Federal Realty Investment Trust. (FRT) — Q3 2020 Transcript

Good morning. Thank you for joining us today for Federal Realty’s third quarter 2020 earnings conference call. Joining me on the call are Don Wood, Dan G, Jeff Berkes, Wendy Seher, Dawn Becker, and Melissa Solis. They’ll be 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. Although Federal Realty believes that 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 information in our forward-looking statements and we can give no assurance that these expectations can be attained. The earnings release and 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 operations. Given the number of participants on the call, we do kindly ask that you limit your questions to one or two per person during the Q&A portion of our call. If you have additional questions, feel free to jump back in the queue. And with that, I will turn the call over to Don Wood to begin the discussion of our third quarter results. Don?

Thank you, Leah. Good morning, everyone. FFO per share of $1.12 in the quarter was about where we thought it would be. And we are pretty low compared to the pre-COVID task. However, it’s pretty good when you consider the progress we made over the second quarter. It’s important that a full third of our tenants are now on a cash basis, so they do not benefit from unpaid accrued rent or straight-line rents. As a reference point, the last time Federal Realty was routinely reporting quarterly FFO in the dollar range was back in 2013 when the stock was trading at or above $100 a share. Although our two and three-year growth prospects back then were solid, they were not nearly as strong as they are from today’s quarterly level moving forward. Let me explain why I think that’s the case. Firstly, we solidified the monthly rent collection as a percentage of total rent. We collected 84% of July billings, 85% of August, 86% of September, and so far 85% of October. November has started off well too. Overall, we have expected better at this point. Importantly, we are fast approaching sufficient cash generation to cover our dividend entirely out of operating cash flow. Secondly, we are tracking a lot of leasing interest in our properties, as exemplified by the volume we did in the quarter and even more so, based on the high volume of tenant conversations we are having that will likely result in deals and occupancy growth, which we believe will occur in the first half of 2021. Finally, the lease-up of our development pipeline in five major markets will further fuel our core portfolio lease-up for which we are already seeing strong demand. Of course, there’s plenty of uncertainty that remains. There are plenty of challenges left in executing this growth plan, especially in new development lease-up. But the initial signs toward a successful path are clear. Let me delve a bit deeper. The operational stress in our tenant base lies with a few specific business categories. As we all know, the theater and gym businesses remain uncertain, just as we see with sit-down restaurants and full-price apparel. All of these companies' management teams are searching and adapting their business plans to find a way to survive and thrive in today’s world, whatever that may be. Obviously, the jury is still out. But in our case, most of our tenants in these categories at our locations were performing strongly before COVID. Therefore, if a number of these businesses inevitably fail in the coming months, then previously profitable and proven locations will either be in demand for successful restructured by those owners or will be sought after by subsequent owners as they change hands. That speaks to the power of strong real estate, and that’s what we are already observing. There may be short-term disruption, but we have proven desirable real estate nonetheless. Let me give you a couple of examples. No fewer than seven COVID restaurant deals from well-known downtown Washington, D.C. restaurateurs have been signed or are well down the road on either moving or opening at locations in Bethesda Row, Rosé at Shirlington, Pike & Rose, or Pentagon Row. We’ve also received unsolicited offers from health club operators in areas like Hoboken, New Jersey, and others, showcasing the strong demand we are seeing. During the quarter, we executed 98 comparable leases, which is more than double the second quarter, totaling 472,000 square feet, more than 70% higher than the second quarter. While the new rents on these deals were basically flat compared to the old rents, actually down 1%, this was expected given our negotiating and leasing philosophy and leverage in the middle of COVID. But note that the average lease term is 5.6 years versus the normal average of roughly eight years, which is about 30% shorter. Essentially, we are trying to secure strong, financially desirable deals for a longer term than usual while limiting the term on deals where we aim to bridge tenants over the COVID period to two or three years. In all cases, we want the most desirable retailers and restaurants at our shopping destinations. The right tenants are the single most essential factor in attracting new class-leading retailers and restaurants to fill any vacancies. Why? Because retailers and restaurants seeking new locations today want to know who their neighboring tenants will be and how well-leased the center will be over the term of their lease. Providing clarity regarding that tenancy is crucial. Here’s the big takeaway: COVID has accelerated everything. The consolidation of retail into the best centers within trade areas that began pre-COVID is continuing to accelerate during and after COVID. If you believe that, as I do, then you understand how vital it is to have class-leading tenants and not just any tenant in those centers. Accordingly, as we've stated since our first-quarter call, we are willing to