Round table session with Federal Realty Investment Trust. I hope everyone had a good networking lunch, a little bit of coffee as we emerged for the afternoon sessions. To my right is Don Wood, CEO, and Dan Gee, CFO, and then Leah, IR. So good to see you. Thanks for coming. And it's Don's birthday today, so happy birthday!
Thanks, Jeff.
There we go.
Everybody needed to know that.
Yes. Yes. Everybody does need to know. I got to warn people. We got to, you know, be nice today. So, again, thanks for joining our afternoon session, kicking off here with Federal Realty. For those in the audience that maybe don't know the company as well, Don is going to provide some opening remarks on the company, where it stands today, you know, and then we want to make this as interactive as possible. So if you have any questions, just raise your hands, and we'll get things started. So I'll pass it on to Don.
Thanks, Jeff, and really, thank you guys for taking time this afternoon to be here. You know, we're going back and giving a little bit of history of the company for those of you who do know us well, but I don't think everybody does. And I'm the third, and I've been at the company since 1998. I've been CEO since 2002. Important is because it does say a lot about the stability of this place. We're a high-quality company. In fact, I would argue we're the highest quality open-air shopping center company out there with respect to not only population around our centers but income around our centers. We are largely on the coasts, West Coast, Northern California, Southern California, and Arizona.
You know, and to accomplish one thing, we sat down and said: We know this is a cyclical business. We know that there are highs and lows in the shopping center business. How do you build a growing stream of cash flow that finds its way through the cycles? Good times, bad times, whatever they are. And I think if we all came together and sat back in the early 1970s, when times are good, people have money to spend, when times are not good. We want to be in places with, from a demographic perspective, and importantly, barriers to entry, because it's really, really hard to put. Those three facets led us to to put together what we think is a really great high-quality portfolio. The other thing is you want to diversify that income stream.
You know, certainly we have our share of grocery anchors. Certainly, we have our share of box anchors. We also have our share of mixed-use properties, and that means a residential income stream that makes up 9% of the portfolio, an office stream, the bad word of office, but different office. That is part of only our mixed-use properties, which makes up 9% or so of our income stream, so you're looking at a way for cash flow to be generated by the company that comes from a really varied type of tenants. Our largest tenant makes up less than 3% of our income stream.
The other thing you'd probably want to do is recognize that in order to create value in real estate or keep cash flow growing through good times and bad, you need as many arrows in your quiver as you possibly can. So we do have a strong not only strong internal growth through the properties that we have, but we also have the ability to use a very strong balance sheet to acquire. We also have a very strong balance sheet to develop. And when it comes to develop, what we primarily do is add on to our existing shopping centers for whatever the highest and best use of that real estate is.
What it's turned out to be a lot of are residential properties or assets that for people living in those residences, they appreciate having the amenities of the shopping center adjacent to them. So that's another arrow that's in the quiver. And when you put all those things together, what you found is a company that throughout its sixty-year history has been able, remarkably, to increase its dividend to shareholders every single year since 1967 . Every single year, since 1967 . And if you think about what's happened in this country, in 20% interest rates, or whether you're talking about 9/11 , or whether you're talking about wars, and certainly many economic cycles of inflation and recession, it's pretty remarkable. There's one time, it was COVID.
The reason COVID knocked us off our game more than other shopping center companies, still not bad, but more than other shopping center companies, is because our markets on the coasts largely closed down, and they closed down more than that. Was interrupted by that and only that over that period of time. It's pretty remarkable. It's also a very bright future. I'm sorry, Jeff, you know me, I could talk on forever. It is a period which is different than much of the last, much of that history, in that it's really the seed supply. You know, for most of that time, some of you and certainly Stuart certainly know, as investors, that I have preached focus on making sure that our product was differentiated, that's, that it was better, that it....
