Operator:

Good day and welcome to the Federal Realty Investment Trust Second Quarter of 2024 Earnings Call. All participants are in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over Brenda Pomar, Senior Director of Corporate Communications. Please go ahead.

Donald Wood:

Thanks, Brenda, and good afternoon, everyone. So here are the highlights. All-time record quarterly FFO per share at $1.69, exceeding internal expectations, analyst consensus, and a very tough comp one year ago. All-time record second quarter comparable leasing volume at 594,000 square feet, within 4,000 square feet of the most comparable leasing volume ever in any quarter. Strong occupancy gains on both a lease and an occupied basis, the 95.3 and 93.1 respectively, up 100 and 110 basis points respectively from the last quarter, levels not seen since the 2017-2019 time period. Quarterly residential operating income on our stabilized REDI properties up 6.7% versus last year, 9.5% when including the new Darien Connecticut products. By the way, the apartments at Darien Commons are 99% leased with a waiting list to get in. Strong transactional activity in the quarter with the $215 million acquisition of Virginia Gateway and the $12 million buyout of the minority interest at CocoWalk, not to mention the sale of our remaining assets on Third Street Promenade in Santa Monica for $103 million. The momentum continued in July with our $60 million acquisition of Pinole Vista Crossing in Pinole, California. Yes, this was a very strong quarter, top to bottom, and based on what we see with our deal pipeline, this leasing environment is expected to continue to at least the balance of the year. Let me give you a little more color on leasing and its impact on our financing. 122 comparable deals at an average starting rent of $37.72 per foot compared with the final year of the previous lease of $34.29. 10% more rent to start, and that's great. By the way, those numbers include 98% of our deals, so they are truly representative of the entire company's results. But what makes that particularly impressive is that the rent on many of the previous leases has likely been growing at 3% or so over the last five or 10 years, and there's still room to increase the new rent to start the next five to 10-year cycle. It's actually 23% more on a straight-line basis because of those very important contractual bumps. Contractual rent bumps on all of our commercial deals on this quarter averaged 2.4% and sit at roughly 2.25% portfolio-wide, very likely the best portfolio-wide in the business. This isn't new for us. It's why in the last 20 years, this company has grown its bottom-line earnings, 18 of them, with only the great financial crisis and the global pandemic momentary setbacks. In this second quarter, 2Q year-over-year growth is muted, largely due to the bed-bath stores that were all still open in the second quarter of last year. Yet we still expect the whole-year growth over 2023 to be right at the top of the sector. Compare FFO for share growth over the past one, three-year, five-year, 10-year, 20-year periods against any other large retail portfolio that has a long history, and you'll see why we're so committed to our way of doing things. The impact on occupancy on both a leased and fiscal basis has been steady and impressive over the last three years, but never more so than this quarter. Both small shop and anchor occupancy growth stood out. In the 2024 second quarter, we picked up 100 basis points in overall lease percentage, bringing it to 95.3. Great result, thanks to record-setting leasing volumes, the acquisition of a well-leased Virginia Gateway, the sale of a less well-leased Third Street Promenade, and by the planned redevelopment of places like Andorra Shopping Center. Our anchor lease percentage gained 90 basis points alone since last quarter and sits at 96.7%. There's another 100-plus basis points to come here. Let me talk for a moment or two about the transactions this quarter, starting with the sale of Third Street Promenade in Santa Monica. First of all, what a great investment this has been for the Trust over the past 25 years. A 13% unlevered IRR over that period and a springboard for this company into relationships with a type of tenant that benefited every mixed-use and lifestyle-oriented project we did. Over the past few years, we lost confidence in the future income growth there for a host of reasons and sold to a local developer for $103 million, on in $20 million when including a one-off sale there late last year. Reinvesting those proceeds in a dynamic asset like Virginia Gateway with far more future growth possibilities seemed like a no-brainer. We've spoken about Virginia Gateway at various events and meetings over the past couple of months, so I won't use this time to repeat them. Suffice it to say, our Virginia management and development team is all over it and excited to have the new raw material to create significant value over the next few years through releasing and selective placemaking and redevelopment. Earlier this week, we closed on the acquisition of Pinal Business Shopping Center in Northern California for $60 million, which will generate an initial cash-on-cash return in the low sevens and will grow from there. This dominant 216,000 square foot grocery-anchored regional shopping center sits on 19 acres and was purchased at $277 a foot. Not bad. The center fits in nicely with our West Coast portfolio complementing Crow Canyon Commons and East Bay Bridge in the East Bay and will be managed from our West Coast headquarters at Santana Road. We're not done on the acquisition front either. Lease-up at Santana West continues with a newly signed deal with an AI-powered cloud database provider for 24,000 square feet on the first floor of the state-of-the-art building. Active negotiations with other prospective tenants for much of the remainder of the building should enable us to continue to report on new deals. And in Lower Merion Township outside Philadelphia, the longstanding Old Lord & Taylor building at our Bala Cynwyd Shopping Center has been fully demolished and construction is underway on our $95 million residential development of 217 apartments with ground floor retail that will be integrated with and complementary to one of federal's most successful shopping centers. We expect a 7% stabilized yield here. It's nice to see that development economics can still work in the right locations. You might be interested to know that in addition to Bala Cynwyd, we have over 3,700 residential units with active design or entitlements in process at a dozen of our existing assets. As construction costs continue to stabilize, as they've been doing, and rents continue to rise with inflation, as they've been doing, these projects are getting closer and closer to pension. Stay tuned. By the way, for those New Yorkers listening who may have reason to be out on Long Island around Huntington, please stop by our completely redeveloped and reimagined Huntington Shopping Center, where the brand new Whole Foods opened just last week and joined a new cadre of tenants, including REI, Ulta, New Dining Alternatives, and others. Set in a beautifully landscaped, comfortable setting, it really represents the best of federal realty thinking and execution. The $85 million comprehensive redevelopment brought in on time and on budget. The before and after effect is pretty striking. Huntington Shopping Center is now a worthy, grocery-anchored, open-air complement to Simon's powerful Walt Whitman Mall next door. As I was finishing up these prepared remarks earlier in the week, I was reading them to the senior team in preparation for this call. Our President Jeff Burke sat back reflectively and commented as to how significant the results of our capital allocation decisions have been over the past 90 to 120 days, given the relative size of this company. He's right. Collectively, they're meaningful and they move the needle in a 102-property portfolio. Between Virginia Gateway and Pinole, we've made nearly 900,000 square feet of acquisitions, deploying $275 million of capital at a 7-plus percent yield. We've completed a comprehensive and transformational $85 million redevelopment in Huntington, New York, began a new $95 million mixed-use development in Bella, and freed up $103 million of underperforming capital with the third-street promenade sale, all while executing 124 total leases for over 600,000 square feet of commercial space, cementing future growth. I'd say the future looks bright. That's all I wanted to cover in my prepared remarks this afternoon, so I'll turn it over to Dan to provide more granularity before opening it up to your questions.

Operator:

Thank you. [Operator Instructions] And our first question today will come from Juan Sanabria with BMO. Please go ahead.

Donald Wood:

Yes, no, Juan, it's a very fair question. We talked earlier in the year about a window and being able to jump through the window when the arbitrage kind of makes sense. I can tell you that if we signed up Virginia Gateway today, it would be more expensive than what we bought at Crystal Clear so that they have come in a little bit. As you would expect with assumptions of interest rates overall coming down. I mean, there's nothing more sensitive than that. Yet still, we've got some things working in the hopper that look like they can make some sense again, whether we close them or not, I don't know. But yes, you should absolutely, you should assume that there's a direct correlation between the product that's available out there and what the cost of money is. So frankly, the ones that we've built made so far where we hit that window right on, I'm feeling great about those two. In terms of the others that we were looking at now, still assume around the same places, maybe inside a little bit. But, let's see what happens with interest rates in the rest of the year with respect to how much product is available.

Donald Wood:

Dan, you want to take that?

Donald Wood:

And with regards to capitalized interest, with regards to 2025, we have no change in terms of the outlook. I think we're getting better clarity. But I think we still need more things to pull in place before we'll provide any guidance on that front.

Dori Kesten:

Thanks for taking my question. You previously talked about adding about 100 basis points of small shop occupancy this year and I believe 200 on anchor. And I think you're already there on small shop and pretty close on anchor. Can you give us an update on your perspective about where you may end the year?

Operator:

And our next question will come from Michael Goldsmith with UBS. Please go ahead.

Donald Wood:

Sure. I think it's really going to be driven by occupancy. I've got largely kind of it was a little back end of the quarter weighted in terms of the moves it move ins. So we didn't see, I think, fully the strength in occupancy growth during the quarter. And so we'll see that more fully in the third quarter. And I think we expect to be kind of in the mid to upper threes in the second half of the year. I think it's not a big stretch just assuming occupancy rates are elevated in the second half of the year.

Steve Sakwa:

Thanks. Good afternoon. Dan, I guess as you sit here August 1st, you got a lot of things that are kind of known and in the bag and you don't really have any that speaking of to mature the tier, I guess just help us think through the swing factors of getting to the low end of the FFO range and kind of the high end of the FFO range.

Operator:

And our next question will come from Greg McGinniss with Scotiabank. Please go ahead.

Wendy Seher:

Yes, Greg, it's Wendy. We are not seeing that diminish in any way the leasing demand that we're seeing over our various different product types. So I think if you look at the tenants that are in our portfolio, that lower end tenant that's sensitive, whether it's Dollar Tree or Party City or some of the, those tenants that are even McDonald's as they just came out with some varied reports on the consumer and their impact on that lower end consumer. So we are not seeing that. In fact, we were having discussions with Starbucks the other day. And they've had some mixed results that you saw come out. And I was looking at all of our 40 some locations that we have with them. And we're not seeing any impact on their sales because our demographic in our markets is more of that affluent upper end demographic. So there is some fatigue showing in the $6 latte, but not so much in our markets.

Alexander Goldfarb:

Hey, I'm not sure it's up in my name today, but it's Alexander still. Don, question for you on new supply. We keep hearing the same thing, which is that rents would have to be 35%, 50% higher to justify, new supply and mass. So I'm just curious, as you guys look at redevelopment and taking down portions of centers rebuilding, are you looking at the same rent math needed to do basic redevelopment? And if not, what explains the significant difference in rents needed to pencil between new supply and redevelopments?

Jeff Berkes:

Hey, Alex. If you're thinking about this from a, are we concerned about more competitive retail supply coming into our trade areas? I would definitely say that, the vast, vast majority of the places where we're located, single story retail service parking is not the highest and best use of the land, which is what Don's getting to, our locations lend themselves to densification, maybe a little bit of ground floor retail and an apartment building or something like that. And we are starting to see those economics become more viable. But, in terms of us getting a lot of competitive new supply in the trade areas where we do business, we just don't see that. In fact, we see a lid on supply and maybe downward pressure on supply, which is giving us a lot of pricing power with retailers.

Jeffrey Spector:

Great. Thank you. Maybe, follow up on all the leasing that you've executed. Can you talk a little bit more about categories? And I know you talked, you had a comment about lattes, but there are a lot of questions on restaurants. I guess, can you talk a little bit more about again, leasing demand by category, what you're trying to fill at this point, and then any other, anecdotal comments you can share and what you're seeing throughout the portfolio in some of the categories like restaurants that people are concerned over? Thank you.

Donald Wood:

Jeff, I feel like I always have to caveat whenever a question comes up about categories. I feel like I always have to qualify it by saying, you have to look at the operators and you have to look at best-in-class operators in whatever the category is. Because as we see, I mean, I was just looking at sales numbers for our restaurants, for example, at Santana Row, at Pike and Rose Assembly Row, extremely productive. And part of the reason they're extremely productive is because there's some of the best operators in the space. If you've got the best properties, you've got the ability to be a little bit more choosy on who comes into those properties. And that applies whether you're talking about, apparel operators, shop, small, smaller shop, apparel operators, restaurant operators, gym operators, all of it. And when you look at a time where the consumer is, there is worry about the consumer going forward, I can tell you, mediocre businesses go away. Strong businesses find their way through. And so that understanding of the strength of the operator has to be figured into the mix when you ask about categories. It's more than just categories.

Michael Mueller:

Yes, hi. Going back to development, redevelopment, whenever you decide it's the right time to flex up again the program, do you think it's going to be more retail focused or mixed use, resi focused at first?

Operator:

And our next question will come from Craig Mailman with Citi. Please go ahead.

Donald Wood:

What was the first part of the question? You got two questions in there.

Donald Wood:

The cap rate on Santa Monica is kind of a little bit of a hard one. I mean, kind of, it's kind of mid to upper sixes, kind of in place, but it quickly kind of goes down into the fives. And next year and the year after that, low fives. So, the unlevered IRR that we kind of penciled is kind of has a low six handle on it. So it's a really attractive source of capital. Not as accretive this year as we would like, but very much accretive over the longer term. The second piece in terms of, look, we acquired and put to work in the quarter $287 million of capital in CocoWalk buyout at Virginia Gateway, at Pinal Vista Crossing. I think raising capital, which we always do in a balanced approach that we fund the business. We have a multiple premium and an attractive multiple that even though it's not where we'd like it to be from an NAB perspective, it's still accretive capital. Where we deployed it, that $287 million, and it was in modest amount, about a quarter the capital needed there was to fund it. So I think it was very prudent in terms of how we approached it. With regards to going forward and future acquisitions, we'll be opportunistic. We have a big, full pipeline of assets under consideration for sale. That will be a component of it. I don't think it necessarily means we will sell. And then we'll look to I think opportunistically tap the equity market as we see it's an accretive, if we can accretively deploy that capital and grow FFO from. So that's kind of how we look at that.

Floris van Dijkum:

Guys, how are you? Good evening.

Floris van Dijkum:

No, I'm not going to cheat. I'm not. I just, you guys have historically always focused on the softer aspects around leases in terms of rent bumps and etcetera. A lot of your peers are touting the fact that they're now driving 3% rent bumps annually, etcetera, as well as less renewal options. Maybe if you could talk about what are the improvements that you're seeing in your lease terms? Are you able to drive what percentage of your leases that you're signing, for example, on your shop tenants are having rent bumps of 4% and maybe some more detail behind that? And also maybe talk about some of the other, the terms for anchors. Are you able to shorten the lease terms there or is there, at market upside at certain levels?

Wendy Seher:

But I think the only thing that I would add to that would be the different components of that contract, whether it be options, whether it be increases, whether it be control rights, exclusivity, there's so many components that really hasn't changed with this high demand that we're going after them any differently than we've always treated them, which is every component is separate and every component needs to make sense on that particular aspect. So I would say we are having some success in getting some more flexibility on options, for example, which we don't like options. We just don't. And so we rarely give them if there's a, if we have to, and if there's a, you know, a capital allocation that's heavy from the tenant, we have to, we'll try to see if we can do it at a fair market value with a base and try, maybe we've done several, many actually, where you tie it to a sales volume that they can't exercise it unless they're reaching a certain level of production within the center. So yes, we are diving deep into all those like we always do and having more success. And it's a balanced approach, right? We're doing a lot of business with these national and regional tenants, so we want to make sure that we have a balanced approach.

Operator:

And our next question will come from Handel [Indiscernible] with Mizuho. Please go ahead.

Donald Wood:

Hey, look, I think 70 to 90 is still operative. I mean, I think we were at the lower end of that range in the first half of the year, the way we look at it. And I think that it's proven to kind of keep that same leverage. I'm hoping we'll end up towards the bottom end. And certainly if we can end up towards the end, obviously that enhances our ability to outperform and get towards the upper end of our range of guidance. But I'm fine given where we were. I think the first half of the year, we ended up kind of at the lower end of that range. And I don't think it's -- we don't see a reason at this point to change that out.

Linda Tsai:

Hi, Dan. You mentioned earlier you're doing a better job of controlling TI dollars. What does that process look like and what are those conversations, how do those go?

Dan Gee:

Yes, Linda, just to make that really clear, I think the biggest thing there is the -- what a tenant and what we as a landlord are willing to do to be able to get that tenant in the space and operating. Whether that means hanging on to an AC unit that you would have wanted replaced ideally. Nah, let's give that five years and let's see how that goes. Whether it looks at -- whether it works on a storefront that a tenant particularly wants that we'll put a limit on and so they'll pick up the incremental cost of a particular storefront they get in. Things like that. What it is a willingness to work together because of the heavy supply demand where we are in demand supply of the space to accept space differently than they were before.

Paulina Rojas:

Good evening. The retail environment is clearly very solid. So what do you think this environment will translate in terms of market rent growth in your markets for the next 12 to 14 months? It seems to me that investors are generally very hesitant to forecast market rent growth above, let's say, 3%, 4%. And I wonder if you agree or disagree with this view.