structure deals with successful and essential retailers and restaurants, providing them with contractual flexibility so that they remain attractive for new leading tenancy on the other side of COVID. That includes some deferrals, some abatements, some percentage rent deals that convert to the old rent over time, as well as flexible break points—tailored one-on-one based on a tenant's importance to the center and their financial viability. Dan will provide more details on this in a few moments. Now, let’s move to our construction in progress, where the timing for leasing the office portion of our significant mixed-use developments is less clear than for the retail or residential components due to the pandemic. The 375,000 square foot Santana West office building is still in the earlier stages of construction and won’t be ready for occupancy until 2022. However, the 212,000 square foot Pike and Rose office building is complete. 45,000 square feet serve as Federal Realty’s new headquarters, while Benefits Advisor’s One Digital has taken most of another floor and is moving in next week. We just signed a deal with co-working leader Industrious for two full floors or 40,000 square feet, leaving about 110,000 square feet available for lease. Lastly, at Assembly Row, where PUMA will anchor that 275,000 square foot office building beginning in late 2021, about 110,000 square feet remains available. While the long-term impact of the pandemic's work-from-home mandates presents uncertainty in office leasing and timing, there’s a growing sentiment regarding the necessity of in-office collaboration for most business plans. Our view is that we have the best and most desired product in the market. Come see for yourself at our new headquarters at Pike and Rose. All of these new buildings are expected to achieve LEED certification. They are state-of-the-art buildings with enhanced clean air systems in affluent suburban communities, well connected to job centers, and they have both access to public transportation and ample parking. Most importantly, they are integrated within well-amenitized mixed-use environments that business leaders deem essential. So what else gives us the confidence to operate as we have? It all comes down to our convictions, not only in the prime suburban locations of our real estate—our sweet spot—but also in the high-quality open-air, heavily amenitized product type and environment that we've created in those locations over the last decade or more. Evidence of the desirability of those prime suburban areas is reflected not only in our leasing volumes but also in the relocation and expansion of downtown central business district retailers and restaurants at our properties, as well as in single-family home sales data. In the third quarter, U.S. home sales volume was up 12%; however, in areas where we have properties, the number of homes sold in Bethesda, Maryland was up 26%, in Falls Church, Virginia was up 18%, in Falconwood, Pennsylvania was up 38%, in Downers Grove, Illinois was up 39%, and in Los Gatos, California was up 60%. All these are first-tier suburbs that house significant Federal properties. It feels like this migratory trend from downtown CBDs to first-tier suburbs is likely to persist. Among all the concerns I have as a result of this pandemic—and there are many—filling our spaces with great retailers and restaurants and maintaining strong economics that provide future growth is not one of them. I am confident that our properties positioned in first-tier suburbs in major metropolitan areas will be more desirable post-COVID. I also know that decades of focus on creating comfortable and attractive open-air spaces at those centers will enhance their appeal. Nearly every discussion we are having with brokers and prospective tenants in every major market results in prospective deals that are premised around tenants assessing the real estate, their location, their co-tenants, their environment, and importantly, their landlord. Tenants want to be with landlords that have financial stability, investment capability, vision, execution proficiency, and a pedigree of favorable partnerships built on long-term customer service improvements—such as a coordinated customer pickup program—which matter significantly today. All of these considerations are even more important now and will certainly be even more critical on the other side of this. As we are set up for that transition. Before I hand over to Dan, I’d like to address the impairment loss we recorded this quarter. It’s no secret that we’ve had difficulty realizing our vision for a redeveloped mixed-use community since we acquired it back in 2015. Initially, the fits and starts with the entitlement process with the city resulted in a loss of precious time for securing existing tenants and establishing new ones in the strong retail market we had in 2015, 2016, and 2017. By the time those entitlements were realized, box rents were under pressure, and the rising construction costs undermined our value creation estimates. Even with all of that, we hoped we had a viable project after some reconfiguration of the master plan. Then COVID hit. The previous strength of the anchor system—comprising a full-size gym, LA Fitness, a substantial AMC theater, and two large entertainment tenants named Splitsville and Game Time—became evident weaknesses that are likely to continue for some time. Our partnership ultimately did not fulfill the $60 million non-recourse note maturity in September, and the lender has declared default. Given the other opportunities within our existing portfolio to invest capital, we decided not to pursue the redevelopment any longer. We are now evaluating all of our disposition options. That summarizes my prepared comments. Let me turn it over to Dan for some final thoughts. We look forward to your questions after that.

