Federal Realty Investment Trust. (FRT) — Q4 2021 Transcript

Good afternoon. Thank you for joining us today for Federal Realty’s fourth quarter 2021 earnings conference call. Joining me on the call are Don Wood, Dan G., Jeff Berkes, Wendy Seher, Dawn Becker and Melissa Solis. They will 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 including guidance. 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 tonight, 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. Our conference call tonight will be limited to 75 minutes. We finally ask that you to limit yourself to one question during the Q&A portion of our call. If you have additional questions, please re-queue. And with that, I will turn the call over to Don Wood to begin the discussion of our fourth quarter results.

Thank you, Leah, and congratulations to you on your promotion to Vice President of Investor Relations this month. Really well deserved, and we are so lucky to have you. Well, good afternoon, everybody. What makes Federal’s business plan so different is our multifaceted approach to capitalize on these best located, best tenanted retail properties with a laser focus on bottom line earnings growth, 104 individual assets with a proverbial toolbox filled with numerous ways of achieving that goal for years to come. It took a global pandemic to knock us off our horse for a time, but we are back up, and we are riding high. 2021 was the first step, where each quarter throughout the year exceeded our constantly upwardly revised expectations. That trend continued in the fourth quarter, with FFO per share of $1.47 handily beating our forecast, and of course, last year. The shining star of the business continues to be leasing, as it has been a whole year, but it was taken to new levels in the fourth quarter. I need to put this into context, so bear with me for a minute. First, on a company-wide basis in the fourth quarter, we signed 149 commercial leases, that is retail and office but not including residential leases, which itself was really strong, for nearly 900,000 square feet of space. That includes renewals of existing tenants, along with space that sits vacant today, is expected to be vacant in the coming months, or as for new buildings currently under construction or just completed. That’s an annual base rent commitment of nearly $35 million. Consider that over the last 10 years, an average quarter’s outlook produced about 110 commercial leases and 500,000 square feet. That means that in this quarter, we did 35% more deals or 80% more GLA than average. This is very strong quarterly volume even in a year where each previous quarter seemed to set some sort of record. And while I don’t think that those fourth quarter levels are regularly repeatable, our leasing pipeline suggests that they will remain above historical averages for the foreseeable future. For the full year 2021, we did 573 commercial leases for 2.9 million square feet and an annual rent commitment of $116 million. These activity levels are unprecedented over the very long history of this company. But this leasing volume is particularly important because it provides strong validation of the very diversified product type that we own and are creating that is highly sought after. And the leasing is broad-based. It’s the single biggest reason that I believe Federal Realty is better positioned post-COVID than we were before. Let me breakdown the quarter numbers a little bit more. I think you will see what I mean. Of the 149 commercial leases signed, 116 of them, or nearly 600,000 square feet were for comparable space, one where a tenant previously operated from. Those leases were written at an average rent of $34.34, which is 6% higher than the tenants they replaced. Another 9 leases or 22,000 square feet were written for non-comparable space at an average rent per foot of $43.53 at places like Assembly Row Phase 3, CocoWalk and Camelback Colonnade in Phoenix. But it’s the remaining 24 leases, or 277,000 square feet at net rent of $48.52, that really is a strong positive differentiator to our business plan. It’s the office leasing at our long-established mixed-use communities in this quarter, primarily at Assembly Row and Pike & Rose. Now look, I certainly realized that general office leasing does not evolve right now for good reason, given the macro levels of uncertainty surrounding back-to-work policies. But not all office space is created equal and it has become clearer and clearer with each quarter and each month that passes that the new Class A office product that we own or are building at 5 of our amenity-rich mixed-use communities is in extremely high demand and commanding rents that are clearly additive to both earnings and value.

Thank you, Don and hello everyone. Our reported FFO per share of $1.47 was up 29% from the fourth quarter of last year and roughly $0.06 above the top of our guidance range. For the year, we reported FFO per share of $5.57, a 23% increase over 2020’s results. Both of those reported increases exclude the one-time debt repayment charge from 4Q 2020 in order to show a meaningful apples-to-apples comparison. Primary drivers of that outperformance versus expectations were higher percentage rent from COVID-amended leases bolstering better collection rates; a faster acceleration in occupancy than expected; stronger leasing at our residential assets, including the Phase 3 residential at Assembly; lower real estate taxes than we had forecasted; plus financing activity, which occurred later in the quarter than expected. This was offset by higher G&A; higher property level operating expenses, primarily one-timers; and lower term fees than we forecasted. For those analysts that keep track, we had $1.7 million of term fees for the quarter against a 4Q 2020 level of $3.6 million. Collections continued to improve, with 97% of monthly billed rent being collected for the quarter, up from 96% reported on our third quarter call. Including abatements and deferrals, we are 99% resolved. Prior period collections were down to $5 million versus $8 million in 3Q. And as a result, our collectibility adjustment was up modestly to $2 million, primarily driven by this prior period follow-up. Collection of deferrals continues to outperform our expectations. Of the $46 million total rent we deferred since the start of COVID, $27 million has been collected, which represents roughly 90% of the amounts that were scheduled to be repaid by year end.