Operator:

And our next question will come from Tayo Okusanya with Deutsche Bank. Please go ahead.

Donald Wood:

No, of course, Tayo, it's a very fair question. And what you're going to hear is an opinion because I have no inside knowledge of it. But when you sit and you think about, looking forward at the demand for retail space over the next five years, I think you should feel pretty good about that. I think Blackstone feels pretty good about that or there wouldn't be negotiations that way. I think that is all about the not only the supply demand characteristics that we've all been talking about here, but also the valuations and the choices in other sectors, which are not as robust as maybe they were over the last couple of years. So when you put all that together, it doesn't surprise me. There are whatever we've got, 17 companies in the shopping center index or something like that. Many of them are smaller companies. I think you should always expect that to -- companies like that to be under pressure of sale. Now, whether those deals happen or not, we'll have to see. But I've never thought of Blackstone as being a company that really stretched. So I suspect they see a lot of value there.

Greg McGinniss:

Thanks for taking another question. Dan, I apologize if you address this in the opening remarks. I just couldn't remember. But what's the expectation on bad debt embedded in the same store and has that changed at all?

Operator:

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Brenda Pomar for any closing remarks.

Operator:

The conference is now concluded. Thank you for attending today's presentation. And you may now disconnect your lines at this time.

Operator:

Good day, and welcome to the Federal Realty Investment Trust First Quarter of 2024 Earnings Call [Operator Instructions] Please note, this conference is being recorded.

Leah Andress Brady:

Good afternoon. Thank you for joining us today for Federal Realty's First Quarter 2024 Earnings Conference Call. Joining me on the call are Don Wood, Federal's Chief Executive Officer; Jeff Berkes, President and Chief Operating Officer; Dan G., Executive Vice President, Chief Financial Officer and Treasurer; Jan Sweetnam, Executive Vice President, Chief Investment Officer; and Wendy Seher, Executive Vice President, Eastern Region President. As well as other members of our executive team that are available to take your questions at the conclusion of our prepared remarks.

Daniel Guglielmone:

Thank you, Don, and hello, everyone. Our reported FFO per share of $1.64 for the first quarter was up 3.1% versus a year ago and came in at the upper end of our quarterly guidance range of $1.60 to $1.65 which we provided on our earnings call back in February. Property operating income was up 5.6%, also above our expectations, highlighting the overall strength of our real estate.

Juan Sanabria:

Good afternoon. Thank you for the time. Just wanted to ask a little bit more about the acquisitions and the funding. I think, Dan, you said that there was a fair amount of product that you're looking to maybe monetize. So hoping you could give a little more color on the dispositions and what kind of values you could get there, cap rates and the spend the spread in terms of what you're thinking on some of these assets that you're looking at in some of these [indiscernible] south markets?

Dori Kesten:

You had a strong quarter in small shop leasing. Can you give us a sense if this was more driven by national or local tenant demand and then what the blended rent escalators were on that.

Wendy Seher:

I mean, we did have a very strong quarter on small shop leasing, and we were able to move the needle, I think, 70 basis points. So very pleased with that with what the team has been able to pull together. It's really broad-based when you look at kind of the deals that we're making for the quarter in the small shops in terms of national, regional and local, the categories that we're seeing, as you may guess, our restaurants in nature, we have full-service restaurants less of the fast food because it's typically not the demographic that we're attracting in some of our centers.

Donald Wood:

Yes, Dori, the only thing I would add to that and really just to make the point that Wendy made, it's broad-based. As you know, we own all different kinds of open-air shopping centers and really across the board and certainly including the mixed-use stuff, we've had a very strong broad-based demand on shop space.

Operator:

The next question comes from Samir Khanal of Evercore ISI.

Daniel Guglielmone:

Yes. Look, I think we -- our credit reserve, we kept it kind of where it is this quarter. And so we're hopeful that that's something that we can do better on and so forth. Look, it's early in the year, and it's one quarter behind us. Typically, we don't move guidance up even when we beat in a quarter. And so look, we'll look to be -- see how the rest of the year unfolds. And hopefully, we can be up towards that upper end and we'll see how second and third quarter does.

Michael Goldsmith:

We've heard from the industrial REITs that retailers are deferring large capital investments in large warehouses. So have you seen any of that pressure of the capital investment required for retail stores in your shopping centers. Have you seen any of that pressure leak into your space recently?

Unknown Analyst:

This is [indiscernible] on for Greg McGinniss. Cisco [indiscernible] still have replaced Splunk as one of your top office tenants. I know Splunk had a couple of years of term left. Can you talk about what happened there?

Operator:

Our next question comes from Alexander Goldfarb of Piper Sandler.

Donald Wood:

Alex, you asked a very interesting question in there about how we underwrite and what the actual results will be once that underwriting effectively happens, and it's been something that I can tell you, I personally look at very hard because over the past several years, we have very much exceeded the leasing underwriting that we've done in the acquisitions that we've made.

Craig Mailman:

Not to beat a dead horse here with acquisitions. But I guess another question I have is just as you guys are looking at what's out there today, is it all just operating assets that you guys could over the next 3 to 5 years, kind of remerchandise or densify and that's the play? Or are there opportunities out there like you guys have done in Assembly or Santana that are that decade to 2-decade play for the company long term to harvest value?

Donald Wood:

Yes, Craig, that's a great question. And the answer is in the middle. No, you should not be thinking about our acquisitions turning into the next Assembly Row or Santana Row or Pike & Rose.

Ki Bin Kim:

So Don, as perhaps new development as far as not to start to take a little bit of a less prominent role in the near term versus acquisitions. I'm just curious, some of these projects, maybe you made some choices on leasing, shorter-term deals or maybe give up a couple of dollars in rent for control because eventually you want to do something bigger with it. I was just curious if -- how often is that the case. And if some projects take longer to start, are there some near-term opportunities that maybe you held up on that might -- that we can expect in the near term?

Wendy Seher:

So I just wanted to kind of add a little bit of color to that. We've always been sort of very strict about how we want to be able to control the property from a merchandising standpoint, from a redevelopment standpoint. So we've always highlighted that with our negotiations in this marketplace now with really demand exceeding supply, we can lean in on that a little bit further in terms of getting some of those controls that we absolutely need.

Donald Wood:

And Ki Bin, if I'm not answering your question, we're not answering your question, please give us a follow afterwards. I'd love to be happy to go through it more.

Michael Mueller:

So Dan, given the traction on office and development leasing that you're having, and how the focus seems to be more in acquisitions as opposed to development starts. Can you give us some sort of high-level color on how you see capitalized interest trending, say, through year-end '25.

Donald Wood:

And the only thing I would say to you, Mike, on that is the [indiscernible] 3 out of 4 from the Yankees. Congratulations for the first place on May 2. More to come, just like '25.

Ravi Vaidya:

This is Ravi Vaidya on the line for Haendel. I just wanted to ask about the TIs. I noticed that for the new leases, there were about $10 higher foot this quarter than last. Is there anything in particular with regarding any of the recent bankruptcy backfills or anything any other activity with leasing that may have driven that?

Operator:

Our next question comes from Floris Van Dijkum of Compass Point.

Operator:

Our next question comes from Lizzy Doykan of Bank of America.

Daniel Guglielmone:

Yes. Look, this was a joint venture that started back in 2015, 2016. It was to redevelop CocoWalk, it was hugely, hugely successful in terms of what we accomplished there in terms of trend forming that asset into what it is today and the returns that we achieve we had mechanisms in the joint venture to buy out our partner where they buy us out. And we bought them out, and we think, a very attractive yield for us.

Operator:

Our next question comes from Tayo Okusanya of Deutsche Bank.

Donald Wood:

So we'd love to add life sciences to Assembly Row or maybe even Pike & Rose. The math doesn't work today. It just doesn't work today. So the -- you certainly know what's in that industry. You certainly know what's happening in terms of supply in Somerville, Massachusetts, for example, and even here in Montgomery County.

Operator:

Our next question comes from Linda Tsai of Jefferies.

Daniel Guglielmone:

Yes. And I think the previous question with regards to comparable alluded to, when we think about it, we have a tough comp in the second quarter of 2023. Second quarter of 2023, we had all of our Bed Bath in possession, rent paying, [ SOFR 1 ] plus, obviously, we had the headwinds. We had really a more optimal balance sheet. We refinanced our debt in the second quarter of last year, $275 million at 2.75%. So some of those headwinds are really what's driving, I think, the more moderate growth year-over-year in the second quarter.

Operator:

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I will now hand over back to Leah Brady for closing remarks.

Operator:

Thank you. Ladies and gentlemen, that concludes today's event. Thank you for attending, and you may now disconnect your lines.

Operator:

Good day, and welcome to the Federal Realty Investment Trust Fourth Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note, today's event is being recorded. I would now like to turn the conference over to Leah Brady, Vice President, Investor Relations. Please go ahead.

Donald Wood:

Thanks, Leah. And good afternoon, everybody. Well, 2023 is in the books. With a strong $1.64 recorded in the fourth quarter, finish off what is an all-time record earnings year at $6.55 of FFO per share. That's happening, despite over $600 million of construction in progress not yet contributing and higher interest expense that cost the Trust an additional $0.27 per share when compared with the average rate in 2022. Yet, with comparable money cost between 2022 and 2023, FFO growth per share would have been 8%, right up there with our best pre-COVID years. It says a lot in terms of the power of the portfolio that has grown bottom line FFO per share at a compound annual growth rate of 4.5% over the last 20 years in addition to an average uninterrupted dividend yield of roughly 3% or better. That includes the great financial crisis, that includes the global pandemic, it includes everything, a better portfolio to own for long term investors in our opinion. It also feels like we're getting closer to a time where accelerated acquisition activity coupled with our redevelopment and remerchandising expertise on new acquisitions could boost that growth rate over the next few years. As far as today’s environment demand continues to exceed supply for the highest quality assets in the closed-in suburbs and with the impacts of the pandemic in the rearview mirror and lack of new supply coming on, I don't see this positive supply demand dynamic changing anytime soon. Our average in-place rents portfolio wide are $31.60 per foot and the comparable retail deals we did in the fourth quarter were at $44.57 a foot and we're at $36.75 for the entire year. I've been hearing that our rents are high and can't be pushed further for the better part of the last 20 years. And I guess on a relative basis they are. Better properties have higher rents. Better properties have higher tenant sales and profitability too. Frankly, it's obvious. Percentage rents are an interesting barometer on this topic. While we push for a strong fixed rent in nearly every lease, tenant sales above a threshold level equates to additional rent. Percentage rent and overage rent totaled $6 million in the fourth quarter and $19.3 million for the year, an all-time record, which broke the $18.8 million record from the year earlier. Fourth quarter retail leasing continued to crank with another 100 comparable retail deals done at 12% rollover on a cash basis, 23% on a straight line basis. These comparable retail deals account for virtually all 98% of the total retail deals done in the quarter, making them representative of the entire portfolio, not just a fraction. It was a great leasing year, the third in a row where we exceeded 2 million square feet, roughly 25% more than the five year average during 2015 and 2019. Just to pound the point home, those cash basis rollover increases come on comp of leases that have had what I believe to be the highest contractual rent bumps throughout their term in the sector, making that rollover all the more impressive. Contractual rent bumps for the deals done in the fourth quarter were roughly 2.5% blended anchor and small shop, with new and renewal small shop at approximately 3%. The weighted average contractual rent bumps for the entire retail portfolio, anchor and small shop not just one quarter’s worth, but the whole thing approximates 2.25%. Best in the business as far as we can tell. The sustained leasing volume and related economics bode well for the future, especially the contractual rent loss. We ended the year with overall portfolio leased at 94.2%, pretty strong but with room to grow. That breaks down between anchors at 96% leased and shop space at 90.7%. When you look at our occupancy possibilities going forward by looking at our past, it's reasonable to expect another 100 basis points of small shelf occupancy and another 200 basis points of anchor occupancy improvement in the coming 12 to 18 months, depending, of course, on the extent of future bankruptcies that we are not seeing today, they're not at all obvious. The residential and office product at our mixed use properties continues to outperform competing supply in non-mixed use environments and stood at 96% leased for both our comparable resi and comparable mixed use office product at year end, while commanding premium rents. Progress leasing up our mixed use office under development 915 Meeting Street at Pike & Rose and Santana West has been measurably stronger with 215,000 square feet newly leased or in the final stages of the LOI to sign the lease process. That includes the first signed deal at Santana West with Acrisure, the global FinTech leader to the insurance sector. With those deals complete, 915 Meeting Street at Pike & Rose will be 80% leased And Santana West will be nearly half leased up. I go through all this to really try to hammer home the obvious health of the business centered around leasing high quality retail centric properties in the closed-in suburbs of America's greatest cities. While bottom line results are and will continue to be muted by the higher, but certainly historically reasonable cost of capital that is stabilizing, rents will likely continue to adjust upward over time to that reality. This is especially true for tenants in locations and affluent areas where customers can absorb higher costs. I hope that higher interest rates don't cloud investors appreciation of the strong underlying business fundamentals that exist today and likely tomorrow. With that backdrop, we're also really excited to add a substantial expansion to the 87 unit first phase of residential product that we built at Bala Cynwyd Shopping Center in suburban Philadelphia a few years back. The first phase opened strong and remains fully leased with growing rents. Strong supply and demand dynamics in this closed-in part of Philadelphia's mainline along with construction costs moderating means that we're able to build an additional 217 residential units, 16,000 feet of additional retail and the covered parking spaces to service it all. On the former Lord & Taylor site at Bala Cynwyd. The shopping center features an expansive tenant roster including an LA fitness gym, a full service grocer, restaurants and necessary services, which are often cited as the reason residents are choosing it. Projects should get underway later this year beginning with demo of the old Lord & Taylor building which should yield a 7% cash on cost return when stabilized, throw out a double digit unlevered IRR based on the rent growth we've seen and expect and be funded from free cash flow. Okay. On to 2024 where we certainly expect another record earnings year with an energized team and a strong sense of optimism. Dan will go into a bunch more detail and I'll turn it over to him and then open it up to your questions. Dan?

Operator:

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And today's first question comes from Juan Sanabria with BMO Capital Markets. Please go ahead.

Donald Wood:

Yes. No, Juan, I try to without mentioning a name or getting myself in trouble, I try to indicate that there is a large tenant there that we are very close to lease signing on, the LOI is done. We're in the last stages of lease signing. I'm not going to name the tenant today, but you certainly will know them. And we would expect that lease, unless something dramatic goes wrong, done very shortly from here on. That -- along with that for sure and a couple of other smaller things is what gets us to that half done on that building in Santana West. And similarly, very close to signing on a couple of deals here at Pike & Rose or at 915 Meeting, which would get that building to 80% leased. So been a very different last few months in terms of, not just tours, but productivity in terms of turning LOIs into leases.

Alexander Goldfarb:

Hey, thank you for taking the question. Don, just going through your tenancy, overall, it's pretty good list in the top tenants, but obviously there's some not rated, some not investment grade. But holistically, as you push the portfolio occupancy and really upgrade tenancy, are there types of tenants that you're saying no to like, for example, the classic private equity, highly levered tenants, even if they are great performer, you're saying, look, historically these type of levered tenants are the ones that cause issues in the next downturn and therefore, even though they may be promising, let's try to limit exposure. Just trying to think what ways that as the portfolio becomes increasingly in demand that you may be gaining leverage to sort of push back on the types of tenants, even if they're a great performer, but just going, you know what, great performer, but not great balance sheet we're going to pass?

Operator:

Thank you. And our next question comes from Steve Sakwa with Evercore. Please go ahead.

Donald Wood:

It does. It does Steve. And look, at the end of the day, it's still a very local business and you're having this conversation based on what the potential choices are for that particular piece of real estate, where I love it, where I think the -- and I just believe this is the most important thing, it is in the contract itself. And so the leverage generally, whether it comes out in better bumps, I mean, you know how I feel about the bumps. That's a contractual increase in cash flow for a long period of time, nothing beats that to me. That's the first thing. And the second thing is, making sure that we have control of the space because the tenant wants control of the rest of that shopping center, not just the space, but the shopping center. And so I do think we're making and I've always kind of focused on this as a big thing for us to make sure that contract is as landlord friendly as it could be, but those are places where we have made pretty strong strides in the last 18 months in particular for strong leases with big bumps. So that's where I'd look for it most. And that's an insurance policy to know that the foundation of this company, the basic shopping centers throughout this company are really strong with rents that whether you believe it or not are under market as proven by each quarter that we go through. Now you take that and you supplement that with things like the redevelopments that we're doing at places like Huntington with a new residential project that we're doing at Bala Cynwyd with potential stronger acquisition market as we move forward, that's where I get very excited and very positive about the future growth of the company.

