Good day, and welcome to the Federal Realty Investment Trust First Quarter 2023 Earnings Conference Call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to Leah Brady. Please go ahead.

Good afternoon. Thank you for joining us today for Federal Realty's First Quarter 2023 Earnings Conference Call. Joining me on the call are Don Wood, Dan G., Jeff Berkes, Wendy Seher, Jan Sweetnam 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 these expectations reflected in the 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 this afternoon, 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. [Operator Instructions] And with that, I will turn the call over to Don Wood to begin our discussion of our first quarter results. Don?

Thanks, Leah, and good afternoon, everybody. Strong start to 2023 here with $1.59 first quarter FFO per share results, ahead of both consensus and internal expectations and 6% growth over last year's first quarter. Also happens to be the best first quarter result we've ever posted. Here's the best part. We signed 101 comparable leases for more than 0.5 million square feet at $34.72 a foot, 11% higher than the cash basis rent the previous tenant was paying in the final year of their lease, 24% on a straight-line basis. Demand was exceptional with momentum encouragingly strong at the end of the quarter, late March. As you know, I've been expecting the inevitable tail off of leasing activity for months and months now as the portfolio leases up. These activity levels exceed historical levels by 20% to 30%, we just plainly haven't seen that tail off yet. The retail demand for the product that we offer is in lockstep with what today's consumers and retailers demand in these affluent first-ring suburbs of major metropolitan areas. One of the larger drivers of that leasing performance this quarter was the signing of four grocery deals, three new deals and renewals. The renewal was implied in the Boston suburb with Star Market and Albertsons brands. The new deals included Giant Food replacing Shoppers Food Warehouse, Karin Plaza and Cyber Baltimore, a grocer that I'm not allowed to announce yet replacing Michaels at Fresh Meadows and Queens and Aldi replacing Barnes & Noble on Long Island. Together, these four deals turned $3.3 million in base rent or $17.81 a foot to $4.4 million in base rent or $23.40 per point. Strong rents and rent growth in proven productive centers in Northeast densely populated suburbs. The timing of them all getting done in the first…

Thank you, Don, and hello, everyone. Our $1.59 per share of reported FFO was a first quarter record for Federal and probably above our expectations and last year's $1.50 results, representing a 6% annual increase. That our performance again was broad-based as all facets of our business continue to contribute. Specific drivers, which deserve mentioned, overage percentage rent continues to outpace expectations as [indiscernible] sales demonstrate strength and resiliency. Parking revenues also saw gains above forecast as customer traffic at our large mixed-use assets continues to drive higher. Small shop occupancy again showed gains and we saw lower expenses both at the property and corporate level. This was offset modestly by higher collectibility impact or bad debt expense was forecast. Our GAAP-based comparable POI growth metric was 3.6%, coming in at the upper end of the range of our 2% to 4% initial guidance. On a cash basis, comparable excluding prior period rent term fees is 5.2%. Cash basis comparable minimum rent grew by 4%. Term fees in the comparable pool this quarter were essentially flat to first quarter 2022 and $1.4 million in each period. Prior period rent this quarter was $1.3 million versus $2.4 million in the first quarter last year. Please note that we have added all of these figures to Pages 10 and 11 of our 8-K supplemental disclosure. You're welcome, Steve. Year-over-year occupancy results were also solid with our overall occupied metric growing 140 basis points year-over-year from 91.2% to 92.6% and our lease percentage increasing 50 basis points from 93.7% to 94.2%. Sequentially, we took a small anticipated step backward given 1Q seasonality and two known anchor partners in January at lease expiration, which were reflected in our guidance. Our signed not occupied spread in the existing portfolio stands at 160 basis points as…

[Operator Instructions] Our first question comes from Juan Sanabria with BMO Capital Markets.

Just curious on the renewals, those popped up in the fourth quarter, if you look relative to the trailing 12, you also had lower TIs. Is that a mix? Or is that kind of a new normal? I know you mentioned some anchor leasing. Just curious if you can comment on that.

Yes. It was essentially a mix with regards just what not done during the quarter. One of them was the grocer renewal that we had up but also just a broader mix. And obviously, the TIs, again, a mix of the leases that got done.

The next question comes from Craig Schmidt with Bank of America.

