Federal Realty Investment Trust. (FRT) — Q4 2020 Transcript

Hi, everyone. Thanks for joining us today for Federal Realty's fourth quarter 2020 earnings conference call. Joining me on the call are Don Wood, Dan Guglielmone, 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 the 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. We do ask that given the number of participants that you limit your questions to one or two per person during the Q&A portion of the call; feel free to jump back in the queue if you have additional questions. And with that, I will turn the call over to Don Wood to begin the discussion of our fourth quarter results. Don?

Thanks, Leah, and good evening, everyone. We closed out 2020 just about as we thought we would, with fourth quarter FFO per share of $1.14 and the total year at $4.52 or roughly 29% off 2019's record results. The fourth quarter and total year numbers exclude the debt prepayment charge that we took when early retiring our 22 bonds. As miserable as 2020 was, and it was pretty miserable, we're very clear as to our priorities and can see our path forward. There is no doubt that the second wave of government shutdowns in our coastal markets, which ramped up around Thanksgiving last year and largely continues through today, though there are at least some encouraging signs of loosening of late, have and continue to hurt us in terms of rent collection and the likely business failures that will come from them. Yet despite that, our growth prospects are really strong when the following three things happen: one, vaccinations are delivered to a large segment of the population in our markets; number two, our coastal markets actually reopen; and number three, consumer behavior reverts to uninhibited freedom and the spending that goes with it, behavior that we are supremely confident will happen. While that's certainly not the environment that we're living through or operating in yet, the sheer volume of leasing and other transactions executed at the end of last year, 103 retail deals for 469,000 square feet, coupled with the strong leasing demand environment that is evident by the many substantive discussions we're having today and some very important management promotions and alignments announced set us up extremely well for a strong post-COVID recovery as those conditions prevail. So where do we go from here? Well, as previously announced, the sale of Sunset Place and two other shopping centers in December effectively generated $170 million of proceeds in debt relief. We put out a press release in January that you should check out for more detail if you haven't seen it. Using that capital along with cash on the balance sheet, we repaid $500 million of senior unsecured notes, half of which were retired early; the result of which means that we have no public bonds maturing until June of 2023. So with little debt due in the next 2.5 years, along with nearly $800 million in cash remaining on the balance sheet and a completely untapped $1 billion credit facility, we've got a war chest on hand should we find retail opportunities that fit our business model in 2021 and 2022. Make no mistake, we're actively looking, including in markets with hot job and income growth where we haven't looked before. A little more geographic diversity in our income stream, carefully considered, is an objective of ours. But today, with the day trader's mentality so prevalent in many corners of the investor and analyst worlds, it's hard to look past short-term results, particularly those at higher multiple companies who are far from immune from the economically devastating effects of government-imposed shutdowns, most notably seen in the heavily populated coastal markets. Eighty-five percent of Federal's property operating income comes from California, Massachusetts, particularly Somerville, New York, New Jersey, metropolitan Philadelphia, Maryland, and Northern Virginia. These markets have the most restrictive government-imposed COVID laws in the country by far. They indeed make 2021 more uncertain than at some of our peers. Nothing we can do about that. The Serenity Prayer comes to mind every day as I grapple with that. But those restrictions sure don't diminish the quality of the real estate that we own in these first-ring suburbs of major metropolitan areas, nor the tenant demand for a spot in these properties in the future, as evidenced by the leasing volume we're doing, along with the conversations we're having with many retailers about their future real estate plans. Here's an interesting fact: when you bifurcate our entire portfolio between the 75% or so of essential service-type shopping centers we own and the retail component of the 25% or so of our properties that are mixed-use or lifestyle-oriented, performance varies greatly as far as the percentage of rent collected or the percentage of operating income diminution from last year pre-COVID. Predictably, it is what you would think. The mixed-use and lifestyle tenancy, heavy in restaurants, theaters, gyms, and the like, has been disproportionately hurt by the shutdowns. There is no real news there. You all know that. But the irony is that those assets represent not only some of the best real estate that Federal Realty owns, but arguably some of the best, most desirable retail real estate in the country; that's not changing. So in a nutshell, 75% of our properties, the necessity-based ones, are performing in line or arguably better than other necessity-based REITs, despite being in government-restricted coastal markets. Think about that. In and of itself, that's pretty impressive to us. The remaining 25% of our properties, the mixed use and lifestyle ones, have been disproportionately hurt because of their merchandise mix but represent our best, most desirable real estate and therefore naturally have superior growth prospects, particularly from the beaten down levels they're currently performing at. That cash flow growth formula feels like a winning one to us when vaccinations are delivered to a large segment of the population in our markets, when our coastal markets reopen, and when consumer behavior reverts to uninhibited freedom and the spending that goes with it. Everything we see suggests that it should be a strong 2022. We'll talk more about that in Dan's comments. On a celebratory note, I hope you'll join me in congratulating Jeff Berkes and our other executives, who have been promoted effective with our Board meeting earlier this week. I hope you saw the press release we just put out. Many of you have gotten to know Jeff over the years, and I’m sure he shares my appreciation for his intelligence, for his real estate savvy, and without question, for his unimpeachable integrity. Jeff and I have been close partners for over 20 years now, and this elevation in responsibility comes at a crucial time given the expected post-COVID retail real estate environment. We need to be as tight and productive as humanly possible. Now to head off the inevitable speculation, let me get it out there by saying that forming the position of Company President and Chief Operating Officer shouldn't be construed to mean that I have plans of going anywhere anytime soon. I don't. But as I've continually talked about and acted upon, career development and succession planning are always top of mind at every level in our company. This new position is a great training ground. I'm sure there will be lots of questions following our prepared remarks, so I'll cut it short today and end mine there and turn it over to Dan for his comments on the quarter before we open the lines to your questions.

