Federal Realty Investment Trust. (FRT) — Q2 2021 Transcript

Well, thank you, Leah, and good afternoon, everybody. To quote Seinfeld's Frank Costanza, 'We're back, baby,' and it seems to me we're the real estate of choice. Let me just cut to the chase here and summarize where we are in 5 points. We nailed it in the second quarter at $1.41. We raised our 2021 total year guidance by over 10% at the midpoint. We raised our '22 guidance, the only retail real estate company to get '22 guidance, by the way, by 5% at the midpoint. We covered our dividend on a cash basis in the second quarter and raised it again for the 54th consecutive year. We had record leasing volume, more than we've ever done in any quarter in our 60-year history. So we'll provide more details on each of those points and others, but that's where this company is as we sit here in the first week of August 2021, and we're feeling great about our market position. At $1.41 a share, we exceeded even our most optimistic internal forecast by $0.20 a share, and we're up 83% over last year's worst COVID-impacted quarter, which was the second quarter. In a nutshell, we didn't anticipate the bounce back in nearly all facets of our business to be so fast and so strong, and we didn't anticipate some of the onetime deals that we were working on to be executed so quickly. We talked about the pent-up demand on the last call in the form of strong traffic and leasing demand, and that has continued unabated ever since, no pun intended. The quarterly financial impact of that optimistic consumer meant that we: one, collected more rent in the second quarter from prior periods than we thought; two, we had significantly less unpaid rent in the quarter than we thought; three, we had fewer tenant failures than we thought; and four, we had far higher percentage rent from COVID-modified deals than we thought. As I said, we covered our dividend on an operating cash basis in the second quarter, way ahead of our expectations. Of course, all of that means we will significantly raise 2021 earnings guidance and raise 2022 earnings guidance as well. As we've said all along, visibility toward '22 earnings was ironically better than 2021. That has proven to be the case, and Dan will talk you through guidance details in a few minutes. While this quarter's earnings were as strong as they were, largely because of the collection of big rent dollars, both past and present, the real story here is the unprecedented amount of leasing that was done and what it means for the value of our real estate into the future. Our properties are in demand across the board. We did 124 comparable deals in the quarter, more than we've ever done in any quarter in our 60-year history for 558,000 square feet at an average rent of $37.34 per foot, which is 8% more rent than the deals they replaced. We signed another 9 non-comparable deals, mostly in our new developments, at an average rent of $44.71 per foot. That's 570,000 square feet of space leased in 1 quarter alone, 25% more than our pre-COVID quarterly average. You might remember that we did almost as much last quarter. So when you put the two quarters together, the production in the first half of 2021 is both staggering and unprecedented. Big kudos to our leasing, legal, and support teams, nearly 1.1 million square feet at an average rent of $37 a foot, 8% more than the previous leases, growing through annual rent bumps over the next 8-plus years. That’s just the tip of the iceberg here. Another interesting consideration is the breakdown of all that leasing between renewal and new tenant deals. Traditionally, two-thirds of the deals we do in any one period hover around two-thirds renewals and one-third new tenants. However, not in these post-COVID six months. It’s nearly flipped, with roughly 40% renewals and 60% new tenants. What does that mean? And why is that important? It first means that we lost a substantial number of tenants during COVID. Since it costs more to put a new tenant in the space rather than renew an existing tenant, our current tenant capital is higher. While that might seem like bad news on the surface, there's a deeper angle to consider. It also means our properties are in high demand from today's relevant and well-capitalized restaurants and retailers all trying to improve their sales productivity post-COVID through better real estate locations. We've always been pickier than most in terms of the tenants we choose for