Thank you, Don. Good morning, everyone. We are very encouraged by the progress and constructive developments we saw throughout our business during the third quarter. All of our centers remain open and have throughout the pandemic, and over 97% of our tenants are open and operational. FFO per share for the quarter was $1.12, reflecting a sequential increase of 45% over the second quarter. Although this is still below the 2019 third-quarter levels, I am encouraged by the progress made, evidenced by our collectability adjustment being nearly cut in half, from $55 million in the second quarter to $29 million in the third quarter. Other factors affecting the quarter include approximately $0.07 of drag from higher interest expenses due to the additional liquidity and balance sheet strength we are maintaining throughout the pandemic. We believe the drag from COVID-19 associated impacts on our hotel joint ventures, parking revenues, and percentage rent is offset by $0.03 worth of upside from lower corporate-level expenses. Consequently, this results in an aggregate net impact of $0.48 related to COVID-19 in the third quarter, signifying a notable improvement from the second quarter's negative impact of $0.83. Collection levels have improved markedly, rising from 68% in our second quarter call to 85% collected as of October 30. We’ve managed to reduce our uncollected rent by more than half. The progress in October has continued, with 80% already collected ahead of our September collection rate as of September 30. Please note that the denominator for our collection metric includes all monthly recurring rent bills and base rent charges for CAM and real estate taxes, and is not adjusted for deferrals and abatements. For context, all deferrals and abatements are classified as uncollected. The denominator has remained relatively constant throughout the first nine months of the year, at roughly $70 million to $71 million per month. We continue to take a tactical approach as we negotiate and work with our tenants through this challenging period. A total of $34 million in deferrals were executed in total for the second and third quarters combined. Of that amount, nearly two-thirds, or $22 million, were with higher credit-rated tenants. Through selected agreements and our anchor restaurant program, we also upgraded $21 million worth of second and third-quarter rents. Many of these negotiations have entailed restructuring deals to include one or more of the following: enhanced credit verification of the guarantors supporting the leases, incremental percentage rent upside where we have provided rent abatement, removal of development, parking, and use restrictions, as well as tenant approval rights. We have also worked to eliminate or postpone lease termination and co-tenancy rights, and reduced or eliminated below-market tenant extension options. Additionally, we successfully finalized a few agreements to open new stores at Federal centers, all of which enhances the long-term value of our assets in exchange for these near-term concessions. Similar to the last quarter, we have provided disclosure relating to the impact of COVID-19 and a summary of collectability and accounts receivable, which can be found on page 10 of our 8-K financial supplements, along with an updated investor presentation integrating our COVID-19 updates on our investor website. As Don mentioned, our leasing volume has returned to activity levels with over 480,000 square feet of retail signed deals, along with more than 60,000 square feet of office leasing, bringing our total leasing activity to nearly 545,000 square feet. This represents the highest combined quarterly volume we have witnessed since 2018. We are similarly encouraged by the level of activity in our leasing pipeline. This activity has supported our leased percentage occupancy metric, which stood at 92.2% at quarter's end. That said, we do anticipate continued pressure on our occupancy metrics over the next several quarters, and we expect to dip into the mid-to-upper 80s at the trough, as we indicated during our second-quarter call. We anticipate meaningful growth from those metrics starting late in 2021 based