Jeffrey Spector:

Great. Thank you. Don, can you elaborate on your opening remark comment on accretive acquisitions and opportunities? It seems like you're a bit more optimistic or maybe excited at some of the opportunities you're seeing. Is that correct? And if yes, is it certain regions, again, type of centers? I know we talk about this all the time, but I think it seemed like you specifically highlighted that in the opening remarks.

Jeff Berkes:

Yes, sure Don. Hey Jeff, it's Jeff Berkes. I'm here with Jan, he'll jump in a minute on what he's seeing kind of day to day in the market. But, yes, you're right. We are looking forward to a good year in 2024 for acquisitions. We didn't really see anything in 2023 that excited us that much other than the opportunities we had to invest within our own portfolio at very accretive rates, but we think the market is starting to heal and we expect 2024 to be a better year, certainly a good year for us for acquisitions and I know you know as well and you probably know what I'm going to say, but keep in mind that -- look we've got a very compelling cost to capital. We are not constrained by any one sub product type within retail, we will -- we're format agnostic. We are more focused on location and opportunity with the piece of dirt than exactly the improvements that sit on it today. We have a really well developed team here that looks at highest and best use and ways to add value through re-leasing, remerchandising and improving the existing improvements, as well as knocking parts of the property down and going vertical and doing things like we're doing at Bala and other shopping centers in our portfolio where we add residential. We've got great relationships in the market. We're known as a closer, both with the sellers and the brokers, so I think we've got a lot of advantages and a really sort of clear eye towards growing the company through accretive acquisitions that are going to deliver long term growth to the company and we hope the markets respond and I think they will, but let me turn it over to Jan and kind of let him give you his thoughts on what we're seeing in the market today.

Donald Wood:

Yes, Jeff, you've heard us talk about this in the past. We are very creative in how we structure deals. We have been for a very long time good at figuring out ways to solve sellers issues, particularly private sellers and older sellers that have owned the properties for a long time. So A lot of tools in the toolbox here at Federal and we expect to be putting them to good use this year.

Greg McGinnis:

Hey, good evening. So it was a great year overall for retail leasing, but Q4 leasing volumes fell about 20% compared to the first three quarters in 2023 and resi occupancy saw 190 basis points quarter-over-quarter. Could you just provide some details on the trends you're seeing in retail tenant demand as well as what happened on the resi side and expectations built into 2024 guidance for resi occupancy and rent growth?

Wendy Seher:

No. I think if you look at -- it's just timing is number one and number 2 is our pipeline still remains strong. And when I look at where we are specifically in small shop leasing, I do feel like there we have a runway there, probably another 100 basis points to grow off of. And also some of the timing is also attributed to several of the deals that we're doing are on spaces that are already occupied. So there's some overlap there.

Dan Guglielmone:

Yes. That's exactly right. On the residential portfolio seasonality is really what's driving that move. We're up year-over-year from an occupancy perspective and we fully expect occupancy to pull back in the fourth quarter relative to due to that exact reason. And we have a small portfolio. I think that it only takes a handful of units to kind of move things a little bit. So I would not read anything into that at all.

Craig Mailman:

Thank you. Just want to go back to the question about acquisitions and it sounded like maybe there could be some OP unit deals in there, but could you just give us a sense of magnitude at this point of view at the level where we need to cap some of the equity and some of your trophy mixed use projects or can you guys fund this with kind of current liquidity?

Operator:

Thank you. And our next question comes from Ki Bin Kim with Truist. Please go ahead.

Dan Guglielmone:

Go ahead, Don.

Dan Guglielmone:

And I'm going to take a mandate, the common thread through all of this is either -- it's funny, either relocations from Downtown to these mixed use properties in both of them basically in that first ring suburbs or out further and coming in looking for the full amenities that is true, these properties provide. And that's been so darn consistent over the past 3, 3.5, 4 years with respect to what's happening there. I don't see that stopping. It's -- the demands of these tenants who are generally taking less space than they had, wherever they were West Coast, some kind of campus. The East Coast, the East Coast, same type of thing potentially. But they were -- they are taking less space but they demand more in terms of the amenity base and that is so consistent in basically the three places, the three big projects, whether it's - same in Boston, with respect to assembly. So, that's the common thread.

Mike Mueller:

Yeah, Hi. I just have two quick development questions. I guess, first for Bala Cynwyd. Is there any meaningful NOI that's coming out of the run rate, your 4Q NOI run rate. And then do you have a ballpark estimate of timing for the Santana office rent commencements?

Dan Guglielmone:

Yeah, on Bala, I don't think there's any material --

Dan Guglielmone:

So no impact.

Operator:

Thank you. And our next question comes from Floris van Dijkum with Compass Point. Please go ahead.

Dan Guglielmone:

Go ahead, Jeff.

Jan Sweetnam:

Hey, Floris. I think -- just in terms of the rent side I would say two things, one of which is, both at Pike & Rose and at Santana West here and also at assembly, really the tenants are looking for something as don said, they're looking for the amenity, they're looking for a better building, they are looking to upgrade their location. And so, they have tended to be less price sensitive on rent. So rents feel like they're holding pretty well, but the tenant improvement packages have in fact gone up. So that's really the change that we've seen, and that's where the competitive piece comes in, but the rents have been really rock solid

Operator:

Thank you. And our next question today comes from Dori Kesten with Wells Fargo. Please go ahead.

Donald Wood:

Look, I think the debt markets have been extremely volatile. And interest rates have lacked direction, to say the least, I think back in October when we committed to doing that transaction, the 10 year was at 5%, the -- our stock was at $85 and we saw this as a unique opportunity for us to lock in a spread on a secured loan on one of our best properties and gets attractive financing. The leverage is lower than we typically would, it's a little bit structured. But today, mortgage rates on retail product today at normalized leverage levels are probably 200 basis points over the Treasury, probably 175 basis points to 200 basis points on a floating rate basis above SOFR, we were able to get 95 basis points through the structuring that we did with our lender. We felt like that was a really, really attractive credit spreads, it was certainly more attractive than the 150 basis points to 160 basis points we're looking at back in October. And to do a five year loan and so it was just a -- I think a unique opportunistic financing that really demonstrates Federal’s historic ability to access different parts of the capital markets at more difficult times in the cycle. And I think that in -- our access of the convertible market, it's another example of that. Don, did you want to add anything?

Dan Guglielmone:

For tax planning. And so, I think having the leverage on there and having debt on Bethesda, where we've created significant value over our ownership created a ton of value above where if we do want to bring in a joint venture partner, this brings and gives us that optionality and that flexibility from a tax efficient.

Linda Tsai:

Hi. Thank you. I think you said earnings growth in 2023 with an 8% apps entire money costs will level of earnings growth does this mean for 2024, if you look at it the same way.

Operator:

Thank you. And our next question today comes from Anthony Powell with Barclays. Please go ahead.

Dan Guglielmone:

Yes, it's a good question. When -- it's not dramatic in terms of a reduction in construction costs. I mean, when you think about the components of it, particularly the labor component of it. When business slows down as it obviously has passed a couple of years, you've got better leverage to get labor rates that makes them more sense. And when you compare that to really last five or six years in particular before that, it's a dramatic difference in terms of being able to forecast. And that's really the most important thing here is, anytime you want to do a redevelopment or development itself, it's about predictability of costs in addition to growth on the rents. So what's happening now is we're finding much better predictability in construction costs primarily on the labor side, we're going to tie these things down to GMP's a maximum price contracts. And so when you're able to do that, then you can then focus more on what the rent growth is the timing, does it make sense to do. In the case of Bala, it was really a case where supply and demand finally made some sense without new product being added in that particular section of the main line, which is very attractive. So we really liked that, now we could make sense of that, a year ago or two years ago or three years ago, but we can make sense of it now. I would hope to see more of those possibilities going forward. And remember, this is land that Federal owns for a very long-time, and that gives you a huge advantage because the land costs are aren't incremental landlords, associated with it. So that's why that makes sense. So when you look at construction, I wouldn't look at it as you know, costs are going to be dramatically lower than they were, but they've certainly stabilized and coming down a few percentage points because of the labor side. It's an important consideration when you're deciding where to go or not.

Paulina Rojas Schmidt:

Hello, everyone. And my question is related to the prior one. And you reported for the Bala project an ROIC of 7, and I think you mentioned in your prepared remarks, the unlevered IRR as well. But more broadly speaking, what kind of profit margin we need to see when thinking about this project to [indiscernible] risks, whether it's cost or leasing.

Paulina Rojas Schmidt:

Yes, when we think about comparing your tax rate or --

Jeff Berkes:

Hey, Dan, if I can just add on. Paulina, it's Jeff. One thing to think about too as it relates to federal and the residential that we develop and we've got about $900 million pipeline of projects in the design and entitlement phase right now is almost all of those -- are at places where we already operate residential property. That's the case at Bala, the case if we do anything of Bethesda Row, Santana Row, Pike and Rose, Assembly Row, other places in Montgomery County, Maryland where we own real estate. So the risk adjusted return for us is really, really strong. We understand the rental market very well, we operate units, we're adding units. So we understand the operating costs very well. And as Don mentioned in the prior question, when we contract for the construction, we're doing that with full construction drawings great bid coverage and a guaranteed maximum price contract. So the risk adjusted returns for us are exceptionally strong when we add residential to our portfolio.

Alexander Goldfarb:

Hey. Good evening. Just going back to the Bethesda Row. I think you guys had spoken previously about possibly joint venturing that asset or maybe there was institutional interest, but I guess bigger picture, historically Federal hasn't been a JV platform. But you talked about it with the potential on Bethesda. So in your view, Don, as you guys talk to joint venture capital, what's their appetite for shopping centers and do they believe that truly this burgeoning growth that we all talk about will actually come to fruition, or is there a view that the leases are so locked in in favor of the tenant that yes, at some point, they can get good economics, but may be a longer timeline than they actually are willing to underwrite and invest, just sort of curious what's going on the private side as you talked to possible partners.

Jeff Berkes:

Yeah, Don. I don't really have anything meaningful to add to that. Sorry.

Operator:

Thank you. And our next question today comes from Steve Sakwa of Evercore. Please go ahead.

Donald Wood:

Yeah. It is guidance. And I think there are a lot of things that go into now in particular that go into the FFO guidance. I mean as it relates to specifically, the comparable y-o-y growth with 2.5% to 4% occupancy levels and how aggressively and how quickly we can up towards 93%. I think, how much percentage rent. And we continue to collect parking revenues and we control property level expenses the way we have which has been a big help. Term fees, I guess don't apply to that metric but that's going to drive FFO. Although it will necessarily drive the of POI metric excluding that, how quickly and how we can get development POI up. And I think one of the things that going to be a big driver as we look we purposely have $600 million of floating rate debt, quickly SOFR comes down. I think we're pretty conservative in terms of our assumptions for where interest rates will go. And so that's -- that will have an impact. And then, I think what we've done an exceptional job at which probably drive some of the POI growth is just getting tenants open sooner, keeping tenants inpossession. Longer -- keeping tenants in that would be expected to leave. I think that's a -- that's a another driver. I think they all contribute throughout the range.

Leah Brady:

Look forward to seeing many of you in the next few weeks. Thanks for joining us today.

Operator:

Hello and welcome to the Federal Realty Investment Trust Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Leah Brady, Vice President of Investor Relations. Please go ahead.

Donald Wood:

Thanks, Leah, and good afternoon, everyone. It's a good time to own high quality retail centric real estate. Demand exceeds supply for the best stuff. And this past quarter's results, and in fact, the whole year thus far has made that patently obvious. For the third consecutive quarter, we signed comparable leases. In other words, 95% of all the deals done during the quarter. The only deals we exclude in our definition of comparable relate to ground-up construction. For over a 0.5 million square feet 553,000 to be exact. For the nine months of 2023, that's over 1.6 million square feet of comparable deals, a mark we've never hit before. It's more than the first nine months of '22, which itself was a record and more than the first nine months of 2021, which itself set a record. You can see it in the occupancy numbers too. Well, the Bed Bath closings were expected to end and reduce occupancy in the quarter versus last year by 100 basis points. Our overall occupancy declined just 30 basis points on a lease basis and 50 basis points on an occupied basis. That says something about demand. If you dig deeper, small shop occupancy, the part of the business we hear the most consternation about increased another 50 basis points to 90.7% on a lease basis, and 80 basis points on an occupied basis. This trend has been a steady and powerful trend for two and a half years now. When you look at occupancy possibilities going forward, by looking at our past, it's reasonable to expect another 100 basis points, a small shop occupancy, and another 250 basis points of anchor occupancy, due largely to Bed Bath. Roughly 200 basis points overall in the coming 18 months or two years, depending, of course, on the extent of future bankruptcies that are not obvious to us today. I go through all this to really try to hammer home the obvious health of a business centered around leasing high quality, retail centric properties in the first ring suburbs of America's greatest cities. While bottom line results are and will continue to be muted by the higher, but certainly historically reasonable cost of capital that's likely here to stay. Rents will likely adjust upward over time to that reality, especially with tenants and in locations that are affluent. I hope that higher interest rates don't cloud investors' appreciation of the strong underlying business fundamentals that exist today and likely tomorrow. So let's talk about rents. 100 comparable deals, which again represents 95% of the deals done this quarter. So certainly representative of the total company. 553,000 square feet starting new rent of $34.51. Final year of old rent $31.17. That's plus 11% on a cash basis, 21% on a straight line basis. A weighted average lease term of 8.8 years, excluding options. The average lease term with all options exercised is more like 16 years. An average CAGR of contractual rent lumps of this quarter's leases was 2.5%. TI's per foot of $31.19, when you don't consider this quarter's option exercises $16.67 per foot when you do. Been hearing that our rents are high for the better part of the last 20 years. I guess on a relative basis they are. Better properties have higher rents, better properties have higher tenant sales and profitability too. Frankly it's obvious. That sustained leasing volume and those economics bode well for the future, especially the contractual rent volumes. Third quarter results benefited from that level of activity over the past six quarters. FFO per share of $1.65 in the third quarter was ahead of consensus, was ahead of internal expectations and ahead of last year's third quarter by 4% despite far higher interest expense and lost Bed Bath income. This is a really strong quarter for us. As you know, we were particularly active on the acquisition front during the COVID years of 2021 through 2022. In total, $1 billion in new additions to the core portfolio during that time, whereby the post-acquisition leasing continues to exceed the acquisition underwriting. Similarly, leasing production in properties that have recently undergone redevelopment and/or property improvement plans have also continued to outperform our expectations and we also expect that to continue. And while big new acquisitions have slowed given the higher cost of capital, note that in 2023, we've been able to invest over $120 million at 8%, with a blended IRR above 10. We did that through, number one, the acquisition of our partners, 22% interest in Escondido Shopping Center. Secondly, the acquisition of the fee and the portion of the Huntington Square Shopping Center that we didn't previously own. And number three, in October, the fee under Mercer on One in Princeton, new Jersey, one of our best performing regional shopping centers over the last 20 years. Smart but creative capital deployment of real estate very well known to us in each case. And as strong as the core shopping center business has been, the large mixed use properties have been even stronger. Retail leased occupancy at 97%. Residential lease occupancy at 98%. Office leased occupancy at 97%, excluding buildings under development. Powerful traffic counts and tenant sales make these property the center of the communities in which they operate. They draw customers from distances far more than the local neighborhood. So as not to leave it out, as I've mentioned on prior calls, our multi-tenant leasing strategy at Santana West has generated meaningful tenant interest that has progressed to advanced lease negotiations with multiple tenants for more than half the building. While leases are not executed yet, our progress here is noteworthy. Strength of our business is grounded in superior demographics. Always has been. Always will be. More density, higher incomes and real barriers to entry are always important in our business, but never more so than an uncertain times in the economy. Past cycles have proven this out time and time again, with 70,000 households with annual household incomes of over $150,000 sitting within three miles of federal centers, there's simply no large open air portfolio available for the public investor to own than this one. Not one. You know, naturally, we're all on the lookout for changes in the strength of the American consumer and their spending habits because, as you know, it's remained surprisingly resilient. So we tried to dissect the limited tenant sales data that we have for the 2023 third quarter and compared it to the 2022 third quarter. As expected for us, sales were up portfolio wide. Digging a little deeper, our properties with the highest average income surrounding them. So a quarter over quarter tenant sales that were significantly better than our properties with the lowest average incomes surrounding them. No surprise, but an indicator we're keeping our eyes on in the months and the year ahead. They set up front. It's a good time to own high quality retail centric real estate. Let me now turn it over to Dan before opening it up to your questions.

Operator:

Of course, we will now begin the question-and -answer session. [Operator Instructions] At this time, we will pause momentarily to assemble our roster. Today's first question comes from Alexander Goldfarb with Piper Sandler. Please go ahead.