our centers. Coupling that with the execution of the broad post-COVID property improvement plans we've discussed over the last several quarters, that higher capital outlay will result in significantly higher asset value in the future. Think about it in a post-COVID world: major markets with first-tier high-quality suburban shopping centers featuring a mix of new post-COVID relevant tenants doing business in revitalized shopping centers and mixed-use properties focused on outdoor seating, curbside pickup, covered walkways, and improved placemaking. Our properties are becoming fresh, dominant, and more relevant in the communities they serve for years to come. The value of our real estate, net of capital, is increasing, and the prospects appear better than they were before COVID. Also, consider that at quarter-end, our portfolio was 92.7% leased, but only 89.6% occupied. That 310 basis point spread, representing nearly 780,000 square feet of space and roughly $30 million in rent, is the largest spread we've had since 2005. Historically, we know how 2006 and 2007 turned out, which bodes well for the future, assuming inevitable tenant fallout occurs at historical levels. Just three years ago, we were at 95%. Moving on, I hope you all saw the major acquisition announcement we made in the press release on June 7, detailing the four deals we closed during the quarter. Overall, we have an 80% interest in the combined income stream from Grossmont Shopping Center in Greater San Diego, Camelback Colonnade, Hilton Village in Greater Phoenix, and Chesterbrook Shopping Center in McLean, Virginia. The gross asset value is $407 million for 1.7 million square feet on 125 acres of land in prime locations in these markets, and we strongly believe that pricing today would far exceed what we negotiated during the middle of COVID. We put out a presentation ahead of NAREIT and our investor meetings in June that focused on these acquisitions in depth, including a unique potential redevelopment opportunity at Grossmont since we control virtually the entire 63-acre parcel from a tenant perspective in less than five years from now. Separately, we have another deal under contract currently that we hope to close this quarter. On the development side, residential and office leasing activity is picking up on both coasts. It's gratifying to see Pike & Rose quickly maturing, coming into its own and becoming the go-to place for many things in the region. In Montgomery County, Maryland, a county not doing much office leasing currently, our Phase 3 office building, 909 Rose, is 77% leased with another 11% under executed letters of intent. That's nearly 90% committed at this point with rents in line with pro forma. That's strong in this office environment, with mostly 2022 rent starts. We had a big quarter up at Assembly Row, and we have now received our certificate of occupancy for the retail portion and half of the units in Marcella, the 500-unit residential building that’s part of the Phase 3 development. Tenants began moving in during July, and the initial leasing pace is exceeding our expectations. 145 units are currently leased at rates that approximate our lease-up underwriting, and that seems to be getting stronger each week. Assembly Row is the mixed-use project in our portfolio that was most impacted during COVID and took the longest to rebound, but it's now recovering as quickly as the others. Office leasing in the Puma-anchored building is also picking up, with serious negotiations underway for the first time in over a year for a large portion of the remaining space. Nothing tangible yet but a good sign nonetheless. Similarly, at our CocoWalk in Miami, we’re fully leased on the retail side and mostly leased on the office side. Tenant openings will continue through the remainder of this year. We look forward to hosting an investor tour in Coconut Grove early next month. More to come on that. In Darien, Connecticut, construction and leasing are moving forward on time and on budget, with the newly built Walgreens opening during the second quarter ahead of schedule. That's important because it clears the way for the remainder of the demolition of the old shopping center and starts the residential over retail component of the project. Good things are happening there too. Let me pause there. That’s about only half of the prepared comments. I’ll turn it over to Dan, and we’ll be happy to entertain your questions after that.

