Mercer has been successful and the current cap rate is significantly lower than the yield to acquire a portion of the fee. Mercer showcases the company's strategy of acquiring land and controlling assets.

The speaker discusses the company's approach to redevelopment projects and how they are able to start projects for the future due to their residential entitlements and the changing rates and leases in the retail industry.

The speaker states that there will be continued growth in the portfolio next year, with a focus on residential opportunities. They also mention upcoming retail environments that will be added to the portfolio. The operator then announces the end of the question-and-answer session and the speaker thanks everyone for joining the call.

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