To us, because it was not the same thing. And as a result of the lack of development, really, since the great financial crisis, in the country, there has been added. And when you think about that through the teens and into post-COVID, it's worked out pretty darn well. And it's worked out pretty darn well because a rising tide does lift all boats, and I think that's great. And that demand, supply characteristic really won't change for the foreseeable future. Takes time to make the numbers work, to plan, to entitle, to be able to build new product. There's some of it starting in a couple of places, but very small. So that supply-demand dynamic, you should expect to continue.
Now, what probably won't continue is an economy that was so propped up post-COVID. And lots of money, $5.5 trillion, you know, into the economy, has a lot to do with consumers being able to continue to consume at the level that they did in 2021, 2022, into 2023. No, I don't. I expect a more normalized environment of, you know, the past 24, 36 months.
And so to me, it's pretty Are located with respect to the real estate that you own. So I'm looking for matters. And when you look at tenancy that is that could Has not seen a lot of bad debt, has not seen a lot of failures. You've got Bed Bath & Beyond, you've got some of the retailers that are hitting, that affect... Because I'm exhausted, and let you ask a question, too.
All right. That was great. Thanks, Don. I guess on something that, you know, we've been emphasizing, but, you know, the last couple of years, year to date, it hasn't mattered as much, or it's not a big part of the conversation: demographics. I mean, and maybe tie into the, we had a consumer panel this morning with the B of A data. We, you know, have seen, some slowing, but resiliency across the board, consumers starting to begin. So are you-- when you talk to your peers or, you know, could create some issues, are you hearing any more issues that we should be aware of?
Yeah, there's a couple of things to talk about in there. You know, one is, what I'm about to say is obvious, but it's important. There's an inherent cushion between a retailer's performance and whether they can sit here at, at wherever we are, September of 2024 , and say, "I have seen very little, if any, reductions in the appetite." Arms around is the quality of the operator. And this is, this will be part of the normalization, which I think is what's happening, Jeff, that's important here.
You know, if you think about most shopping centers in the United States of America, wherever you live, wherever you've traveled, wherever you go, you've certainly seen places where it doesn't matter other than the TJX box or the Ross box or the Dick's box, whatever that's in the shopping center, or the grocer, whoever it is, when you look at the small shop, there's a propensity to lease to whoever will pay the rent. And that, to me, is short-sighted. By the way, it's mediocre, but you got money, and there's stuff that... When things get tighter and the consumer like that, your margins are squeezed, your costs are up, it gets tougher. The difference between being able to pay your rent and continue to thrive in your business is whether you're a good operator or not.
There is not enough talk about that. I say that because what we try to do throughout the portfolio, and albeit it's a higher quality portfolio, so we have a better chance of doing it, is to find the best operators in each category. When you can do that, and you know you've got tenants that are not worried about making it through the cycle, they're. They know they're in the industry as being the best operators. All those kind of things that you know are aspects are why what happens to us in downturns normally.
Get to where I started from, that's kind of the way I see the next couple of years. A good economy. I do think, well, I'm hopeful, but I'm not an economist, so if we don't, I want to make sure that it's not get to where we are today. That's why I'm hopeful on a relative basis, that you'll start to see some, you know, in a prior period, that didn't matter as much because it was all because the rising tide was lifting all boats.
Does it take a recession to see these differences?
No.
It doesn't.
No, no. You know, you know, this is not a political comment. This is just fact. Federal Realty made more money for its owners during the Obama administration. There's two things: Interest rates were low, and that's important. After 4.5% or 5.5%, well, that's not a number that you can't make any money with. That's economy growing too fast, you got other places to put your money. There's other opportunities. Economy grow. Or what I think we're going to see over the next few years, and that is a slow-growing,
Talked about 9% resi, and I believe you said you're also at 9% office?
Yeah, 9% or 10%.
Over the next five or 10 years.
For those of you who don't know us well, we have Federal, and that is, you know, $4+ billion of our Big Four. Santana Row in San Jose, California, our flagship. Pike & Rose in North Bethesda, Maryland. Bethesda Row, Bethesda, Maryland. Assembly Row in Somerville, Massachusetts. In each of our major markets, we've got a big one, and what we get out of the big one is the economics of the residential, the economics of the office, the economics of the retail, and the integration of those in the big one. What people don't get is what we've learned by doing those billion-dollar projects, basically, trickles through to our other 102 assets. We've learned tons about construction.
