Q4 2022 Federal Realty Investment Trust Earnings Call
Employers and Ed tenant amenities.
Dispositions completed in 'twenty, two contributed roughly $5 million of DIY during the year that toi will not be there in 2000.
We've assumed a credit reserve, excluding the impact of bed Bath and beyond of roughly 75 basis points.
With respect to bad debt, we are adding another 25% to 60 basis points of reserve depend.
Depending on the uncertain outcome with respect to this tenant.
Please note in 2023 and moving forward, we have less than 70 basis points of exposure.
As our win with location at a natural exploration in January .
2023, and has not been on our 23 forecast since mid last year.
As is our custom this guidance does not reflect any acquisitions or dispositions in 2023, except what has already been announced.
We will adjust for those as we go given our opportunistic approach to both.
This guidance also does not assume any tenants moving from cash basis to accrual basis revenue recognition.
Please note the expanded disclosure in our 8-K on page 30 provides a detailed summary of this guidance.
And before we go to Q&A, let me take a minute to highlight the strength the outperformance that our signature mixed use retail assets demonstrated in 2022.
The big four of Santana Row Assembly row, Pike, <unk> rose and Bethesda row.
Took a disproportionate hit during COVID-19 because of government shutdowns in their respective markets.
But they now set they finished 2022 at 99%.
Reported retail sales were 15% to 20% higher than the prior year and our backup above pre COVID-19 levels.
Tumor traffic was up 20% versus the prior year and 7% above above pre COVID-19 levels.
Comparable retail <unk> these assets were up 30% versus 2021 and over 6% above pre COVID-19 levels.
Plus we are forecasting comparable growth in retail.
2023 of 6% to 8% at these four assets given continued strength in leasing demand.
Our retail components of our mixed use assets are unique.
And have driven and should continue to drive NOI growth material materially above that of a typical open air shopping center, providing an additional point of differentiation between federal and its peers.
Further our operational mixed use capabilities and design construction leasing operations are unrivaled.
And a unique competitive advantage moving forward and the continued evolution of open their region.
Capabilities that are applicable across our entire report retail portfolio and a big reason why we expect that sector, leading retail growth for years to come.
And with that operator, you can open up the line for questions.
Thank you we will now be conducting a question and answer session.
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One moment, please while we poll for questions.
And our first question is from Juan Sanabria with BMO capital markets. Please proceed with your question.
Hi, good.
Good afternoon, and thanks for the time.
Just curious on the total portfolio to one of your later comments in your prepared remarks, where NOI sits relative to 2019 levels and where do you and when do you expect to get back to that kind of made the comment for the big for it but just curious on the broader sample set.
We're back we're back.
Yeah.
In fact, well above.
2000, 1919 level so.
I know one that what Dan was just talking about was specifically with respect to the floor.
Mixed use assets and you know for obvious reasons, there, but the whole portfolio is on the overall back above.
Back above 2019, it's the higher interest expense that effectively brings us back down to about the same S. F O b.
But certainly operationally significantly above.
Okay.
Thank you and our next question is from Craig Schmidt with Bank of America. Please proceed with your question.
Thank you.
I just wondered if you could just give us what the drag will be increased.
Increased interest expense.
<unk> versus 'twenty two.
Roughly 30 30.
For sure.
Alright, minus plenty about where we ended up.
We end up.
And then just real quick.
The.
I'll shop with.
Relatively flat sequentially.
Do you still see that as a major opportunity for growth on your P O I.
Yeah, and Wendy I don't know if you want to add to this or not but I'm very very positive about our small shop occupancy.
And I.
I think where we're sitting there it at 90% or so now which is back to place that we haven't been for quite some time and we're not done we got some more room to grow there.
And I would add to that there's a real sense of urgency on the leasing side.
Overall, especially on the small shops.
Clothing, the weak or weaker guys as we now have gone away and I small shops, that's driving right now obviously heading into maybe some headwinds, but some of the technologies and so forth that have come post COVID-19 are really driving sales for a lot of the retailers, including the restaurants.
