Welcome to Citi's 2026 Global Property CEO Conference. I'm Craig Mailman with Citi Research. We're pleased to have with us Federal Realty and CEO Don Wood. This session is for Citi clients only. Disclosures have been made available at the corporate access desk. To ask a question, you can raise your hand or go to liveqa.com and enter code GPC 26 to submit questions. Don, I'm gonna turn over to you to introduce your company and team, provide any opening remarks, tell the audience the top reasons an investor should buy your stock today. Then we'll get into some Q&A.
Well, thank you very much, Craig Mailman and Citi, and thank you guys for taking the time to spend some time with us today. First of all, I think the first question you were asking right away, and that is, you know, what are the top reasons investors should buy Federal Realty stock, right? Let's get to that right away. First of all, what's going on in the world today? Broad picture. Let's, let's own hard assets, okay? Hard assets are really important to do. With respective hard assets, why us? You are talking about a company that if you want to look not only for safety, you have to be.
Don, hit the button on your microphone. There you go.
Is that on? That is on.
Now we're good.
None of that was recorded, right?
No.
I'm gonna start over. I'm gonna start all over again. Time to invest in hard assets. When you think about why Federal Realty in terms of investing in hard assets, you know we've been around a real long time. You know, there's this notion of paying a dividend that is less important to investors today. What is critically important is that that dividend has been paid in increasing amounts for 58 years. That's kind of ridiculous. If you think about a business that is cyclical, the notion that a dividend has increased every year since 1967 through 2026 is kind of unheard of. It is unheard of. It's the only REIT that can say that.
When you think about that level of quality in the asset, when you think about that level of safety in the asset, Frankly, the only thing that knocked us off our perch was COVID, and that's because our markets were closed that way. When you think about how that happens, the quality of this portfolio, and particularly what we've been doing lately over the last year to recycle capital at an extremely low cap rate. It's selling some residential in the 4%, selling some more stable retail product in the 5%, and redeploying that accretively into 7% yielding assets. I'm not sure who else has that built-in level of that cost of capital to be able to redeploy that way. I think that's really important.
What that's creating is sector-leading growth at the bottom line for 2026. Everything that we see suggests that will continue into 2027. You're getting sector-leading growth. You're getting all of that with the highest quality portfolio out there in a hard asset category that is based on the notion of continuing to increase that cash flow in a sustained self-sustaining way. I think that's pretty unique. We've also opened up our markets to be able to take what it is that we've done historically really well on the coasts and brought that to the center of the country in the form of Kansas City on the Kansas side, Leawood and Omaha, which we are finding undermanaged assets dominant, that we can create incremental IRRs in excess of 9%.
That is the same thing we've been doing for a long time, but being able to fund that with such a low cost of capital is really unique to what we're doing. Look hard at us these days. It's a little different than it was a year ago or two years ago, and I think we're communicating that better also. Take a look at what's happening with us today. It's a good time to think about us.
Great. That was short versus history.
Craig, you're gonna ask another question, and I'm gonna go on for 35 minutes. If you want to give me an opportunity to bring it up.
No, all jokes aside, the... you highlighted the capital recycling, which has been a bit of a differentiator for you guys versus others, given your some lower cap rate retail, the apartments. At the same time, you're talking about starting new apartments, right? Hoboken, Bala Cynwyd. How should we think about the incremental unit growth? Is that gonna be the merchant building model where you guys are building it, realizing it, selling it? Is there a part of it that you need to keep for the mixed use component where you wanna control it?
You know, one of the core competencies of this company that has not changed in the 30 years that I've been there is the notion of how to intensify real estate. That doesn't mean that public companies that are primarily development companies are very easy to run. We're not primarily development companies. We do incrementally add to the intensity of our projects. If you look today with a development team that is very well experienced and has, frankly, not failed one time with respect to the products that we built, to the extent you can see what works in development, it's hard to build retail today. It's hard to make retail pencil. It's hard to make anything pencil with respect to building new products, except for an exception.