Thank you, Don, and hello, everyone. We are generally pleased with the progress we see in our portfolio as we closed out a difficult year. While all of our centers remain open, with 98% of our retail tenants open and operating in some capacity as of February 1, COVID-19 induced government restrictions continue to provide challenges to their businesses. We reported FFO per share of $1.14, up a couple of cents from the third quarter. Now trying to assess what specifically is the direct negative impact of COVID-19 is difficult, but let me walk you through some of the drivers of our results during the quarter. On the positive side, we continue to see and be encouraged by the resiliency of our tenant base overall as collectability adjustments continued to shrink from $55 million in the second quarter to $29 million in the third quarter to just $19 million in the most recent. From a sequential perspective, this progress was offset by a number of items, many of which were one-timers: $0.04 of impact from several non-recurring items hitting G&A, $0.03 of drag from higher property-level expenses that were primarily seasonal in nature as well as $0.03 of headwinds due to the timing of fourth quarter debt capital transactions that we executed. As a result, headline progress versus the third quarter was muted. Year-over-year relative to the fourth quarter of 2019, we saw a direct negative net impact of COVID-19 for the quarter of $0.37 per share, continuing improvement over the second and third quarters' direct negative COVID impact of $0.83 and $0.48 respectively. Collections continue to improve on the 72% and 85% levels, previously reported for 2Q and 3Q respectively, and are now up to 89% for the fourth quarter, showing solid progress despite weakness in December and January due to the second wave of government mandated restrictions in place in the majority of our markets. As a reminder, our approach to reporting collections is very transparent and, in our view, the appropriate approach. The denominator is comprised of all monthly billed base rent plus charges for CAM and real estate taxes and is not adjusted for deferrals and abatements. In our numerator, all deferrals and abatements are classified as uncollected. Also note that our denominator remained fairly consistent throughout 2020 at roughly $70 million to $71 million per month. During the fourth quarter, we continue to take a tactical approach as we negotiate and work with our tenants through this unprecedented impact on our businesses. $36 million of deferrals were executed in total for 2020; of that amount, $22 million is with higher credit accrual basis tenants. Abatement agreements now totaled $37 million as additional rent concessions were provided as government restrictions impacted our tenants' ability to operate at full capacity. Abatements will continue in 2021, primarily as a result of temporary percentage rent arrangements as we have made the decision to partner with many of our tenants to get to the other side of the pandemic together with the objective of longer-term benefits and stronger sustainable growth. As we did in the first six months of the pandemic, we took advantage of these negotiations to improve many qualitative lease provisions in exchange for that rent flexibility. Incremental percentage rent upside where we have abated rent, removal of development, parking and use restrictions, eliminating tenant lease termination and cotenancy rights, and the deletion of below-market tenant extension options all enhance the long-term value of our assets in exchange for these near-term concessions. Following the surge of productivity during the third quarter, we had another solid quarter of leasing with almost 470,000 square feet of total retail deals, and then add in 33,000 square feet of office leasing, bringing our total to over 0.5 million square feet of fourth quarter deals signed. Combined with the third quarter, that's over 1 million square feet of leasing to close out the second half of the year. We are also very encouraged by the level of activity in the leasing pipeline. As a result, our occupancy metrics have demonstrated surprising resiliency, with our leased metrics standing at 92.2% at year end, flat versus the third quarter statistic, and our occupied metric remaining in the 90s at 90.2%. These levels are off 200 and 230 basis points respectively versus year end 2019 levels. While we still expect continued pressure on our occupancy over the next few quarters and expect to dip into the upper 80s at the trough, as we have previously discussed, continued leasing activity at the volumes we achieved in the second