Thank you, Don, and good afternoon, everyone. The unexpectedly strong results of $1.41 per share in the quarter not only blew away 2020's year-over-year comparison, but represented a 20-plus percent sequential gain over the first two quarters, and more than 20% above our forecast and consensus. Given the big beat for the quarter, let me take a little time to put some color around the broad categories of outperformance that Don outlined. $0.13 of outperformance was driven by collection-related items. $0.06 of upside was from improved operations, with $0.05 for one-timers that were above our forecast, which collectively totaled a $0.24 beat versus our previous quarterly guidance. First, some detail on the $0.13 of upside from collection. Rent collection for the quarter, net of percentage rent, was almost 200 basis points ahead of expectations. Prior period rent collection was $7 million versus $4 million in our forecast. Our percentage rent for the quarter was almost $3 million above forecast, highlighting the strength in consumer traffic across the portfolio. Second, the $0.06 of operational outperformance was driven by our occupancy essentially staying flat, which was roughly 50 to 100 basis points better than we had expected. Improved hotel, parking, and specialty leasing revenues all exceeded forecast. The third category of $0.05 of onetime items above forecast were attributable to term fees, bankruptcy payments, loan reserve reversals, and other miscellaneous payments collectively exceeding our expectations. Please note that we do not expect the $1.41 to be the run rate for the balance of the year. Even $0.09 of the results is not expected to be recurring. As Don mentioned, we are in the midst of delivering 500 units of residential at Assembly Row, which will be dilutive over the next few quarters, among other items, but we'll address that later during guidance. Let's take some time and revisit collections. Our collectability impact was more than cut in half to $6.4 million compared to the $14.8 million in the first quarter, fueled by the strength of prior and current period collections, net of abatements. Rent collection in the quarter surged to 94%, up from the 90% level as reported on our first quarter call. With abatements and deferral agreements totaling 4% of billed rent, our unresolved rent now stands at just 2%. Of the $39 million in deferral agreements negotiated to date, $17 million have been repaid, representing about 90% of the scheduled deferral payments. The remaining repayments of $22 million are set to be paid back over the next few years. Elections for cash basis tenants improved substantially to roughly 80% for the quarter, up from 66% in the first quarter, a very strong signal. For occupancy, the continued pressure that we expected during the second quarter never really materialized as our tenants remained resilient. With record-breaking leasing volumes across the portfolio, economic occupancy should steadily climb higher from this point, backed by the 310 basis points of spread between leased and occupied, that is embedded within the portfolio. Other strong leasing metrics to note: our small shop leased occupancy grew almost 200 basis points to 85.7% from 83.8%, showcasing tremendous movement in a single quarter. Regarding our lifestyle-oriented retail assets, which were hardest hit during COVID, the spread between leased and occupied has now grown to 440 basis points, driven by strong tenant demand and signaling a sustainable acceleration in this segment's recovery. Comparable property growth rebounded in a significant manner for the quarter, up 39%, an unprecedented result and a record for Federal. However, it’s also important to recognize there is limited relevance for this metric in the current environment, whether positive or negative. Now let me address guidance. We enhanced our guidance for both 2021 and 2022, increasing 2021 by over 10% from a prior range of $4.54 to $4.70, to a new range of $5.05 to $5.15 per share. This implies a 13% year-over-year growth versus 2020 at the midpoint. For 2022, we are taking it up by 5% from a prior range of $5.05 to $5.25 to a new range of $5.30 to $5.50. Let’s review some of the assumptions behind this improved outlook. For 2021, as I mentioned, the $1.41 per share results for the second quarter will not be a run rate for the remainder of the year. As I mentioned, $0.09 of the 2Q results is onetime in nature. Term fees and bankruptcy-related income will not recur at the same level, and please note that we have very few term fees in the pipeline currently. While current period collections should continue to climb modestly higher, prior period collections are forecasted to decline for the remainder of the year. Also consider the previously mentioned dilution, roughly $0.03 per quarter, from the residential developments we're delivering in the second half. Additionally, we anticipate increased G&A and property-level expenses of $0.02 per quarter as the cost of doing business has risen post-COVID. However, we do expect accretion from the second quarter acquisitions of roughly $0.02 per quarter. This revised guidance indicates an increase in our FFO forecast for the second half of '21 of almost 10%. For 2022, the improvement in outlook is driven by: one, a faster return to pre-COVID collection levels; two, a stronger occupancy due to record leasing activity we've observed; three, a full year contribution from Grossmont, Chesterbrook, and Phoenix; and continued improvements and contributions from our development pipeline. Though we still await tangible leasing at Santana West, it doesn't look like that will contribute to FFO until 2023. Also, please note a level of pragmatism in these numbers. By all accounts, COVID variants are keeping the virus with us longer than we would like. We anticipate some level of tenant fallout as PPP money and other government subsidies diminish, impacting select tenants' ability to operate profitably. Finally, getting rents started on our record levels of new leasing activity will be a paramount focus for the operating teams here at Federal. Please note there is no benefit assumed in our guidance for either year from switching tenants back from cash basis to accrual basis accounting. Lastly, let’s move to the balance sheet and an update on liquidity and leverage. Following the $325 million spent on acquisitions and over $100 million on new development during the quarter, we maintain ample total available liquidity of $1.3 billion, comprised of $300 million in cash and an undrawn $1 billion revolver. With $125 million in mortgage debt scheduled for repayment over the next 90 days, we will have no maturing debt until 2023. Additionally, we remain opportunistic in selling tactical amounts of common equity through our ATM program. We sold $140 million at a blended share price of about $117.50 for the quarter and a forward sales agreement to manage our liquidity over the next year. Our remaining expenditure on our $1.2 billion in-process development pipeline is down to $270 million, with an additional $60 million remaining for our product improvement initiatives across the portfolio. Given the surge in our EBITDA, our leverage metrics have returned to significantly stronger levels as well. Pro forma for our 2Q acquisitions and $175 million in forward equity under contract, our run rate for net debt to EBITDA is down to 6.2x. Our fixed charge coverage is back up to 3.7x. Total liquidity binds pro forma to $1.5 billion. Our targeted leverage ratios remain in the mid-5x for net debt to EBITDA and above 4x for fixed charge coverage. Before we get to Q&A, let me quickly mention that following the covering of the dividend this quarter from AFFO, our Board yesterday declared an increased quarterly dividend per share of $1.07, given the surge in traffic across the asset base, the resilience and quality of our sector-leading real estate portfolio, the strength of our balance sheet, and sound forward-looking decision-making. Maintaining the dividend through another challenging economic cycle now appears likely. This should provide federal shareholders with further peace of mind, as an investment in FRT comes with a reliable, uninterrupted, steady, stable stream of current income as part of their total return. And with that, operator, please open up the line for questions.

