Federal Realty Investment Trust : 2Q 2023 Earnings Transcript

Federal Realty Investment Trust

Second Quarter 2023 Earnings Conference Call

August 2, 2023

Federal Realty Investment Trust - Second Quarter 2023 Earnings Conference Call, August 2, 2023

C O R P O R A T E P A R T I C I P A N T S

Leah Brady, Vice President, Investor Relations

Donald C. Wood, Chief Executive Officer

Dan Guglielmone, Executive Vice President, Chief Financial Officer and Treasurer Jan Sweetnam, Executive Vice President, Chief Investment Officer

Jeff Berkes, President and Chief Operating Officer

Wendy Seher, Executive Vice President, Eastern Region President

C O N F E R E N C E C A L L P A R T I C I P A N T S

Alexander Goldfarb, Piper Sandler

Juan Sanabria, BMO Capital Markets

Michael Goldsmith, UBS

Greg McGinniss, Scotiabank

Ravi Vaidya, Mizuho

Samir Khanal, Evercore

Craig Mailman, Citi

Lizzie Doykan, Bank of America

Ki Bin Kim, Truist

Dori Kesten, Wells Fargo

Michael Mueller, J.P. Morgan

Floris Van Dijkum, Compass Point

Linda Tsai, Jefferies

Paulina Rojas, Green Street

P R E S E N T A T I O N

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ViaVid has made considerable efforts to provide an accurate transcription. There may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only.

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Federal Realty Investment Trust - Second Quarter 2023 Earnings Conference Call, August 2, 2023

Operator

Good afternoon, and welcome to the Federal Realty Investment Trust Second 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, Vice President of Investor Relations. Please go ahead.

Leah Brady

Good afternoon. Thank you for joining us today for Federal Realty's second quarter 2023 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; Wendy Seher, Executive Vice President, Eastern Region President; and Dawn Becker, Executive Vice President, General Counsel and Secretary; as well as other members of our executive team that are available to take your questions at the conclusion of our prepared remarks.

A reminder that certain matters discussed on this call may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any annualized or projected information as well as statements referring to expected or anticipated events or results, including guidance. Although Federal Realty believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, Federal Realty's future operations and its actual performance may differ materially from the information in our forward-looking statements. We can give no assurance that these expectations can be attained. The earnings release and the supplemental reporting package that we issued yesterday, our annual report filed on Form 10-K, and our other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial condition and results of operation.

Given the number of participants on the call, we kindly ask you to limit yourself to one question during the Q&A portion of our call. If you have additional questions, please requeue.

With that, I will turn the call over to Don Wood to begin our discussion of our second quarter results. Don?

Donald C. Wood

Thanks, Leah, and good afternoon, everybody. Special thanks to David Simon for finishing his call, more or less on time this afternoon.

All-timerecord-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.

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Federal Realty Investment Trust - Second Quarter 2023 Earnings Conference Call, August 2, 2023

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 will go a long way towards offsetting the loss at Bed Bath & Beyond and Christmas Tree Shops income stream in 2024, until they're re-leased and rent paying.

In terms of Bed Bath, we lost one 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 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 '22. 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. Meaning, 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 in hiring in areas like AI, electric vehicles, and related technologies. Feels like Silicon Valley is stabilizing.

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Federal Realty Investment Trust - Second Quarter 2023 Earnings Conference Call, August 2, 2023

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-knownmixed-use communities sitting just outside San Jose, Boston, Washington D.C., and Miami, seem to us, seem to me, be 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.

Dan Guglielmone

Thank you, Don, and hello, everyone.

Reporting a Company record FFO per share of $1.67 is very satisfying, particularly given the interest rate headwinds we faced, and is a testament to the continued strength of our business model. To reiterate Don's earlier comment, we beat our previous record of FFO in the quarter last year by 5% when adjusting for the outsized term fees that we had last year, and also posted 5% sequential growth versus the first quarter. Again, a strong indicator of the health in our underlying business.

With respect to this record performance, which significantly exceeded our expectations, we can point to the following drivers: higher property-level POI than was forecast driven by continued strength in rents, parking, specialty leasing and percentage rent, coupled with lower operating expenses as well, as a continued focus on cost controls at the corporate level resulting in lower G&A. This was offset by the aforementioned higher interest costs. As you can see, a very strong quarter.

With respect to our comparable metric, POI growth was 4.6%, excluding the impacts of term fees in prior period rent. On a cash basis, comparable POI growth, excluding term fees and prior period rent was even better, 4.7%. Term fees in the comparable pool this quarter were down significantly to $1.6 million versus $5.5 million in the second quarter of last year and prior period rent this quarter was $1.2 million versus $2.2 million in the second quarter of 2022. Again, please note, all of these figures are disclosed in detail in our supplemental 8-K on Pages 10 and 11.

Year-over-year occupancy showed continued progress with our overall occupied metric growing 80 basis points year-over-year from 92% to 92.8%, and our lease percentage increasing 20 bps from 94.1% to 94.3%. Small shop momentum continued year-over-year with a 90.2% rate being up 90 basis points over the previous year with a targeted lease rate for small shop of 92%.

Our signed not occupied percentage in total stands at approximately 3% or $34 million, comprised of roughly $17 million of incremental total rent in our existing portfolio and an additional $17 million of total rent in our non-comparable pool, where leases are signed, and the space is to be delivered. Our non- comparable signed non-occupied pool is an important differentiator of Federal's business plan, which is often overlooked.

Total comparable leasing volume for the quarter of 576,000 square feet, a Federal record for a second quarter and the second highest volume for a quarter ever on a comparable basis. The rollover at 7% on a cash basis and 19% on a straight-line basis, highlights the straight-line growth that's driven by sector- leading contractual rent bumps, which for our entire portfolio, averaged roughly 2.25% blended across both anchor and small shop.

Now, to the balance sheet. At June 30, we stood with $1.3 billion of total available liquidity comprised of $1.2 billion available under our revolver and $100 million of cash. During the quarter, we successfully demonstrated access to the unsecured market at attractive levels with a $350 million, 5.375% green bond, our second green bond, highlighting our focus on sustainability and our commitment with respect to our

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ViaVid has made considerable efforts to provide an accurate transcription. There may be material errors, omissions, or inaccuracies in the reporting of the substance of the conference call. This transcript is being made available for information purposes only.

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