Federal Realty Investment Trust (NYSE:FRT) Q1 2024 Earnings Call Transcript May 2, 2024

Federal Realty Investment Trust misses on earnings expectations. Reported EPS is $0.687 EPS, expectations were $1.65. Federal Realty Investment Trust isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome to the Federal Realty Investment Trust First Quarter of 2024 Earnings Call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the conference over to Leah Brady. Please go ahead, ma'am.

Leah Brady: Good afternoon. Thank you for joining us today for Federal Realty's First Quarter 2024 Earnings Conference Call. Joining me on the call are Don Wood, Federal's Chief Executive Officer; Jeff Berkes, President and Chief Operating Officer; Dan G, Executive Vice President, Chief Financial Officer and Treasurer; Jan Sweetnam, Executive Vice President, Chief Investment Officer; and Wendy Seher, Executive Vice President, Eastern Region President, as well as other members of our executive team that are 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 the 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 other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial condition and results of operations.

Given the number of participants on the call, we kindly ask that you 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 first quarter results. Don?

Donald Wood: Thanks, Leah, and good afternoon, everyone. Well, it's a New Year and Federal continues to charge forward with a very solid $1.64 recorded in the first quarter, along with 3.8% same-center growth when excluding term fees and COVID repayments. And an all-time first-quarter record 567,000 square feet of retail leased at 9% higher rents, the answer to the often-asked question of do demographics matter post-pandemic become quite evident. They sure do. The level of leasing activity in the quarter is particularly notable. Our record retail leasing was impressive, but maybe more so with the 190,000 square feet of office space leased at our mixed-use properties. Supplementing the long-awaited 141,000 square-foot lease to accounting consulting firm PWC at One Santana West, bringing that building to nearly half leased was an additional nearly 50,000 feet leased elsewhere in the mixed-use portfolio, including two deals at 915 Meeting Street at Pike & Rose, bringing that building to nearly 80% leased.

The remaining vacancy at 915 Meeting Street at Pike & Rose and One Santana West represents considerably less than 2% of the value of the Company. Tenant interest in the remaining space at both buildings remained solid. All-in all, for the quarter, we signed 117 commercial leases, retail plus mixed-use office for over 775,000 square feet of space with strong economics, not including our residential portfolio, which itself generated record first quarter property operating income of over $17 million. Make no mistake, our product, primarily retail, but also including complementary office and residential is very desirable in the marketplace and a huge positive differentiator. Now obviously, higher interest rates take away some of that operating positivity when you get down to the FFO line, but we still grew at over 3% in the quarter and at $1.64 at the higher end of our guidance range.

We did 104 comparable retail deals in the quarter that cumulatively were written at 9% higher cash basis rent than the final year of the previous tenant or 20% on a straight-line basis. And just to pound the point home one more time, those cash-based rollover increases come on top of leases that have had what we believe to be the highest contractual rent bumps throughout their term in the sector, making that rollover all the more impressive. Contractual rent bumps for the deals done in the first quarter were roughly 2.3% blended, anchor and small-shop. The weighted average contractual rent bumps for the entire retail portfolio, not just one or two or three quarters worth, approximates 2.25% and higher when considering the office business, best in the business as far as we can tell.

The sustained leasing volume and related economics bode well for the future, especially the contractual rent bumps. Now I spoke last quarter about the upside in our occupancy, especially with respect to shop space and felt that another 100 basis points over the 90.7% that we reported at last year -- at year-end was doable. In the first quarter of 2024, we picked up 70 of those 100 basis points, bringing our small-shop lease percentage to 91.4%. There's more to come here. Our anchored lease percentage is 95.8%, there's another 200 basis points to come there too. Those two components combined at 94.3% leased overall, pretty strong, but as we're demonstrating room to grow. We take a very proactive approach to leasing and often lease space well in advance of an existing lease expiration or vacancy, all in the name of improved tenant health and merchandising mix and as an insurance policy towards potential gaps in future cash flow.

