Federal Realty Investment Trust (FRT) Earnings Call Transcript & Summary

All right. Welcome to the Federal Realty roundtable. I just want to introduce the team up here. We have Don Wood, who's the CEO; Dan G., CFO; Stuart Biel, Senior VP of Regional Leasing. And I think most of you know Jill Sawyer, who's the Head of IR. So Don, I know, again, it's a big crowd. There's a lot of people who may -- in some generalists here may not know your story. So maybe just I'll turn it over to you for some opening remarks, maybe talk about federal story kind of...

You know that standard is buddy because I could talk for 3 hours [indiscernible].

A couple of minutes.

I'll try to be brief. First of all, thank you, everybody, for giving us the time this morning. The -- the company has been around a long time. I think most of you know that since 1962. It's -- this is a really high-quality REIT, shopping center REIT. We are led by retail. There is no question about it, but the company has over a lot of years, intensified the properties that we own. And what that generally meant throughout much of the 2000s and into the 2010s was intensifying with residential and office in addition to the retail, but only where the retail was the reason that people gathered to the site. So we are -- while we are a clearly a retail company, the income stream is roughly 80% retail. It's 10% resi, it's 10% office. That has been a negative over the past few years that starting with COVID coming out of COVID. I believe that is behind us. And one of the good things about where we are as a company today is the agnostic level of our retail properties. And when I say agnostic, we are mixed-use. We are lifestyle centers. We are grocery-anchored shopping centers. We are a few power centers, et cetera. Anything other than enclosed malls is what we're all about. We've -- we've increased the dividend to our shareholders every year since 1967. There's not another REIT that can say that. It is a really high-quality portfolio. It is one that has done better than most certainly over that very long period of time. But in the last few years, as multiples have contracted, as interest rates have gone up, as we dealt with the overhang from COVID, we wind up trading very similar to other companies. And there are a few things I wanted to talk to you about today. I think we'll get into them. I think we'll get into capital allocation. I think we'll get into the stuff that works, some of the stuff that doesn't work in our business. I do think from a time perspective, this is a really good time to be looking hard at retail. You have probably heard it up and down the space, but demand does exceed supply. for high-quality retail. I think that's a really good thing. And I expect that to persist for some time. And with that, let's get into some specifics.

Before we get into strategy, is there any updates, I don't know, that post earnings or anything through presentation that we have.

Yes. No. I think we -- what we've reported 30 days ago in terms of a very, very strong leasing backdrop with regards to tenant demand continues. I can tell you even it's almost accelerated to the point where we're -- our pipeline is as robust as it's been in the almost decade since I've been at the company. So I mean that just continues and from that perspective, nothing new, more of the same.

Okay. Don, you've talked about the acquisition strategy before. You've talked about it in different meetings. You've talked about it during the earnings call. Maybe expand on that a little bit here for people that are not so familiar.

