Welcome to Citi 2025 Global Property CEO Conference. I'm Craig Mail man with Citi Research, and we're pleased to have with us Federal Realty Trust and CEO Don Wood. This session is for Citi clients only, and disclosures have been made available at the corporate access desk. To ask a question, you can raise your hand or go to live.qa.com and enter code GPC25 to submit questions. Don, I'm going to turn it over to you to introduce your company and team, provide any opening remarks, tell the audience the top reasons investors should buy your stock today, and then we can get into Q&A.
Terrific. Thanks, Craig. Good morning, everybody. Thanks, by the way, Craig, for the 8:00 A.M. on Monday morning. Let's go. Let's start.
Could have been 7:30A.M.
A.M., but it's not bad. I think most of you know Dan Guglielmone, our Chief Financial Officer. You may or may not know the President of our East Coast Operations, Wendy Seher. And Wendy's here with a leasing background, too, so conversations about the business and what's happening with respect to supply and demand should be particularly apt as opposed to inept at speaking about. So I want to address your question right up front, and that is, what's going on with Federal?
Why should you own this stock? And the first thing I'd like to do is fall on my sword. The answer is value. And while everybody says because they're a good value, in this particular situation, I think we have some real reasons as to why that's the case. First of all, we did not do a good job two, three weeks ago, whenever it was, when we released our fourth quarter earnings and guidance for the street. And when I say that, there were two items in particular that were reported about.
One is the absence of capitalized interest on Santana West, which I'll talk about in a minute. And the other was a deal that we cut on the development of an asset in California that resulted in a tax credit of a large gain that came our way. I think the street looked at those, from what I can tell, as being surprises. And Federal Realty on that day was worth $500 million less than Federal Realty was worth the day before. I want to talk about the reasons, and I want to suggest to you that that's ludicrous.
And let me start, first of all, with understanding a little bit about real estate. And part of this is because the investor base, as you all know, has changed pretty considerably. But there is a need to understand real estate value when you look at a company. You may act on it, you may not act on it, but understanding it is still, it seems to me, pretty important to evaluating an opportunity.
So four years ago, we hit COVID, as many of you know, with a $300 million office building in San Jose, California, that was being built spec that got caught straight in the middle of COVID. And it was empty. And rightly so, the investment community punished us for that. And we didn't have a lot of leasing. We announced a couple of years after that a Price Waterhouse lease that takes about half of the building or almost half of the building. And since that time, dribs and drabs.
And so as a result, the stock has been depressed for a number of reasons, but that certainly is one of them. First of all, it's office. And second of all, it is in Silicon Valley, which has been hurt over the past few years. Now, what happened on the earnings call three weeks ago was the best news we've ever had on Santana West. And that is we reported that we're now committed on 82% of the space of that building and that we very much expect it to be done from the standpoint of stabilized or nearly stabilized by the end of this year.
Now, any real estate person over the last four years that was understanding what was happening in Silicon Valley had to be thrilled with that information. And we know because we, as real estate people, were ridiculously proud of that information because it's clear that what is happening in Silicon Valley, the hit that Silicon Valley took in that 2021, 2022, even into 2023 time period, it's pretty much done. And it's looking from an AI perspective and lots of other investments very, very positive.
Yet from an accounting perspective, we were unable, we are unable to capitalize the interest associated with that development in 2025. And accordingly, we'll have an accounting hit of $0.10 a share, and we reported that. Now, that is accounting. And I would agree that if we announced that we were no longer able to capitalize the building because it's done and there was no leasing that was happening, that that would be very, very bad news. And the equity value of the company is less or should get hit from that.
But the news was the opposite. The news was simply in the office business, as you know, there are periods of free rent. There is a build-out effectively of space that has to happen. And so the rent from that nearly leased-up building will start in 2026. Accordingly, while done in 2025, leased up in 2025, there will be capitalized interest that is no longer capitalized that won't be offset with rent. That will happen in 2026. In any world, in any real estate world, that is really great news. It was not taken that way.
I do think we needed to do a far better job of explaining that ahead of time, including the extent of it, which included timing of Price Waterhouse investing in the space, not the rent start, but the timing of them investing in the space. We didn't do a good job of explaining that or predicting it. As a result, we're hit pretty hard. The second thing, something called a new market tax credit, was viewed as a one-time positive that should not be considered in earnings or with respect to the future.