I kind of wanted to talk about mixed-use and added resi. I noticed on your future development opportunity page, you've gone from six mixed-use projects that could add residential, now, we have 14. What I'm wondering is, I've heard you say that one third of your properties or mixed-use now, where do you think you might be in five years' time? And the second is, will mixed-use assets grow faster in their rents than strictly retail ones? And what are retailers telling you about mixed-use? And what are the resi people telling you about mixed-use?

Boy Craig, that's pretty funny. I love how we limited it to one question. You have a whole white paper in that question there. You are the best. So a couple...

I apologize upfront.

Not at all. Don't apologies at all. I'm just having just a little fun. Listen, the -- what you see in the 8-K is a continuation of what we believe, and that is the ability wherever we can to maximize the use of the real estate that we own, especially when we're talking about successful retail shopping centers with -- and you know ours are on bigger pieces of plant. And so the ability to add other uses is something that it's just part of our DNA and something we'd like to be able to do. Now I don't -- I would not -- you should not expect us to be running and putting shovels into the ground over the next nine months, 12 months at those projects because the economics don't make any sense today. I do expect them to make some sense in the future, and that's what that is supposed to convey. Now with respect to the overall mixed-use properties, the -- what we have clearly found, clearly found is that the demand for lots of uses in both office and retail and resi and hotel frankly at a really well-done mixed-use property is a real differentiator. It's where people want to be. It's why in the comments I made -- I'm talking about traffic counts that are really enormous. These are a lot of -- there's a lot of visits there, a lot of sales. They also seem to have the ability to raise their prices in places like that more than that more value-oriented properties. And I guess you would expect that Apple in areas, the Lulu Lemons of the world, et cetera, they can raise prices. And as a result, we see the ability to charge higher rents there. Now if we did that right on the ground floor, then we should also see outsized returns, both in the form of occupancy and the rates that we're getting upstairs in the other users. That's been our experience, frankly, since COVID, I think it's even stronger than it was before COVID.

The next question comes from Steve Sakwa with Evercore ISI.

Yes. Don or maybe Wendy, just on the leasing side, I mean, I know this strength has probably surprised you, Don, things have remained healthy. Consumer spending has held up. I'm just wondering what you guys are hearing from tenants. And you mentioned maybe bankruptcies picking up. I'm just wondering how you feel about the 75 basis point general reserve and might you not use all of that as you sit here today just as you survey the landscape.

Steve, let me just kind of add some color first before Dan talked about the numbers. But you're right, we're seeing great demand on the retail leasing side, specifically in the small shops. We have not seen a decline of anything considerable as it relates to people's ability to fund projects and make decisions. They're making decisions for the long term, and they're understanding that with these recession discussions that these headwinds that we're facing, the decisions that they're making are critical to their livelihood, especially for the mom-and-pop. So there's a flight to quality that continues to happen in our portfolio. So I'm feeling very bullish about what I see in our pipeline. Again, I honestly, I was expecting it to level off a little bit, and it has not. It is as robust as ever. So I'm very encouraged.

And I guess, Steve, I would only add to that. Yes, there might be some room in the 75 basis points. But I read the same things in the newspapers that you do, and its May 05 or May 04 or whatever day it is. By the way, Steve, my 25th anniversary at least, happy anniversary Don, right? It makes me laugh though because the power of the small shop tenants. And that Wendy mentioned is something I really want to make sure that you understand a little bit, we don't do kind of first-time mom and pops. We don't have those type of businesses here. They are almost always adding a store or adding a food use from a place that -- from strong cash flow at another location, whereby they're expanding into the third or the fourth or the fifth. There is that flight to quality. That's a critical component. So if this is anything like whatever happens this year or next year is anything like prior recessions, this is one of the strongest parts of our portfolio and the place that the differentiates us.

The next question comes from Greg McGinniss with Scotiabank.

Happy 25th Don -- to celebrate let's talk about office demand. Can you just talk a little bit more about the interest you're seeing in Santana West this feels like serious increase? Is it all tech whole building or by floor? And so any additional color is helpful there. And then we'd also appreciate updated info on 919 lease-up and initial rent contribution expectations.

Sure. Yes. Greg, this is Jeff. Let me start off on the West Coast, obviously, Don can jump in on the second part of your question. So the business decision we made late last year to allow the building to be leased by four by four and to start building out the building. So we were a great alternative to the sublease space that's coming on the market that I'm sure you've heard about is working out for us. That combined, I think, with a little bit more of a settling at least in the, call it, mid-sized tent market as what they're going to need in the way of the office space as cause tours to tick up, and we have paper going back and forth with a couple of tenants. So they're not full building tenants, but they are multi-floor tenants and I don't know whether we'll get any of them not, of course, at this point, but there is activity and I would call the activity very good. And really happy when we made the decision that we made to start building out more four-by-four.