on current and projected demand. We are witnessing three specific leasing demand drivers within our portfolio. First, retailers migrating from urban to suburban markets, particularly the restaurant deals that Don mentioned in places like Bethesda Row, Pentagon Row, and Pike & Rose, along with best-in-class restaurants and urban-focused retailers planning openings in Hoboken, and a multitude of retailers in downtown Boston considering both Assembly Row and Linden Square. Second, upgrading to best-in-market open-air locations, such as Marshalls moving from a second tier lower rent location to our Gaithersburg Square asset, which is a highly sought-after space in that sub-market, all of which will yield better economic terms for us. Furthermore, we have several additional deals in the pipeline involving other leading discount apparel retailers, mass merchandisers, and grocery chains. Lastly, we are seeing interest from new-to-market lifestyle and digitally native tenants targeting our best-in-class open-air, mixed-use, and lifestyle locations. Santana Row is in discussions with Nike Live, Vuori, Arcteryx, Faherty, Ugg, and a new restaurant concept called Chika. Meanwhile, Assembly Row is securing new deals with Sephora and Shake Shack, in addition to CVS in the soon-to-be-delivered PUMA building. Pike and Rose is attracting a new concept from the founders of Cava, along with several other deals in the pipeline. Overall, this diverse activity is very encouraging. Moving on to a discussion about our balance sheet and further liquidity enhancements. As you may have seen in early October, we raised $400 million of unsecured notes due in 2026 at a 1.38% yield, bringing our total pro forma liquidity as of September 30 to over $2.25 billion, which comprises $1.25 billion in cash, coupled with our undrawn $1 billion credit facility. Notably, we executed this as a green bond, which I will discuss further later on. Our $1.2 billion development pipeline continues to progress; we have about $500 million remaining to spend against this approximately $2 billion of available funds. It’s important to note that this pipeline is projected to yield $70 million to $80 million in POI when it fully stabilizes, expected by 2023, rather than the 2024 timeframe. We made the decision not to move forward with the Sunset Place redevelopment, and I assure you that we will remain disciplined regarding all capital and resource allocation decisions moving forward. Regarding our balance sheet management, we will continue to pursue opportunities and negotiate asset sales, having over $200 million in deals under active discussion at blended yields in the low fives. We remain in a strong position to navigate through this challenging environment, prioritizing leveraging our balance sheet over time as we look to opportunistically bring down leverage levels to our historical norms. As announced yesterday, our board decided to declare a regular cash dividend of $1.60 per share, payable on January 15, marking our first dividend of 2021. Before heading to Q&A, I’d like to briefly address Federal’s commitment to ESG. ESG has long been a core component of our business strategy. Until 2020, we had not prioritized clearly communicating the breadth and depth of this commitment to our stakeholders. Our inaugural Corporate Responsibility Report was released in late March 2020, albeit in unfortunate timing with the pandemic. We are extremely proud of our green bonds issued in October, further demonstrating our commitment to green building design and construction, with plans to invest $400 million in LEED Silver, Gold, and Platinum buildings. We have a strong pipeline of comparable LEED development projects, positioning us to potentially issue more green bonds in the future. Additionally, as you may have seen from the Navy, we ranked fourth among about 100 real estate companies for on-site solar capacity on the Solar Energy Industry Association's annual list of top U.S. businesses utilizing solar energy. We are proud of our progress on the ESG front, thanks to Dawn Becker and Emily Gagliardi who are leading this charge. With that, Operator, please open the lines for questions.