half of 2020 will set us up for more pronounced growth in 2022. We continue to see strength from the same leasing demand drivers we've talked about on prior calls: first, urban and CBD tenants migrating to top-tier first-ring suburban assets; second, top-tier tenants upgrading their real estate to the best in market open-air locations; and third, new to market lifestyle and digitally native tenants targeting our best-in-class, open-air, mixed-use and lifestyle properties. As Don highlighted, while our lifestyle and mixed-use oriented assets have underperformed in the COVID environment, new demand from these best-in-class lifestyle tenants has been strong, as evidenced by lease yields and openings during the pandemic with brands such as Nike Live, Athleta, Sephora, Warby Parker, Room & Board, Serena & Lily, Arc'teryx, Vuori, Lovesac, Faherty, Bluemercury, NIC and ZOE, Shake Shack, Sweetgreen, Levain Bakery, Salt & Straw, and anchor restaurants such as Teleferic Barcelona, Nighthawk Pizza, Chika, Stellina, Spanish Diner and Planta with two openings, to name more than just a few, plus many more under negotiation. Needless to say, our best-in-class mixed-use and lifestyle real estate is poised for a significant rebound in 2022. Our residential portfolio has held up reasonably well during the pandemic with collection levels up towards 98%, the only exception being our 450 units at Assembly Row where the Montaje has felt some weakness as expected. Average comparable leased occupancy for our 2,700 comparable residential units stood at 95.1%, down only 60 basis points from year-end 2019. Our existing office portfolio has performed solidly during the pandemic as well with collections averaging 97% and occupancy remaining stable. As we've discussed previously, however, lease-up of office space in our development pipeline will be slower than we had expected pre-COVID as corporate decision-makers postpone space planning needs by at least a year to 18 months. That being said, preleasing at CocoWalk stands at 75%, with South Florida office demand remaining strong. At Assembly, PUMA is building out its new headquarters space in 55% of Block 5B on Grand Union Boulevard, and PUMA, at this point, plans to move all of their employees in this summer. Pike & Rose has 63% of 909 Rose Avenue is spoken for. One Santana West lease-up remains speculative, however, openings are not expected until 2022. Now to a quick discussion of the balance sheet and an update on our further enhanced liquidity position. The fourth quarter was an active one on the capital markets front. In early October, we raised $400 million of unsecured notes in a green bond. The second half of December, we repaid $500 million of unsecured notes. In December, we sold $170 million in assets that at a blended in-place yield inside of 4%. This left us with $800 million of cash available and an undrawn $1 billion credit facility, providing $1.8 billion of total liquidity at year-end with no bonds maturing until 2023. With our $1.2 billion in-process development pipeline continuing to be executed upon, we have just over $400 million left of that to spend. As Don mentioned, we find ourselves today sitting with significant dry powder. And with Don's and my remarks today, we hope we have conveyed to you the optimism that we have for the future of our business and the strength of our portfolio to truly thrive on the other side of the pandemic. Our ability to generate outsized cash flow growth is fairly clear when, as Don said, vaccinations are delivered to a large segment of the population in our markets, those coastal markets reopen, and consumer behavior reverts to uninhibited freedom and spending. But the timing for those three things to occur is not clear and certainly not clear in 2021. As a result, for 2021, we are not providing formal guidance at this time. The best we can do for you, if you need a stake in the ground, is that it's roughly going to be flat to 2020 with the first quarter of 2021 at roughly $1 per share and build each quarter from there. We do ironically feel significantly more confident in providing an outlook for 2022 than we do for the current year. Based upon the leasing activity and demand we see for our real estate, the strength of our essential retail portfolio, the significant upside in our mixed-use and lifestyle retail assets, the resiliency and stability of our existing residential and office and the phasing in of POI from our $1.2 billion development pipeline in 2022, 2023 and into 2024, we expect 2022 FFO per share will be in the low $5 range, representing double-digit FFO growth year-over-year. So stay tuned.