Investors should look at that any way they want to look at it, included or not included, but understand what it is. In 2018, in exchange for building in Central Los Angeles a shopping center that we did with our partner Primes tor, we were able to get a very favorable treatment of money back if certain things happened. The deal was cut in 2018. The end of 2024 into 2025, it became clear those things have happened and we will get paid. Big number, $0.15 a share.
Whether you include it in the earnings or not, it should at least be considered in the multiple because what it meant was we negotiated a really good deal. And if you look over the past few years, there's always something like that at Federal, whether it was San Antonio Center where we were able to sell 1/3 of the center for an incredible price to a local school district because of the value of that real estate or other things that happened kind of regularly throughout Federal.
That's why we historically have traded at a real premium, not just because of the real estate itself, which is better real estate. It's good stuff, but because of the ability to negotiate deals, which are very favorable to the company. Those two things happened. Those two things were looked at as offsets. We're not communicated as well as we can. And the company was worth $500 million less that day than it was the day before. To me, it should have been worth $250 million more.
So there is a huge swing, which does answer your question finally, Craig, as to why in the world we think that there is a unique opportunity right now to take advantage of that dislocation if you own the marketplace and own us. I'm going to stop there for a minute. What else do you want to know?
It's a good place to stop, so you said kind of there was some misunderstanding with some people viewing as non-core and others. One of the things I took away from it was from a run rate perspective, right? It offset that $0.10 loss on capitalized interest and maybe gives you a better economic run rate for 2026 FFO versus, again, the peaks and the volatility you may have had if you hadn't had the tax credit. Is that a fair way to look at it?
Let me try to simplify and clarify a bit. When you think about Federal, I think we've said and other people have said, you know, it's a more complicated business. And the more I talk about it and think about it, it's not really. We do three things. And those three things need to be viewed, if you will, separately so that you can understand the components of the company. One is the core, the core portfolio.
We lease space. We operate space just like anybody else. Now, we think we do it in places where there is more upside based on the type of real estate that we buy and own and operate and the relationships with tenants that we have that should yield 3%-4% of property level POI in a given year and occupancy neutral. That's really good in this business. Look at that separately.
The other thing we do absolutely is we redevelop. And that causes development, redevelopment, that causes lumpiness. There's no question about it. And so understanding how that plays into the year-in-year-out FFO, we absolutely need to do a better job in clarifying that and frankly, not necessarily having that cloud the great results from the core portfolio. And by the way, 2024, great results. This was our best year ever in an awful lot of different metrics because the supply-demand characteristics in our business are very good.
So you can imagine from my perspective being frustrated by this, I'll call it noise, although I don't think it's noise. I think it's an understanding of another component of the business offsetting that or not understanding that. And the third thing we do is acquire. If there's anything that you look at over the past few years, take a look at where we've acquired, what we've acquired in actually not almost, in every single case. The markets have been a little smaller.
What we have been able to do in those markets, though, is bring a level of productivity and a level of tenant interest from tenants who wouldn't have been there with the former owner of the shopping center. Pembroke Gardens is the closest one here in Pembroke Pines, Florida. It's a great example.
If you look since we bought that asset, what we've been able to do with releasing, what we are doing with respect to improving the property, it's phenomenal, and it far exceeds what the previous owner did, so you can look at it and you say, "Yeah, gosh, you're way out on '75." Is that really what you do? And the answer is you bet.
It's what we do because post-COVID, we're able to bring tenants who would normally not look at the asset because when Federal Realty buys a center, those tenants and the reputation we have with those tenants say, "I got to look at that." That happened in Pembroke. It just most recently is happening. It's why we bought Del Monte Center in Monterey, California. That is a smaller market, but when you look at the incomes in that market, it needs to be serviced.
Those customers need to be serviced by a better product. Our contacts, our ability with that type of center does that. Kingstowne in Virginia, the same thing. Gainesville, Virginia, where we bought Virginia Gateway last year, the same thing. We're constantly beating our underwriting. So from the core perspective, three to four, think about really good redevelopments.
Yes, yes, lumpy like Santana West and acquisitions that will outperform even what we think when we're buying them. And then you have a business plan not so hard to understand, hard if you're only going to stay at 50,000 sq ft or not square feet, feet. Not so hard if you get down and look at those buckets. And we're going to do a better job in communicating that and disclosing things related to that. And so I personally think it's a good time to get in. That's up to you.