That is Federal Realty's properties are generally larger than the average shopping center. Therefore, they have excess parking lots, et cetera, on them. What we've been able to do is to incrementally, without land costs, huge advantage, incrementally add units with our team, our capital, 100%, to be able to add units that on average, the consumer or the person living in that apartment will pay roughly $200 a month more to be in an environment that is fully amenitized than they would in that same box in the sky four blocks away without those amenities. That's been proven by us time and time again. It certainly started, to your point, Craig, with the mixed-use properties, but can also and does also apply to Darien, Connecticut, to Bala Cynwyd, Pennsylvania, to a new project starting in Willow Grove, Pennsylvania, Hoboken, New Jersey, et cetera.
If you look at our investor, new investor package, there's some new stuff in there, and it gives you more clarity with respect to that. To your point, what is different is I am willing to monetize those assets, not in a merchant building model. Please make that go away. We're a REIT. We don't do that. The notion of building and taking that income in for a period of time, and then at that time considering overall cost of capital and the opportunities as to how to redeploy that capital, there's a willingness to monetize and sell those assets. We've done that a few times this year at Santana Row, at Pike & Rose, mid four caps, Santana Row, low five caps at Pike & Rose. Pretty important stuff.
The tax gains associated with those are large, as you would imagine, to be able to tax efficiently 1031 exchange into assets that we find like Kansas City, like Annapolis, Maryland, like Omaha, that have higher growth projections. Why? Because they've been undermanaged for a long time. Because the tenants that we can bring to those properties with retailers who wanna be there, but have not found the landlord and the property that they're comfortable with is where we're making great strides. That bit of recycling will continue, Craig. Today, if you look at the income stream of Federal, 80% of it is retail. The reason 80% of it is retail is because that's who we are. That's what we do. Bringing those communities together and creating higher sales for higher rents.
While we've had those pieces of land and the capacity and core competency, if you will, to be able to add residential product to that makes all the sense in the world. It's very hard for us to not do that. 10% of our income stream is from residential. 10% is from office, only on the large mixed-use project properties that we have and some of our better shopping centers. That should continue. That's how you should think about it with $200 million put to work each year in a repeatable income stream where, you know, in 2026, for example, our Bala Cynwyd residential project next to the Bala Cynwyd Shopping Center has just been completed. We're just starting the lease now.
That will start contributing in the second half of 2026, certainly into 2027. There'll be another you'll see Hoboken in 2027. You'll see Santana, where we sold those two assets. We're building another 260 some odd units on the third periphery, the third block of Santana Row. That will be contributing 2027 and 2028. We just announced Willow Grove, Pennsylvania, which will be 2028 and 2029. You'll see each year the repeatable notion of incremental resi added to really great shopping centers. You can't do that everywhere because you need $3 a foot rents. You need marketplaces. You can't build if the rental rates are $1,400 a month. Just can't do it. At $2,700 a month, $2,800 a month, you can.
That's the incremental value that we're exploiting by owning great shopping centers in marketplaces that will support incremental intensification.
Just to clarify. Think about like at least a two-year hold period to get through a safe harbor at post-development, and then you guys decide what to do with the resi.
I'm sorry, say it again, Craig?
Simplistically, you're not gonna be a merchant builder. You said you hold onto it a while. I'm assuming to get through the safe harbor so you can 1031 exchange it and do all that. Like a two-year-plus hold period.
Yeah, I think that's, I think that's a fair way to look at it. Even at that point, there's always capital allocation decisions. Is that the best cost of capital? What's the marketplace happening at that time? Is that a good time to monetize? Should it be held because there's new supply in the area? That, you know, all the typical considerations. I guess I really wanna make sure that this audience understands that our number one priority is smart capital allocation. That's on the buy, that's on the sale, that's on the tenant coordination money, that's on salaries, that's on everything. How we use your money is the most important thing and the most led set of decisions that we make. So it's why I sound sometimes like, "No, I'm not gonna give you...
This is not exactly what we're doing, because it does depend. It depends on the market at that time, and you want it to depend on the market at that time, where we can be very opportunistic.