Donald Wood:

Thanks for the question, Alex. The answer is a hard, no. Santa Monica Third Street is a, it's a really unique situation, frankly, in the country. We made a fortune on Third Street. And if I show you the IRRs from when we owned it till you know when we sold that building and frankly, the rest of it, they are really spectacular. But there is no doubt that COVID changed Third Street significantly. And, yeah, there's downside on the street. We're not believers in the ability to continue what we have. Now at a different basis. Maybe that could make some sense again because it would be reset and starting again. But please don't take Third Street Promenade and extrapolate that to other assets within the portfolio. It's a unique one-off.

Steve Sakwa:

Yeah. Thanks. Good afternoon. Don, maybe just sticking on the transaction market and looking for opportunities. You know, one of your, I guess, peers in the shopping center space is kind of pivoting and putting a fair number of assets on the market for sale. I'm just curious if any of those larger format assets might hold appeal to federal?

Operator:

The next question is from Juan Sanabria with BMO Capital Markets. Please go ahead.

Donald Wood:

Sure, sure. You know, I think that you'll see roughly about 10% of the aggregate number of the 27 million coming in the fourth quarter. I think the balance of it largely will come out over the course of 2024. You know, I don't think I think it will be fairly, you know, front end loaded first half of the year, a little bit more weighted than the back half of the year. And it will not be materially different in terms of kind of when it comes online, when you look at everything, including the space coming online for the non-comparable properties. So largely 10% in the fourth quarter and then the balance in 2024.

Greg McGinnis:

Hey. Good evening. Two parter on guidance here. First is on the implied Q4 FFO per share guidance range, which at 1.59 to $1. 67 feels a bit wider than usual. So what could take you to the top or bottom of that range? And with regards to development funding, you quite reasonably took equity funding out of guidance but maintained disposition expectations. So how should we be thinking about funding development at year end and into 2024?

Operator:

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

Donald Wood:

Yes. With regards to the 85 to 95, that's kind of in line. We end up around about 100 basis points. So I think we did slightly better than historically, meaningfully better because I think we had less impact from Bed Bath & Beyond that I think we originally had forecasted. But I think that that's been a positive result from us managing the portfolio over time. And with regards to the watch list, we just don't have much exposure to any of the names that people are worried about. Names like Rite Aid, Big Lots, Joanne, Express represent a de minimis amount of our total rent exposure in the ballpark of about 25 basis points. It's really nothing. And so I think near term, we feel pretty good about the watch list. But we'll assess that for 2024. And we'll move forward as we get through our budgeting process through the balance of this year.

Dori Kesten:

Thanks. Good evening. You started the call with the expectation of 100 basis points of small shop occupancy and 250, I believe, for anchor to be gained over the next 18 months to two years. Would you expect your leasing spreads to remain comparable to what you've seen of late also for that period?

Operator:

The next question comes from Jeff Spector with Bank of America. Please go ahead.

Donald Wood:

Jeff, no, I cannot name a tenant. Where are my comments? By the way, you just cost me $10 with Melissa. I said if I made the comments that I made in here, which are real clear with respect to where we are, the deals we have, how close we're getting, et cetera, but we don't have signed leases yet, I said if I made those comments in there, there wouldn't be a question about the same thing. But you are and you cost me $10. I'm going to bill you on that, if you don't mind. That's really all I can say about that. You should be optimistic because we sure are in terms of the ability to keep moving forward. But no, I cannot name a tenant.

Hongliang Zhang:

Yeah, I guess a follow-up to the prior question. If we were to think about leasing at Santana West, if you were to get a tenant in, would you fully -- would the capitalized interest fully burn off there? Or would it be a proportional amount. Thanks so much.

Dan Guglielmone:

Consistent with what we've discussed in the past, there's no changes in our expectation with regards to that and that policy.

Ravi Vaidya:

Hi, there. This is Ravi Vaidya on the line for Haendel. Hope you guys are doing well? What's your early read for '24 same-store NOI? Some of your peers have particularly expect next year's same-store to be above average again. Can you talk about that a bit and the levers that you could possibly pull to achieve above-average same-store level for next year?

Operator:

The next question is from Anthony Powell with Barclays. Please go ahead.

Donald Wood:

Yes, you should be very positive about that. If you think about where our residential is, it's only in four places, four or five places and they're all at the mixed-use properties that have high rents on -- in general because of where they are and the right growth is generally better because of where they are. We're seeing that particularly true at Assembly in -- just outside of Boston. We're seeing that equally true in Silicon Valley. And so when you kind of think about the particular markets that we're in and you think of the cost of home prices and home -- and mortgages that effectively go there, renting at fully amenitized, great locations looks awfully good. And that's our business model. So I can't really talk generally about the residential world because I don't know it outside of these mixed-use environments in our four big projects. I hope that's helpful. Be positive about it.

Linda Tsai:

Hi. It looks like your weighted average lease term moves around each quarter, but stays pretty consistent in the 6.5 to 7.5 years. I just wonder if there's any desire to drive lower lease terms to capture more upside, given the low retail supply.

Operator:

The next question is a follow-up from Alexander Goldfarb with Piper Sandler. Please go ahead.

Donald Wood:

Good question, Alex. It really is. I'm going to turn it over to Wendy to make sure that you get the specifics.

Jeffrey Berkes:

I would say, Alex, it's Jeff. Keep in mind that we're pretty tough on waste terms, and we're not necessarily giving away a lot of the things that you're talking about to begin with. The leverage is definitely, as Wendy said, shifted to a lot of the landlords in many respects, given the shortage of space and given our proclivity to be tough on all terms in the lease, not just the financial terms. We're cutting good deals right now, and we're cutting them with great tenants. Really, really positive environment right now.

Juan Sanabria:

Thank you. Just going back to Michael's question from earlier in the call about the implied fourth quarter guide. Maybe, Dan, could you provide a little bit of a bridge on the implied sequential deceleration of what those drivers are in FFO from the third quarter run rate to the midpoint of the implied fourth quarter guide, please?

Operator:

The next question comes from Nick Joseph with Citi. Please go ahead.

Jeffrey Berkes:

Sure. Yes. Nick, let me answer the -- this is Jeff. Let me answer the first part of that question, and then I'm going to turn it over to Wendy so she can walk you through some of the things that we've got going on at Mercer. But the acquisition of the fee, which happened in October, was something that we baked into the deal 20 years ago. So exercising that option today does not have any bearing on what we would do with the property longer term. The plans that we have in place for Mercer right now are -- would have progressed with or without that. But we've got a lot of great things going on at the property, and it's been a great asset for us. So Wendy, do you want to fill in some of the details?

Dan Guglielmone:

Yes. And just to remind folks that, that was a $55 million investment at 8.7% yield. So kudos to the folks who've embedded that option 20 years ago to allow us to have this really great opportunity to invest capital at a property we own. I think an implied -- current cap rate on it significantly inside of the yield to acquire a portion of the fee underneath.

Operator:

The next question comes from Hongliang Zhang with JPMorgan. Please go ahead.

Donald Wood:

Yes. It's a great question and one that we spend a lot of time around here doing. Obviously, the higher cost of money means a higher level of return threshold. And so really what it's about for us and this, I think, is different than most people is we do have the ability to do, given the residential entitlements that we have, given the amount of redevelopment on retail properties with an additional residential component, that's something where you've got rates that change every year. You got year leases. And so the notion of being able to get something started for a few years from now and having it move in is much more likely in that category than it is obviously when you're talking about some other piece of real estate. So you'll see more of those redevelopments, retail redevelopments that we do on our existing properties. That will continue and will start -- will pick up again next year. But you'll also see some of the larger stuff, I think, later on next year with respect to particularly residential opportunities within the portfolio, places that we've already created that retail environment to be additive to.

Leah Brady:

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

Operator:

Good afternoon and welcome to the Federal Realty Investment Trust Second Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Leah Brady, Vice President of Investor Relations. Please go ahead.

Don Wood:

Thanks Leah and good afternoon everybody. And special thanks to David Simon for finishing his call more or less on time this afternoon. All-time record-setting quarter for Federal Realty this time with $1.67 second quarter FFO per share result ahead of consensus, ahead of internal expectations, and ahead of last year's second quarter. By the way, last year's second quarter was helped by a large termination fee from Amazon as they exited their brick-and-mortar bookstores. Ex-termination fees, this quarter's bottom line FFO per share growth grew 5% despite significantly higher interest expense. That's a really strong quarter for us. Leasing velocity continues to be the highlight. We signed 107 comparable leases of 576,000 square feet at $35.34 a foot, 7% higher than the cash basis rent the previous tenant was paying in the final year of their lease, 19% on a straight-line basis. Demand was exceptional. When you include non-comparable leases, which, by the way, for us, largely relates to newly built out space on our redevelopment and development projects, along with our office leasing, we executed 135 leases in the second quarter for a very robust 652,000 square feet, representing $23 million of newly contracted annual rent. These are production numbers that lie well outside the averages over our very long history and we'll go a long way towards offsetting the loss at Bed Bath & Beyond and Christmas Tree Shop income stream in 2024, until they're re-leased and rent paying. In terms of Bed Bath, we lost 1 of our remaining nine Bed Bath leases during the quarter. That lease, a 25,000 square foot box at Mount Vernon Plaza in Northern Virginia, has been re-leased to Burlington at a 57% rent increase. Three more Bed Bath leases were rejected effective June 30 and July rent was received on the remaining five. Two of the remaining five were Buy Baby locations that were assumed by online Baby retailer Dream on Me, and we, therefore, expect to continue to receive rents in the future. The remaining three leases were rejected in the third quarter, and accordingly, we'll have a hit to occupancy of about 1% and lost rent of $2.5 million or so for the balance of 2023, all of which has been considered in our guidance. Deals are in the works for all of our Bed Bath locations and replacement rent will start to ramp up in late 2024. Both leased and physical occupancy continued to improve compared with the previous quarter and the previous year. 94.3% leased, a 92.8% physical occupancy at quarter end are up 10 and 20 basis points, respectively, compared with the first quarter and 20 and 80 basis points, respectively, year-over-year. Small shop occupancy gains, in particular, continued their trend during the quarter and increased 20 basis points on a lease basis and 40% on an occupied basis. That's a total increase in small shop occupancy of 310 basis points since Q1 2022. The quality of our small shop tenants and the discerning way that we choose them at our properties is where we create a ton of value. All small shop vacancy or tenancy rather is not created equal. I've noted in the past couple of quarters that leasing productivity and rate that have occurred at the properties we've acquired over the past several years has significantly exceeded our underwriting and that has continued. Similarly, leasing productivity at properties that have recently undergone redevelopment and/or property improvement plans have outperformed our expectations, and we expect that to continue, means that maybe we can be a bit too conservative at times. The roughly 3,100 apartments that make up an important part of the revenue stream at our mixed-use and other properties remain a real differentiating bright spot for our portfolio and continue to add to both cash flow and to value. In the aggregate, our residential portfolio was 98% leased at June 30, and provided 11% more property operating income this quarter than compared with the last year's second quarter. Resi is a super important component of our mixed-use neighborhoods as is the office component, which is also 98% leased outside Santana West and the Choice headquarters building, which is under construction. We did, by the way, deliver the newly built out office space to Choice Hotels this quarter and expect them to finish their work and occupy the building by year-end. Sodexo in the same building will follow right behind. I reported last quarter that inquiries and property tours have seen renewed life at Santana West, and that has certainly continued. Even the Northern California press is starting lower layoffs and dramatic new investment and hiring in areas like AI, electric vehicles and related technologies. Feels like Silicon Valley is stabilizing. So I look back and I think about what it is that we're doing, and I kind of tell you that some of the country's most productive and well-known mixed-use communities sitting just outside San Jose, Boston, Washington, D.C., and Miami seem to us, seem to me, be the right on the mark of the product that is and will remain in high demand as resilient consumers continue to prove that to be so. Let me turn it over to Dan before opening it up to your questions.

Don Wood :

Thanks, Dan. As I listen to Dan's conversation and comments there, I thought one more point that I really I wanted to make. There's so much conversation about the supermarket part of our business and part of the industry and how good that is, but I want you to know about our mixed-use communities. I spoke about the overall outsized performance of the four -- big four mixed-use communities last quarter, but it bears repeating as its strength continued and helped drive the results in the second quarter. Taken together, Assembly Row, Bethesda Row, Pike & Rose and Santana Row are a real company differentiator for Federal, as you know, and more in demand than ever before, with retail leased occupancy at 98% and tenant sales well above 2019 levels. These properties are humming with estimated foot traffic in excess of 30 million shoppers in the trailing 12 months. That's a big number. And it comes from the database of place for AI, which we think is well understated. In our estimation, this is the product in the market that consumers in a post-COVID world want the most. So despite the well-publicized bankruptcies of companies like Bed Bath and Christmas Tree Shops and the effects of higher interest rates on our business, I'm feeling pretty darn good about the way this year is playing out, and that's been the basis for which we could increase guidance by as much as we did this quarter. Let's now turn it over and open it up to your questions.

Don Wood :

You’re welcome, Alex.

Don Wood :

Thanks, Alex. First of all, I'm really impressed that you're reading Montgomery County, Maryland press releases and get into the detail of what's going on at Federal. It's pretty cool. Yes, we did get full entitlements for apartments at Federal Plaza. And I think I've talked for quite some time about using a downtime to get our development team and keep our development team working on entitlements that can be put to work as the economy changes. And I know a lot of people talk about residential. Resi is a really important part for us, and it's not just resi at the mixed-use properties, which is also obviously an important part of what we do. We, right now, not only have just gotten federal Plaza entitlements, but there's 500 units that are shovel ready that we could do today, and we're really looking hard at the capital allocation and the numbers to see how much -- what we really need to get done there and what we can underwrite at Santana Row and at Bala Cynwyd, Pennsylvania. In addition to that, there's another dozen properties, another 3,000 units, so like 3,500 units for which we are actively working on entitlements at our shopping centers. These are places, you wouldn't necessarily think about them particularly, like Friendship Heights, like the Avenue side of Baltimore, like Hoboken in New Jersey, Panam shopping center, a bunch of them. And when you think about us, we've done this stuff before. We've been doing it for 20 years. So look at the back of Congressional Plaza, Housing [ph], Chelsea Shopping Center, previously at Bala. We do a lot of this stuff and we try to do it with our own capital when the numbers make sense so that it moves the needle. Doing stuff with the capital that we could put to work and get it -- get an above-average return will move the needle for Federal. And it's one of the key differentiators given our experience that we look at and will look at over the next 5 and 6 years. Some of those projects don't pencil today. No surprise to anybody. So what? Get the entitlements. Increase the value of the land. Be ready to put money to work when it makes sense. That's a key part of our growth.

Juan Sanabria:

Just curious if -- as you think about getting bigger and looking for new opportunities, which you've talked about in the past, just how you're thinking about funding. Would you consider any joint venture of any of the big 4 properties that help differentiate -- or how are you thinking about kind of the push and pull of growing that -- funding that?

Operator:

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

Don Wood:

Yes, Michael, it's a great question. Let me give you a little bit here and then have Jeff or Jan to expand to the extent there's something else to say. The important thing to understand here, I do believe there is a stabilization happening in the Valley. And I think if you lived out there or saw the press and everything out there, you'd say, maybe we are getting some sort of a period of time where things can start happening. We are in some earnest and, frankly, advanced negotiations with tenants for space right now that are looking at our space simply because of where it is at Santana Row, simply because that is a brand-new product that is fully amenitized. And look, I've been snake-bitten a couple of times before, so I'm certainly careful about this. But I'm pretty confident that we'll have some leasing success in the relatively near future. I hope I'm right. If I'm not, you can say I was wrong. But it feels palpably different in the Valley than it has over the last year or two. And I know that from a product standpoint, this is the stuff that -- I mean, we're getting the views because of the type of product that we have because of the fully amenitized mixed-use environment. This is where it's at.

Operator:

Our next question comes from Greg McGinniss of Scotiabank. Please go ahead.

Jeff Berkes:

Hey Greg, it's Jeff. Yes, the market is starting to pick up a little bit. There's been a handful of trades or maybe slightly less than a handful of trades in our West Coast markets at cap rates to start with a five. There's probably another couple of handfuls of deals in the marketing process on both the East and West Coast where we would look to buy and the expectations there are sub six. So we're starting to see more stuff come to the market and the bid ask spreads start to narrow. As you know, we have a very active team. We're always in the market. We're always trying to force stuff before it gets into an auction process, And we're looking at a lot of stuff, but we're selective too and don't really have anything to talk about at this point. But definitely out there are definitely looking and starting to see more activity. So hopefully, we'll have something good to report in coming quarters in that regard.