I guess what I want to focus in on is the small shops. The 190 basis points seems really strong. Most of your peers are showing just the reverse. They're showing an increase in leasing by the anchors, reasoning being they're national and they can move faster than the small shops; and two, sometimes you need these anchors in place to push the small shops. Maybe you could tell what you did differently to drive the small shops? Or what is it indicative of from the small shop side?

Thanks, Craig. Let's just turn that over to Wendy. Let's see what Wendy thinks about that.

Yes, I think we continue to see very strong and steady demand from our anchors, including Target, Home Sense, and REN, which is new to the market. We are consistently making deals as we have historically, demonstrating strong momentum. However, what really excites me is our outstanding performance in small shop leasing. There is significant demand for our properties across all levels, and we are partnering with top-tier brands, including Nike, Athleta, Starbucks, and Ulta. I'm particularly intrigued by the retailers with more conservative expansion strategies. They are selectively choosing the best locations nationwide and pursuing small, strategic growth that enhances their property types. Tenants like Levain Bakery, Blue Bottle Coffee, Oriana, Room and Board, and Simon Pearce are among those choosing our properties in the neighborhoods where we operate.

So I know Don gave a breakout of 60% new, 40% renewed. Were you seeing a similar ratio? Or was it even higher new tenants in the small shop?

Well, I'm not sure, Craig. We can go back and look at it. I would expect that to be commensurate either way, but I have to go back and look at it. The new deals on the small shop side have been spectacular. And so that's going to be a big number. I just don't know if it's bigger or smaller than the anchors.

Yes, Craig, it's Jeff. To put it succinctly, what Wendy mentioned is important. A differentiator, obviously, between us and our peer group is that the lifestyle and mixed-use properties—what's said in the prepared remarks—leverage strong leasing activity in those properties, primarily characterized by small shop tenants. We're very pleased with the level of activity and the quality of the deals our leasing teams have been able to secure in that portion of our portfolio.

I just have a quick question on terms of cash on hand. Things have obviously improved quite a bit. Yet it still seems like you're running with about $300 million in cash. How should we be thinking about what's considered a normalized level for the current environment of cash? Should we expect that to drop off to something more pre-COVID like? Or do you anticipate running with something more elevated over the long term?