Yes. I will. The company has for -- I've been there a long time. I've been there since 1998. And one of the things that I love about the place is the reputation that we have garnered in the coastal markets. And we are pretty darn dominant in and around Washington, D.C., in and around Boston, in and around Philadelphia, Southern California, Northern California and South Florida. And so what has happened with respect to that is we've always kind of looked hard at bigger type of assets to own. And when I say bigger type of assets, I mean 250,000 square feet or better, lots of acreage. Think about it as pulling not from 3 miles, but pulling from 10 or 15 or 20 miles, dominant regional shopping centers and then filling it around. those dominant retail shopping centers. And we've done that really well on the coast. Well, starting from -- starting after COVID there, what became pretty clear to us, and I'm very excited actually for you guys to meet Stu today, and Sue is going to be doing a bunch of the talking with respect to this way. Stu Biel and I have been together 20 years at Federal. He is our most strategic leasing person. He is a revenue person by trade effectively. And what we started hearing over and over again post COVID is why aren't you guys here? Why aren't you guys there, et cetera, from retailers? And that's a really important thing because this is a very revenue-centric company. I'm a revenue-centric person. Where is the demand for the product? Where are you going to pay me? And we'll figure it out from that point forward. And what we found was retailers -- and it still -- it's true today when you hear about tariffs and when you hear -- retailers have a longer perspective in terms of what they're looking at than just this month or this year or this quarter. And so the notion of will you guys look at other markets became more and more -- we started hearing it from more and more people. A few years ago, we've made a bunch of larger acquisitions, and some of them are not in the specific first ring suburbs that we did historically. And I don't know if you guys will get a chance to see it. I think it's up on the website. Is it up on the website today, the new investor presentation? But we've got some new stuff in that, that I'd love you to take a look at. And one of the slides in there shows 4 big assets that we've purchased over the past few years, starting with Phoenix, Camelback Colonnade, including Kingstowne Towne Center another big center in Virginia, Virginia Gateway, which was out in Gainesville and Pembroke Gardens in Florida, outside of West Florida, as you head out from Miami. And those 4 centers, which we've had now for a few years, just a couple of things to think about because it's foundationally important to how we think. Those 4 acquisitions cost us $760 million, $0.75 billion, 2 million-plus square feet of space, 236 acres. So 4 really big pieces of land retail destinations. Those -- under our ownership, those shopping centers, 4.5% annual growth since we bought them, 35% rollover new leases over old leases, 20% higher rents than underwriting. 9% 10-year unlevered IRRs that we've seen and 2.5% contractual rent bumps versus what was in place 1.5% before that. Clearly, we did something different with these shopping centers than was done before, clearly. And they demonstrate an important part of what it is that we do because if you think about retailers, retailers look to go where they are confident they can do the highest sales. And by the way, if those retailers are underwriting higher sales, we get higher rent from them. So we took this notion and said, are we sure we're not being too myopic with respect to the markets that we've always been in and should we expand the top of the funnel a bit. Bunch of -- I don't know, 7, 8 months ago or so, maybe a little more than that, WPG puts up for sale as they liquidate a 3-property portfolio, Scottsdale Quarter, and Oklahoma City asset and a Kansas City asset. We obviously looked specifically for Scottsdale Quarter. If we did Scottsdale Quarter, everybody in this room that knows Fed would say, yes, right down the middle of the plate, that's what they should be doing. A billionaire stepped up and paid a ridiculous number in our view. I shouldn't say ridiculous, a number that we couldn't underwrite for Scottsdale Quarter and it wasn't one that was going to make sense. We looked at Oklahoma City, too. We had issues with some of the future growth and things that we saw there. And then we looked at Kansas City. Dominant, dominant assets on the Kansas side, Leawood, Kansas versus the Missouri side, that the more we got into it, the more we looked and said, "Man, what are people missing? There is a bunch here. Our own retailers were calling and saying, we'll go there if you're the owner. And so we really dug into markets like this. And I can -- we're going to talk about Kansas City in a minute a little bit. There's a slide in the deck over here that you should see. It's called the buy box. What it is? And to try to provide a little more guidance as to what it is without telling you specifically what we're looking at. first of all, you'll never convince me that affluence isn't the most important thing to look at. We just -- consumers have to have money to spend. And what we try to do as a company is to make sure that when times aren't good, we don't get hit as hard. When times are good, we do better. And affluence is the single biggest thing we look at with respect to that, can consumers consume, just critically important. Households of over 150,000, dominant center, not just any center. It's got to be at least 250,000 square feet of space. It's got to reach at least 10 miles as a trade area, often more, has to be in a metro area of at least 1 million people with a dynamic job base in those places. And if we have -- if we can look at that, and then most importantly, have Sue looked at that and say, well, okay, is there a supply-demand gap from a consumer perspective, are those consumers being served? Are they underserved by the retail choices that are in the markets that they're in? And are there a few retailers at the center who are an upper-end consumer, not luxury, but an upper-end retailer who are doing really well. If we've got those pieces together, then we ought to being federal, we want to be able to duplicate or improve on the numbers I just told you for the 4 assets that we've been looking at. Stu effectively took over the due diligence process and will run the future leasing process of Kansas City. And I'd love it if you take a minute to kind of share -- I don't want to do too much because we're doing an Investor Day basically or a property tour, let's call it, we'll do an Investor Day too down the road. But a property tour on October 12 at the property. We're going to do a chiefs game. I'm walking Taylor down the. We're going to do a chief game and a property tour the next day. And I want to steal, Jill keeps telling me don't steal too much thunder from that. But I would like you to give a view, Stu, as to why this fits effectively in what it is that Federal has always done with respect to our business.