Hey good evening. First, Jeff, congratulations. So awesome for you to get the new title, business cards and all the fun stuff. And then congrats to Barry and the rest of the folks who have gotten promotions. So two questions here. Don, just thinking big picture, you're not alone in traditional coastal REITs who are now exploring other markets, presumably down South, the Sun Belt. But it's interesting because, for the past two decades, there's been this whole coastal, coastal, coastal, and then suddenly with COVID, everyone's looking elsewhere. So my question is, is it really COVID or you guys have been thinking for several years now about expanding to new markets? Maybe they are down at the Sun Belt, but the COVID and what's happened was just sort of the catalyst, the expeditor.

Yes, Alex, that's a great question. First of all, I don't want my comments to be construed as not being positive with respect to the coastal markets. At the end of the day, it's jobs and good paying jobs at that. And when you think about where we are in those markets, in those first-tier suburbs, that looks really strong. Now, when you go forward and you say, okay, where would you like to put incremental capital, it doesn't mean we still won't look in the markets that we're in that we know, but it does mean that, through COVID, it’s pretty clear that there will be other job center growth places that were starting pre-COVID but, like almost everything, have accelerated as a result of it. Markets like Phoenix and Florida, and what's happening in South Florida and a couple of others, I do think it would be wrong of us not to effectively understand the dynamics in them and be able to act on it to the extent we get comfortable with the highest-quality stuff in those markets. You'll never see us going down quality; that's a really important point.

Okay. And then the second question is, it also seems like, recently, there's a lot of demand from entrepreneurs, people starting up, whether it's new restaurants or new concepts. And yet, at the same time, there are still tenants who are struggling, and I don't just mean like movies, theaters, or gyms, but some others. So can you just sort of walk through what's happening? Why is it that we're seeing these spurts of new tenants forming at the same time that you're still seeing a bunch of people struggle? It just seems to be this odd paradox. I just want to better understand it. Is it purely just the categories themselves, and that's it? Or are there other dynamics at work that are driving some of these new leases that you're seeing?

First of all, there are certainly lots of dynamics. But one of the single most important things to remember is that companies that are struggling at this point and continue to struggle, I cannot say enough about the impact of the government restrictions. I mean, we're a business of contracts, and when the government steps in, and effectively doesn’t allow the contract to be performed, it’s the weirdest time I've ever been involved in. So absent that, you do have new businesses forming with new bases. Legacy costs of old businesses and having to be able to figure out how they're going to make money going forward with all those legacy costs is sometimes much harder than a new business coming in. For example, if you take a look at what's happening in the gym space, you'll see new purchases of gyms with packages of gyms at a fraction of the cost that that gym company was worth 12 months ago. When you come in with a new low basis, you've got a completely different P&L, a completely different business plan, and a different balance sheet and the ability to afford and to pay what you need to do to get in some of that high-quality real estate. So it's a natural cleansing that won't just be in 2021. This is a phenomenon that will take a number of years to work through. From my perspective, you will see businesses coming in with a lower cost basis to start versus their existing legacy competitors.