Dan G.:

Yeah. We fully expect to be able to capitalize based on our build-out plan for the floor by floor and the timing and so forth through of 2024, and we expect to replace the -- we expect to have income starting as we bring that capitalized interest down. And so we don't expect the disconnect at the moment, but we'll know more as we get leases signed and as we continue to build out and see on the success of the multi-tenant approach that we've had in the building.

Ravi Vaidya:

This is Ravi Vaidya on the line for Haendel St. Juste. Hope you guys are doing well. Just one question here. Can you comment on your watch list? What would you estimate it to be on an ABR basis? And what would you estimate the embedded mark-to-market would be on that subset?

Wendy Seher:

Yeah. I mean we're constantly reevaluating the list, and it's not just the watch list, but it's who's going up in size, who's going down in size and how are we managing what that means to us in the long term. If you look at what bankruptcies, I'm feeling pretty good about what I see on our watch list. If you look at the bankruptcies we've had, David's Bridal. Both of our leases were assumed. Party City, we have short-term leases with them, and we have one lease out for signature to backfill. The one location and the second location has two letters of intent on it. And Tuesday Morning, we had three locations with them. Two of them already signed leases and one is in lease documentation we executed this quarter. So, feeling pretty strong.

Samir Khanal:

Hey, Dan, I guess, similar to the last question, just on sort of the watch list. I know you've put in this sort of a general reserve, I think you said about, if I recall, it's 50 to 75 bps. I'm just trying to -- knowing that it's sort of August here. And is that you just being a little bit conservative, or do you expect some fallout into the back half of the year? I just want to make sure I'm not missing anything. Any hints or any comments you can provide into maybe even next year, right? I mean where do you think that general reserve would be? Do you think it will be higher or lower, similar to this year? Thanks.

Operator:

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

Dan G.:

Yes. A big hit there is going to be the interest expense. We refinanced a bond in the second quarter, repaid them effectively on June 1, so we're going to see the full quarter there. Plus, the Fed continues to raise rates, and so we do have a little bit of exposure on the floating rate side. And that's probably the lion's share in addition to the Bed Bath impact in 3Q.

Unidentified Analyst:

Hi, everyone. Thanks for having me on. So you did comment on leasing productivity and that's continued to outperform expectations. Can you talk about the spreads achieved on the leases executed this quarter? It just looks like that moderated, particularly on renewals. Just want to get some more color on what tenants are still willing to take and kind of comment on the outlook for the trend on spreads going forward?

Operator:

The next question comes from Ki Bin Kim of Truist. Please go ahead.

Dan G. :

No, very good question, very good question. Look, with regards to the equity, that's just an assumption that we layer in for our guidance. It doesn't make a huge difference between the $200 million that we -- I think we had previously. So I wouldn't read too much into that. I think that it's just a number that is in there for an assumption to get to that midpoint of 652 [ph] and the range that we have. And with respect to buying back stock, I mean, look, I don't think it's a particularly attractive use of our capital today. given we've got potentially -- we want to preserve our dry powder for better opportunities currently and think that we'll focus on acquisitions and redevelopments given where we're currently trading.

Dan G. :

And to the extent we don't like where our stock is trading, we've got a pool of assets that we'll opportunistically look to sell in the market and try and obtain more attractive pricing than where our stock is trading. So we've got multiple arrows in the quiver to fund the business going forward.

Dori Kesten:

Thanks. Good evening. What refinancing options are you considering for your 2024 maturities? And then where is that pricing today?

Operator:

Our next question comes from Mike Mueller of JPMorgan. Please go ahead.

Dan G.:

Yes. Blended, it's in and around roughly 2.25 across the entire portfolio, anchors and small shop. And this quarter was in line with that, maybe a little bit shy. And that's retail only. Obviously, to the extent that we have other commercial leases, they tend to be higher and they tend to have annual bumps that drives that blended spread up.

Operator:

The next question comes from Floris van Dijkum of Compass Point. Please go ahead.

Dan G.:

Just with regards to pricing, look, we don't do it for the incremental pricing. You could say that there's probably incremental demand. And what that means for pricing with the bonds and so forth, I think, is difficult to quantify in today's market. We do it because, honestly, we like to highlight the fact that when we develop in our mixed-use communities, we develop at LEED Gold or better. We've got a LEED Gold-certified neighborhood designation at Pike & Rose, which is one of only a dozen, I think, in the country. ESG is an important part. I think Don Becker should maybe kind of highlight what we -- some of the more specifics. But look, we do the green bond because I think it kind of showcases what we do, but it also expands just the universe of potential investors who will look at the bonds. And if it gives us better pricing, that's great, but it just -- it enhances execution. And I think that's the most important thing.

Linda Tsai:

Hi. The comparable signed but not occupied pipeline of, I think, $34 million and the noncomp of $17 million, what's that cadence of the about $50 million coming online?

Operator:

Next question comes from Paulina Rojas of Green Street. Please go ahead.

Dan G.:

The lower CapEx that you're seeing this quarter?

Don Wood:

Yes, Paulina. We are having a hard time hearing you. I don't know whether it's the connection or not. We're going to try to answer this, I guess, on the capital. If we're not giving you what you want, please give us a call directly. Call Dan or Melissa after this, and we'll get you specifically what you want. But we're going to take a shot, I guess where we're going.

Operator:

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

Operator:

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.

Operator:

Good day, and welcome to the Federal Realty Investment Trust First Quarter 2023 Earnings Conference Call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Leah Brady. Please go ahead.

Donald Wood:

Thanks, Leah, and good afternoon, everybody. Strong start to 2023 here with $1.59 first quarter FFO per share results, ahead of both consensus and internal expectations and 6% growth over last year's first quarter. Also happens to be the best first quarter result we've ever posted. Here's the best part. We signed 101 comparable leases for more than 0.5 million 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. As you know, I've been expecting the inevitable tail off of leasing activity for months and 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-ring suburbs of major metropolitan areas. One of the larger drivers of that leasing performance this quarter was the signing of four grocery deals, three new deals and renewals. The renewal was implied in the Boston suburb with Star Market and Albertsons brands. The new deals included Giant Food replacing Shoppers Food Warehouse, Karin Plaza and Cyber Baltimore, a grocer that I'm not allowed to announce yet replacing Michaels at Fresh Meadows and Queens and Aldi replacing Barnes & Noble on Long Island. Together, these four deals turned $3.3 million in base rent or $17.81 a foot to $4.4 million in base rent or $23.40 per point. Strong rents and rent growth in proven productive centers in Northeast densely populated suburbs. The timing of them all getting done in the first quarter bodes well for the future. The Bed Bath bankruptcy filing news will not exactly welcome, was inevitable and frankly, better than the band data is being write-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 retained. Dan will provide more detail on what we've assumed in our numbers. The natural lease expiration of a large-format Bed Bath & 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 a Tuesday morning in suburban Boston, it also closed when the lease expired in January, fairly overshadowed the many store openings elsewhere throughout the portfolio. Meanwhile, small shop occupancy gains continued on a quarter and increased 50 basis points. That's a total increase in small shop occupancy of 270 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. All small shop tenancy is not [indiscernible] And as much as I love the grocery deals I mentioned earlier, it's the retail side of the big four mixed-use communities that I find most impressive. Taken together, Assembly Row, Bathesda Row, Pike & Rose and Santana Row are a real company differentiator for Federal and more in demand than ever before, with retail leased occupancy at 98% and tenant sales well above 2019 levels. These properties are with estimated foot traffic in excess of 28 million shoppers in the trailing 12 months. That's a big number and comes from the database of Placer AI. Roughly two thirds of tenants report sales of big 4, so the numbers are representatives. 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 fair to repeat it. Demographics made, especially in times of economic pressure and especially now at the $5.5 trillion of government stimulus that propped up the economy during the papers is waning. Past cycles have convinced us that families simply have to have money to spend for retail real estate cash flow to grow. 68,000 households with average annual household income of $150,000 sit within three miles of Federal Realty centers. That's $10.2 billion of family income generated within a three-mile route-mile radius and more than half of those people have a four-year colleagues agree or better. I know no other significantly sized retail portfolio back in same. With the late quarter on the transaction flow, where we sold a small grocery-anchored shopping center in the quarter for $13 million, center located in very suburban Newberg in Pennsylvania as one of the latest 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 Seritage Realty Trust for $35.5 million. 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. With this first quarter transaction, we now fully control this 18-acre parcel in affluent East North Fort Long Island. And as I mentioned earlier, we just replaced Barnes & Noble with an Aldi grocery store you're creating another grocery-anchored property in the portfolio. With a $5 million-plus annual income stream on our $56 million all in investment, we've created a much more valuable property with an unlevered IRR in the low teens and arguably $20 million plus of immediate incremental value. You might have also noticed that after the quarter's end, we refinanced our $275 million in bonds coming due June 1, with a new five-year $350 million green bond at 5.375%. The offering was significantly oversubscribed with demand helped by our lead gold or better investments. Next up will be the financing or refinancing of our $600 million bonds coming due next year. 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 2021 and beyond, you only need to look at $600 million plus of construction and process on the quarter-end balance sheet to identify a large source of future income and capital already invested, Much of it lease is not yet reflected in the results. What was reflected in the quarterly results was a $10 million property operating income contribution from the latest completed phases of some of our mixed-use operating properties, namely Assembly Row Phase III, 009 Roads at Pike & Rose and a full quarter, a stabilized cocoa wall, which contributed. And finally, our floor-by-floor buildout at Santana West seems to be attracting more interest in the marketplace as inquiries and property tours have seen renewed life in the last 30 to 60 days. Tech sector in Silicon Valley is far from settled, but the increased activity is certainly well. 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.

Operator:

[Operator Instructions] Our first question comes from Juan Sanabria with BMO Capital Markets.

Daniel Guglielmone:

Yes. It was essentially a mix with regards just what not done during the quarter. One of them was the grocer renewal that we had up but also just a broader mix. And obviously, the TIs, again, a mix of the leases that got done.

Craig Schmidt:

I kind of wanted to talk about mixed-use and added resi. I noticed on your future development opportunity page, you've gone from six mixed-use projects that could add residential, now, we have 14. What I'm wondering is, I've heard you say that one third of your properties or mixed-use now, where do you think you might be in five years' time? 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?

Craig Schmidt:

I apologize upfront.

Operator:

The next question comes from Steve Sakwa with Evercore ISI.

Wendy Seher:

Steve, let me just kind of add some color first before Dan talked about the numbers. But you're right, we're seeing great demand on the retail leasing side, specifically in the small shops. We have not seen a decline of anything considerable 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, 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. Again, 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.

Operator:

The next question comes from Greg McGinniss with Scotiabank.

Jeffrey Berkes:

Sure. Yes. Greg, this is Jeff. Let me start off on the West Coast, obviously, Don can jump in on the second part of your question. So the business decision we made late last year to allow the building to be leased by four by four 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 is working out for us. That combined, I think, with a little bit more of a settling at least in the, call it, mid-sized tent market as what they're going to need in the way of the office space as cause tours to tick up, and we have paper going back and forth with a couple of tenants. So they're not full building tenants, but they are multi-floor tenants and I don't know whether we'll get any of them not, 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 more four-by-four.

Daniel Guglielmone:

End of the year.

Daniel Guglielmone:

Yes.

Operator:

The next question comes from Connor Mitchell with Piper Sandler.

Donald Wood:

Yes, Conor. It's 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 in Hoboken, and love the investment that we've made there. 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 two or something like that. But that project is going to very likely make some sense. To the extent we can find more have it makes sense in markets where we already are like that. We'll look at it all day long. But that's the type of thing that's far more attractive to us than chasing headcount.

Unidentified Analyst:

This is Hassan [ph] on for Craig. The active mixed-use redevelopments all have a 6% projected returns. How are you thinking about return thresholds for incremental project starts given the elevated cost of capital?

Operator:

Next question comes from Floris Van Dijkum, Compass Point.

Daniel Guglielmone:

Yes. The occupied percentage of small shop is 88%. And we would expect to be able to drive both of those up higher. I think that's a real opportunity. And up towards the occupied percentage above 90% and up towards north of 92% on the lease side. I think there's still more room to run on that our portfolio.

Derek Johnston:

I 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 '24, somewhere around that time frame. Do you think there's visibility in rates and somewhat of a stability in rates can condense or narrow what must be a wide bid-ask spread. So you can maybe do some accretive acquisitions and reignite that growth engine later the year?

Operator:

The next question comes from Michael Goldsmith with UBS.

Daniel Guglielmone:

Look, I think the biggest driver would be just continued strong leasing volumes. Our pipeline is as strong as 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. 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 we'll be able to weather this difficult economic environment, whether or not we see a continued uptick in bankruptcies. And I think that balance, we've done very well balancing that. I think that we've managed to have very little exposure or on a relative basis, certainly, but just in absolute terms in terms of our exposure to those bankruptcies, we hope that continues.

Ravi Vaidya:

This is Ravi Vaidya on the line for Handel. I hope you guys are doing well. 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?

Operator:

The next question comes from Hong Zhang with JPMorgan.

Daniel Guglielmone:

Yes. No, I think -- look, it depends on so far of our 9 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% on an occupied percentage. We'll be probably closer to 92%. But we'll see how that all plays out. What gets somewhat that is in terms of what leases get purchased in there liquidation. And from that perspective, we would hope to have a clearer sense from that number as the bankruptcy unfolds.

Paulina Rojas-Schmidt:

Don, you have talked about how you believe your portfolio outperformed peers in an economic downturn. And you have highlighted how affluence, good demographics are a key driver behind that. But an are perceived perhaps as vulnerability is your slightly higher exposure to more cyclical categories restaurants a little bit more foot 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.

Operator:

The next question comes from Tayo Okusanya with Credit Suisse.

Donald Wood:

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. So those are not a lot of properties, but it's a few that we look at. The -- that's what we talked about last quarter, last year, et cetera. And we got to get comfortable that we're going to get paid well. 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 Jeff, is there anything to add to that? Think that's it.

Linda Tsai:

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 SNO pipeline. I was just wondering if you had a number for that for yours.

Operator:

Our next question comes from Alexander Goldfarb with Piper Sandler.

Donald Wood:

Thanks, Alex. It has panned out the way we thought. In fact, probably better than we thought in terms -- given the fact that we didn't consider a global pandemic, and those properties performed exceptionally well during the pandemic. What -- the answer to your question really depends on the right local partner. It really depends on the market, of course, that we need to be comfortable with and a partner that we would need to be -- that we would need to be aligned with, with respect to our views and the way we can manage a property. Prime Store has been that. It's been a very good partnership. We've had trouble adding more to it. We would have wanted 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 perform really well. I'll actually be out there on Monday of next week with Prime Stores. 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 and if we're not familiar with, we'll get hurt. So we better have the right partner, and we've not found that at this time.

Leah Brady:

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

Operator:

Greetings, and welcome to the Federal Realty Investment Trust Fourth Quarter 2022 Earnings Call. At this time all participants are in listen-only mode [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Leah Brady. Thank you. Ms. Brady, you may begin.

Donald Wood:

Well, thanks, Leah, and good afternoon, everybody. We ended 2022 on a very strong note and reported FFO per share of $1.58 in the quarter and therefore, $6.32 for the full year, ahead of both internal and external consensus expectations and a precursor to the strong guidance that great real estate with class-leading demographics will allow us to forecast. We're more than a year ahead of where we thought we'd be in recovering from the depth of the pandemic in terms of leasing, occupancy and bottom line earnings. We executed a record 497 leases for over 2 million square feet of retail space in 2022, and the comparable deals were done at 6% more rent on a cash basis and 15% more rent on a straight-line basis than the leases that were expiring. We did that while simultaneously increasing our inherent contractual rent bumps to over 2.25% annually overall. And by the way, based on what we see looking forward into 2023, at this point, while I doubt that we'll do 497 leases again. I would expect a higher lease rollover percentage in 2023 as continued strong demand and inflationary pressures are helping negotiations. We leased up the portfolio at 94.5% at year-end compared with 93.6% a year before and still have room to further increase in 2023. Most importantly, that intensified focus we've been talking about over the last year or so, aimed at minimizing that difference between percent leased and percentage occupied, i.e., getting tenants rent paying more quickly. Well, it's working. While our percentage lease continues to grow, up 90 basis points in 2022, our percentage occupied is growing even faster, up 170 basis points in 2022, suggesting some of the quickest times between lease signing and rent paying in our history, a particularly impressive feat during the supply chain struggles of the past two years. So all of these things resulted in 2022 FFO per share of $6.32, 13.5% higher than the year before and right on top of our pre-pandemic record. I know you've heard me say it many times before, but it bears repeating. Demographics matter, especially in times of economic pressure, past cycles have convinced us that families simply have to have money to spend for retail real estate cash flow to grow. 68,000 households with annual average household incomes of $150 to $1,000 sit within 3 miles of federal centers. That's $10.2 billion 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 no other significantly sized retail portfolio that can say that. So it's manifesting itself in a myriad of ways, including a wide variety of tenants who saw their sales exceed the percentage rent threshold in the lease in the fourth quarter. While not a huge absolute number, since we strive for strong fixed rent in our leases, the broad-based percentage rent contribution in the quarter, particularly among our restaurants and soft goods tenants over and above the fixed rent is notable and contributed an additional $0.02 per share compared with last year's fourth quarter and is a continuation of the trend that we've been seeing all year. Now as economic activity falls and higher interest rates affect everything from car loans to mortgage payments to deal underwriting, we would certainly expect to see a slowdown in consumer spending which very well may cause retailer reticence and a slowdown in the period. It hasn't happened so far. Leasing -- that kind of change is pretty obvious. But that's okay. This business remains more solid. And if history is any indication, federals real estate will outperform given that superior demographics, along with a very strong diversification of rent. No one tenant makes up more than 2.8% of our rental stream, and that tenant is TJX. To put a finer point on that, when you think about today's troubled tenants, Bed Bath, Party City, Rite Aid, Tuesday Morning and even Regal Cinemas, of which we have no exposure, all of them combined comprise less than 1% of our 2023 forecasted rental stream. Average in-place base rent at our 9 Bed Bath & Beyond and Buybuy Baby locations is $15 a full. Rental will be more than replaceable as we navigate through the expected bankruptcy process with. We continue to opportunistically prune the portfolio of non-core and slower-growing assets. And in the fourth quarter and the last few days of the third quarter, we sold three smaller properties, all in Maryland, for proceeds of about $135 million at a combined flat 5% cap rate

Operator:

[Operator Instructions] And our first question is from Juan Sanabria with BMO Capital Markets. Please proceed with you question.