On the other side of it, you guys have entered Omaha, Leawood, as you said. You clearly are. I assume you have an acquisition pipeline behind it. From a strategic perspective, how quickly should we see you enter new markets versus try to scale at least in the markets that you've more recently entered, right? Like, what's the strategic to not spread yourselves too thin and get scale to make it worthwhile to go to some of these locations?
Yeah. It obviously, it depends on the art of the possible, what's available, what makes sense at the time. There are a few things I wanna talk about with respect to this initiative. Some of the people in this room, a couple at least, came to our property tour plus late last year at Leawood in Kansas. The reason we had that, and the reason we wanted I guess we had 35 investors or so and some sell side there. The reason we wanted to do that is to have you leave with two things clearly in your minds. Number one, that Federal was not going down quality and chasing FFO for the sake of chasing FFO.
I think it became really clear to everybody that was there, and we took them downtown Kansas City through the neighborhoods to the property, met with the mayor, showed a lot of numbers in terms of what it is that we were effectively doing there. I think everybody left with the notion, "Yeah, these guys aren't going down quality. This is an undermanaged asset that is in a marketplace that feels a whole lot like what they do in other parts of their business." The second thing we wanted everybody to come away with is the understanding that this is not a new business plan. This is what we do. Same plan, different dirt. Entering...
we also said, and it's important to understand, you shouldn't think of Federal as having dots all over the United States of America now. With all kinds of new markets. three - five. three -five . Kansas City is one. Omaha's the second. I'd love to add a third this year. I'm not close enough on anything to be able to talk about that today. I can tell you that we've got nearly $100 million close to being able to get something done in our existing markets, more strategic stuff that you should see in the first half of this year, and hopefully as we go through the year, the continuation of that. When we enter a new market, Craig, to your point, it's with a large dominant asset.
There could be a great 125,000 sq ft grocery anchored shopping center, but I'm not gonna enter a new market with 125,000 sq ft grocery anchored shopping center. It doesn't. First of all, it's not big enough to spread costs over to be efficient in terms of that. More important than that, it doesn't make you a player. When you own the best shopping center on the Kansas side of Kansas City, you're a big deal, and we're already seeing that. The notion of a map of where we want to go. If you guys are there, we'll give it a shot. We see that over and over again. If you think about it, same at Pembroke, it's the same kind of notion.
If you think about it, if you're a retailer, and it costs you millions of dollars to open a store of any size, hundreds of thousands if you're small. Before you would, why would you invest money in a place where you don't know if your landlord is going to make it a safe place that's built out well, that's got the right neighboring tenants? Why would you hang yourself out? Why would they hang you out to dry? Why would you do that deal? With a track record that we have, what you're seeing at these places, Pembroke, Kansas City, Virginia Gateway, Del Monte in California, et cetera, what you're seeing is that willingness. It's not a fluke that there is increased demand for the properties at much higher rents because the track record says the sales are going to be higher. It all comes down to sales.
Anything to add on that, buddy?
I think we have done enough of these now that we're able to do such good due diligence that we're finding we can hit the ground running really fast too. I think, you know, the 24 deals, I think even exceeded our expectations in Leawood and certainly getting some of the tenants like Alo and Vuori to step up when they stepped up is ahead of schedule. A lot of that is just the groundwork we're able to do when we're under diligence because we have such good relationships across, you know, now such a big geography.
Give a preview of what they'll see at Pembroke tomorrow.
Yeah, I mean, since we've owned Pembroke, we bought that in 2022, we've signed, you know, you'll see under construction Pottery Barn, West Elm, Williams Sonoma, you'll see an open Anthropologie, Lululemon, Kendra Scott, Lovesac. I don't want to steal all of our thunder. Coach just opened, Aerie under construction. Again, it's just this momentum that starts to feed off of itself as the tenants come in and start doing sales and you start to kind of get your aperture opens further and further to who will consider it. I think you'll see that's now ahead, obviously, of Leawood, but it's a pretty good example of the same direction we're going there as well.