Yes. And Greg, just to say the obvious, that is a difference. That is a difference in feeling. I don't think we could have said that. In fact, we didn't say it on the February call or maybe last November. So really happy about that decision at this point, too. Hopefully, it bears fruit. Time will tell. And with respect to 919, 919 it's really -- it's really interesting. 915, we haven't done 919 yet. On 915, we turned the building over the floors over to choice. Then they are building out their space. We will have a contribution from them next -- starting next year.

End of the year.

End of this year.

Yes.

Sodexo also, which, as you know, signed the lease, we're almost ready to turn the space over to them. That is going really well. And then -- so then -- so that's the 60-some-odd percent of the building that is completely leased. We have serious back and forth on a number of tenants for most of the rest of the building at this point. So it's pretty interesting at a time when, as you know, there can't be a dirtier word than office in the country is it possible that a subcomponent of all of us is actually undersupplied. And that's a component would that be mixed-use properties where you have a new building in a first ring suburb, which is obviously all we have. So I'm pretty encouraged by what we're seeing here at Road is certainly the same up at Assembly Row. And with new activity at Santana West, I hope we have something tell to you.

The next question comes from Connor Mitchell with Piper Sandler.

So now that you've entered Hoboken Phoenix, and I know you've mentioned you're not rushing to start digging any time soon. But as you deploy more capital, do you see more urban infill or population growth areas and maybe just how you think about the two different market types.

Yes, Conor. It's it certainly wouldn't be areas with big population growth. The problem with big population growth means that there's usually room for a lot more supply to be added. And we want to be in supply-constrained areas. Nothing more supply constrained than Washington Street in Hoboken, and love the investment that we've made there. We're just getting into on the one redevelopment there, whether we can effectively make the numbers work. I'm very encouraged by that fact. I would not, again, expect to see us under construction in the next month or two or something like that. But that project is going to very likely make some sense. To the extent we can find more have it makes sense in markets where we already are like that. We'll look at it all day long. But that's the type of thing that's far more attractive to us than chasing headcount.

The next question comes from Craig Mailman with Citi.

This is Hassan [ph] on for Craig. The active mixed-use redevelopments all have a 6% projected returns. How are you thinking about return thresholds for incremental project starts given the elevated cost of capital?

Yes. No, it's a very good question. And I think I've answered this a couple of [indiscernible] but think about it this way. We need incremental returns or incremental returns on top of our cost of capital in terms of development of at least 150 basis points from an IRR perspective, more like 200 basis points from an IRR perspective. The reason I keep saying IRR perspective is because the stuff that we do in those projects, we won't do unless they grow faster. Our experience has shown us that those projects are -- we are able to increase rents faster. The residential component is important with respect to that. But incrementally, once we get comfortable with what our cost of capital is going to be, I'd like a little more clarity from the Fed. Maybe we're getting there -- getting a little bit closer that way on the debt side. On top of that, add 150 to 200 depending on the risk of the particular project from an IRR perspective. I hope that's helpful.

Next question comes from Floris Van Dijkum, Compass Point.

I guess could I ask about your shop occupancy at 90% leased, what is the gap between occupied and leased and how much more will that number, can you drive that over the next two years? And how much more do you think that will increase maybe even this year?

Yes. The occupied percentage of small shop is 88%. And we would expect to be able to drive both of those up higher. I think that's a real opportunity. And up towards the occupied percentage above 90% and up towards north of 92% on the lease side. I think there's still more room to run on that our portfolio.

The next question comes from Derek Johnston with Deutsche Bank.

I wanted to touch on capital recycling, primarily because it's such an important growth tool for REITs. And really, it's been hampered as you know, especially this year. But Don, with the Fed striking a pause here and some calling for perhaps a first round of cuts and maybe Q1 '24, somewhere around that time frame. Do you think there's visibility in rates and somewhat of a stability in rates can condense or narrow what must be a wide bid-ask spread. So you can maybe do some accretive acquisitions and reignite that growth engine later the year?