Yes, Alex, I mean that is the – I mean, that’s the question of the day. Everything we said, we seem to see. And again, it’s looking at it through our view, which is not a national view. It’s really primarily a postal view, suggests that this – that the recovery of sales, etcetera, is here to stay. I do think there was something very interesting that happened through COVID in terms of people’s realization of how important socializing is. It’s really important how going out to eat and to shop is. So I think a lot of that stays. The other thing, and you kind of touched on it early in the first part of the question, I want to address is the residential side. There is no doubt that places – and again, our residential outlook is only on a few places. But it got hurt as you think about it going into COVID. The way it’s recovering is pretty interesting to me. And we have a really interesting barometer. If you remember at Assembly, pre-COVID, we were opening up a big 500-unit building that we call Montage. And in that building, in the fourth quarter of ‘18, October, November, December of ‘18, before any COVID, that building, we had average rents of $3.35. Ironically, we’re now opening the second building, which is also 500 units, and it’s right next door. It’s called Micelle. It’s leasing up faster than we thought, and it’s leasing up at $3.85 in that fourth quarter, 15% more than pre-COVID at Assembly Row. It’s really interesting. And if you look at the deals that are happening in January and February, it’s not a big sample size because of January and February in Boston, but those are well over $4. So there is something that’s happening here with respect to lifestyle, with respect to shopping, with respect to certainly the office piece in terms of what’s to come that really feels like an energized pre-COVID time that, to some level, is here to stay.

Hi, guys. Good afternoon. So two questions here. The first question is, obviously, on the apartment side, what we’ve seen all around is the rent rebounds and rent growth is tremendous. On the retail side, the sales recovery has been just off the charts. I mean, the mall companies have been saying it’s well exceeded 2019. You guys are talking similar. It’s hard to believe that this is all just a catch-up of people staying in their homes during 2020 and early 2021. So do you think there is something else at work? Or is this just like a one-hit wonder? We all rebounded this year or 2021, and then sales are leveling out? Or do you think that people have sort of – and retailers themselves have rediscovered retail, and therefore, this accelerated sales pace is sustainable in the next several years?

It’s Dan. Hi, Katy, how are you? Look, I think that we’ve given a range of 3% to 5% for comparable property. I think that kind of what goes in that is just collections, both prior and current, as well as kind of going forward. Also what we do with regards to term fees, which we’ve kind of reduced. Our prior period rents have also been reduced. We’ve given a range. I think you’ll see on Page 33, in our guidance we gave a little bit of a range with regards to G&A expense of $50 million to $54 million. I think it’s a sense of the range of development, redevelopment capital that we can put to use. And then also how much equity we raise.

Great question, Craig. Let’s let Jeff jump on that first, particularly from the acquisition side.

Yes. Hi, Craig, good evening. I think you’re right on the point. We were really happy with what we got done in ‘21. As Dan mentioned in his prepared remarks, we got those deals done in the first half of the year, generally speaking, which was great. All the properties we bought in ‘21 have great redevelopment and value-add opportunities going forward, which as you know we think is very important when you are buying something. The second half of the year tightened up yield now, whether you’re talking about cap rate or IRR, are lower than they were pre-pandemic. And where public equity trades in the teens on average, it’s a real head scratcher as to how you make the numbers work for your normal grocery-anchored neighborhood or community center.

First of all, I fully agree with you, Michael. I fully agree with you, which you have to first really mixture you get is all the capital that has been spent to date that has not – that is not yet producing. And that is automatic FFO growth, automatic property level growth. And it is the single biggest source of growth in the next couple of years after plain old lease-up of a portfolio that is still under lease in terms of where it goes. Now look, I certainly realized that general office leasing does not evolve right now for good reason, given the macro levels of uncertainty surrounding back-to-work policies. But not all office space is created equal and it has become clearer and clearer with each quarter and each month that passes that the new Class A office product that we own or are building at 5 of our amenity-rich mixed-use communities is in extremely high demand and commanding rents that are clearly additive to both earnings and value.

Yes. The answer is yes to all the questions you just asked about it. I mean look, supply chain is a big deal. And are we able to do stuff about it? You bet we are from the standpoint of certain of the components of it, whether you’re talking about HVAC equipment, whether you’re talking about some of the provisions in the lease where that tenant will work with us. There are things that we have done and continue to do.

Those companies are joining others like Puma, Avalon Bay, NetApp, Bank of America and Splunk in helping to create long-term sustainable communities in our portfolios in Somerville, Massachusetts, Montgomery County, Maryland, Silicon Valley and Miami. And check this out. While 197,000 feet of the 277,000 feet done in the quarter was primarily at newly constructed buildings at Assembly and Pike & Rose, the remaining 80,000 was for comparable space at a positive 23% rollover.

Thanks for joining us today. We look forward to seeing everybody at Citi conference in a couple of weeks.