Thank you and our next question is from Greg Mcginniss with Scotiabank. Please proceed with your question.
Hey, good evening.
Dan I was hoping you could just touch on what would be driving you to either the bottom or top end of guidance. This year.
Look I think the big variable is what happens with the bed Bath bankruptcy.
I think that probably at the top of the range, we will expect to have a more normalized.
Chapter 11, well, we're expect to get a few boxes back.
Whereas if it's a liquidation that will push us towards the bottom of the range.
Yeah, I think that.
Okay.
That's probably one of the bigger drivers.
That takes us either up or down.
Okay, and if I could just.
Thank you and our next question is from Samir Khanal with Evercore ISI. Please proceed with your question.
Hi, there.
Thanks for the question, maybe maybe you can touch upon the transaction market.
Kind of what you're seeing from a pricing or cap rates today.
I don't know if there's a way to bifurcate between through a pure suburban open air centers versus any color you can provide a lifestyle centers.
That would be great. Thanks.
Yeah. He's merits, just you know not a lot of color because theres not a lot of transactions.
You know, we're always in the market looking for stuff, regardless, what's going on but theres just not a lot out there right now I mean, if you want a data point.
Yes.
Yeah.
Back in the day when the market was active or the best grocery anchored centers, where maybe 100 to 150 basis point spread.
Right over the 10 year Treasury, but we haven't seen many trades and I don't expect to see a ton of trades. This year. So you know kind of anybody's anybody's guess at this point.
Thank you and our next question is from Michael Goldsmith with UBS. Please proceed with your question.
Good evening, Thanks, a lot for taking my question.
<unk> is on the comparable property growth guidance can you help reconcile that.
Moving pieces that generate your guidance of 2% to 4% growth in ex prior period of term fee is three 5%. This year relative to last year. It does seem that curious if you're expecting a little bit less occupancy growth, but maybe walk through some of the other pieces and then on capital interest.
Does that go from a potential headwind.
Tailwind this year any implicate what are the implications for 'twenty four.
Okay.
Look I think the building blocks that kind of a R. R.
Comparable.
As kind of a combination of things that get us there.
I think we would expect.
Yeah, well I think our contractual bumps which continue.
To be kind of a sector, leading kind of north of a one quarter percent. When you include kind of some of the.
The office I think occupancy growth relative to where things were last year.
Land.
A good chunk of <unk>.
All over because what's interesting is ours is a GAAP number so the contractual rent bumps are don't contribute as much what really does is the rollover to rollover growth which is the.
The straight line rollover, which captures those rent bumps and so that should be a big driver.
Because of the progress we've made and you've got residential.
We'll continue to see percentage rent.
And parking.
Yeah. We mentioned you know the probably 100 to 130 basis points of credit Reserve then also about 100 basis points.
Currency headwind.
And prior period rent headwind it got just kind of to that midpoint.
Of that metric.
Thank you and our next question is from Craig Mailman with Citi. Please proceed with your question.
Hey, guys I just wanted to circle back up on the interest capitalization question.
And just two.
Two questions on this basically just.
What would the guidance have been if you guys had for our sins capitalization on Santana west and kind of from a timing perspective, even if there was no leasing when would you have to just finally stopped capitalizing there and then just secondly the.
The strategy shifts to the multi tenant.
What kind of demand are you guys see if at all in the smaller spaces.
Are you guys getting built out suites or just trying to demise the space.
No. It's a good question listen the it became pretty clear as you know we worked hard to get a full building user at Santana West we shifted to that strategy, we've talked about a little bit last year, but we shifted to the strategy of building out the individual floors.
Instead that debt would be accounting for that as it is to capitalize.
To continue the capitalized but the reason for it the business reason for that is that we do see more demand in that 50 to 100000 square foot.
User there are tours that we're giving now obviously you know what's going on with tech and in Silicon Valley. So I certainly don't have anything.
Great to say.