Maybe just one thing to say on that too. When we underwrote Pembroke last year, we underwrote it based on everything Stu just said. What we found when we got there, in addition to the positive surprises on the retail side, was a parking lot in the back of the shopping center that is completely unencumbered by tenant leases. That's unusual. Usually there's negotiations that have to happen with tenants if you're going to try to build something or expand or intensify. No such encumbrances. So what we've done over the last 15, 18 months is get 300 plus residential units fully entitled and approved for Pembroke. That was not in the original underwriting. That type of stuff happens on larger pieces of land that are regionally driven, where you can create a great retail place and have people participate in that retail by living there.
I don't know whether the numbers will work on that residential project or not. We're darn close and we're working it, turning it up, et cetera. That's the kind of thing that creates growth that is not in the underwriting, is not paid for upfront, but tends to happen as long as you've got the core competency to make it happen.
The returns when we underwrote Pembroke back in 2022 was targeted unlevered IRR just north of 8%. Re-underwriting it because it was so under-managed and because we've exceeded kind of our expectations in that underwriting, we're now re-forecasted that to be north of 10%. That does not even include the incremental returns we potentially could get from the residential. That would be take it even further. Just, you know, we're really excited to have everybody come visit tomorrow and look forward to it and looking forward to having you host us.
Yeah. No, we're excited. I'm kind of curious, you brought up the 28 leases you did in Kansas City already. I mean, how many of those are new relationships that had reached out to you and said, "Oh, you're going there, take me with you," you know, versus how many more are on that list of potential they didn't wanna be the first mover, but they still wanna be in the sub-market, and so the upside to that center over time could continue.
Sure. Other than a handful of the best-in-class local tenants we found and done, all the other tenants we were talking to all the way through diligence, which is how we were able to get them done so fast. seven, eight months ago we closed. That I think is why we had such conviction going into it because we had talked to 50, 60 tenants that we knew. I think we've gotten them to commit to signing a lease a little bit faster than we thought, and then it just they build on each other, so that momentum has built. You know, Lego and Coach and [solidcore] and Alo, now you start to stack those names together, it, you know, you're building a bigger list of others that will consider it.
Most of them, if not all, we had talked to in the lead-up to closing.
I don't wanna mix the apples and oranges because the IRR was on Pembroke, so maybe we'll focus on that. I'm curious, when you underwrite that 10% unlevered IRR, like, what's your exit cap? Are you assuming? The point I'm getting at is, like, if you improve the center this much, is that even being captured in potential cap rate compression under that 10%?
Yeah. No. We don't kind of compress the cap rates on the terminal side. It's either at or higher in terms of what the terminal cap rate will be going in. It'll be a wider cap rate than what we did going in or flat, depending upon where we are in the capital market cycle.
It's a great question, Craig, because look, you talk IRRs, anybody can say whatever they want. What you can't do is fool yourself. The deal that our standards for doing it is we do not ever assume in the underwriting of an asset cap rate compression to make the numbers work. If it doesn't work at the same cap rate that we went in or higher, depending on what the situation is, then we don't do the deal. To your point, that is the biggest piece of cushion that our underwriting effectively has. If you do it right, you are absolutely compressing the cap rate. You know, even in an interest rate stable environment, that cap rate should come in. I mean, we bought Kansas City at, What did we buy that?
Six seven.
six seven?
Yeah.
We bought it at a six seven. With what we're doing, in five years from now, let's assume everything stays the same with interest rates just for fun, to take that variable out of it. In five years, that income stream will be significantly higher, and what I believe is that cap rate will be 50 basis points or more inside of it. The combination is really where you create your value. Honestly, it's why on all of our dispositions, we have huge gains that have to be tax-sheltered to make the most sense. It's why this whole capital recycling program is so unique.
Just I don't want this to come off.
Oh, come on, Craig. Just say it.