Sure. And Don mentioned retailers have been calling us, and that's been true, especially since COVID. And as this funnel has now opened a little bit, we're getting increased calls because they see that we're starting to look wider. So certainly, Lee would hit all the points that Don just mentioned. In the case of existing tenants that are there, which I think is not a point that should be missed, instead of 3 or 4 in this case, there were really like 6 to 8 tenants that were -- I had to ask our acquisitions guys a couple of times to rein the sales because I didn't believe them they were so strong compared to national averages. And so when we married up here are 6 or 7 really relevant tenants that are just way outperforming the national average and then we talked to 40, 50 retailers that are not in the market, hey, is this a market that's on your radar? To at T, Lee would -- I mean, the demos are -- you can't argue with the demos. They didn't -- in some cases, feel yet that there was the right owner there that was going to steward it in the right direction and take it kind of from here to here. So with the combination of the proven sales history, the relationships we've built and the way that they know we own our centers, we now have -- you'll see, we'll announce hopefully when we're there. We've got a couple of deals that we had kicked up even before we had closed. Uniquely to this property, too, there are 2 centers that sort of sit caddy corner from one another. One has clearly been taken better care of than the other, and there's a significant rent gap, not as significant of a sales gap. Actually, there are tenants on both sides that do extremely well. And so we got very excited at how much we could close that gap pretty quickly by doing the right types of leases and maintaining the property that doing some things that were frankly kind of low-level maintenance. And so that intersection of tenants that want to be in the market but haven't yet found an owner that they feel comfortable with and tenants that are in the market that are way outperforming the national averages is where I think we really found a sweet spot there.

Let me just say a couple of things about this, so there's not a misconception. The obvious question then is, well, okay, are there going to be dots all over the United States of America where Federal Realty owns one property? And the answer to that is no. What we are trying to do is very similar to what we did in Phoenix right before COVID. We were able in Phoenix to find the dominant shopping center in Camelback Colonnade, one of the ones I referenced earlier and effectively be important in the marketplace. It needs to be a dominant center to be important to the city, to the retailers, to everybody involved in the business. And by owning Camelback Colonnade, we were able to expand into Scottsdale with Hilton Village, Scottsdale Forum. We were able to get a couple of deals in Chandler. And so even though there are consolidated deals from a retailer perspective, we could then say in Phoenix, we could serve you in Chandler, in Scottsdale or in Phoenix. And it became a really strong important market to us. I would expect that same thing to happen in Kansas City and in other places that we come in once we're able to find the dominant asset. Number two, this clearly doesn't mean that we are not as committed as ever in the existing markets that we're in. We are. And so the notion -- today, we have 2 properties under control. We'll see whether 2 new acquisitions under control. I don't know whether they'll both make or not. We're in due diligence now. And if they make, great. If they don't make, they don't make. But one is in one of our existing markets. that will make complete sense. And one of them is in another market similar to this. And so as I kind of look forward, what has happened as a result of this open funnel is the inbounds that our acquisition teams from me to everybody else through the acquisition side of the business are getting from East [indiscernible] JLL, owners themselves, retailers about would you guys consider that we would have never gotten before, means to me, at least, the chances of this being able to continue and to keep that -- be successful in opening that funnel are probably better for us than most because we're seeing that disproportionate share of inquiries that nobody thought we'd be interested in before, so we weren't hearing about it. It's a really interesting time. And when you kind of sit back and you look historically at kind of where I started, the -- as an example, the office component that we have at Pike & Rose. In the next 30 days, we will be 100% filled, 100% have strong economics. Why? Because office is so great. Because it's at Pike & Rose, and you've got a fully amenitized environment that can create value there. Similarly, 90% -- over 90% at Santa with -- and more than that when you include all the other properties that's there, 95%. So clearly, it's the amenitized base of what we've created that is the key thing to create that value. That's kind of what's happening now. And the only other point I'd like to add, you'll have your own points of view on cost of money and interest rates going forward. But I can tell you, we are very much have some real talent in developing. And so the notion of developing usually incremental residential because of the cap rate there are closer to working. The math is closer to working there than in most places. And so to the extent that picks up a bit as we find other markets as we just talked about there, plus the absence of the drag from the office timing of through COVID, it's a pretty good time, I think, to get productive on thinking about federal. And I think that's where I'll leave it. I don't know if there's one question or 17 in there, but that's the story.