About demonstrative progress there, but that building is getting a lot of loss and so we're very hopeful that that this strategy of looking for 100000 square foot tenants rather than the full $3 $53 75 will be fruitful feels good that way in terms of what that means on the on the accounting as you know.
<unk> got $250 million into a building it all at 5% or so a year of a carry on that and so that winds up.
You know.
Continuing at this point to be on the balance sheet.
And effectively it.
At some point you don't wind up going through the P&L, but you can do the math on that.
Thank you and our next question is from home does St. Juste with Mizuho. Please proceed with your question.
Hey, good evening out there.
So Don I was intrigued by your comments on the better rent bumps and the superior long term core growth profile of the portfolio I remember a while back you can provide a buildup of what you thought the portfolio can do over a longer term basis in terms of that core.
Internally generated growth I think for 3% to 4%, which included some of the bumps spreads re Bob I guess I was curious if you could give us an updated corporate what do you think a long term core growth profile looks like now it could look like now with the improved bumps you're referencing as well as maybe parking some of the bodies no rent a tailwind coming online here. So yeah my.
That's one part.
Okay, That's fair and I mean, they look you know the business and the general business in the shopping center business allows the port, Florida fully able to grow with Tom and occupancy of a typical shopping center, a one 5%, 100% what do they do we've been able to have long term growth of three three and a half something like that.
On an occupancy neutral basis, I feel very good about that and with respect to the comment I was making about the about the rent bumps it's really.
We've talked about this in the past a little bit of inflation. Other inflation is a really good thing in our business. So much inflation certainly isn't it but to the extent, we get to a normalized level of of inflation. It allows us to push more and Wendy and that team is having success effectively with the ability of increasing or improving the economic.
For longer term deals because inflation is real and everybody knows it you're not.
We're not trying to push.
You know a noodle uphill so so.
That long term growth rate of 335% I feel very good about.
Thank you and our next question is from Floris Van <unk> with Compass point. Please proceed with your question.
Thanks.
Guys I appreciate you throwing out guidance that.
That is a little bit more adventuresome than some of our some of the.
Your retail bradner.
And maybe if you could talk a little bit as you know not all space is created equal and I know you've been saying that for a long time dawn.
But one of the things that intrigues me about your portfolio and where I think people might be underestimating.
The growth potentials, particularly in your small shop space because your rents are double your your your anchor tenants.
You talked a little bit about your leased percentage how much of that is occupied how much more do you expect to gain in terms of least growth in.
And in 'twenty, three and then maybe if you can.
If we walk through the elements of both your of your growth for 23, you talk a little bit about that and he talked about the the 2.2.
<unk> five fixed bumps you have an element of leases that you signed in 'twenty three that were where you got a partial year and obviously that those are going to contribute in 'twenty three as well and then you've got your <unk>. When you get your spreads if you do the math I mean, it looks like youre going to be well north of 4% NOI.
Gross if if if I'm, adding it up correctly.
Yeah and I appreciate the question.
Book.
If you add all those things up yes, it gets beyond the 4%.
Then you have you apply a credit reserve you've got some headwinds and so forth and so yeah look we're hopeful that our 2% to 4%.
Net comparable growth as a conservative estimate and we hope that the strong.
Rollover, we're expecting in 2023 continued contractual rent bumps continuing to be able to push occupancy will continue to drive.
Wrong.
Core portfolio growth profile in 2023, but yeah, there are headwinds out there and so the 2% to 4% response and reflects that.
Okay.
Our next question is from Derek Johnson with Deutsche Bank. Please proceed with your question.
Hey, everyone. Good have a good afternoon.
Yes, So you mentioned earlier and obviously, it's widely understood.
With that cost of capital elevated.
What about tapping the equity markets as valuation here should we hear recovers I think there's 200 million issuance at the midpoint, but really guys and it seems to match the development spend.
So I guess, how do you view greater equity activity as a financing tool given the state of capital markets and as values recover.
<unk>.
Eric Let me start and Danny I'd have to.