Thanks. Good afternoon, everybody. Don, I guess on the leasing, I was just wondering, if you could provide a little bit more color. I appreciate what you and Dan talked about in terms of the activity in Q3 and Q4. And I'm just curious if the strength is concentrated by region, if it's concentrated more by product type or price point within the portfolio. Just trying to get a sense for maybe where you're seeing the greatest and then areas where you may be seeing less demand.

Let me start out this way, so on the call, Steve, Wendy Seher, who as you know, has the biggest part of our portfolio and a lot of that is essential based assets, unless in some boxes. So let her speak to that, and then Berkes is also on the call; that can give you a much better idea on the mixed-use types. So, listen to those two, and then I'll try to put it all together. Wendy?

Steve, thank you. On the Eastern Region, as I’ve been looking at our pipeline, if you look at our pipeline in January of this year versus January of last year before the pandemic happened, we actually have more activity on the East and more in our pipeline. So, I'm very encouraged by what I'm seeing. I talk to retailers all the time and I continue to see interest in a flight to quality. So, a lot of the retailers coming into 2021, maybe end of 2022, may make fewer new deals than they made before. The deals they make are important from a risk mitigation standpoint that they go for properties that they know and have a history of strong sales, whether they're highly amenitized or general essential properties, because I have both on the East Coast. They want to mitigate that risk. They want to make the right choice, and we have an advantage because of the history pre-COVID of very strong sales in high-quality real estate; people believe that that high-quality real estate is not forever changed because of COVID. So I'm very encouraged by what I'm seeing.

Yes, and Steve, I'd add on to that by saying it's really no different here on the West Coast; the demand is very broad-based, whether it be in our more traditional essential centers, including the Primestor portfolio, or Santana Row, or quite frankly, our other lifestyle mixed-use projects on the East Coast, which I've had some involvement in over the last couple of years as well. The list of tenants that Dan read off from our entire lifestyle mixed-use portfolio has active leasing and negotiations going on right now. We’ve got two retailers under construction at Santana, a third to start shortly, and three restaurants under construction at the moment. We’re about to sign a lease with a noteworthy operator out of San Francisco, that’s doing their first restaurant outside of San Francisco. We’re very encouraged by what we’re seeing. To key a little bit off of Alex's prior question—thank you, Alex, by the way for the congratulations—we're not necessarily in a financial crisis this time around. There seems to be plenty of capital for some of these newer concepts to get capitalized. We’re seeing that very specifically in the restaurant business right now. There doesn’t seem to be a shortage of capital, and like Wendy said, everybody wants the best real estate. So whether you're new and somewhat starting up, or you've been around for a while and you can open fewer stores now than you could a few years ago, there's a lot of focus on our real estate and it is very broad-based.

Great. Thanks. Good color. Maybe second question, Don. Just in terms of— it sounds like you've got a lot of capacity on the balance sheet. Just what are you seeing in the transaction market, what's happening in terms of distress? And how are you sort of weighing that against potential developments down the road when you're mixed-use assets that you've got Phase IIIs and IVs?

Yes. Well, listen, first of all, the last part of your question first, Steve. We've got plenty of development to do. In terms of acquisitions, we learned a real good lesson in 2008, 2009, 2010, and Jeff and I were just talking about it last time. And the lesson was how, at the end of the great financial crisis, there weren't really a ton of distressed assets for us to acquire, and there weren't. Great assets are often not distressed, and not distressed in terms of price. So it wasn’t about us going down quality and getting a lot of stuff because of that, which is kind of why, at this point in time, we're looking for the best stuff around. There are people willing to talk to us about that; prices do seem to be firm but a little better than they were certainly pre-COVID, but those prices are not cap rate prices because what NOI are you capping as you look at it. They're really great real estate prices. That's kind of how we're looking at potentially using some of that. The cash on our balance sheet is insurance, and the reason there's so much of it is insurance. We did it that way because we believe going forward, given what we just told you, we need less insurance. Certainly, I don't have a treasure trove of transactional information on deals that have just happened that we can really talk to you about in terms of where we're trying to go, but suffice it to say, we do believe we will find some opportunities in the markets we want to begin including our existing markets and one or two new ones that let us get deals done in a way that will be accretive now and certainly accretive to value with more development opportunities associated with them going forward.