Donald Wood:

We're back. Yes, we're, in fact, well above 2019 levels. So I know one that what Dan was just talking about was specifically with respect to the 4 mixed-use assets and for obvious reasons there. But the whole portfolio is on overall back above 2019. It's the higher interest expense that effectively brings us back down to about the same FFO but certainly, operationally, significantly above.

Craig Schmidt :

Thank you. I just wondered if you could just give us what the drag will be on the increased interest expense of '23 versus '22?

Craig Schmidt :

Okay. And then just real quick. Small shop was relatively flat sequentially, do you still see that as a major opportunity for growth on your POI?

Wendy Seher:

And I would add to that, there's a real sense of urgency on the leasing side overall, especially on the small shops. Through COVID, the weaker guys, as we know, have gone away and our small shops are thriving right now. Obviously, we're heading into maybe some headwinds, but some of the technologies and so forth that have come post COVID are really driving sales for a lot of the retailers, including the restaurants.

Greg McGinniss:

Hey, good evening. Dan, I was hoping you can just touch on what would be driving you to either the bottom or top end of guidance this year?

Greg McGinniss:

Okay. And if I could just… [Technical Difficulty]

Samir Khanal:

Thanks for the question. Maybe you can touch upon the transaction market and kind of what you're seeing from pricing or cap rates today. I don't know if there's a way to bifurcate between sort of your suburban open-air centers versus any color you can provide in lifestyle centers. That would be great. Thanks.

Operator:

And our next question is from Michael Goldsmith with UBS. Please proceed with your question.

Daniel Guglielmone:

Okay. Look, I think the building blocks that kind of are comparable is kind of a combination of things that get us there. I think we would expect I think contractual bumps, which continue to be kind of sector-leading, kind of north of 2.25% and include kind of some of the office. I think occupancy growth relative to where things were last year will add, I think, a good chunk of rollover because what's interesting is ours is a GAAP number, so the contractual rent bumps don't contribute as much. What really does is the rollover to rollover growth, which is the straight line rollover, which captures those rent bumps. And so that should be a big driver because of the progress we've made. And you've got residential. I think we'll continue to see percentage rent and parking. And then we mentioned the probably 100 to 130 basis points of credit reserve, then also about 100 basis points of term fee headwind and prior period rent headwind that gets us kind of to that midpoint of that metric.

Craig Mailman:

I just wanted to circle back up on the interest capitalization question. Dan, just two questions on this, basically. Just what guidance have been if you guys had burned or ceased capitalization on Santana West? And kind of from a timing perspective, even if there was no leasing, when would you have to just finally stop capitalizing there? And then just secondly, the strategy shift to the multi-tenant, are you -- what kind of demand are you guys seeing, if at all, in those smaller spaces? And are you guys gearing to build out suites or just trying to demise the space?

Operator:

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

Donald Wood:

That's fair, Haendel. I mean the -- look, the business, the general business and the shopping center business, allows the portfolio to grow with common occupancy of a typical shopping center of 1.5% and 1.25%, what they do. We've been able to have long-term growth of 3%, 3.5%, something like that, on an occupancy neutral basis. I feel very good about that. And with respect to the comment I was making about the about the rent bumps, it's really -- we've talked about this in the past, a little bit of inflation is a really good thing in our business. So much inflation certainly isn't. But to the extent we get to a normalized level of inflation, it allows us to push more. And Wendy and that team is having success effectively with the ability of increasing or improving the economics for longer-term deals because inflation is real, and everybody knows it. You're not trying to push a noodle uphill. So that long-term growth rate of 3%, 3.5%, I feel very good about.

Floris Van Dijkum:

Thanks. Guys, I appreciate you throwing out guidance that is a little bit more adventuresome than some of the your retail partner. And maybe if you can talk a little bit, as you know, not all space is created equal. And I know you've been saying that for a long time, Don. But one of the things that intrigued me about your portfolio and where I think people might be underestimating the growth potential, particularly in your small shop space because your rents are double your anchor tenants, you talked a little bit about your lease percentage. How much of that is occupied? How much more do you expect to gain in terms of lease growth in '23? And then maybe if you can -- if we walk through the elements of your growth for '23, you talked a little bit about -- Dan, you talked about the 2.25% fixed bumps, you have an element of leases that you signed in '23 that were -- where you got a partial year, and obviously, those are going to contribute in '23 as well. And then you got your SNO and you get your spreads. If you do the math, I mean, it looks like you're going to be well north of NOI growth, if I'm adding it up correctly.

Operator:

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

Donald Wood:

Yes, Derek, let me start, and Dan will add to this. Look, there's a couple of principles involved here. So one is I never want to surprise our own so I never want a whole bunch of equity out there at any one time. I'd like to do it in conservative amounts as we go through a year. We opportunistically then obviously can turn that dial up or back based on where we believe value lies and what the uses are. The most important thing is what is the use for that money. And at the end of the day, to the extent we are very comfortable that we can use shareholder or debtholder proceeds to be able to create incremental value, that's what we will do. That's the driver always because we don't have to, to the extent we don't have those uses, and even the development pipeline that you know, it's far lower than it was, only a couple of hundred million dollars left spend at this point. So lots of flexibility. And that's what I always want to maintain with respect to the balance sheet here is the ability to kind of take advantage opportunistically of what's going on in the marketplace to create value. And I look at debt and equity similar to that.

Anthony Powell:

Hi, good afternoon. It's a question on lease spreads. Good to see the acceleration in the fourth quarter. How are you balancing higher lease spreads versus maybe higher bumps? And are you seeing any tenant push back in that conversations or tenants just saying we need the space and like the space, so we're going to accept the higher prices?

Donald Wood:

And I think because demand is strong and continues to be strong, we found success in being able to push on both of those levers, particularly in the last couple of quarters.

Alexander Goldfarb :

Hi, thank you. Good evening. Just a question on Santana West because it seems to be -- that seems to be the delta versus the Street. I think it was $0.20 is what you originally guided when you ceased capitalization. Now obviously, great to hear that there's work going on in demand. But I guess my question is, do you guys think that you were a little too conservative in ceasing capitalization? I understand that you stopped work on the project, but given markets are moving or fluid when it comes to leasing, do you think that maybe should have just left it as a capitalized project? I'm just wondering because all the other stuff that you guys are doing is great, but that capitalized interest seems to be the delta between the '23 outlook and where the Street is, so I'm just trying to understand.

Operator:

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

Jeff Berkes :

Yes. Paulina, it's Jeff. And I think I understand your question. I think you're talking about the number of people that come to work every day, Monday through Friday, at the office buildings at Santana Row. I'll tell you two things about that. One, that's a small part of the traffic at Santana Row. Santana Row generates a ton of traffic over the year. And the primary reason people are coming there is to shop, eat and enjoy the property. The weekday traffic is building as well as return to office is ramping up in Silicon Valley. So, we do see that coming back and coming back strongly. But overall, that's a relatively small component. And like Dan said in his prepared remarks, traffic today at Santana Row is above what it was in 2019. So, we're in pretty good shape there, and I appreciate the question.

Michael Mueller:

Hi. I guess looking at the future phases at Assembly, Pike & Rose and Santana, whenever you think the time is right, how -- I guess, what's the time frame to reactivate those various phases in the project?

Operator:

And our next question is from Ki Bin Kim with Truist. Please proceed with your question.

Don Wood :

Yes. No, it's a very fair question. I'm not sure it will take longer. And the reason is because we are building out the individual floors. So that work, effectively a year's worth of work here, is being done ahead of time. And so, on timing, I think feeling pretty good. In terms of the extra carry and potentially on cost, yes, I would expect those to be incrementally higher, but we also have benefits in terms of our base building and lots of other things that are reducing the cost of Santana West. And I guess the last point to really make just make sure you're not overemphasizing this one building that makes up 1.5 points -- 1.5% of the asset base of the company. And when you kind of sit back and you take like our entire office portfolio, they back out just Santana West, just alone, even our ongoing other buildings, which are under construction, in total, 92% leased. And if you knock out the one that's being built here at Pike & Rose, that's not finished yet, they're 97% leased. So, the product -- and this is really important, from a real estate person's perspective, the product is right all the way through, and it's a different product when it's attached the Santana Row, Assembly Row, Pike & Rose.

Craig Schmidt:

Great. And just one, I wanted to congratulate Jan Sweetnam on his new role of Chief Investment Officer.

Don Wood :

Thanks, Craig.

Jan Sweetnam :

Still West Coast-based but spending some more time on the East Coast, Craig.

Jan Sweetnam :

Well, that's a good question, Craig. Well, look, there's a -- feels like there's going to be some increase in product out there, Craig, and some new product for us to look at. Expanding our base in Phoenix, I think, is going to be a big focus for us. But I feel pretty good that there's going to be some larger good product for us that we can buy accretively. So, nothing's set in stone, feet ready to go, and we'll see where it takes us.

Greg McGinniss :

So just a couple of follow-up questions. One is on the disposition pipeline. I think you noted $350 million on the last call. Just curious if you're still pursuing the remainder of those transactions.

Greg McGinniss :

Okay. Great. And then on the resi occupancy, which fell quarter-over-quarter, was that because of the Rolling Wood sale? Or are there some other reasons for that?

Operator:

And our next question is from Juan Sanabria with BMO Capital Markets. Please proceed with your question.

Dan Guglielmone :

Yes. Look, I think we're going to look to be opportunistic like we always are. I think we're going to -- we created a significant amount of capacity to give us the flexibility to be opportunistic, completely undrawn on $1.25 billion will give us flexibility from a timing perspective. But we expect to access the bond markets throughout 2023 to address the maturities that we have, June maturity as well as the January '24 maturity.

Michael Goldsmith :

Thanks a lot for taking another one for me. The lease occupied spread compressed by 50 basis points down to 170 basis points. So, on the one hand, you're monetizing all the leasing that you're doing, but maybe on the other side, you're not -- there's maybe a little bit less benefit in the pipeline. Like how do you think about it? It seems like you've been very positive on being able to monetize it sooner, but just wanted to kind of get your thoughts on either side of that argument?

Dan Guglielmone :

Yes. And just to add another thing that's not in that 170 basis points of signed and not open SNO is are non-comparable pool where we have an equivalent amount of POI that's expected to come on from what we're delivering stuff, buildings that are not yet placed into service, where we have leasing done, contracts leases that are done. And it's the equivalent of that same 170 basis point spread. So that's an added differentiator and an advantage that none of our peers have because they don't have the scale of that non-comparable pool.

Leah Brady :

Thank you, everyone, and we look forward to seeing many of you at the Citi Conference.

Operator:

Hello. And welcome to the Federal Realty Investment Trust Third Quarter 2022 Earnings Conference call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Leah Brady. Please go ahead.

Don Wood :

Thanks, Leah. And hello everyone. Well, consumer spending remains very strong in the major submarkets where federal operates, particularly in our mixed use properties, and has resulted in another quarter of outperformance in terms both executing long-term leases as well as bottom line earnings. 126 executed long-term leases for 585,000 square feet of space, an FFO per share $1.59 were both above external and internal expectations and continue to signal strong demand for high quality retail and mixed-use real estate. The future pipeline appealed not yet executed also remains robust and as such will be raising 2022 guidance again. Demographics matter, especially in times of economic uncertainty. Past cycles have convinced us that families simply have to have money to spend for retail real estate cash flow to grow. 68,000 households with annual average household incomes of $150,000 sit within three miles of federal realty centers. That's $10.2 billion of family income generated within a three mile radius, and more than half of those people have a four-year college degree or better. I know of no other significantly sized retail portfolio that can say that. It's manifesting itself in a myriad of ways, including a wide variety of tenants who are seeing their sales exceed the over trend threshold in the lease. Although not a huge absolute number since we strive for strong fixed rent in our leases, the broad based over trend contribution in the quarter, particularly among our restaurants and soft goods tenants over and above the fixed rent, is notable and contributed an additional $0.02 per share compared with last year's third quarter. As I said, strong core leasing remains the engine that drives us. Over the last decade, pre-COVID, that's 2010 through 2019, average third quarter production for comparable properties at federal meant doing 88 deals for just over 400,000 square feet. In the 2022 third quarter, we did 119 deals for 563,000 square feet, 40% more than the average. Annual rent bumps of our retail leases average about 2.25% overall and higher when including office leases. That's a powerful advantage over the typical shopping center portfolio. The fact that demand has remained this heated with a deal pipeline that looks to stay strong, speaks volume about our properties and the markets they are in and naturally about future property level operating income growth. It's one of the reasons Dan is again, raising annual earnings guidance $0.12 at the midpoint. The solid tenant performance also manifests itself in continued occupancy gains as tenant failures remain low. Our current year lease rate is now at 94.3% and occupied rent rate now at 92.1%. Those leased and occupied rates are 150 and 190 basis points respectively better than a year ago and there's obviously still room to grow there, particularly on the small shop side. At 89.9% leased small shop space is a remarkable 640 basis points higher than the COVID low point with further gains expected by year-end. I referred earlier to the outsized demand that we see at our mixed-use properties. Note that the retail component of our four large ones Assembly, Pike & Rose, Bethesda and Santana are 98% leased at quarter’s end. In addition, we continue overall to hit or beat targeted delivery dates. One of our key corporate goals for 2022 and a real tribute to our tenant coordination and construction teams, I'm as convinced as I've ever been that we have the right product in the right locations with the right demographics for the inflationary economy that we're in. And by the way, with a well demonstrated 55 year respect for the dividend component of our total return, a dividend yield of 4.3% for a portfolio of this quality seems awfully compelling to us. And against that backdrop, we've also been able to sell a couple of non-core assets at good pricing and refinance and upsize our term loan and line of credit to be sure that we have plenty of balance sheet flexibility and dry powder for whatever the economic environment feels like in 2023. In terms of capital needed for our large development projects, we have less than an incremental $225 billion to go, about $100 million to complete the Choice Hotel, headquarters building at Pike & Rose. A $100 million largely for tenant build out commissions at Santana West and $20 million to complete Darien Commons. By the way, after the quarter, just last week, we just signed a 52,000 square foot lease with a credit tenant bringing that building at Pike & Rose to over 60% pre-leased. Those products alone will be contributing an incremental $40 million in operating income in years to come. Investing in these and other projects, both large and small with fixed rate debt and equity before the recent rising rates will serve us well in the coming years as these state-of-the-art buildings begin cash flowing. Similar to development, our pro rata share of the acquisitions that we've made since the beginning of COVID through today totaled $850 million. Those acquisitions from Grossmont to Camelback Colonnade, the Pembroke Gardens and so forth, are performing well ahead of our expectations in the aggregate and are expected to yield in the mid-60s in 2023. In that same time period, we generated over $400 million in proceeds from non-core asset sales at a sub-five cap. That capital recycling was not only immediately accretive, but the medium and long-term growth rates of our acquisitions, net of dispositions are clearly superior. Okay, that's about it for my prepared remarks this morning though, I'd like to leave you with one final thought before turning it over to Dan. In our view, the recent run-up in interest rates was inevitable, but not necessarily at the pace we're seeing, while sure to pressure everybody's earnings to some extent in the years ahead, how much so and for how long remains to be seen. So the real question is, will property level operating income more than compensate. These are the times when well-leased, well-located dominant retail and mixed-use centers in supply-constrained affluent, densely populated markets and submarkets shine. We're in a cyclical business, no news to anyone. And it's why our business plan has always included multiple ways to counter the rise in money costs and the effects of inflation. The combination of best-in-class shopping centers along with acquisition and development property level income contributions financed with money from an earlier time, along with the potential sale of certain assets, including discrete residential buildings within our portfolio, gives us more flexibility and more tools with which to handle cyclical pressures than most. We look forward to the challenge. Dan?