We've learned tons about placemaking and how to make a place feel special. We've created relationships with tenants that aren't in usual shopping centers, that are in our shopping centers. It's found its way all the way through the company, and you'll notice a difference if you go out and look at our assets than at the typical shopping center, and so the notion of having those mixed use properties, we're able to make economics worth by going up. Going up, not much of a--, and so we created communities. The residential at those properties has grown at 3.5% CAGR for over 20 years in those properties. It's been fantastic because, and you'll all know. The shops with the services to effectively go along with you.
And in any of those markets, so at CocoWalk, something that we did just in the last couple of years, that those rents are premium. New or being built. Now, that's the only places where we do have office, and that's the place where we've done 1.2 million sq ft of leases over the last four years. The ability to put mixed-use on them, which I love putting residential on properties that we already own. But you should expect that ratio, you know, nine and nine, 10 and 10, whatever that to be, roughly 80. This is an 80% of the income stream is retail all the way through. And I would argue that the residential and office is so tied to the retail at those places that we're really, you know, we-
On that residential side, when we saw you in March, you know, you said you want to be opportunistic and take advantage, more residential to your properties.
Yeah, it's an important thing to understand, rather than to build. Construction costs are high, cost of money high at 4%. Exactly like we did cut in the great financial crisis, is to cut construction generally, building something. The reality is, that's the very last phase of development. The permission to be able to do what you want to do, the entitlement it is, and the pricing of what it is that you're going to do, it takes a year or more, and you work on that like crazy. That's what we've been doing over the last couple of years, with respect to entitling and designing largely residential adds, apartment adds to our best shopping centers. We've got an opportunity, it looks like, to do 12 of them.
Do I think we're gonna get to all 12 of them? No. Do I think the math will work on all 12 of them? No. But we got the first one, and it's under construction in Bala Cynwyd, Pennsylvania, which is on the Main Line, just outside of Philadelphia, at Bala Cynwyd Shopping Center, a very good shopping center that we did, where we did an experimental first 90 units a few years back, and it killed. So a mixed-use project, the going in yield will be a 7% unlevered on residential, which is really--- You know, when you can count on 3% CAGR each year from that time, because you get to those leases, it's not like you're putting this thing away. You're getting to that, year after year. From my perspective, makes a ton of sense from a capital allocation perspective.
No land costs, because you own that land effectively there, which is a huge plus. Often in some of these places, parking's already there or partially there, which is another huge component of cost that is advantageous. We're real close on adding a smaller project in Hoboken on a piece of land on a retail piece of land that we own that should come up next. I think you should expect to see more of that over the next few years as the economy changes. And you know this gets down to kind of where we are today. Most retail real estate portfolios are fully occupied. Now once you get to 95% or 96% you got there's no you're fully there.
Now, we got another 100 basis points or potentially more in ours, because we were hit harder by COVID that way. But if you say, "Well, okay, once you're fully leased, how do you grow?" The investment community in general, particularly the generalists, who don't know this business well, are being led to think that these properties can grow much faster than they actually can. Because when you think about... It's made up of the anchor boxes, which almost universally, or universally, have maybe 1.2 or about 1.4, because the way those leases work, small shop, which is very, very important to have distinguishable and not just anybody.
Pull that together, a good same store growth, portfolio, a really good one, level of property operating income, and I think most grow a bit much less than that. So in a more mature market, in a more normalized market, what other arrows do you have that create value and add cash flow to that income stream with, through more sources is going to be. And so I'd like to have as many arrows in the quiver as possible.
We're a $10 billion equity cap company. The notion of doing all the work to entitle, to design, to you know, get something ready on your property, with your land costs, to be, you know, have it be an $80 million, $100 million project, something like that, saying $20 or $30, doesn't move the needle for us enough. So we would prefer, and we've developed the expertise over 25 years, not unimportantly, there, wow! So that it translates to the bottom line. At the end of the day, it's got to come through the bottom line.