Assets you -- core assets you acquired [indiscernible] some of the changes in the metrics. Talked about retail orders that [indiscernible] federal [indiscernible] dealing some retailers that you did bring to those 4 assets? Who's new?

Yes. I'll use Pembroke as an example because we're in the middle of a couple of these deals. But since we purchased that, we signed lululemon Anthropologie, Kendra Scott, COACH, Aerie, and we're about to sign 3 under one common ownership tenants. So that's -- I mean, that's in, I don't know, 30 months of ownership. And each of those has increased the sales of the existing portfolio. So I can go through that with all the properties, but that's an example.

Don, on these newer markets that you're going into, talk about how competitive those markets are in terms of the transaction market?

Yes. I guess what I would say about that, Samir, is, look, the smaller $30 million, $40 million, $50 shopping center assets, grocery-anchored in particular, that's pretty darn hot. And there's a lot of competition for assets of that size, as you would imagine. As you get to bigger assets and you start talking a couple of hundred million, I mean, Lord is $289 million for 550,000 square feet of space. Obviously, there's less competition. And I do think we bring to the party there a really strong track record of doing that type of deal. We should talk and we can talk about how we fund those things and where we create the capital to do so. But when you're -- it's certainly competitive. But when it comes to potential buyers who don't have to find financing, for it, that knocks out a bunch. The ultimate size that knocks out a bunch. And again, the track record from the standpoint of certainty of getting a deal done, that's a real advantage in our side. So it's not to say there isn't competition. Of course, there's competition. Scottsdale Quarter was a good one. I would have loved to own Scottsdale Quarter. No. We're not going to pay a 5 cap for an asset like that. So when you sit back and think about it, we think this is kind of a sweet spot for the type of things that we do, including, by the way, no, you can't underwrite at Leawood or at Pembroke or Kingstown or Camelback or Virginia Gateway. You can't underwrite intensifications to those properties. in the form of additional development on the property down the road. You can't underwrite it when you're buying it. But let me tell you something, you get 236 acres with 4 properties there, pretty darn good chance you're going to see some of that stuff down the road. We're not going to pay for it upfront in the acquisition. But we're real close to entitling over 300 units at Pembroke for a parking lot that does not have restrictions on it from those retailers to be able to do that. So if we can get the rent, if the numbers can make some sense there, they're awfully close, there's going to be additional value that properties like that have that we're able to harvest over the longer term.

And what does that opportunity set look like for you as we think about the next 12 months? Because you brought up WPG. I mean they're basically trying to liquidate a lot of those assets. They've got there was Leawood, they're getting out of Texas. There's a lot of those types of markets. Like what does that opportunity set look like?

It's hard to say. Look, the way -- what I would love to be able to do is to be able to allocate as much as $1 billion a year in acquisitions and development before asset sales with those type of things. And when you think about them, when they're $200 million, $250 million, $150 million acquisitions, you're not talking about a large number of deals. We're not a volume shop. We never were a volume shop. We won't be a volume shop. But when you're talking about significantly sized assets with upside, we're talking 3 or 4 a year or 2 or 3 bigger ones plus some development a year, and those numbers can make a real difference to growth rate.

And in terms of pricing, it's very similar to where you've been done, let's call it 7 cap high 6s...