Operator:

Thank you. [Operator Instructions] The first question today comes from Alexander Goldfarb with Piper Sandler. Please go ahead.

Dan Guglielmone:

Yes. Now we'll go to rent spreads to FFO first. The rent spreads we announce are for deals that are signed during the quarter. They will not start for the next year or two, so there's obviously, and that's just one component of how our company grows, which is what the rent spreads are. As we said we also grow rents from contractual rent bumps, which we'll get this year, it is two-and-a-quarter percent retail leases only both anchor and small shop blended that we see in our portfolio, a little bit higher, if include the office leases where we get a little bit higher bumps.

Dan Guglielmone:

Look, we provided goal post or guide posts that that got us to 2023, and we've hit that here in 2022. We're going to provide guidance in 2023 on our February call, but one thing I will tell you is we will see really, really good and strong robust property operating income at the property level in 2023, and we'll continue to see growth coming from our non-comparable portfolio, coming online as well contributing and that obviously in this environment we'll have to counter inflation on operating expenses and we'll look to counter the impact of interest expense.

Operator:

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

Dan Guglielmone:

Well, yes. I don't think there's a lot of wondering about that. If you take a look at history, obviously this isn't the same as the great financial crisis. It's not the same as the dotcom crisis of 2000, 2002 Craig. But it is clearly a period or going into a period of reduced economic activity, call it what your will. It's why we own the properties we own. It's why the demographics we believe are incredibly important going forward. So what those exact numbers will be and what they're – what the future holds and in terms of both inflation and reduced economic activity, I firmly believe we'll outperform. And I believe that just as we have in past cycles, because the affluent, the density and the barriers to entry of where we are, I go back to those numbers because they’re so important. When you’ve got $10 billion of income power within 3 miles of a shopping center, it’s very hard to imagine that that’s not going to be a significant advantage in both an inflationary environment and a lower economic activity environment. So I like this on a relative basis very much.

Don Wood:

Craig, it’s hard to imagine that’s not the case. We’re taking this call today from Santana Row out in the middle of Silicon Valley. There’s always confusion is Silicon Valley, the Bay Area and the stuff that you hear about San Francisco, it couldn’t be – 40 miles is a 1,000 miles away in terms of markets. I’m looking out on this street right here, if you saw the activity, if you saw the restaurant numbers in particular that are generated here, it goes to validate your point critically. We’re seeing the same type of thing in those restaurant numbers at Assembly Row and at Pike and Rose. And so the notion of the combination of those type of properties along with a very substantial grocery anchored shopping center portfolio together, I think makes your point crystal clear.

Steve Sakwa:

Yes. Thanks. Good afternoon. I guess, Dan or Don or Wendy, just as you talk about the leasing pipeline, I was just wondering if you could add a little bit of color on the types of tenants that you’re seeing, if there’s any regional variation. And I guess, as you think about the upside in the portfolio, where do you think the lease percentage can ultimately get back to and when does the – I guess the gap between leased and occupy close more significantly?

Don Wood:

And I guess, Steve, with respect to the second part of your question, I would very much expect this portfolio to be a 95% plus leased portfolio. Now, the notion of the timing of getting there is dependent on the number of things. First of all, we’re not solely driven by occupancy. We’re driven by economics and value creation. And I’ll give you a perfect example. What happens with the Bed Bath & Beyond’s as we go forward? If I had my way, we would get them back as soon as we can and we'd lease them to more productive tenants at higher rents. That's what we'd like to be able to do. Now, that doesn't mean we won't extend one for a year, another year, whatever, but I guess occupancy per se, my point is here is only one consideration in trying to reach the goal. It's not trying to get to 95% no matter who and no matter when. And that's an important thing to understand. And I do think that that's something that we put a lot of weight on the balance necessary to be able to get there. The second thing is obviously the leaks in the bottom of the bucket. What are we going to see over the next couple of years in terms of tenant failures, et cetera? Obviously, we've gotten into this period of time of post-COVID in a better position the industry has because of the loss of weak tenants at the beginning of COVID. And at this point it's still looking really strong and I don't see a lot of leaks at the bottom of the bucket beyond the Bed Bath and always a few small shops, et cetera. But what the extent that's going to be is going to determine the timing of the question that you're asking. I would hope to be there within a couple years.

Don Wood:

Yes, we've made good progress on that. It used to be north of 300 basis points spread. We've got it down to 200 on our way to that targeted, 100 to 125 basis points.

Steve Sakwa:

Thanks. Sorry for long question. Second, just on capital deployment, I guess, Don, how are you thinking or how have you changed kind of your hurdles for either new development, redevelopments ground up or acquisitions? It sounds like you have a pretty robust disposition pipeline at 5%.

Steve Sakwa:

But just how are you thinking about unlevered yields for new investments?

Steve Sakwa:

Great. That's it for me. Thanks.

Derek Johnston:

Hi everybody. Good afternoon. We view renewed office demand as a real potential, positive catalyst for federal, and especially when it comes to investor sentiment. And I think I'd say what we learned exiting the pandemic era is office location, newness, quality operators, they have all seen and, and should continue to see outsize demand. So I guess, how are tours progressing and interest progressing, specifically at Santana West? And perhaps touch on some other assets. And are you more confident on your office component, given what you're seeing on the ground than maybe a few quarters ago or a year ago?

Jeff Berkes:

Yes, I mean, setting 9:15 and once Santana was aside, our office portfolio is 97%, 98% leased. And the reason why it is, is because all of our office locations are amenitized, and we've been saying this for a long time, that is the new standard for having office space. If you can't offer your employees amenities, you can't keep your buildings leased. And we have amenities and space at our properties, that's why we're 97%, 98% leased. Big change out here in Silicon Valley. We talked a little bit about this last quarter. But three, six months ago, the big question here was when are we going to get people back to the office? And I think I said on last quarter's call that Apple, Google and others had made the decision to get people back right after Labor Day. And that has in fact happened. If you live or work out here, you notice it when you turn on the TV in the morning and see the traffic stacked up to get over the Bay Bridge, or you drive down 280 past Apple's headquarters, there is a line of people that get off 280 at the Apple headquarters exit. So the conversation has changed from when to what. And the what is all about what do we need in the way of space to right size our requirement and provide our employees what they are demanding, which is state-of-the-art space with state-of-the-art systems and amenities. So the confidence that Don just mentioned is because of that. And if you look around Silicon Valley, there is really only one building that's state-of-the-art with state-of-the-art amenities, and that one is Santana West. So, I wish we could say when we can't, but we remain positive on our prospects to lease that building.

Jeff Berkes:

Hey, thanks Derek. Yes. No, look with the exception of Bed Bath & Beyond that's probably at the top of our list. We only have about 83 basis points of exposure to them. About 60 basis points of that is to the Bed Bath name. Other than them, nobody else is anywhere close to material in terms of folks were focused on, they were all single digit basis points of revenue. And so there is really not anything that's on the near term concern list for us.

Wendy Seher:

I would say, when I think about Bed Bath & Beyond, look at what we've done over the last, last three, four years or so, which is we've kind of reduced our exposure in that with them as a company, probably about four or five locations, so material. And as I look at what's left, we have three buybuy BABIES that are in good, healthy condition in terms of their productivity from the shopping centers. And we have six Bed Bath & Beyonds and one Harmon. And as I couldn't agree more with Don that although there would be some short term pain, I would be very comfortable controlling all of that real estate.

Operator:

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

Dan Guglielmone:

Yes, look, I think, you highlighted some of the color I've provided on 2023, we are going to provide more detailed, comprehensive with underlying assumptions on our February call. We're in the middle of our budgeting process. We're not done with that, that we need more visibility. And we'll have more visibility hopefully in three months. And that's when we'll give you that detailed information. And so stay tuned.

Michael Goldsmith :

I appreciate that. Are you able to at least provide kind of where prior period rents collected are, just so that we can kind of quantify around that?

Operator:

The next question comes from Greg Mcginniss from Scotiabank. Please go ahead.

Don Wood:

Yes, it's a great question. So you know what that's about, Greg, is about pushing rents hard, particularly of Fed Assembly. And so we were we lease that up so fast that as the turns happened, we wanted to push rents to find the equilibrium lost as a point or two of occupancy, which is just fine. It's funny when you – and going back even to Steve Sakwa's question earlier, what should this portfolio be leased at? I always say 95% or so because it's not just about leasing it up and getting the building filled. It's about making the most money with it. And so the notion of testing where the rates are, where they can be, where they should be relative to occupancy, always makes me more comfortable in the 95%, 95.5% range. For 97%, 98%, it feels like we're leaving money on the table. So there's nothing more to look into that – into it than that. Extremely strong growth, I don't have those numbers actually at either Santana or at Assembly, but they're strong.

Greg McGinniss:

Okay. Thank you. And then just thinking about tenant retention and the potential for increasing occupancy, looking at this quarter, new leases represented 90 basis points of occupancy, leased rate was only up 20 basis points, though. So 70 basis points to move out during Q3, how is the tenant retention comparing to prior years? And as we look towards potentially more challenged economic environment, thinking in that context, what's driving move-outs today?

Operator:

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

Dan Guglielmone:

Yes. With regards to – we kind of feel as though our 2022 guidance for – it was just a stronger outlook for the fourth quarter, significant outperformance in the third quarter. I don't think there's necessarily onetime items in there, except for prior period rent and term fees, which really third quarter over third quarter, we're roughly modest and I don't see that. It's just stronger continued expectation that the trends that occurred and our outperformance in the third quarter will continue into the fourth quarter with regards to continued strong percentage rent, continued strength in occupancy buildup, asset in our pipeline, tenants taking possession of space and then, obviously, with some offset to a higher interest rate environment.

Dan Guglielmone:

Well, the difference between zero on a cash basis and 10% on a straight line are the rent bumps we're getting. And that's an important component to consider when you think about rollover is not only what is the rent you're getting at least maturity to the new market rent. But what are you collecting along the way? And so the rent bumps that you get are reflected in that straight line rent rollover number and we think that's as important the ramp-ups you get as the rollover you get at least in.

Hong Zhang:

Yes, hey, I think you talked about how your typical lease-to-occupied spread is around 100 to 125 basis points. As we think about commencements next year, I was wondering where you think that spread could trend to by year-end.

Don Wood:

By the end of the year.

Don Wood:

I do want to make another point and make sure you're getting the specific – what this is all about. The difference between signing a lease and getting rent started is all based on the tenant construction and the tenants, the permitting process, tenant coordination process. That's been one of the things that has really dogged this industry for the past three years since COVID, supply constrained environment, the logistical problems, et cetera. So really, what you want is to get that tight because what that means is the time between a signed lease and the time and that rent start is the most important thing. Yes, over COVID, that was going to be exaggerated because you were doing leases in such volume that it took time to get that rent started. But the objective should be to get that number lower and lower, not necessarily to have it as wide as it can be because that to me suggests that we're not getting tenants over. And that's really important. So Dan, answer is absolutely correctly, but I just want to make sure that you kind of get what that metric means on an overall basis and how – why it's so important for us to get it down to 100 to 125 basis points.

Jeff Berkes:

Yes, it's Jeff. We've had a partner in that asset for a very long time approaching 30 years that needed some flexibility on their exit from the asset. So we structured a deal that gave us the option should we decide to exercise it next year to go ahead and take them out. I think the cap rate that we used to value the asset was in the upper 5s. Escondida has been a great property for us over the years, one of the stronger growers in our West Coast portfolio so little bit of a win-win for everybody there.

Juan Sanabria:

Hi, thanks for the time. Just curious on the guidance for same-store NOI and what has been delivered year-to-date and kind of what the exit implied is for the ex any term fees noise that's caused there, I know you raised the guidance, but just curious on what the fourth quarter implied expectation is with the upward limit of raised guidance you think about 2023?

Juan Sanabria:

Great. Thank you. And then just – this has been asked a couple of different ways, I guess. But for the small shop tenant base, you're basically at 90%. So could you just remind us what the prior peak was, how high that could go. And like out of that small shop tenant space, what is kind of local versus national or regional tenants? And any color on that more local tenant kind of confidence in the credit behind that?

Wendy Seher:

When I think about the small shops, we certainly had, like everyone did failures throughout the pandemic. And what we – what the result is, post-pandemic is a pretty savvy and experienced small shop that knows how to get through a difficult time. So I think our small shops are pretty on stable ground. Many of them have better balance sheets than they’ve had before. They are quite active in making sure that they’re maintaining their locations with us and growing, and certainly we’ve always felt that that local tenant really brings the color and the vibrancy to the community that we need. So I’m bullish on the small shops.

Operator:

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

Don Wood:

Yes, and it’s a great question. And yes, I do, expect dispositions to be a key funding source of it. One of the things we’re talking about in looking now and it’s premature is it’s pretty incredible the value that we’ve created on some of the residential product that we have. And it is such a unique funding source. And again, that’s at our big mixed use properties that that such a critical part to getting these places established and moving them along, and now they’re established. We’ll look hard at does harvesting that make any sense? And so that’ll be a component that’s in the consideration of how to fund. Secondly, the – when it gets to where to deploy the capital, that deploying of capital is very much dependent on a very localized look at demand. And making the case for the Assembly, life science development building, obviously, we want to see venture capital funding in a better place than it is today. Obviously, we want to understand what the cost requirements of building that are. And so, building by building, redevelopment by redevelopment very localized in terms of that decision making process. But again, the capital – the sale of particular assets, I just think we have more flexibility and more arrows in our quiver, if you will, to decide how to get that done then most.

Don Wood:

No update to talk about there. At this point, I can tell you it’s very important to us that the entitlement process not just for that one building, but for the adjacencies to that is completed. We’re working hard on that during this pause period that could give us a whole kind of leg up if you will, when we are ready to move forward again. I also very much want to see what happens next to us with the Blackstone financed life science project to the extent who they land is obviously very important to what’s happening there. So the one thing I know that you can get comfortable with us is that we’re not formulaic in terms of those decisions. They’re very, very much revenue-based based on what’s happening around us at that particular time. So bit more time to go to see what and when there, if you will.

Linda Tsai:

Hi. How much leasing is completed for…

Linda Tsai:

Sorry. I said how much leasing is completed for 2023 and what’s that usually like this time of the year?

Dan Guglielmone:

As of today, we’ve got about 881,000 still expiring and anchor 1.6 million or 1.7 million in total. And obviously we’ve got the leasing that we’ve got done. I don’t have specifically that number. Probably makes sense, we could follow back up with you with regard to specifically how much of that specifically has been leased.

Dan Guglielmone:

Yes. I think we need to kind of spend some time getting through the budgeting process, fine tuning that. That’s a tough question today for us to assess. We’re in – we’ll have that ready and done in January, and hopefully we’ll provide some of that guidance when we provide more formal guidance on the February call.

Operator:

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

Don Wood:

Yes, I’d say it’s all good stuff that you’re asking about. And let me go for a few things that that I’ve noticed along the way. There – on the retail side, very little difference in behavior in terms of getting those leases – the desirability of getting the space, and that’s why the pipeline looks as strong as it does. The question there is, it always comes down to what’s the construction of the space going to cost? And because that’s uncertain now in a period of inflation that flows down the process a little bit. And so, from a behavioral perspective, does it – will it take longer to get leases done? That’s a potential effect of trying to underwrite construction costs primarily, but not got nothing to do with demand. It’s got everything to do with the math of getting that done. In terms of the apartment side, you’re in a period of time here in the markets we’re at where interest rates and home mortgage is going to where they are, make apartments look awfully, awfully attractive. It’s why you’re seeing the demand that we’re seeing. I just went to the numbers here at Santana Row. It’s incredible in terms of the strength of the consumer here as it relates to apartment spending and again, the same thing over in Boston with respect to the product that we’re offering there. So, for me it always comes down to does that consumer have the means to consume? I can tell you, we’ve got a couple of shopping centers that are – where the demographics are below $75,000 of household income. There is no doubt in our mind that those shopping centers struggle more than the ones that have $150,000 and $160,000 of consumer – of household income. So from our standpoint, this is a portfolio that’s very high quality. We certainly have a couple of shopping centers, a few shopping centers at the lower end, and there’s a demonstrable difference, so that’s how I kind of look at the consumer.