Well, thank you. Federal's third quarter same property NOI was down 18.1%. That compares to the average for scripts at about a 12.7% decline. What’s responsible for the somewhat lower same property revenue versus some of your script peers?

Let me start with that actually, Dan, and then you go. You know, Craig, Dan is going to follow. But I don’t know, and I almost don’t care, and I don’t mean that tongue-in-cheek. What we are trying to do is not just get back to where we were, but to transform our retail landscape effectively in an over-retailed environment, to ensure better shopping experiences on the other side. In order to achieve that, we are making the necessary deals with tenants we need to support long-term viability. We are actively choosing not to assist tenants that won't survive and would lead to more vacancies. So, there is a very low focus in this company right now on comparative same property NOI. While we will assess it from an overall cash flow standpoint to pay our bills, dividends, and position ourselves for the future, that’s about all it amounts to. From a comparative perspective, I don't really have an answer to your question in terms of us versus our peers. Maybe Dan does. But I wanted to make that clear initially.

Yes, just from a mathematical point of view: the big driver is obviously the collectability adjustment. Our approach, the fact that we have the highest percentage of tenants on a cash basis, reflects a very prudent strategy. However, this drives our collectability adjustments as a percentage of billed revenues to be among the highest in the sector. That’s the leading factor influencing our performance. I believe this will afford us greater transparency throughout this period and will reduce the impacts moving forward.

Thanks. And then just as a follow-up, how is the leasing activity surrounding the Third Street Promenade? Have the leasing efforts been hindered by LA County's conservative stance?

Hey, Craig, it’s Jeff Berkes. Yes, that’s absolutely true. We obviously have some space on Third Street that needs to be addressed, and we are working on it. However, until things open up further, I don’t expect to witness significant leasing activity at Third Street Promenade, whether it's our buildings or any other buildings.

Thanks, good morning. If we put aside FFO and same property NOI for a moment, if we had a chance to be on site and observe some of your operations and what you're witnessing on the ground, what do you think is the most underappreciated aspect of what’s happening with your tenancy and your portfolio today?

That’s a good question, Ki Bin. You know, if you're looking at late 2021, 2022, and 2023 from the perspective of a retailer trying to negotiate a deal today, the challenge for them is asking them to commit to a string of payments for seven or ten years while they have less visibility than ever. The work we’re doing now to ensure the right tenants are in each center is crucial for giving retailers confidence to enter into economically strong deals. You won’t see this reflected in results yet, but philosophically, it’s a different approach for us since we are implementing it nationwide. Each shopping center's objective is to ensure that when additional vacancies arise, we will have the right tenants positioned, and that’s where we are focusing our efforts. I promise I wasn't being dismissive in regard to Craig's earlier question. Our objective is not focused on where we were, but rather where we are going. That’s a fundamental difference that our management is focused on.

That’s helpful, thank you. And my second question is about tenants. I heard from several restaurateurs that while they succeeded impressively before COVID, you provided anecdotal evidence supporting that. Knowing it’s a short timeframe for measuring any activity, how does it feel right now? Do you believe the investments made were aptly directed? Are those tenants now showing signs of recovery as they emerge from the downturn?

Very much so. Now look, the big question is whether we will feel the same way through January, February, and March. This is still a critical window for the restaurant and experiential categories. However, to date, it has been encouraging to observe. The performance of our restaurant assets has been surprisingly robust at Assembly Row—operating at around 80-85% of pre-COVID levels—and at Santana Row, we are seeing numbers that exceed 100% of prior performance due to expanded outdoor seating and increased capacity. So, has this initiative worked so far? Yes, indeed. The true test will arrive in the upcoming months.

Great, thanks and good morning. Given you are no longer pursuing the Sunset redevelopment, do you have any other plans for that capital? Are you focused solely on reinvesting in leasing CapEx, or are you seeing any interesting market opportunities for other investments given the current disruption?