High 6s, 7 cap asset is -- and again, on the sale of assets that we do, we've got 2 components, I would say, on the dispose side. One is very unique to us, and that is the Santana Row, Assembly Row, Pike & Rose, Bethesda Row, assets like that, they're critically important to us. They grow well. These are -- and there's a whole lot more to do with respect to them. But they've also grown such that there are peripheral buildings that we have built off the Main Street of each of those assets that are largely residential, sometimes office. Today, the market for residential says, boy, how about harvesting some of that? It doesn't hurt the overall value of the property because we're not putting at risk the thing that created all of that value, i.e. the street and the apartments above it, et cetera. But as we did with Levare, one of the buildings at Santana, a block off the street, we're able to get a sub-5 cap on that. I don't -- it's hard for a retail company to trade, even the best retail company to trade at a premium that would allow that not to be a really nice source of capital. So we're looking at that in a couple of places. A building with -- at Pike & Rose similarly is for sale. Again, nothing that ruins the overall street or what it is that we created, but a peripheral. By the same token, we're building new residential at Santana Row behind Levare on a third block out there that should yield somewhere between a 6.5% and then to a 7%, and we'll monetize that afterwards. So it's kind of a unique piece of asset base, if you will, that is a lower capital cost asset base that can help create room for the acquisitions that we're talking about. That does not take away from what we've always done and we'll continue to do, and that is refine the portfolio by selling assets that no -- retail assets that no longer have any opportunity for growth. I think we demonstrated that in Southern California, most recently with the sale of Third Street Promenade last year and Hollywood a few -- couple of months ago. And that we've done all we can and frankly, saw both of them going the other way with what's happening in the more macro economy there. So you'll see both of the disposition machine running in order to help support this program we're talking about.

So match funding through dispositions and which would be accretive into...

Exactly. And general match funding, we've got $1.6 billion of liquidity through our bank lines and cash and so forth as an interim kind of financing and then basically selling $200 million in the market currently. We have another $200 million on deck, so $400 million that are kind of in the near-term pipeline. And probably another $1 billion that we have on the shelf that we can draw from as we go forward. And all of that kind of on a blended basis, sub-6. Unlevered IRRs probably have a 6 handle on them for the most part. And we're redeploying that into near-term initial yields of 6 is 7% and longer-term IRRs in and around 9%. So obviously, accretive short term and accretive long term in terms of that capital recycle.

I just want to see if there's...

All of this is on balance sheet, and we leverage other cheaper capital and platform to do even more.

Being looked at. Being looked at, not a hard no at all.

Maybe on -- I know we've talked about next year where there's accretion, there's a growth. Maybe help us understand kind of where you are in Santana West, that will be contributing into next year.

That will be a big significant contribution next year.

Okay. So sort of starting in Jan day 1. Yes, that type of thing. And then you have the meeting point, right? I think 9...

9:15 meeting. Exactly. It's close to 100% leased.

Okay. And help us frame out sort of the...

3 big building blocks that we talked about with regards to kind of what's going to drive 2026 is we have 3.25% to 4% comparable growth this year on roughly a $700 million comparable base. And so we expect something similar there, maybe be a little bit more conservative. Maybe it's not 3% to 4%, but maybe it's kind of in the mid-3s and so forth. But that should drive about $0.30 roughly of comparable growth for next year. That's what we've talked about as kind of a rough guidepost for comparable growth, okay? We also see probably in the range of $0.12 to $0.15 of contribution, probably $0.12 to $0.13 because I think we're going to actually outperform this year in terms of what we deliver in the development -- incremental development POI that we deliver, but call it, $0.12 to $0.15 for next year. So build that off of our base of $7.06, which is the midpoint of our current FFO per share excluding the new market tax credits. So the $7.06 plus that, the same-store growth of about $0.30, plus another, call it, $0.12, $0.13 maybe is a conservative number to get us to kind of the upper $7.40. And we've been talking about the headwind from our debt, which is the third component. We are refinancing bonds in February at 1.25%. We've been guiding people to 5.25%. We will do much better is our expectation to do better than the 5.25%, which was about a $0.15 headwind in 2026, probably going to be a few cents inside of that. So those are kind of nice building blocks, and that excludes any contribution from some of the acquisitions and dispositions, positive accretive capital recycling that we've got in the pipeline that should hopefully get done by year-end or early 2026.

Okay. So that excludes all the stuff we talked about, the acquisition and the accretion. Okay. Anything -- and just in terms of some of the retailer fallout we had this year, again, as we think about the industry, the SNO pipeline in the next year, I mean, how do you feel about the watch list at this point? Are there any tenants, any categories that sort of stick out? Because I know there's a lot of positivity, but you want to be a bit balanced.

We haven't had really much exposure to it this year. I mean there are a couple of names that we are focused on. Container Store, one of them. We got about 50 basis points exposure. They're still paying rent. We're -- but that's something we're proactively trying to backfill those situations. There are 5 of our best centers. We have demand already, multiple players, we think kind of as potential backfill candidates for all of them. And then other big names, not really. We just don't have a lot of exposure.