It's a good question, Mike. We ran through COVID with higher levels of cash. I think we're still above the stabilized level of cash that we expect to need and expect to run with. My expectation is that maybe it's $100 million, maybe $150 million in cash on hand compared to more like $25 million plus/minus that we used to run with.

Got it. And one clarification. When you were speaking about the upside in the quarter, you just mentioned $0.05 of one-timers above what you assumed. What was the total amount of what you would consider to be the one-timers in the quarter?

Roughly about $8 million of one times.

$0.08.

Or $0.08, sorry. I misspoke. $0.08 worth of one-timers in the quarter, and we had forecasted something obviously lower than that. We did expect the Splunk term fee of the straight line, and we expected the repayment of our debt, but we were surprised by a lot of other activity that came through the quarter that we don't expect to recur going forward.

I'm wondering if you could comment on, based on your current fundamental outlook, how you're thinking about the opportunity to start additional phases of development in the near term? Or even potentially new ground-up sites as opposed to pursuing more acquisitions? And just how you're thinking about the yield differential there?

I love the question, Katy. I'm not sure if you've been in our senior executive meetings over the past weeks if you're spying because those conversations are front and center. It depends, right? When you look at a place like Pike & Rose, for example, this is a property that we're really, really happy with the office leasing. Can it effectively support another building in time? It's possible. So we're discussing that. Could we find a big enough tenant to anchor it? I don't know, all those considerations are part of each project. Do we want to start a brand-new ground-up in the next year? I say no. We frankly have plenty to do in the existing ones we have. Comparing acquisitions versus development, there was a window that we jumped through during COVID where that difference was really attractive, leaning towards acquisitions. That’s changed slightly now. It's still early in the recovery, so we’ll see how it plays out. However, it’s not about turning one stick on and the other off; it’s about adjusting based on what we find. Hope that helps in terms of our forward approach. Of course, any time we have a deal to announce, we'll certainly share it.

And I know you mentioned you had one additional acquisition in the pipeline as of now. Any other comments you can share regarding what’s in the pipeline beyond that? Or what you've seen in terms of pricing movement since you closed the last four?

No, not at this time, Katy.

Don, you talked about the wide spread between leased and occupied. I'm wondering: A, how quickly can that close? And maybe if you or Dan could just talk about what is implicit in your 2022 guidance for either an average occupancy or perhaps a year-end occupancy by 2022?

Sure, Steve. I'll take the first piece, and Dan, if you can take the numbers on the second part. The leasing we’ve done, largely small shop deals, tends to happen quicker than anchor tenants. That activity should start to benefit us later in 2021 and particularly into 2022. The anchors have a longer lead time. They focus more heavily on new deals, which support income streams. You’ll see significant upgrades to our portfolio as a result of this.

With regard to guidance, what's embedded there indicates some modest continued improvement through the end of the year. We should expect to get back up above 90% occupied by year-end, roughly 92% to get into probably around 92% to 93%. Will we achieve the full spread of 310 basis points? We’ll see. But the guidance is roughly around 92% to 93% by the end of '22.

Okay. And maybe just as a follow-up for you or for Don, when you think about how Federal Realty took a lot of pain in the downturn and is now starting to see the snapback, when would you estimate that your NOI would be back to pre-COVID levels? Is that a '23 number? Is that by the end of '22? How should we think about that pace of recovery?

I don't know what to tell you, Steve. We’ve discussed it a lot. I would hope for it to be back in 2023. However, let me pose something thought-provoking. If you take our portfolio today, historically, this company has been a 95% leased portfolio. Taking all the capital we've spent in development, acquisitions, and other capital projects that aren’t yet producing income, we would project over $7 a share. Thus, our aim isn’t solely about recovering pre-2019 levels. It’s about smart investing and gaining momentum post-COVID, even as challenges with the pandemic persist. But I cannot say when we will achieve that aspiration.