Hi, everyone. Good evening. Thank you. How have development yield expectations changed for the current projects or even the entitled projects? Can we get an update on some of the key inputs like land prices, maybe construction, labor, materials, and, of course, importantly rents? So do you expect a compression in yield, if 100 to 125 basis points possibly?

Derek, we don't see it as that much. There will be some compression. If you look at the 8-K we put out, we did get more conservative on a couple of those assumptions. Still lots to figure out yet, and again, it depends on the product. It's hard to figure out on the office side today, but it’s certainly not in construction costs. It’s most likely in build-out costs from a TI perspective for more office space there. In terms of rents, it's anybody's guess to some extent, but our office and residential development, which is most of what our development is, are all in mixed-use properties that are well established and effectively are the best product available coming out of COVID. Therefore, you shouldn't expect a drop in rents in any significant way. There may be some extra carry costs associated with it and maybe a little bit more TI, but everything we still see says that the developments we are completing will be accretive to value and accretive to earnings.

Hi. I want to come back to the guidance as much as you don't want to talk about guidance.

Who is this?

Hi, Michael.

Well, he said my name. I guess, I'm having a real hard time trying to put your pieces together because you sound confident, Don, and you can make assumptions for what things could be this year. You don't have that much of a complicated business; your balance sheet is in good shape. You’ve locked all these things the way you have confidence on the leasing front. I guess, I'd like you guys to be a little bit more specific; you have almost an $11 million FFO drop that you're communicating between the quarter that just ended, and we're a month and a half into the first quarter. Can you detail if there were things in the fourth quarter that are not recurring that would cause that variance? What else is happening to drop from $1.14 to $1? And then I get it, what you're saying, Don; like you have more confidence in 2022; a lot of 2022 is where you're coming from in 2021. You're embarking on a $5 number that's almost $40 million of NOI of FFO. What are the components of that? How much of it is NOI? How much of it's investment? How much of development? How much of it's G&A? How much of it is interest expense? Give us the pieces that give you the confidence to get there?

Michael, we're not providing formal guidance, okay? We provided—typically on our November call we provide preliminary goalposts where we don't provide any assumptions behind it. Even today, we have provided a goalpost for 2021; that's what we provided to you. We're not providing assumptions. I think in light of COVID, we're comfortable providing what we are providing, and the assumptions will hopefully come at some point later this year in 2021, when we have better clarity on the environment and when those things are going to happen that will allow us to have the visibility to provide the level of detail and assumptions that you're asking for.

You know Mike, it’s—let me just add— just say something to Dan, when you – what I don't want to do is go down the rabbit hole you want me to go. Let me be very specific about that; when you go line item by line item, as you do, you put a specific amount of exactness or credibility or false understanding. That's what's going to happen. We don't know that, Mike. When you break—you know the components of this business; you know the development that is under way that we give updates on every single call. The amount of rent that we're collecting—we just broke it out between 75% of the company, the essential component and the lifestyle component of the company. The notion of how we grow earnings and what we've been able to do, it's definitely a question for an investor to decide; do you believe in this business plan to be able to get there? But if I do it your way, Mike, what I'm winding up with are billions of questions on individual line by line item that suggest they are more accurate than we are able to provide at this point. So we're not going to do that.

I respect that, Don, but at the same time, every one of your competitors is taking their best shot at numbers. And the reality is I feel like you just teased people by saying we’re going to get to $5 in 2022 and it's going to be a $1 in the first quarter 2021 without giving the context of how you get there, right? I'd rather talk about how you're going to get there than...

I think the assumptions—broad assumptions behind the $1 relative to the $1.14 in the fourth quarter, we've started collections in January; they are down and behind December's collections. December collections were a little bit weaker. We have $3.5 million of term fees in the fourth quarter, another strong year of term fees; we're not projecting that. Our occupancy is projected to go down in the first quarter. Like I had indicated, we expect to dip into the 80s. Percentage rent is down, and plus we sold a number of assets, and we're sitting with significant cash on the balance sheet, relative to where we're putting those proceeds to work immediately. We're building capacity and financial capacity and flexibility when it will be dilutive in the quarter, before we deploy that cash. That is the rough roadmap from $1.14 for roughly a $1.