Okay.
There's a couple of principles involved here.
One is I never want to surprise us.
So I never want a whole bunch of equity out there at any one time I would like to do it and conservative.
Amounts as we as we go through a year. We Opportunistically then obviously can turn that dial up or back based on our based on where we believe.
Value lies and what the uses are the most important thing is what is the use for that money.
And at the end of the day to the extent, we are very comfortable that we can use.
Shareholder.
Shareholder or debt holder proceeds to be able to create incremental value.
That's what we will do that as the driver Owens.
Because we don't have to to the extent, we don't have those those uses and even the development pipeline that you know.
It is far lower than it was only a couple of hundred million dollars left to spend.
At this point, so lots of flexibility and that's what I always want to maintain with respect to the balance sheet here is the ability to kind of take advantage opportunistically of what's going on in the marketplace to create value and I look at debt and equity Similarly.
Thank you and our next question is from Anthony Powell with Barclays. Please proceed with your question.
Hi, Good afternoon question on the lease spreads and good to see the acceleration in the fourth quarter, how you're balancing kind of lease spreads versus maybe higher bumps and are you seeing any tenant pushback no conversations are kind of saying we need the space by space. So we're gonna except for higher prices.
Yeah look this is there is these are.
And amalgamation of a number of deals in any particular quarter, you'll see some.
Some deals that have higher rollover youll see some that are more anchor rate related versus small shop related is a giant mixed I don't want you to look and say I see a deceleration in leasing spreads in the fourth quarter Theres No theres no trend there the trend you should expect to see.
It's actually higher rollovers in 2023 based on what we see in the pipeline and that's simply an opportunistic notion of being able to understand what spaces are coming due where the demand is for that for that space and that's what's in the pipeline that's opportunistic based on on what's.
And everybody in every case, we're pushing for very high contractual bumps bumps.
I would say with those leases. So in total the economic contribution is greater I don't want to just look at that.
That lease rollover spread and wants to look at it holistically in total including the contractual bumps.
And I think because demand is strong and continues to be strong we found success in being able to push on both of those levers.
Particularly in the last couple of quarters.
Thank you and our next question is from Alexander Goldfarb with Piper Sandler. Please proceed with your question.
Thank you and good evening.
Just a question on Santana west because it seems to be that seems to be the delta versus the street I think it was 20 <unk>.
We originally guided when you ceased capitalization now obviously great to hear that there's work going on in demand, but I guess my question is do you guys think that you were a little too conservative and ceasing capitalization I understand that you stopped work on the project, but given you know markets are.
Moving our fluid when it comes to leasing do you think that maybe should have just left it as a capitalized project.
Just wondering because all the other stuff that you guys are doing is great, but that capitalized interest seems to be the delta between the 'twenty three outlook and where the street and so I'm just trying to.
Your stance.
So Alex Mikes point on that is the direct answer to your question is no I don't think we are too conservative on that I think your inherent premise and what youre, saying is that the accounting drives.
The business decision and it's exactly the opposite it is the business decision with what.
<unk> toward the building that drives or whatever the accounting is I frankly didn't even though the accounting when we first talked about how the.
We were going to go out what tenant base, we're going to go after.
Once we lost the <unk>.
First couple of Big building users. So no I don't think so and the notion of looking at capitalized interest as a positive or negative thing with respect to 'twenty three here's the fallacy in it what we're laying out in 'twenty three.
<unk> does not have an impact from Santana west.
What it does is show with the impact of everything else in this company and that's why that that.
That operating growth is coming through that's why the bottom line is is coming through ideally you will see as we move forward rent that are more than pay a rent on santana west that more than pays for the interest expense, but it's not like we're getting a benefit for that in 'twenty three we simply don't have any.
<unk>.
Santana West and 23, sorry, just fundamentally.
I think they look at it a little backwards.
Thank you and our next question is from Paulina Rojas with Green Street. Please proceed with your question.
Hi, good evening.