That’s a good question. First, we have numerous developments already underway, and we’re effectively utilizing that capital for those projects. Do I foresee opportunities arising over the next year or two for assets we would love to own? Absolutely. I genuinely hope we will come across such opportunities. We’ll soon see how our asset sales impact market values as we navigate the selling process, though we haven’t yet finalized any sales. But yes, we do anticipate potential opportunities. We are prudent with our capital allocations. The failure of the Sunset Place project was regrettable; there were good reasons for it but, at the end of the day, it is still a failure. Therefore, we take the allocation of our capital very seriously, which is why we believe maintaining dividends is crucial from that perspective. Should we uncover additional opportunities for strong real estate in the future, we will be eager to pursue them.

Noted. Since the tenant base is shifting, are you considering your exposure to fitness and experiential tenant categories differently moving forward? Are those likely to become targeted asset sales?

Yes, well, there are different thoughts regarding fitness and theater categories. I believe both categories will remain relevant. However, the jury is still out regarding what their business models will entail and what they’ll need to maintain profitability. So you could say I worry about that aspect. It’s easier discussing an established retail center where a tenant’s presence is vital to the community, and we have opportunities to backfill with differing uses. However, when initiating new space, that decision becomes more complicated. Our earlier investment in the Sunset redevelopment was moving forward with too much faith in those users. That was not a risk we were willing to take.

Hey, good morning, everyone?

Hi.

Dan, I was hoping you could provide some clarification on your dividend philosophy. I believe you mentioned you're approaching sufficient cash flow to cover the dividend fully. I would like to deepen that thought; the board doesn't want to make any cuts like many of your peers. The third quarter guidance of $1.12 implies a mid-$4 share outlook for next year, comparable to this year. Yet you’re showing coverage already above 110%. Are you, even the board, considering if maintaining the dividend yield is the right move even if you can afford it? How long might you be willing to overpay it?

Yes, we've had extensive discussions about this over the past six months, and there must be a guiding philosophy. Ours may be somewhat unconventional. We believe that dividends form a core component of total returns for investors. The idea is that, looking ahead, we certainly see a pathway to reducing our payout ratio back to an 80% target level. Depriving ourselves of that dividend, when we can afford it on the balance sheet, seems premature from our perspective. This is precisely how the board and our team have been evaluating this. The dividend is an integral portion of total returns. We acknowledge the uncertainties posed by the pandemic and that, at some point, we might not maintain this strategy. However, as we stand in November 2020, we believe we are capable of distributing the November dividend as this represents a cash outlay we will need to undertake in any case. It will amount to $80 million next year. Additionally, we are confident our taxable income will surpass that amount next year. There's a reasonable probability that situation holds true for February as well. By then, we will surely have additional clarity around our financial positioning for 2021, 2022, etc. The decisions will be adaptive depending on those dynamics as we do every three months.

Thank you. Also, concerning the challenges, is there a common theme in geographic focus or product type related to the expected sales you mentioned? How is buyer demand today regarding cap rates and anticipated NOI?

Yes, Jenny.

Yes, I'll handle that. The best way to summarize the current market dynamics on several specific assets is to say they are quite varied, with each asset having its own characteristics in regards to location and resources. I would prefer not to divulge too much about pricing at this moment, as we are amidst negotiations for each of them. Ultimately, we expect that assets believed to trade at high valuations are currently holding strong prices. I look forward to discussing this further hopefully in the next quarter.

Understood. Thanks.

Hey, good morning, everyone. Don, looking at your tenant base overall, the encouraging comments regarding restaurants convey a strong resurgence for experiential tenants. But as you evaluate your tenant base, how much of a shift do you anticipate going forward? Do you think it will simply be a trimming of exposures or should we expect you to dial back on certain areas while enhancing others moving ahead?