Hi. Thanks for the time. I enjoyed listening to that prior exchange. Just on the acquisition front, I was curious on the target of assets you're looking at, if it's more the essential grocery-anchored type of assets or more the lifestyle mixed-use type of assets, and if those assets that you're looking at to acquire are more stabilized or maybe redevelopment opportunities where you could see some value. So just curious on kind of the target of what you're looking at and maybe any sense of how you're looking to remix or reshape the portfolio as part of that discussion?

Yes, that's a fair question. We hope, with a bit of luck, you see both. To us, we really believe it's not about a particular format or a particular type of shopping center; it’s about the growth prospects. If we think the growth prospects are in a more stabilized asset that has rent upside because it should be remerchandised, we like that a lot. If it's one that's been mishandled, mismanaged and could be redeveloped, we like that too. It depends. The first thing we're aiming for is the right markets with the right barriers to entry and demographics, so that we can get comfortable with job growth; and to be sure we have a pretty good chance, with what we do, to create higher sales from the tenants and higher rents therefore. I hope we will see, but we're looking at both opportunities for mixed-use development with some kind of stabilized piece, and then further development down the road and a more stabilized asset where we think there are possibilities for rent growth and other means to create value. I hope that's helpful.

Great. First, I just want to congratulate Jeff and Jan and the others that got promotions. So congratulations.

Thanks.

I wanted to discuss occupancy and where it might trough. I'm assuming that the fourth to first quarter includes the seasonality that would usually come with a lower occupancy number, but it seems like there may be an impact from the second wave of government-mandated closings which could also weigh on the occupancy number and maybe extend into the second quarter. I just wondered if you had any thoughts on that.

That's right. The first quarter is always significantly tougher for our business. The other point to consider is, with respect to small business, I could not tell you who is more frustrated than I am, with some of the restrictions that are extremely severe on our properties, not only for restaurants but for other users as well. I don't know when they'll be lifted, and I don't know how long those businesses can last. I suspect stimulus is coming soon, but it’s February, and we've been talking about it for months. So on the small business side, those are the people who are being hurt the most and that's different than the big companies that are national chains. But frankly, we make our money on the small businesses that manipulate into success and can pay more rent. I do see that being a very positive catalyst as we look forward. I just don't think it's right now. And maybe it's a good time for me to mention that in all my years, I’ve never been more comfortable with a forecast, with a view to the future, one year out, than today. This is why we're not giving 2021 guidance, which is why we're talking about 2022 with more specificity. That is kind of crazy in my history of doing this job, but it is the way it is today. We thought we’d put both the sell-side and the buy side in Federal Realty’s perspective as it relates to our growth profile, which looks extremely positive.

So just a quick clarification when you talked about occupancy going into the high '80s, were you talking about the 92% lease level or the 90% occupied level?

The 90% occupied level.

Got it. Okay. And then for the new restaurant deals we're talking about is a primarily sit-down full service? And I guess, where do you see the dining mix going a couple of years down the road versus where it was pre-pandemic?

It's interesting. We are doing a variety of restaurant alternatives that we like to offer in any particular property. We're really trying to reconfigure outdoor space and create more of it. We're using as part of our property improvement plans the use of pergolas, furniture in areas, and landscaping to create those places, which restaurants are asking for. Maybe I can put you in touch with Stu Biel in our shop, who has a lot of these types of properties. So while the quick service stuff we're still doing and will continue to do is pretty much as it was, we’re looking for outside seating wherever possible, in any other common areas. It is also the sit-down restaurants. I see that not to the extent it is today but some component of that will allow for comfort in outdoor dining; that was happening in a bigger way for us pre-COVID, and it was accelerated through the COVID process. So, there is a big variety in terms of what's going on, but definitely more focus on outside areas.

Hey. Good afternoon, everybody. Hey, Don. Just a simple question: the Board has been committed to the dividend through this whole process looks like, so they're going to continue to be. Do you have a sense as to when you might be able to cover the dividend with just pure operating cash flow?

Yes. Hopefully by the second part of 2022 we’d be there and all of 2023.