And I'll just take some time to kind of walk through, I think, a little distilled down to some numbers. I mean, we reported $6.77 in 2024. We provided guidance at $7.16. That was 5.8%. With the pluses and minuses, the new market tax credits, back those out along with the timing delay. That $7.16 becomes $7.11 if you want to ignore kind of the noise in 2025. That $7.11 over $6.77 is 5%. Okay? You don't want to do that.
You just want to say, "Okay, let's get rid of the new market tax credits because they're just a one-timer." You're at $7.01. That's still 3.6% growth. Okay? But when we look forward to 2026 and beyond 2025, the buckets that Don just talked about, the comparable portfolio, which we are forecasting this year to have 3%-4% growth in same store or our comparable POI.
In '25.
In 2025 and that's in the headwind of our COVID prior period rents from deferral agreements going away. Okay? We've got the ability to take what's on page 12 on our same store disclosure, $767 million in 2024, goes 3%-4%, takes you to $790 million-$800 million, call it $795 million, $794 million roughly. Historically, we have grown over the last, call it decade, excluding kind of the aberration of COVID, but in the 3%-4% range, we have grown comparable POI.
Assuming even if we go 3%, 3.25%, 3.55%, the lower end of that 3%-4% range, we have the ability to grow our comparable portfolio next year, 2026, make an estimate on that. That's about $25-$26 million, call it $0.30 a share. Okay? In 2025, we're going to have a little bit of a delay in the ramp-up of our redevelopments and expansions. That's on page 16 of our 8-K where we kind of detail the ramp-up.
Assuming that we stabilize at both Santana Row, 915 Meeting Street, and Huntington, you've got incremental POI of about $20 million net of capital costs and interest expense, capitalized interest going away for a full year. That gets you to about $15 million. Let's assume that we're not taking that all on in 2026, but a piece of that, call it $0.15 of incremental. That's $0.45 of growth roughly from the two pieces, the comparable portfolio and the ramp-up. Doesn't even consider acquisitions.
Those two things get you to about $ 7.46. That's about 6.5% underlying operating FFO growth. I mean, that's a meaningful 3.5%-6.5%. Roughly, if you look at a two-year CAGR, that's 5% CAGR between 2026 and 2024. Ignore the noise of 2025. So I think we have the underlying core business. Don't let the noise of 2025 mask the strong underlying core growth in our business, which is a 5% compounded growth, excluding acquisitions, which is not included in our guidance.
Now, yes, we have an interest rate headwind next year from refinancing a bond. But even with that, assuming, call it $0.10, $0.12, $0.15 of headwind, we're still up in the $7.30-ish range, which is 4% compounded FFO growth over the two-year period. Any way you look at it, we are demonstrating, I think, very, very strong growth in our underlying business, even in the face of the headwinds that everybody's focused on in terms of 2026. We feel like 2025's guidance was really, really very, very strong, strong 3%-4% compounded.
I mean, compounded annual growth in our comparable portfolio really should be kind of towards the top of the sector and shouldn't be lost on the fact. We also don't have the exposure to a lot of the bankruptcy that is out there. We have probably minimal exposure to the Joann, the Big Lots, the Party City, the Rite Aid, so forth. Really not facing that in any big way. I think that's another thing that shouldn't have been lost in terms of the strength in our underlying business.
I'm going to add one thing, Danny.
Yeah.
So I know there's a lot of that conversation is necessary to have for modelers. That's necessary to have to understand where FFO is going to go. And that's all really important. But from my perspective, the single biggest thing that this company does that is different that needs to be considered in the multiple, whatever multiple you want to play on it, is the value of the underlying real estate.
I know that's not a popular thing to say, but the reality is the land that is not producing at places like Santana Row, at places like Assembly Row, places like Pike & Rose and others. We always talk about those three, but others that has significant value to a private owner is never considered in these conversations because it's just been, I don't want to say, I'll say it, dumbed down to just FFO. Not unimportant, not trying to make it unimportant, but understanding the real estate has to be a component to investing in Federal.
And I want to circle back to that in a second. But before we do, I had a question come in, and I don't want to gloss over it, but you guys had mentioned the communication, the disclosure. Someone wants to know kind of what disclosure changes are you contemplating that you can discuss today to help investors?
You want to take it?
Thank you, you take it .
Look at that.