I do, Derek, I mean you said the word in your question, there has to be some level of stability. There has to be predictability. And without that, as there hasn't been, as you know, it's sure, the bid-ask is very different. That will change. Now it will change over time, and there are other things than just Fed's that dictate whether there is or an acquisition market that makes sense for a disposition market that makes sense, but it's not going to stay the way it is. So yes, I mean, we run this business. We've run this business for a long term, long time. We'll continue to do that. And during those cycles, there will be a reversion to some level of stability that allows us to get stuff done. No questions.

The next question comes from Michael Goldsmith with UBS.

Dan, you had a slight beat on FFO relative to the consensus, you're not touching guidance as it's still early in the year. I guess like what are you looking for over the next three months or when we next speak on an earnings call, would that -- would give you more confidence that you can take the year's expectations higher? And then separately, like what are you looking for, which would maybe give you a little bit more caution in terms of the outlook for the year.

Look, I think the biggest driver would be just continued strong leasing volumes. Our pipeline is as strong as is large in terms of what's been executed to date this quarter and what's in the pipeline of executed LOIs. It's never been higher. And so that continues, and we can see that continue. I think that obviously, we'll have some confidence. On the flip side, look, I think the market is -- got some risk out there, particularly with regards to tenants and whether or not tenants we'll be able to weather this difficult economic environment, whether or not we see a continued uptick in bankruptcies. And I think that balance, we've done very well balancing that. I think that we've managed to have very little exposure or on a relative basis, certainly, but just in absolute terms in terms of our exposure to those bankruptcies, we hope that continues.

Next question comes from Haendel St, Juste with Mizuho.

This is Ravi Vaidya on the line for Handel. I hope you guys are doing well. Just wanted to comment and ask about the snow spread. You currently are at 160 bps. Would you view this as a long-term steady state for what snow could be?

Look, we've done an exceptional job, I think, of bringing our SNO metric down from north of 300 basis points in our existing portfolio, down to 160 basis points. We'd like to get that tighter. We'd like to get that down to 100 basis points to 125 basis points. One of our differentiators though, is that we have an SNO and space that is yet to be delivered from our large redevelopment and expansion pipeline that is equal to that size. So we have $18 million in the existing portfolio, $18 million of total rent in our development, redevelopment and expansion pipeline and that equates to over 300 basis points. I think that's pretty compelling. And I don't think anybody has a redevelopment pipeline that has the pre-leasing that's been done, where it's something that is a real differentiator because we've got scale. And that truly, I think, the equivalent of what's in the existing portfolio and what's in the redevelopment portfolio. is effectively 300 basis points or more.

The next question comes from Hong Zhang with JPMorgan.

Just a quick question on occupancy. I think last quarter, you talked about potentially pushing economic occupancy above 93%, maybe in the mid-93s by year-end. Just wondering if that's changed given the Bed Bath announcement and your views on near-term bankruptcy risk in general?

Yes. No, I think -- look, it depends on so far of our 9 anchor boxes, we've only had one lease rejected. We'll see how it plays out. Obviously, if there's a full liquidation, then we're not going to be at 93% on an occupied percentage. We'll be probably closer to 92%. But we'll see how that all plays out. What gets somewhat that is in terms of what leases get purchased in there liquidation. And from that perspective, we would hope to have a clearer sense from that number as the bankruptcy unfolds.

The next question comes from Paulina Rojas-Schmidt with Green Street.

Don, you have talked about how you believe your portfolio outperformed peers in an economic downturn. And you have highlighted how affluence, good demographics are a key driver behind that. But an are perceived perhaps as vulnerability is your slightly higher exposure to more cyclical categories restaurants a little bit more foot price apparel. So could you please provide a little bit of a history lesson on how these segments have performed historically in downturns in your portfolio to have a better understanding of how the overlap between high demographics and cyclical categories perform.