One time, we spoke I think office traffic and a component of it was still down.
Really quick amendment I don't remember the exact figures, but maybe in the neighborhood of 30% down.
Change it at all at this point what is your view.
<unk> profit path firms will look like.
Tom.
Yeah, Hey, Paul It is Jeff I think I understand your question I think you're talking about the number of people that come to work every day Monday through Friday.
The office buildings and sand in a row.
I'll tell you two things about that one that's a small part of the traffic.
In a row Santana row generates a ton of traffic over the over the year and the primary reason people are coming there is to chop eating and enjoying the property.
The weekday traffic is building as well as a return to office is ramping up in Silicon Valley. So, we do see that coming back and coming back slowly but.
Overall, that's a relatively small.
Small component and like Dan said in his prepared remarks.
You know traffic today at Santana row is above what it was in 2019 so.
We're in pretty good shape, there, but I appreciate the question.
Thank you and our next question is from Mike Mueller with Jpmorgan. Please proceed with your question.
Yeah, Hi, I guess looking at the future phases at Assembly Pike, <unk> Rose and Santana.
Or do you think the time is right now I guess, what's the timeframe to reactivate those are various phases in the projects.
That's a great question Mike.
There is an important underlying assumption here.
We loved the development component of our business.
And there are certainly times like now where we turned down that spigot.
And you know arent comfortable to be able to start construction.
Struction, but don't let that.
Misinform you to believe that that capacity and the work that we do with our team which stays together during down cycles here.
Making it shovel ready to be able to activate quicker.
Idea is to be able to activate quicker than any of the competition. That's what we tried to do so the ability to stay very tight on the.
Not only with our contractors with pricing.
Entitlements for future phases at places like Assembly, it's front of mind all the time.
So what.
Whatever's going on in the month and the market, Mike and I don't have a crystal ball with respect to 'twenty, three or 'twenty four 'twenty five, but I know, we'll be back at it faster than most and thats the key from a competitive standpoint.
In terms of the way we look at it.
Thank you and our next question is from Kevin Kim with Carol. Please proceed with your question.
Thanks.
I believe we're at a point on Santana west, but from a business standpoint, I'm actually curious if you could go multi tenant.
And I.
I would guess that maybe prolongs the lease up timeframe.
So, even though you're capitalizing cost for longer shouldn't the all in cost expectation go up therefore, the yield come down incrementally I'm not sure if the.
There's plenty of other variables to consider but I was just curious if you can provide some color around that.
Yeah.
That's a very fair question I'm not sure it will take longer.
And the reason is because we are building out the individual floor so that work.
Secondly, a year's worth of work here is being done ahead of time and and so on timing I think feeling pretty good in terms of the the extra carry and potentially on costs, Yes, I would expect those to be incrementally higher while we also have benefits in terms of our base building and lots of other.
Things that are reducing the cost at Santana West and I guess, the last point to really make sure.
Just make sure I'm doing.
Overemphasizing. This one building that makes up a.
A point and a half of the a percent in the half of the asset base of our of the company and when you kind of sit back and yet.
You take our entire office portfolio and you back out.
Just Santana West just alone even our ongoing other buildings, which are under construction in total for 92% leased and if he can knock out the one that's being built here at Pike <unk> Rose that's not finished yet they're 97% leased.
So the product and this is really important from a real estate person's perspective, the product is right all the way through and it's different products when it's attached to Santana Row Assembly row Pike <unk> rose.
Thank you and our next question is from Craig Schmidt with Bank of America. Please proceed with your question.
Oh, great and just one I wanted to congratulate you on Sweden him on his new role.
Chief investment officer.
Thank you Greg.
Thanks, Craig.
Are you seeing much close Pacer will you will you be moving east.
West Coast base, but spending some more time on the east coast Craig.
Okay. Okay, and then just maybe you know what.
What are some of the.
Opportunities you most want to pursue.
On your new role.
Well that's a good question Craig.
Well look there's there's a.
Fuel sector is going to be some increase in product out there, Craig and new product for us to look at.