Please, with the baloney, throw it right back. So the single biggest thing, and I don't have it all worked out yet. I think most of you know Leah Brady, who runs investor relations for us, is retiring at the end of this conference. So by the way, you want the truth, make sure you ask Leah. She'll say anything as she's going. She has three wonderful children, including one who was just born a few months ago and will retire to stay home. We do have an agreement with somebody to come join the company.
We should be able to announce that within the next 30 days or so. Can't do that yet for some reasons that you can imagine. So we're not going to do that. But that individual who's very experienced in IR will help us answer the specific question of exactly what's going to happen.
Generally, from my perspective, it goes back to the buckets. It goes back to understanding better the core assets, what the core delivers there, what the redevelopments effectively deliver, what the acquisitions could and would deliver, how they perform, and whether it's office or residential or a component of the bigger assets roll into the operations. I want more separation and more clarity about that I think should help the specifics to come.
And so, I want to circle back to your commentary on the real estate value and going away a little bit from FFO. You guys have continued to be acquisitive on a select basis. You talked on the call about some bigger assets out in the market. But with where the stock is trading, right, there's the academic discussion about buying real estate maybe inside or of where your NAV should be trading as you think about, do you buy back stock, do you buy assets?
But you also have a pool of some very valuable assets in Santana Row, in Assembly Row. And you guys have historically talked about when's the right time to tap that. And it feels like the private market demand for those types of assets is improving.
So are we getting to the point now where maybe you have to start to think about extracting some value out of those to kind of backfill with newer opportunities to kind of keep the growth going forward? And then you demonstrate the value of the real estate in the private market versus what the public market's value is.
I'm glad you asked that, Greg. Thank you. The answer is yeah. We have a particular asset. I don't want to go into it right now because I don't want to screw up the deal. But we have a particular asset for sale that is creating an awful lot of interest. It is on the West Coast that will demonstrate some of the value that we've created. With a little luck, we will use those proceeds to effectively create the next phase of one of the assets that is out there. And I think you'll see the spread between what something's worth and what we can develop it at.
Your bigger point is huge. And that is the value of the common equity of this company absolutely needs to be able to support those acquisitions. And to the extent it doesn't, that will thwart growth. That is just economics 101 in terms of how that works out. But I believe with the clarification we're talking about, the results we will put up, the sales that you're asking about, and the result for that will make it very clear that the equity is undervalued. And I hope gets rectified.
I know we all kind of look at going in cap rates, which is a simplistic way to look at the accretion dilution piece of it, but as you guys think about the underwriting and the IRR kind of trade long term, what is that kind of equation looking like today on some of the things that you're underwriting versus maybe some of the assets you're willing to part with a portion of?
Yeah. Well, it's a good question. Look, this whole business, if you're going to be public, you better be balanced. And so you got to balance a lot of different things. One of them certainly is accretion. So the notion of assets that long gone are the days where I can go in, buy something at a 4.5 and say, "Don't worry, this thing's going to be amazingly valuable in five years or seven years." Can't do it. So we won't do it. What you'll see are retail acquisitions in particular.
Like you just saw at Del Monte, what I love, there is a niche that we should exploit better, we as a company. It's a niche of while most shopping center assets are very generic. They are what they are in the United States of America. Whoever owns them, they are shopping centers. Some of them are better. Some of them can attract retailers who won't consider the others. Some of them can be attracted to markets to do one or two stores, not 10 or 15 or 20.
Wendy, Jeff Kreshek, a guy you'll meet tomorrow, Stu Biel, the key part of our revenue machine, if you will, are 20 and 25 years experienced at bringing those tenants to places that we can really create IRRs near 9. So if you can go in 6.75, 7.25, something like that, and turn that into a 9 IRR without messing with terminal cap rates on that, that makes a lot of sense.
And if you look at Pembroke, and we've got some slides if we're going to meet any of you in the one-on-ones or 10-on-ones later in the next two days, I'd love to show you what has happened. An asset that we went in, what did we go in Pembroke at? Six? Right back in.
2022.
2022, we went in at a six. We're at a seven today. And we'll wind up at an eight within two and a half years. When you look at the IRR associated with that, it's really strong. In assets that certain investors said, "What are you doing there?" But we know, based on the conversations with the people who will pay the rent, what they will be able to do and what's happening there, we know that we can create real income, cash flow growth at those properties. That's what you should expect for us.
Those are the type of numbers that you should see. On sales, I mean, at the price we're trading at today, I don't know, the overall cap rate, the whole company is six and.