That’s a great question, Alex. Given that many of these decisions are long-term, the answer is not a one-size-fits-all. It is not seamless, understandable, or comprehensive as might be necessary. It ultimately comes down to specific shopping centers, mixed-use projects, and what is needed for each community. Interestingly, I would contend that for years, there will be far fewer restaurants effectively making money. So where will those restaurants go, and what will their future look like? This evolution is being figured out nationwide, and, from my view, D.C. is slightly ahead because of the geographical landscape here, with less emphasis downtown and greater activity in these first-tier suburbs—where we have invested significantly over the last 40 years—there is likely to be strong demand from restaurant owners who previously relied on the downtown economy but are now seeing a shift in potentially suburban consumer behavior. This transformation is resulting in restaurants reevaluating their priorities and perspectives, leading to an unexpected influx of interest in Federal properties from tenants. Our head of leasing has confirmed that interest. Thus, when examining markets and asset types, I suspect we will have a similarly diverse and strong income stream moving forward. Some shifts in specific categories like gyms or theaters may occur, as the business models in those sectors face more uncertainty.

I recall a decade ago you expressed after the credit crisis that food is a necessity while retail is more of a luxury. However, restaurants are integral to providing for people. Many individuals invest in beautiful kitchens but refrain from using them, preferring to dine out instead. My second question is on cash basis tenants; did you state that a third of your tenants are now cash-renting?

Yes, that’s correct. For context, we've collected about 85% of rents overall, which assumes payment from those cash-rent tenants. However, as we review the outlook and the potential occupancy trough you mentioned for the first half of next year, how do you think the 15% of remaining tenants not paying rent will shake out as well as the portion of that one-third of tenants that are cash-renting?

Well, we are indeed working hard for every dollar from every tenant, whether in cash or on an accrual basis. We remain optimistic regarding our uncollected rents. There's no doubt some tenants will face obstacles in this climate. It’s reasonable to project that their path will be rocky, especially through early 2021. However, we are also equipped to manage that risk. If some tenants do falter, we are likely well positioned to replace them with suitable options.

Would it be reasonable to assume half of the cash-rent tenants might not make it through these challenges? Or would that assumption be extreme?

That's quite difficult to estimate. Certainly, there will be some fallout, but I can't provide you with a precise figure at this time. What I can assert is that, even if some tenants exit, we are in a good position to backfill those vacancies effectively.

Hi, good morning. This is Greg McGinnis on with Nick. Could you just walk us through the impact that tenant bankruptcies have had on portfolio occupancy and NOI this year? And what is still outstanding regarding tenants still navigating the bankruptcy process? Additionally, are there any near-term risks emerging on your watch list, or has the tree been sufficiently shaken already?

In regard to bankruptcies, they have impacted our occupancy rates minimally—around 80 basis points. So far, we’ve been exposed to about 4% of our revenues related to all tenants that filed for bankruptcy this year. If you discount tenants who have emerged from bankruptcy and remained operational at our centers, our total exposure stands at around 3.25%. Of this, we anticipate an ultimate impact of about 1.25% to 1.5% on our total revenue.

Understood, thank you. On that note, do you foresee continued fallout this year? Or has the shake-up been substantial enough already?

From my perspective, I consider that we have endured the worst of 2020. Still, I believe we will see one more wave of challenges, especially in the first half of 2021, leading us to forecast occupancy below the 90% mark during this period.

Thank you for that information. Another question I have is regarding the steady rent collection numbers you have posted recently. Do you expect major fluctuations leading into year-end? How should we interpret these results?

I believe high-80% collection levels will likely persist, considering the current approach we’ve employed remains consistent. However, I suspect that some additional fallout may occur, as Dan and I both stated, within the short term.

Alright, thank you for that.

Hi, good morning.

Hi, Vince.

Could you elaborate on how the increasing trend of remote working has impacted foot traffic in shopping centers? Looking ahead, do you anticipate these patterns changing the demand profile for urban centers or affecting the ideal merchandise mixture?