First, congrats on being a Dividend King. I wasn't even aware of that. I knew about a Dividend Aristocrat but Dividend King is pretty cool. Don, following up from Steve's question, last quarter when I asked you about '22 and said you wouldn't put out '22 unless you thought you could beat it, which is what you've now done. Listening to Dan’s talk about what's not in the number since essentially your tenants who are cash basis aren’t assumed to revert back to straight line, which means there's an upward bias to earnings. Plus you significantly outperformed this quarter. Why should we stay within your guidance range for '22? Why not go above it? Your team aims to always outperform, and you're not issuing guidance unless you believe you can achieve beyond it.

How in the world, my friend, could I possibly answer you the same way I did last time when I have to sit here and say, from last time, Alex was right. I mean that's hard for me to do well. Hard for me.

Can you repeat that? Slow down and say it louder.

Well, now you're getting greedy, Alex. So I said it one time. Do I believe what we were doing was sandbagging? I do not believe that. We were assessing the situation as best we could at that time and many things have improved a lot faster in our markets. But at the end of the day, Alex, you are right, dude. And let's do it again.

Can I just interject? I mean to that point, one, the straight lining is a positive; two, you have your experiential tenants who are coming back; three, there's the improvement in occupancy. It just seems like there's a lot in terms of upward bias in each quarter, and yet everyone exceeds. That's essentially the point, and I think I've answered my own question, but you've validated it. So the next question is, regarding the new tenants, the 60% coming into your portfolio—are they relocations from other centers? Are they new to market? Are they tenants looking to expand? A little bit more detail on what that new demand is.

The new demand is broad-based; it's all of the above. Furthermore, Wendy kind of touched on this when she mentioned well-capitalized tenants who aren’t volume-based—those not trying to open 250, 300, or 500 stores. They're selectively choosing locations for brick-and-mortar setups that supplement their online efforts. We’re capturing more than our fair share of those types of tenants, which is a positive. Many are new to the market, and they may have stronger capital post-COVID than before. We’ve communicated that demand is broad-based and largely from tenants trying to enhance the quality of their real estate locations, which directly impacts their sales productivity.

Just on the guidance, again, what are the assumptions that you have built into the 2021 guidance that would get you to the low end of the range versus what it would take to get you to the high end?

For the most part, I think it's just the range of numerous factors we talked about in the numbers. For instance, the continued upward surge in collections, additional prior period rent assumptions—including those projected to trail off later in the year. We've seen pretty steady prior period rent collection of about $7 million each of the last three quarters. We expect it to go down to about $3 million to $2 million for the latter half of the year. There could be some upside there from that perspective. To the extent we have a successful acquisition, we'll bump guidance slightly due to that. But overall, it’s about that outperformance we're experiencing, expecting term fees overall. We had $3.4 million net in the quarter versus $1.8 million net last year. We're now expecting maybe $1 million this quarter. That presents an area of some upside. The upper end of the range requires a few factors lining up accordingly.

That's helpful. It's really admirable that you put out 2022 guidance. As we think about how your prior guidance compares to the current one, you noted that the gap between your '21 and '22 guidance kind of shrank this quarter. Some of that can be explained by onetime charges, but what are the other adjustments in assumptions for next year that are reflected in that?

Michael, ultimately what you're observing is a faster recovery. All of our previously made assumptions are occurring faster than anticipated, especially with what we have outlined for '22. The run rate we discussed for '21 has simply improved.

I was hoping to spend a little time on the lease spreads. Based on current demand and your lease expiration schedule, how do you think spreads will trend into and perhaps through '22? There was a slight dip sequentially in the spread in the second quarter despite strong momentum. I'm curious if that was mix-related and your expirations jump up next year regarding price per square foot. Can you provide context on how those spreads may evolve throughout '22?

I’d say a couple of things. First of all, we’re a relatively small company, and so in any particular quarter, there's going to be significant variation. I chuckled a little when you mentioned a decrease in the second quarter compared to the first quarter. I think one was 9 and one was 8, which to me are essentially the same. Both quarters saw deals that rolled down as well as those that rolled up significantly. The likelihood of staying within those single-digit numbers is highest; we’re comfortable with that. Still, it does depend on the mix of deals from quarter to quarter. Larger companies don’t encounter this variability in the same way.