No, that's right. There will be one-offs. There's -- we have one pin stripes. I think Pinstripes filed today. I don't know how many pin stripes there are like 9 or 10 in the...

18.

18 of them. And I think 3 of them are very profitable. 4 of them are. We got a very profitable one. So we'll see what happens if they can figure it. But it's always the one-off kind of stuff like that. That's okay. That's the business in terms of the way it works out. But generally, our job is to make this part of the conversation less impactful to us than it is to others. And I still think that's the case.

Yes. So not much tenant fall. It feels like the -- whatever credit loss reserves we used before, it should be pretty normalized.

I think sitting here today that it won't be consistent with what we've had for the last year or 2.

Yes. I know we've got a couple of minutes. Any last minute questions?

I think there's still concern over retailers opening plans. your latest leasing meetings the velocity?

Yes. I mean we are seeing no slowdown in the pipeline. That's the honest answer. We got asked about tariffs a couple of times already, and that was really much more of a conversation we were hearing in the spring when the sort of numbers were moving around like crazy, and it slowed down a lot in terms of our conversations revolving around that. I think these retailers are making longer-term decisions than that, signing long-term leases. It's very hard to find good space. So they're not going to forgo the ability to get into a center for 10 years over something short term. That's what we're seeing. We're having a lot of success leasing occupied space. Our centers are so tight in a lot of cases that we're doing leases on spaces that are -- where weak tenants have 12 to 18 months of term. We're leasing them now so that new tenant -- they want to be there badly enough that they're willing to wait and then they go get their permits and they're ready to go. So you're also condensing the downtime a lot. So as we've gotten fuller and tighter, we've started to look a lot more at those spaces and attack the occupied spaces. That doesn't necessarily show up in our numbers, but you're sort of buttressing our income stream there a little bit. Those spaces are going to already be spoken for and have very narrow downtime because tenants will be ready to go right away. So looking out the next couple of quarters, there's nothing that we see today that is showing any signs of slowing down on the pipeline.

And that translate to kind of continued kind of movements upward on both our occupied rate and our lease rate over the next several quarters.

I'd love you to think about this. A lot of times, people are asking the question, well, if demand exceeds supply so much, why -- why aren't you just killing it? Why isn't this whole industry just killing it with -- let's understand a few things, first of all. First of all, no tenant is going to do a deal that doesn't make money for them. So the notion of I'm just going to go get 30% more rent or whatever, just no tenant is going to underwrite. The question always comes down to how will the tenant underwrite their sales. So the real job is to make sure you've created a place that they can underwrite the highest sales possible. It's really important more than anything else there. The second thing is Stu's point, I got to drive this home. This is really a cool thing. We're doing -- we did 600,000 square feet of leasing in the second quarter. That is a huge number. You would then think, therefore, why didn't occupancy go up through the roof. Really important point here. We are leasing for the future now. And the notion of a tenant that is in the space and whose lease is coming up 2 years from now, who we don't -- who doesn't have an option of who we don't want -- who would -- is not going to be there, don't want them there in 2 years, the ability to do a deal for that tenant today or a renewal today at a strong rent. All that does is provide insulation for the future. So the notion of signed but not occupied has it -- to understand what that means. Ideally, there would be no signed but not occupied. Ideally, what you've done is signed well occupied along the way there so that there is no difference because the bottom line is reducing risk in the future, downtime in the future is one of the biggest beneficiaries of demand exceeding supply right now that isn't talked about at all, critically important.

Don, I've got a couple of rapid fire questions.

Of course, you do. All right. I didn't start that a few years ago.

All right. Number one, when the Fed starts to cut at the short end, do you expect borrowing rates, long-term rates to decline, stay flat or potentially rise?

I expect it to decline.

Number two, last year, the majority of companies stated they are ramping up spending on AI initiatives. How would you characterize your plans over the next year, higher, flat or lower?

Depends what you call on AI. I'll just give you a number, say higher. There's so much more to that answer than a rapid fire.

Okay. Last one. Do you believe -- this is for the sector, shopping center sector average. Do you believe same-store NOI growth for your sector will be higher, lower or same next year?

Same.

Okay. Thanks, everybody.

Thanks, everybody.

Thank you.