Paulina, thanks for asking that. it's kind of like in my prepared remarks, I wanted to make a distinction of how those mixed-use properties with generally higher-end tenants, how effectively they do. And what we have found -- and look, retail -- sorry, real estate is local. So in the specific markets where they are operating both historically and currently, what we're seeing is increased sales and importantly, very importantly, on a period of inflation, those tenants have the ability to raise prices. When I sit and I think about -- and I don't know the answer to this, but I ask you to consider something like this. If you take aspirational tenants, the Lulu Lemons of the world, people like that effectively. And imagine how much they've been able to increase prices over the next -- last two years of inflation and compare that more to maybe the big lots of the world or something that is aiming for a lower demographic. It's harder to press -- it's harder to push price increases. That's a really important thing for us in all parts that includes restaurants, et cetera. Now I don't know whether I've told you this before or not, I don't remember, but everybody was worried about Federal Realty going into the 2008, 2009, great financial crisis because we had more restaurants, because we had more lifestyle, if you will, everybody was worried about Federal, and it turned out that those were the best-performing categories in the company doing that. And when I look today at our company, and I look at the restaurant performance in the mixed-use properties, they are generating over $1,000 a foot of sales. And part of that is because they've been able to raise prices. Part of that is because there's a huge amount of volume that goes through there. But that gives them the ability to certainly cover the rents that we are charging them and more. And when you think about that in those type of areas, we would expect that to continue to happen. The conversations we have, and we are very tight, we're a smaller company in terms of number of properties than our competitors. We have very close relationships with our tenants. We understand what it is that they are doing to be able to work through difficult -- more difficult economic times. And so those things give me confidence because we have been doing this a long time, and there are cycles. And I expect it to behave similar to the way it's behaved historically. I hope that's helpful.

The next question comes from Tayo Okusanya with Credit Suisse.

Congrats on a solid quarter. Don, last quarter, when you kind of talked about dispositions, it sounds like there was a pipeline of kind of a little bit over $100 million or so you were working on. I think this quarter, you kind of announced $13 million of it done. Could you talk about like the rest of the pipeline, what's kind of happening there whether it's kind of taking a little bit longer to close deals because of the shakeout on the debt market. So just give us a sense of maybe what's kind of happening on that front?

Yes. We have and continue to have a list of assets that we would recycle as a component of our business plan. And frankly, we have that list in good times and bad times in terms of what it is. So those are not a lot of properties, but it's a few that we look at. The -- that's what we talked about last quarter, last year, et cetera. And we got to get comfortable that we're going to get paid well. And so in going through that process, we couldn't get comfortable on as many of those assets as we thought we could. That doesn't mean they come off the table. That just means pursuant to the question that was asked a little bit earlier, once there's some stability and some understanding of the general market conditions, you'll see a pickup in the disposition side of our business. I don't know, Dan or Jeff, is there anything to add to that? Think that's it.

The next question comes from Linda Tsai with Jefferies.

I'm not sure if you look at it this way, but I think one of your peers talked about the average rents in their SNO pipeline. I was just wondering if you had a number for that for yours.

Probably on a total rent basis in the kind of the low to mid-20s and probably in the upper 30s on a -- mid- to upper 30s on a base rent basis. But we can come back to you with more precise numbers. I don't have them exactly here.

Our next question comes from Alexander Goldfarb with Piper Sandler.

Don, can you -- a number of years ago, you guys expanded into the Hispanic centers out in California. And just sort of looking for an update on that. Then also the Korean like the H Marks of the world seems to also be a pretty powerful anchor, and those shopping centers also seem to have that cold-type following. So do you see expanding into more in the Asian Hispanic centers? Or is your experience so far with what you bought a number of years ago, maybe not panned out the way you thought.

Thanks, Alex. It has panned out the way we thought. In fact, probably better than we thought in terms -- given the fact that we didn't consider a global pandemic, and those properties performed exceptionally well during the pandemic. What -- the answer to your question really depends on the right local partner. It really depends on the market, of course, that we need to be comfortable with and a partner that we would need to be -- that we would need to be aligned with, with respect to our views and the way we can manage a property. Prime Store has been that. It's been a very good partnership. We've had trouble adding more to it. We would have wanted to have added more to it. But those are individual deal by deal, and they've got to make some sense, and we didn't find any of that made sense. But those assets perform really well. I'll actually be out there on Monday of next week with Prime Stores. So that part's worked out really well. In terms of any other property type with a demographic that we're not as comfortable with, as I say, we need the right partner because these are real estate decisions that have to be operated and have to be leased and have to be grown specific to a market and if we're not familiar with, we'll get hurt. So we better have the right partner, and we've not found that at this time.

This concludes our question-and-answer session. I would like to turn the conference back over to Leah Brady for any closing remarks.

We look forward to seeing many of you in the coming weeks. Thanks for joining us today.

The conference has now concluded. Thank you for attending today's presentation. You may all now disconnect.