Great. Sorry to be more clear. I was focused specifically on the new lease rate spreads, but point taken.

Just to clarify. We are actively considering new acquisitions in various markets such as the Sunbelt and perhaps Texas. We are also continuously assessing our existing assets and reviewing whether some should be disposed of, though that's not currently our focus. Our priority is effectively matching funding to the equity side at this time.

We're already looking into some new markets to expand. We've discussed this in prior quarters and during NAREIT. You’ve seen us venture into Phoenix, and we're currently exploring other markets as well. We don't have specifics to discuss right now. Still, we are happy that we got the deals done when we did, as the market has tightened significantly. We remain cautious yet optimistic.

Once again, funding will be balanced and opportunistic. If the investment sales market allows us to sell some assets at attractive prices, we will take advantage of that, and we’ll announce it.

How has office interest materialized, especially for Santana West? Thanks for the color on your HQ and the traction you're seeing at Puma. I realize Santana is still a bit away from delivering, but I believe it was almost fully leased with an LOI prior to the pandemic. Has that potential tenant or other anchors like them re-engaged? Or are you seeing any traction?

Jeff, this one is all yours.

To address the latter part of your question, the potential tenant that we were close with pre-pandemic has not materialized, and we don't expect them to. Although office leasing activity in Silicon Valley recently has engaged a little more, tours are picking back up, including for Santana West. We don't have concrete deals to share yet, but the uptick in interest is a good sign overall. What’s encouraging about Santana West is the minimal supply of new builds in Silicon Valley right now, along with an amenity-rich offering, which bolsters our hopes for getting it leased.

It appears all high-quality retail assets seem to be generating significant demand. This level of leasing in a post-pandemic environment is surprising. Federal is witnessing strong leasing, solid spreads, and the highest average base rents. What's going on here, Don? What dynamics or shifts can you share that you're observing?

Let me share some insights. If you are a retailer or a restaurant, think about the challenges of the past 18 months. Many businesses have been recapitalized and are facing new competition in the market. These operators now have a distinct chance to redefine their business strategies and enhance their locations in prime properties. High-quality suburban shopping centers that focus on location investment are particularly appealing to tenants looking to boost their sales performance. Essentially, our landlords are collaborating with tenants who aim for sales growth, which benefits everyone involved, especially the smaller shop tenants that were previously mentioned.

The only point I'd add is to consider the dynamics from our end; it allows us an equal opportunity to strengthen our assets and amplify merchandising through quality partnerships, remaining proactive in decision-making about long-term post-COVID investments.

As you listen to your peers' calls and their leasing statistics, most public companies have reported strong leasing activity and healthy pipelines. Are you and your team noticing any shifts in the marketplace between public and private landlords regarding where leasing is occurring and whether this is leading to shifts in market share towards higher-quality assets? Should we expect changes in properties that are struggling to attract tenants?

That's an excellent question, Michael, and I wish I had more than anecdotal evidence, but let me share my observations. Retail tenants are prioritizing partners who recognize the importance of improving properties together, enhancing sales, and maximizing their locations. Private companies unable to invest further or those unwilling to partner effectively will be at a significant disadvantage post-COVID. I believe the gap will continue to widen based on these factors, benefiting better quality real estate while further disadvantaging undercapitalized operators.

It’s unusual to navigate this evolving market. Just a question regarding tenant leasing. Are tenants expressing interest in openings for years into the future? Are they addressing current leasing to allow for any falloff or reengagement?

To clarify, when you pivot about leasing, we’re observing average term durations that span 8.4 years right now, indicating that tenants are strategizing for the next decade rather than merely addressing immediate needs. The gradual move from 89% leased to 92%, 94%, etc., will progressively become more challenging, at which point the properties available become crucial. So, your perception is valid, as tenants seek optimal long-term agreements as opposed to short-term solutions.

I'm also observing a robust pipeline that continually expands, allowing for strong performance without any signs of slowing down for now. So I remain confident looking ahead.