Don Wood:

Yes, the whole last 6 minutes of the conversation. No, no, very strong demand.

Don Wood:

Yep. Thanks.

Leah Brady:

We look forward to seeing many of you at NAREIT. Please reach out to me with any meeting request. Thanks for joining us today.

Operator:

Greetings. Welcome to the Federal Realty Investment Trust Second Quarter 2022 Earnings Call. At this time all participants are in listen-only mode, a question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. I will now turn the conference over to your host Leah Brady. You may begin.

Don Wood:

Thanks, Leah and good morning, everyone. An all-time record quarter for us in a number of important respects, none more important than bottom line earnings. At $1.65 per share of FFO, the 2022 second quarter handly beat our previous record of $1.60 posted three years ago in the second quarter of 2019. Even when adjusting for COVID one-timers, second quarter FFO per share matched that previous high watermark. Lots of things going very well here at Federal. We did more deals both on a comparable basis and overall in those 90 days than we've ever done in our company's 60-year history. We continue to lease up our development pipeline and increase our occupancy percentage. We ended the quarter at 94.1% leased. We've added multiple new strategic properties to our portfolio that have clear paths to future growth. And our balance sheet remains strong with $177 million of cash on hand and zero drawn on our $1 billion line of credit at quarter end. As we've been saying all along, the execution of our multifaceted business plan, which in these uncertain times does not rely on a big bet on any one particular income stream, continues to set us up extremely well for the future. The quality of our assets, combined with our sector-leading demographics and high barrier markets tend to outperform through economic cycles as has been the case every time in the last 25 years. So check this out because we did just get new demographic data in as of August 1. So within three miles of our centers, there are 175,000 people on average, that's 68,000 households, 68,000 households, right? $150,000 of average household income. That equates to $10.2 billion of spending power within three miles of our shopping centers. And more than half of those people have a four-year college degree or better. Who else can say that? It's about that spending power that's critical in uncertain times in my view. And cyclicality of the economy is far different than the unprecedented restricted market shutdown due to a global pandemic. They're different. Perhaps the best way we can demonstrate our confidence in the portfolio is by standing behind and in fact raising our dividend to shareholders just as we have each and every year since 1967 -- 1967. That's 55 years a totally unprecedented track record among REITs and among most companies in any industry, one that speaks to the commitment to our owners and to the quality of the income stream. At an annualized rate of $4.32 a share, that's a 4.1% dividend yield at the current share price pretty darn strong for a company of this quality. Okay. Let's start with leasing during the quarter. Over the last decade average second quarter production for comparable properties at Federal meant doing a little less than 100 deals for just over 400,000 square feet. In the 2022 second quarter, we did 132 deals for 562,000 square feet nearly 40% more than the average. And we've never come close to doing 132 deals in any quarter. But the fact that demand has remained this heated with a deal pipeline that looks to stay strong, speaks volumes about our properties and the markets that they're in and naturally about future earnings growth. So, one of the reasons Dan is again raising annual earnings guidance $0.23 at the midpoint. So, one of the more underappreciated phenomena of the strong demand is that, we're able to be more proactive in terms of leasing space that's not yet vacant. While that leasing doesn't immediately show in the occupancy stats, it will mean, less downtime in the future and shopping centers that are merchandised with more relevant tenants sooner than they would otherwise be. The portfolio was 94.1% leased and 92% occupied at quarter's end with continued improvements expected by year-end particularly on the small shop side. At 89.3% leased, small shop space is a remarkable 580 basis points higher than the COVID low-point. Our stepped-up post-COVID reinvestment effort is another critical component to future growth. It's no news to anyone on this call that the traditional generic and homogenous shopping center business is cyclical in nature and not a high-growth business. So you have to stand out to outperform over cycles. You do that by picking the right markets and positioning and merchandising in those markets, but you also have to reinvest to continually find the edge. Reinvesting is more important now than ever before. It's why we have nearly two dozen active and meaningful development projects in planning or underway totaling over $100 million this year and next which will likely yield double-digit un-levered yields over the ensuing years through higher customer traffic and rents, in line with our historically observed results following property improvement projects. That reinvestment is one of the primary reasons we can continue to push rents. Leasing has been exceptionally strong at our newly development assets also, from the completion of CocoWalk, to the office projects at Pike & Rose, to the residential over retail at Darien and to the residential and office Phase 3 at Assembly Row each of these additions have exceeded our post-COVID expectations in terms of lease-up pace. In the case of the residential product at Assembly that's exceeded in both pace and rental rate. Now the one exception is Santana West and there's no question that the cooling of the technology sector in the last 90 days both in terms of their stock prices and getting employees back into the office has been a wet blanket on what had been strong leasing momentum. It has therefore been difficult to bring fully negotiated deals over the transom. Disappointing yes, but important proper perspective having a brand-new state-of-the-art office building adjacent to one of the most successful amenity-rich destinations in the tech capital of the country, isn't so bad. Particularly, since it only represents about 2% of Federal's asset value and will be an important driver of future growth when it hits. It's a matter of time. Stay tuned. We've also remained active on the acquisition front. Following the end of the quarter, we completed the All-Cash acquisitions of two very special properties in two of the markets where we're focused on expansion. The Shops at Pembroke Gardens a 392,000 square foot dominant retail center on 41 acres at the corner of I-75 and Pines Boulevard in Pembroke, Pines, Florida, as an important asset to our portfolio eight miles south and west of our equally dominant Tower Shop Center in Davy and 20 miles north of our newly completed and highly acclaimed CocoWalk mixed-use destination in Coconut Grove. Our ability to remerchandise and push rents potentially add density down the road and fortify federal as a must talk to player in South Florida, were all considered in this important acquisition. The $180 million purchase will generate better than 5% return in year one with a very strong going forward NOI growth that will produce an IRR well in excess of our cost of capital. Across the country in Scottsdale, Arizona, we were able to acquire the 214,000 square foot office building directly adjacent to our Hilton Village, property giving us over 1/3 of a mile of continuous -- contiguous frontage on Scottsdale Road, immediately across the main entrance to Paradise Valley, the region's most affluent in our view underserved community. The integration and rebranding of these properties as one along with the proximity of work home and retail and restaurant amenities in this post-COVID environment is expected to allow us to create a seamless modern environment that will support greater rents and higher long-term occupancy. This $54 million acquisition will yield 6% in year one. And like Pembroke is expected to provide very strong NOI growth that will produce an IRR well in excess of our cost of capital. These two acquisitions along with the previously announced 410,000 square foot Kingstown Shopping Center, in Northern Virginia represent a combined investment of $435 million at a 5.25% yield in year one and more importantly very strong IRRs on three dominant retail destinations in three particularly fast-growing markets from a good job’s perspective. Okay. It's about it from my prepared remarks this morning though I want to leave you with one final thought before turning it over to Dan. Investing decisions grow tougher as economic uncertainty increases and real estate investing is clearly a cyclical business. It's why the underlying business plan of this company has always contemplated cycles in its investment strategy. These are the times when well-leased well-located dominant retail and mixed-use centers in supply-constrained affluent densely populated markets and submarkets shine. Whatever it is to come economically over the next couple of years Federal is well positioned to outperform. Dan?

Operator:

[Operator Instructions] Our first question is from Alexander Goldfarb with Piper Sandler. Please proceed with your question.

Don Wood:

Listen Alex first of all, I got to really thank you for that comment on the dividend because we in this company believe what you just said in terms of its importance more than a lot of people for whatever reason. So yeah, we're real proud to have be able to raise the dividend every year since 1967 and that includes COVID. With respect to the question on demand and regionalization of tenancies, there are absolutely tenants that are looking for new markets to expand into and particularly the well-capitalized companies to be able to do so. What is always important to us, and I know you've heard this before, but it's so true is the merchandising of those centers. So when you look at CocoWalk and you look at the mix of regional tenants, but also really important local tenants that make the place special. The secret sauce is the mix that happens. And yes, we will have success effectively getting any particular tenant, with the wherewithal to be able to demand to the extent, we can show them a profitable opportunity in a new market. And I think we can do that. I think we do that well. Jeff?

Alexander Goldfarb:

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

Jeff Berkes:

Yeah. Let me add a little bit to that, Alex. And let me also maybe clean up a bit, where you started too. You mentioned San Francisco is one of the markets we're in. We're not in San Francisco. We're in Silicon Valley, and there's a big difference between the two. And a lot of people read headlines on watching news, and hear about things that are happening in San Francisco, and attribute it to the whole Bay Area and this. Yeah, it's just not accurate, if you will. San Francisco is still struggling mightily through some social issues that are making a return to office and office leasing very difficult. And that's not really, the case in Silicon Valley. And we're not taking a pause on leasing, if you will. We're out there working as hard as we can to lease a building as quickly as we can. Year-to-date the Silicon Valley Class A office market has absorbed 2.8 million square feet of space, vacancy is 12%. If you include sublease space, I think it goes up to 14%, which historically for Silicon Valley is not great but nationally, those aren't bad numbers. And last quarter, there was 1.8 million square feet of positive net absorption and four big leases between 150,000 and 380,000 square feet that accounted for 1.1 million square feet, of that positive net absorption. So I think what's happening now is -- and it's going to be choppy for a few quarters, and I think we're probably going to see more sublease space come to market. The companies are really struggling with a way to get their employees back to work, and figure out what the appropriate locations and space needs, are for those employees. And I think we're going to see some downsizing -- and perversely, that might work to our advantage in Santana Row. You remember NetApp, took 700 Santana Row, because they downsized out of multiple buildings that were not state-of-the-art, and not fully amenitized. And there's other tenants in the market right now, that are thinking about doing the same thing. And when you look at one Santana West, it is the only way fully amenitized Class A, building of size in Silicon Valley. So well I think, it's like Don said, disappointing that we're not leased yet. We're working hard on it, and we're confident about it. And when you step back and look at the rest of our portfolio, excluding one Santana West and 915 Meeting Street, which is still under construction, our Class A office space and our other office space and our mixed-use properties, is 95% plus leased. There is a very strong positive reaction, whether you're a small tenant or a large tenant to officing in properties, that offer a full range of amenities close to where you live, which is why we bought for down in Scottsdale. We can talk about that further, if you want but I just wanted to make sure you got the full kind of detail on the, what's going on in the portfolio and our thinking going forward on one Santana West.

Craig Schmidt:

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

Craig Schmidt:

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

Wendy Seher:

Sure. Thanks Craig. Basically during COVID and post-COVID, the retailers confirmed that their greatest customer acquisition tool is the right location. And so they are focused on that to set the stage for growth continuing, especially with more relevant tenants and the savvy tenants and there's a sense of urgency in getting the right real estate. And we're seeing that in our performance, we're seeing that in our pipeline, and we're seeing it on our varied shopping center opportunities that we have with all -- it's not just value-based, it's not just service-based, it's all across the sector full-paced apparel and value as well. So, we are seeing that sense of urgency on setting their fleet in the right direction for the growth and being able to go through what is normal cycles and being able to mitigate that downside.

Craig Mailman:

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

Jeff Berkes:

And it is a robust discussion. There's obviously tension, particularly, in an inflationary environment where we're pushing hard to get the kind of increases during the term that Dan talked about in his prepared remarks and not give an excessive amount of term when we're in an environment like this. So, it's a healthy conversation. It's not unusual. Every lease negotiation is tense and Wendy and her team and the folks on the West Coast do a really good job of balancing everything they need to balance to make sure we have the right people in our properties that are investing in their operations and we're getting the best economic deal possible.

Craig Mailman:

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

Craig Mailman:

Great. Thank you.

Samir Khanal:

Hey, Dan. Can you help us walk through, sort of, the 2023 growth at this time? On the one side you've done a great job on the leasing front right? The leased versus occupied that pipeline is pretty solid here. But on the other hand, you have potential headwinds from closures. Santana West it seems like maybe getting pushed out a little bit here on the timing perspective. I guess how are you thinking about growth today versus a few months ago?

Samir Khanal:

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

Operator:

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

Don Wood:

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

Don Wood:

Yeah, let me give you a couple of things. I'm sure Jeff will have more on this. But I personally couldn't be more excited about this. First of all Hillan Village, which we bought last year, I guess a little more than that now at this point. We just see very strong re-leasing potential to make it much more of a specialty shopping center with a higher end tenant because of where it is. Our first 12 months of leasing or so there has validated that that's what's happening. So with respect to that first acquisition, we are more than pleased with the basic thesis for buying it. When this office building adjacent to it, which is a very attractive office building, but frankly lease in a very pedestrian way, we think we can do the same thing on the office side to make it way cooler to the right type of tenant base that would -- that's the same tenant base that we're aiming for in the adjacent retail property, putting those two things together, especially in a post-COVID environment where individuals and companies in the area are looking to be closer to home with an amenitized environment we feel like there's great upside all while yielding over a 6% yield while we do that. So, I love the idea of being able to not to take our vision for the retail and effectively expand and integrate what it is with the office building which really is building directly adjacent to it. That's the thesis for what we're trying to do here.

Operator:

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

Jeff Berkes:

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

Dan G.:

No. With respect to guidance, we do have a pipeline and we do expect to be active on the acquisition front but be disciplined, but we don't provide guidance for speculative acquisitions or dispositions, when they happen we update guidance to reflect that. So yes, there's no forward-looking acquisition or disposition impact on the guidance we have.

Don Wood:

Haendel, it's a great question and it's been a critical focus and frankly a worry of mine for the past year and half or a little bit more. I don't exactly know beyond more beyond our approach to it. Why it has not been the problem that I worried it was going to be but it has not been. We found alternate solutions. In a number of cases it's been job number one for the operating team, the tenant coordination team. The ability to effectively do things different than the lease contemplated in order to get a restaurant open or a store open have been critically important tools. And that again is a relationship part of our business. It's a critical part to it. And so when I look at have we been hitting our opening dates. The answer to that is yes, we have. And it was the single biggest thing I was worried about coming into 2022. So it's been handled I think pretty darn well, even though the spector of delays, kitchen equipment and other things is certainly still out there.

Operator:

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

Dan G:

Well, we would expect kind of given traffic in July was strong as well where we have parking revenues coming in. we hope that it continues to be sustainable. I mean, I think, the traffic volumes at our big mixed-use properties where we can charge parking revenues. We see that being a consistent source at least through the balance of the year.

Michael Goldsmith:

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

Operator:

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

Dan G.:

Yeah, I think with regards to -- we are making progress and we've kind of pivoted and I think elevated our discussions and our activity on the disposition front. And given the visibility we have kind of as the year goes along, I think that dispositions can serve as a surrogate for kind of raising equity. And given that visibility, we're tempering kind of the expectation of raising equity, plus given where we're -- our equity has been traded. So, we've raised the lion-share of what we expected at a very strong blended price. We basically contracted for that all last year in 2021, when our stock price was obviously at a different time. Really pleased that we did. And I think it positions us -- we look to be very balanced in how we approach financing the business and feel very, very fortunate that we're as well positioned to continue through with the equity that we raised over there throughout COVID.

Mike Ennes:

Tenants need to make money. Rent is one component of their expense structure, to the extent they're doing the volumes and trading value, they'll pay the rent. And with us it's not just about, beating on that tenant for rent we are partners. And so, the notion of making that shopping center or a mixed-use property, the best place the go-to place is just a critical part to what we do. I mean if you think about it Derek, the 580 basis points increase since the bottom of COVID in terms of small shop occupancy, up almost 600 basis points. That is only because there is demand from people who have a chance to get into a federal center who could not get into it before because of the high occupancy and are willing to pay that because they're going to make money when they pay that. It's really not much more than that and I know there's always focus on our ABR. I've been here 25 years there was focused on our ABR, 25 years ago. It's -- they're better assets man. And those tenants can make money at those levels.

Ki Bin Kim:

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

Ki Bin Kim:

And going back to that previous question about profitability I mean that makes sense, right? It's not just sales yet to be profitable. Any high-level metrics you can share in terms of how much more profitable, do you think tenants can be at your centers versus some other centers on a just low rent basis? Yes, just trying to get a sense of what -- how much mode of safety there is for tenants to continue to pay these higher rents?

Wendy Seher :

It's the consumer spending power. It's the demographics that Don mentioned in his opening remarks, which is the quality of the real estate in the demographic markets with high average household incomes that have the ability to spend. So that's a critical component when they're looking at these markets. The other piece of it is, the history. If you can go into a center, as Don said, you haven't been able to get into Federal Realty Centers always, and they have a history of performing, and there's value in that and that's recognized, so that's why we've been able to keep up this leasing demand is partly, because there's -- this need to get -- they might be doing less locations, but they need those locations to perform. And they're willing to make a higher spend in order to make sure that there's confidence that that store will be profitable.

Linda Tsai:

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

Linda Tsai:

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