Spanning our base in Phoenix, I think it can be a big focus for us.
But I feel pretty good that there's going to be some larger good product for us if we can buy accretively. So nothing's set in stone.
Feed feed ready to go and we'll see where it takes us.
Thank you and our next question is from Greg Mcginniss with Scotiabank. Please proceed with your question.
I agree there.
And for the second time I've done that in this earnings season.
[laughter].
Alright, so its just a couple of follow up questions. One is on the disposition pipeline, particularly noted $350 million on our last call. Just curious if you're still pursuing the remainder of those transactions.
Yes.
<unk>.
Yes, essentially.
We got done you know the one rolling liquids with $68 million were still in process on about $130 million of additional acquisition, we'll see if we get them over.
Then I would say.
The balance are we.
We determined that it didnt meet the timing parameters, we needed or the pricing parameters, we stayed disciplined and decided not to move forward.
But there is that there is a possibility you bring those back later in the year when there's a a more receptive capital markets environment.
Okay, Great and then on the raise the occupancy which fell quarter over quarter was that because of the rolling.
Hollywood sale or are there some other REIT.
Scott.
Jeff that's just timing a little bit we're pushing hard on rates.
And so as turnouts com we.
We don't want to leave money on the table, so that balance between rate and occupancy is always a you know it's always part of the Formula and you know we put a bunch of water on rate, you'll see that come back up.
In 'twenty three.
Thank you and our next question is from.
With BMO capital markets. Please proceed with your question.
Hi, just curious if we should expect any.
Action on the balance sheet in terms of your 24 explorations given you've got a couple of chunky piece.
Pieces of debt coming due and kind of how you guys are maybe thinking about getting ahead of that.
Yeah look I think we're going to look to be opportunistic like we always are I think we're gonna we created a significant amount of capacity to give us the flexibility to be opportunistic completely undrawn on our $1 billion in a quarter will give us flexibility from a timing perspective.
We expect to access the bond markets.
<unk> 2023 to address the maturities that we have June maturity as well as the January <unk> forfeitures.
Thank you and our next question is from Michael Goldsmith with UBS. Please proceed with your question.
Thanks, so much for taking another one for me.
The leased to occupied spread compressed by 50 basis point and kind of down to 170 basis points. So on the one hand, you're monetizing although leasing that you're doing but maybe on the other side youre not theres, maybe a little bit less benefit in the pipeline like how do you think about it it seems like you've been a very part.
On being able to monetize it sooner, but I just wanted to kind of get your thoughts on.
On either side of that argument.
Well, Michael I want to make sure we agree on the premise the leased percentage continues to get better get higher.
The primary thing there is that we continue to lease up the portfolio feel very good about that now.
It's a job of of that leasing team and that's working out pretty darn well, what the job of the tenant coordinators the job of the construction people. The job is to get those tenants open and frankly that has just been as amazing as leasing is and leasing had record year record years 10 of coordinators and that part of the construction of all of those though.
Spaces to get them opened is just stellar.
So I hope when you look through whats important about leased versus occupied that you know if you're in the middle of Covid, it's great to have a whole bunch of leasing done and not a bunch of open as they come back up but to get to normalized operations you want that as tight as you, possibly can to be able to turn a contract into rent.
I Love, where we are impacted because we're doing both increasing that leased and more than increasing that amount by occupancy yeah and just to add another thing that's not in that 170 basis points of signed not open right now.
No.
Our non comparable pool, where we have an equivalent amount.
Of Toi, that's expected to come on from what were delivering stuff buildings that are not yet placed into service, where we have leasing done that contract contracts are leases that are done and it's like the equivalent of that same.
170 basis point spread.
So that's an added differentiator and an advantage that none of our peers have because they don't have the scale of that non comparable pool.
I'm showing no further questions at this time I would like to turn the floor back over to MS. Leah Brady for closing comments.
Thank you everyone and we look forward to seeing many of you at the Citi Conference.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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