That’s a fascinating point. I’ll share a pertinent example that encapsulates your question. When we were evaluating an investment in Hoboken last year, the concern was that Hoboken lacked significant office to attract daytime traffic. Traditionally, retail in the area relied on foot traffic from nearby office workers, which has led to significant concerns. However, Hoboken has recently become one of our best-performing assets. Why? Because many people are home, meaning day-to-day street traffic has been boosted significantly. Our collections are solid, and our tenants have performed well overall. Yes, there are tenants experiencing difficulties—just like in every area—but we are positioned to backfill successfully. Can that trend be extrapolated to other regions nationwide? I don't know. I think that might be a stretch, yet I do see select locations benefitting in terms of increased demand due to remote work. Do I expect it to remain at current levels? No, I don't. Many of our office workers are gradually returning, though we currently only have around 50-60 out of a capacity of 150-160 employees in the office every day. The atmosphere has proven uplifting and has unexpectedly improved morale. Though decision-makers might not rush into new office leases yet, the sentiment towards returning to the office is increasing.

Thank you for that insight. I've got one more question regarding CapEx. Can you discuss the expected economics surrounding converting a former theater into another use?

Yes, definitely. Converting theaters can prove challenging, especially if they lack substantial market presence. The complexities involved hinge on numerous elements, including how the building was designed and constructed; whether stadium seating is a structural component drastically affects renovation costs and space optimization. While in some instances, high rents can support comprehensive remodels, if rents are too low, capital investments may not yield profitable returns. When high rents prevail, those expenses can be worth it. However, if we're faced with lower rents in general areas that necessitate renovation, it can be challenging to justify that capital spending. If we're talking about markets capable of sustaining high rental rates, then reconfiguring the previous theater may be valid and lucrative. Yet, I can't give you a specific average figure, as we've seen significant variability across the cases.

That makes sense. Thank you for your insights.

Hi, thank you for the opportunity. Following up on Alex's cash basis question, could you clarify how much revenue was collected from cash-basis tenants in the third quarter?

Roughly about 60% of revenues collected from cash basis tenants in the third quarter.

Thank you. How does this compare to the second quarter?

Significant increase; it was about 40% for cash basis tenants in the second quarter.

Thanks. Lastly, do you believe that the passage of additional PPP loans will positively affect some of your tenants on the bubble, assisting them into recovery? Or are the pressures they face currently extending beyond what these loans can provide?

It remains to be observed, Linda. PPP loans were significant—they were vital during this first phase. I expect we’ll likely see renewed discussions and funding starting in January or February. I see significant potential for relief during this critical period. If you think about it, we are entering an unusual year where winter rolls into spring—under normal circumstances, consumer spending tends to spike at that time. However, this coming year has the potential for being exceptional, as the usual uptick in spending may coincide with the potential rollout of additional PPP funds and the arrival of a vaccine. It’s worth noting that this winter may create even tougher challenges than what we would typically expect. So, the provision of PPP is just one catalyst we have going into what could be a strong spring and summer season in 2021.

Good morning, team. Dan, regarding cash, should we expect you to utilize some of it for the upcoming bond maturity and then term loan next year? Or will you tap the markets again to maintain liquidity, given those upcoming maturities?

Yes, we will primarily use the cash we have to repay the bonds maturing in January. We have flexibility regarding the term loan due in March, allowing us to extend it for another year. Our strategy involves maintaining maximum flexibility based on the visibility we have as we navigate through.

Understood. Regarding the parcel at Grand Park you went under contract with earlier, is that transaction still on course to close later this year or next quarter?

Yes, we remain on target, but it will likely push into early next year, somewhere in the first half, before we feel fully assured about its happening.

Okay, great. Regarding pricing, is it still holding steady? Has anything changed?

Pricing remains consistent.

Don, if I missed anything in your earlier comments about Sunset, have you halted negotiations with the lender?

We have not halted negotiations at this point; we will see how things unfold.

Okay, thank you all. That’s all I had this morning.

Thanks everyone for joining us today.