Hi. For these younger retailers seeking space, what parameters do they have in terms of occupancy costs? Is it different from legacy retailers? And what flexibility do you provide to help them in their path to sustainable growth?

What we’re doing, Linda, to start is that a lot of these deals have low fixed rent and a hard percentage, which is effectively related to the question you’re asking. While there are lower bases going in, the question of how much volume they're going to do and where their price points will be two years from now are different than what they will be in the first 12 months when they open. I love your question and I spend a lot of time thinking about them, talking about how those business models are going to work. The bottom line is, there is uncertainty with it. Sharing that risk with them from a percentage rent basis, however, extends our objective of earning more rent than we used to earn, but the ability to earn will depend on the first 12 months to 18 months of openings.

That makes sense. And then, the 4Q blended leasing spread of plus 1% versus minus 1% in 3Q is an improvement, but not where you want to be. In the vein of expecting clarity next year, what sort of average blended leasing spreads are possible in 2022?

Yes. That's a good question. I hope to be in the high-single digits at that point. And again, with us always it will depend upon the mix of a big deal here versus smaller deals, etc. But—and that’s where I hope to be. The other thing about what I did is with every deal we do is a landlord right to terminate after two or three years depending on sales levels. We’re kind of going in with you, but you don't have 10 years to figure it out, you know what I mean? So it's a good balance of sharing the risk.

Hello. As you think about expanding your geographic footprint, how would you describe your appetite for lifestyle centers, community centers, or even power centers? I think you have mostly talked about lifestyle centers, but I wanted to get a general idea if you have at all thought of the other property types.

Yes. What we should do and I think you're new to the retail side of Green Street is covering or no? But I'd like to spend more time with you offline to go through what our business plan is because we are pretty agnostic as it relates to the retail format for everything from community-based, grocery-anchored shopping centers to more of a power center, to more of the lifestyle center and the mixed-use component. We're open to all of it. What we're open to is the ability of that piece of land in that shopping environment that they have for us to be able to create value, either through raising rents or through redevelopment or even further going vertical.

That makes sense. And then, do you give any credit at all to the idea that the rise of work from home will facilitate Americans' migration from expensive cities to more affordable cities, potentially harming the margin, cities like San Jose in California, and some of their assets? Or do you think that you will not suffer at all from these potential trends?

No. I very much believe in those trends; we will change the office environment dramatically in the country. The most important thing is the product you have, wherever that product is, is the best in the market. There will always be demand in the markets where we do business, and certainly in all of this, it’s just better be what employers want. If you consider our office product in terms of the mixed-use community we are in, with being fully amenitized, it’s really important with respect to air and HVAC movement, etc. I think we're in the right places with the right product; so office is not generic, and that has to be viewed very carefully post-COVID.

Thanks for taking the questions. And I'll be brief, by the way, Jeff, congrats on the promotion. It's great. Yes. Don, I know I sense a little bit of frustration on your part about these questions about guidance, etc., and you do have a pretty big development pipeline that should produce about $60 million of NOI over the next couple of years. Have you ever considered putting out an NOI bridge three years hence or something like that to get people more comfortable? Is that something that you would consider doing?

Certainly, we will take it under consideration, Floris. Just to respond to the frustration: the frustration is with the bullying of the line-by-line. This is what you should do. You’re right. I don't take that well at all. We're running the company the best way we can, communicating the best way we can, and certainly, we’ll take suggestions, but we won't be bullied.

And then maybe a follow-up, a little bit about some of the newer markets. I mean aren’t you already in one of those markets that is seeing some heady growth as people go to warmer climates? I'm particularly referring to Miami, and do you see—I know you just walked away from an asset there or you sold an asset, but do you see yourself reupping in those markets over the next 12 to 24 months?

Very possibly, Floris. Yes. No, look, we made a bad deal with that one; but that doesn't change the fact that job growth, migration, and business-friendly environment could be good for us going forward. You're going to love CocoWalk when you see that completed. I know you love Tower Shops, which is completed. Those are going to be two of our best assets in the company. So, yes, we’re open to more.

Thanks for joining us today. We look forward to speaking with you over the coming weeks. Thanks.