We've got some impactful anchor renewals coming up later this year and early next that should continue the positive trajectory. In terms of a tenant watchlist or other indications of a shift in demand, there is nothing out-of-the-ordinary that we can point to. We have little exposure to those tenants that are most talked about these days Express, Big Lots, Jo-Ann's, Family Dollar and 99 Cents Only as they tend to cater to a lower-income demographic. Our tenants have been largely been able to pass on cost of goods and labor increases to their customers. Those customers may grumble at the higher prices, but thus far, they've been both able and more importantly willing to pay them. In addition, our retail tenant base is very well-diversified by both in terms of tenant concentration as well as property type.

And while we'll always have one-off tenant failures as just part of the business, portfolio-wide collectability issues haven't been and are expect -- are not expected to be outside our historical experience or specific 2024 guidance. Business looks good. The last topic I want to address before turning it over to Dan relates to external growth. While we've turned down the dial a bit on immediate development projects, the residential development at Bala Cynwyd Shopping Center notwithstanding, we turned up the dial and level of intensity on sourcing acquisitions. It's an interesting and unique time in the acquisition marketplace right now. While there is a limited supply of Federal Realty type opportunities out there, there's also less viable competition for those centers than there has been historically.

We look for shopping centers that are generally larger in size than the average center with opportunities for remerchandising, redevelopment, higher rents and potential site intensification. We look for shopping centers in markets that have strengthened significantly over the past 15 years and especially post-pandemic markets like Phoenix, Central and South Florida and Northern Virginia among others. We look for shopping centers that are immediately accretive to earnings based on the cost of cap -- based on our cost-of-capital advantage, but even more importantly, produce returns meaningfully above our long-term cost-of-capital. We look for shopping centers that will be immediately financed through combination of other asset sales and our largely undrawn $1.25 billion credit facility and then refinance for the long-term subsequently.

We've begun our due diligence process on one such large asset currently and have a growing pipeline on others. Obviously, it remains to be seen if and how much success we'll have in this buy versus build cycle, but using both our operating strength and reputation as well as our balance sheet strength and flexibility, is a specific focus of ours for the balance of this year and next. That's all I wanted to cover in prepared remarks this afternoon. So I'll turn it over to Dan to provide more granularity before opening it up to your questions.

Dan Guglielmone: Thank you, Don, and hello, everyone. Our reported FFO per share of $1.64 for the first quarter was up 3.1% versus a year ago, and came in at the upper end of our quarterly guidance range of $1.60 to $1.65, which we provided on our earnings call back in February. Property operating income was up 5.6%, also above our expectations, highlighting the overall strength of our real estate. Primary drivers for the strong start to 2024, POI growth in our comparable portfolio, up almost 4% excluding prior period rents and term fees, driven by resiliency in our occupancy levels, continued strength in our residential portfolio and stronger contributions from specialty and temp leasing. This was primarily offset by lighter term fees than forecast and some timing noise with respect to collections.

We have an expectation of reversing that over the balance of the year. Comparable POI growth, excluding the impact of prior period rent and term fees was 3.8%. Comparable minimum rents grew 3.6% and comparable total property revenues were up 4.1%. Portfolio occupancy levels showed greater resiliency than we forecast, as our leased rate increased up to 94.3% and our occupancy rate staying at the 92% level, both metrics better-than-expected, as retail leasing volumes hit record levels with our leasing and tenant coordination teams, getting tenants open sooner and keeping tenants in place longer. Testament to our ability to grind down revenue growth at the property level while curating best-in-class tenant lines. Given the tremendous start to the year from a leasing perspective, coupled with a strong pipeline of lease deals in process, which are some of the highest levels we've seen post-COVID, we are extremely well-positioned to drive our occupancy metrics over the coming quarters.