Six.
Six. I don't know, somewhere in the mid-sixes, something like that. The company's worth more than that, pretty significantly. And I think we'll demonstrate that to you in the coming months.
Does anyone in the room have any questions? Okay. Can you talk a little bit about Del Monte? Where are they going in cap rate is, what the opportunity is there? I know it's a high demo market, but it's getting a little bit of.
It's in the upper sixes, mid- to upper sixes. And we fully expect to be into the mid-eight to nine kind of over time. So we're creative kind of going in day one. We already raised the equity for it when the stock was $115. So we're actually very, very well positioned from that perspective in terms of funding it.
We have a special relationship with AAT also, with Ernest, with Adam. I have deep respect for what it is that they do in their business. This was an outlier for them, and it was an outlier not only geographically, but it was an outlier in terms of the types of tenants that they deal with.
Ernest or Adam would tell you that in a minute, so when we started looking at the assets, the first thing we did was to call all the tenants that we thought should be there based on the income levels that are there and the opportunity because there's nothing else in town, and the results that we got from those conversations, that's what made us say, "We got to look hard at this here." Those conversations, now that we've owned it, now I can't give you names here.
Anyway, can't. Those conversations have come in saying, "Now that you guys own it, let's get serious about how we're going to move and what we're going to do there." That's the beauty of the reputation with retailers and with developers and what we've been able to do that today is not reflected with investors. My job is to get that back with investors. And part of the way we're going to do that is to make sure you understand how the constituents who pay the rent view what it is that we do for a living.
If we can buy the best assets in a particular market that are in the best location in that particular market, and it's underserved from a retail perspective and for the consumer that's there, and we can leverage our core competencies of relationships with tenants, reputation in the marketplace, our placemaking, all of the things that we do really, really well, that is going to be a source of growth for us on the acquisition front.
And that you'll see us look to target those types of opportunities. Not only Del Monte, but Virginia Gateway last year, Pembroke Pines the year before. All of these kind of are those types of opportunities where we can really leverage that core competency that Don's referring to.
That platform that we have with those retailers and those relationships of 20, 25 years of producing not only great places and they look nice, but they're productive in terms of sales. So we're a little bit of a risk. We are a risk mitigator for those decisions.
When they go into that real estate committee and they're trying to get something approved and they say Federal Realty owns this, they kind of know what they're going to get. And they know they're going to get a partner who's going to invest with them. So that risk mitigation is great. And it's a platform that we need to exploit more, I think.
I'm going to jump to the rapid fires, then jump back to my last question just so we don't run out of time, but same story in a while for the strips in 2026.
2026?
2.5%, and I think the reason I say that just is because I think some who have that exposure to some of the bankruptcies that will take time and so forth, I think will be much higher than that because we just don't have that exposure at this point in terms of the visibility we have early in 2025.
And then from number of companies, same, less, or more in strips?
Less.
Yeah, I think so too. I think so too. And I don't usually say that because there's always a lot of talk and nothing happens. But I think so too. Less.
To go back to the question I was going to ask, which I figured we were going to run out of time. But you've always talked about demographics and what makes Federal different, right? And there's been a lot of chatter about the top income producers in the country really driving a significant amount of the spending.
And so I'm kind of curious as you're having these conversations, the terms you're able to drive to get these tenants in some of the places where the spending is happening and how sustainable that demand from the consumer you feel like is just given how top-heavy it has been.
Yeah. I'll give you a point of view. I don't know if you want to add to this one as we go. But income matters, man. You have to have income levels. You have to have the ability to spend. I've been preaching that for 25 years. You're not going to see us go to places that don't have that income because you do need spending. Now, this is about the craziest time in the country. It's hard to figure out all of the things that will happen. But if you're going to bet, bet with incomes.
Bet with incomes. And whether it's completely sustainable, not sustainable, whatever else, you have family incomes around your shopping centers of $150,000, $160,000. You are simply better able to navigate whatever happens than you are if those family incomes are $60,000 and $70,000. It's not rocket science.
That's just the case. If you have those incomes and you have the relationships with those tenants that are anxious to grab hold of those incomes, then you're just better off. So I can't guarantee anything, but you got to look at those basic fundamentals in your investment decisions.
Perfect. Thank you guys so much. Everyone have a great conference.
Thank you for your time, guys.
Thank you.