I just want to make sure if there's any questions from the group. If not-
You're doing a lot of clicking up there.
Please, are you writing your own report right there? Please.
John, you talked about the Big Four, you talked about development, especially in apartments. So from a funding standpoint, how do you, does the Big Four fit into that equation as far as funding new development, and how do you think about it whether it's-
First of all, our job, I think, is to not surprise you. And so capitalizing your company with consistency, making sure that all potentially the capital streams are available to you is such a key part of what it is that we do. Which is $50 million a year at a time through the ATM program. We've been doing that since 2011. That cost of capital there, which I think we've done a good, really good job of doing it. We absolutely we recycle assets and sell $100 million-$200 million so this year so far along the way. And then the third thing, and I'm getting out to your, to your question now, the third would look to in the future, joint venturing those Big Four assets or a potential part of those big, a nd to some extent, still, the public markets are not paying for those assets.
Those assets are low cap rate assets, man. They're the best in the country. And I, if any of you wanna, you know, wanna really dig into and see and understand a Santana Row or an Assembly Row or one of the Big Four, I'd be happy to show you, and you'll see what I mean. I mean, these are better. These are really good, stable income streams with future development opportunities embedded in them. When you look at that stuff, you know, a $117 stock price doesn't catch it, doesn't cut it. Frankly, it was a $100. When it was a $195, I was really saying, "Man, we got to figure out how to, how to, gotta exploit that.
I mean, we got to get paid for that." If I had my way, the stock price would reflect it. We would not have joint ventures. I personally, I don't want another, I don't want another partner, and they're diluting our growth assets there. When would I do it? Oh, there's a number, there's a place, there's a time that that can happen. It's not today. Don't need it today with the other measures that we talked about, but it's something that's on the screen. Effectively, if you look, if you really think about it, it's a competitive advantage. There is a big chunk of this company that is undervalued, that we can tap at some point in the future. That can't be a bad thing.
When we saw you in March at our retail executive event in New York City, I think in all the years I've known you, you were the most excited on acquisition opportunities. You know, where do you stand today on the, you know-
Yes.
I guess, the opportunity set?
Let's talk about how it works. Right? There isn't one of you here, and in order for you to be comfortable at a value that you think what it is, nobody's been comfortable with where interest rates were going, with what the story was gonna be. That change exuberance, if you will, because what was happening was, there was a difference between bid and ask. What I'm willing to pay and what you need to do COVID, and wasn't gonna happen. As that came down early on this year, we saw a window, and we jumped through that window, in two ways. Pinole in Northern California, and to me, one of the best things we ever did was Virginia Gateway in Gainesville, Virginia. So nearly $300 million of assets.
Virginia Gateway, you know, we're gonna do a 7.2 yield, cash on cash to start there. If they had waited 4-6 months to today, that'd be 75 basis points, 100 basis points inside that, because there's far more clarity on what's going on with interest rates. Now, that exuberance, let us get those done. Do I wish we did more? Sure. We tried. Not a lot that was out there. Now, the question is, will we be able to? Because once again, a seller is gonna have an expectation of falling interest rates. Their expectation for what they're gonna get paid is gonna go way up, or gonna go up. Question is, our stock is higher, our cost of capital is lower, we can pay more.
If the bid-ask before we're looking at right now to be able to do that. So I'll tell you more at 3:00 P.M., if you'll wait till then. We're not gonna put out capital that is not accretive to create value producing from an IRR perspective over time. We've been able to find a couple of those. I'm hopeful that we can find a couple more to go, and that'll always be a key part of what it is that we're doing.
Great. That went by fast. We're already out of time. We do have three rapid-fire, rapid answers.
I didn't think we were doing rapid. What, are you Bellarmine here? What happened?
Come on.
Three quick ones. First, do you expect real estate transactions to increase once the Fed starts to cut? Yes or no?
I don't know.
Okay.
I don't. It's-