It's too soon to increase our targeted year-end occupancy levels, but we are in a good spot at this point in the year. Another part of our business worthy of note is our residential portfolio, which continues to be a source of strength. Same-store residential POI growth was 6% in the first quarter on the heels of a similarly strong fourth quarter. This was driven by 5% plus revenue growth against 3% expense growth, leading to results well ahead of focus. While we are dialing down new development starts, are still substantial in-process development pipeline continues to make meaningful contributions as lease-up continues at these projects. Darien Residential continues to exceed expectations and is 99% leased. Darien Retail is over 90% leased with several store openings set over the coming quarters.

Huntington Shopping Center is 94% leased with Whole Foods and others set to open by third quarter. And as Don mentioned, 915 Meeting Street and One Santana West continue to view solid progress at almost 80% and 50% leased, respectively. Note that global foodservice giant Sodexo moved into its new North American headquarters at Pike & Rose during the quarter. Now on to the balance sheet and an update for liquidity position. All of our refinancing requirements for 2024 were handled at the very start of the quarter with our $485 million, 3.25% exchangeable notes offering. This leaves us with no material maturities until 2026. We stand with over $1.33 billion of available liquidity of our $1.25 billion credit facility and cash-on-hand. And have redevelopment and expansions spend remaining of only $100 million for the balance of 2024.

Additional funding sources this year approach almost $0.5 billion and include expanding leverage neutral debt capacity as EBITDA comes online in the $150 million to $175 million range, free cash flow of $50 million to $75 million as we approach pre-COVID levels and a sizable asset sale pipeline under consideration. Our leverage metrics continue to be solid as first-quarter annualized net-debt to EBITDA stands just inside six times. That metric is targeted to improve over the course of 2024 to 5.7 times by year-end and to 5.5 times in 2025. Fixed charge coverage was 3.5 times at quarter-end. And that metric should also improve as incremental EBITDA comes online over the balance of 2024. Now with respect to guidance. With a first solid first quarter behind us and leasing demand continuing at a stronger pace than expected, we are tightening and raising our 2024 FFO guidance from $6.76 per share and the midpoint to $6.77, with a range refined upwards to $6.67 to $6.87.

This represents 3.4% bottom-line FFO growth at the midpoint and almost 5% at the upper end of the range. Keep in mind, this is being done with the realization that interest rates will likely remain higher for longer and provide roughly $0.02 to $0.03 of greater headwinds in 2024 than we originally forecast 90 days ago. This upward revision and guidance is driven by stronger underlying portfolio performance than expected as leasing and occupancy metrics outperform expectations, as well as a more optimistic outlook for such difficult to forecast items such as parking, specialty leasing and percentage rent. Add to that, some of our first quarter headwinds are expected to be timing issues that should reverse themselves in the coming quarters. As a result, we are also revising our comparable growth outlook upward.

Comparable growth is now forecast at 2.25% to 3.5%, up from 2% to 3.5%, and our comparable growth excluding prior period rents and term fees is now forecast at 2.75% to 4%, up from 2.5% to 4%. While we made significant leasing progress at One Santana West and 915 Meeting Street in the first quarter, none of those leases are expected to impact our forecast in 2024. We'll see the impact in 2025. More to come on that outlook as the year progresses and additional leases get signed. All other guidance assumptions as outlined on Page 27, our 8-K, remain unchanged. Although please note, we do not include prospective acquisitions and dispositions activity in our guidance. We will update our forecast for that activity as it gets completed. Now before we go to Q&A, I'd like you to please listen up for this is important.

For the first quarter -- with the first quarter in the books at $1.64 per share, our quarterly FFO outlook for the second quarter is $1.63 to $1.69, again, $1.63 to $1.69 for the second quarter. Consistent with the cadence presented on our call in February, the third and fourth quarters should increase sequentially from there, reflecting the continued momentum we are seeing across our business. With that, operator, you can open up the line for questions.

See also

Top 25 Stocks in the S&P 500 by Index Weight Right Now and

25 Vacation Spots in the U.S. That Won’t Break your Bank.

To continue reading the Q&A session, please click here.