... antagonistic. No, no. The story you guys are laying out shows the value of the platform over time, right? You find a piece of land behind Pembroke you didn't even know you could have, right? These are all long-term value plays and, you know, it takes a couple of years to remerchandise and effectuate the plans on some of these asset sales to get to your unlevered IRR. In the world of public REITs, investors have gotten a little bit. The time frames of seeing that value materialize have compressed.
Mm-hmm.
Right? You do see the numbers from an earnings perspective when developments come on, and you do see that uplift. A lot of the value is still in the dirt over time that isn't realized in FFO. I'm just kind of curious to, as you guys continue to evolve the platform, how you bridge those two realities.
Yeah. The word is bridge or balance or however you wanna look at it. The... I know that I can't run this company 12 months at a time. I... It's real estate. The beauty of the investor base is to have that liquidity to get in and out whenever you wanna get in now. That's our deal. On our side, the ability to keep this going ties back to this notion, how did the dividend go up every year for 58 years? You have to be able to balance it. For us to be able to provide you with 6% plus growth and create that value that suggests that that will continue long after 2026 or 2027, et cetera, is the name of the game.
You know, that is both the benefit to being public and the hit to being public is all summarized with that balance between owners and operators. I think we've got that balance really good right here now. Any questions, by the way? Could you just hit the button?
Thank you. Hi, this is an Australian question. In Australia, our kind of mall owners are reluctant to do rezoning because of permitting problems. The concern is that subsequent developments might be impinged by the rights of the rezoning people who have, you know, bought in the neighborhood or bought your development. Can you just expand on that?
Can you?
Well, with regards to getting it permitted.
Talk about that.
Yeah. What would happen would be, say you do, I think you said something like 212 at Santana or something like that. In apartments, so you do a bunch of apartments near your mall, and then those owners have sort of rights or.
Yeah.
You know, become a potential-.
We negotiate with...
They become a potential source of aggravation, as it were, if you were trying to expand your mall.
Look, that's one of the things that we do and sometimes permitting problems in the markets that we're in, we welcome them in certain cases because we're established in those markets. We have good relationships with the surrounding neighborhoods and so forth. We're able to get those permits done and the entitlements over the finish line.
Yeah.
It's difficult. It's not easy. We're able to accomplish that. That is a, I think, a competitive advantage we have in the markets that we're in to be able to understand that entitlement process, to be able to deal with the aggravation of neighbors, to be able to negotiate with, you know, the neighboring, to be able to figure out how high we can build, you know, the residential buildings that we're in and so forth. Some of those negotiations go into. You know, there's a whole host of things. That's a competitive advantage in the extent that we can get those entitlements done and approved by the neighborhood as well as the is something that is a skill set we have that allows us to create value, you know, at these opportunities.
There's also one thing to think about here. There are times when it makes all the sense in the world to put a shovel on the ground and go. There are other times when it makes no sense in the world to do that. What always makes sense is to work with those communities, with those neighbors, with those city council people and county council people to create the ability to do that when the time is right. For those of you who are in Boston, for example, to me, one of the best assets that this company has is Assembly Row.
What is great about Assembly Row is, it is such a dominant destination that what we're working on now is the ability to entitle nearly three million sq ft more on the power center section of the property, which would continue the community, if you will, all the way through. Those numbers don't work today, and there isn't a public investor that will value that. However, private investor would look at that and say, "You've been working for three years on the entitlements. The entitlements will cost us over $1 million to effectively get." They don't have value in terms of putting a shovel in the ground today.
Yet the value of that asset, I would never be able to take the NOI divided by 0.05 or whatever and sell that asset today because I would be leaving tons of private value on the table. This is part of the balance part that Craig is talking about. You're right, you don't get paid for that in the public markets. There is a time that all of that aggravation and all of that work, that's why Assembly Row is there in the first place. Tons of aggravation, and it's turned out to be one of the best things we have. They're generally worth it, to Dan's point, to go through it.
That's same store NOI for next year. For the-
Mid threes.
Mid threes. Same, more or fewer companies?
Fewer.
Perfect. Thank you guys so much.
Appreciate it, Don.