Everybody, why don't we get started here? This is the Federal Realty Roundtable. Very happy to have the full management team up here. Don Wood, CEO from the company. Don, there's a lot of people here, introduce your team, maybe provide some opening remarks.
Sure. Well, first of all, great to give us the opportunity to speak today. This is Dan Guglielmone. Dan's the CFO of the company. He's been the CFO for the past 10 plus years. He reminds me of that often. To my left is Stu Biel. Stu is here as basically the head of leasing for most of the company. East and central region, which is where we've been embarking lately.
Retailer questions, Q&A, this guy's a great guy to tap, whether it's in this meeting or afterwards. I think you know Jill Sawyer, our head of investor relations. Away we go. I was looking at the questions that Samir and BofA sends ahead of time, and there's a lot of generic stuff in there.
There's a lot of stuff in those questions. How is the consumer? What is tenant demand like? All this stuff that, as I was thinking about, and what I'll answer for you, all is going to sound just like every other shopping center company. Demand continues to be very strong. We don't see signs of a weakening consumer.
All of the stuff that you would expect to hear in one of these meetings, I do not like that. I would prefer to do things that kind of differentiate us from what is happening, the general. What it is that we think makes this something that is compelling for you guys to dig in a little bit deeper .
I see in this room people that I have known for many years, frankly, and some that I do not know at all. I am dealing with "Hi, Jamie" I am dealing with an audience here and on the webcast that is both. I do want to refer everybody here to a new product that we put out from a communication standpoint. It is our second quarter investor deck that on my way up on the train a couple of days ago, my final review in preparation for all the meetings of each of those things.
I found myself sitting there saying, "Man, this is a really good company. Man, this is a company that is different. Man, this is a company that not only are the general demand and supply characteristics of the retail business good, but I think we are in a unique position, to be able to be better than good." I kind of wanted to give you some of the reasons why.
A lot of this is post-COVID, the status of retail, status of geography to some extent, something that I thought you might find interesting. Federal Realty has been around for a very long time, and we have always been a very high quality company, and high quality defined really by income. Income is, from my perspective, the most important thing in the success of a shopping center company.
I never want to be in a business where the best way I am selling you a product, whatever that product is by saying, "Hey, I am the cheapest, and I can beat you on price," because that is commodity stuff. I want you to pay more for me. I want you to pay more rent if you are a tenant.
I want you to pay more for the earnings multiple if you are an investor, because I want you to think that it is worth it. The way that I get there is not only with high quality assets, but the ability to have as many arrows in the quiver as possible to create additional value on these pieces of land. We have historically been a coastal company from Boston down through Washington, D.C., then Florida, Northern and Southern California.
What we have decided and what we did, because we own our assets and have held our assets on average 20 plus years. Over a 20-year period of time, we have built them up, we have leased them better, we have created better environments effectively to create higher earnings growth, which we believe we can continue.
But Post-COVID, we said, "It feels like we ought to be able to do that in other markets." Work habits have changed. Geographic migration has changed. There are other markets. The first one that we entered was last year, Kansas City. Not Kansas City, Missouri, but the Kansas side, where we thought that we could take what we do as a business on the coasts and effectively provide a better product if we owned the most dominant assets in the market.
We bought, and it was the WPG sale, which was Oklahoma City, Kansas City, and an asset in Phoenix, that we looked hard at all of them. Really looked at Kansas City, Kansas, and those assets and said, "There's a big mark to market here to the extent we could bring in our tenants from some of the coastal relationships that we have into the centers themselves." It's made a big difference.
We followed up with Omaha, and while it's not completely done yet, and I can't give you all the details, there's now a large acquisition that we expect to close over the next 60 or 90 days or so, in a central time zone marketplace that really will have created a big one, nearly a half a billion dollars in investment side, that will really create a central region for us that is expected, in total, to be about 3 million square feet of retail space and grow at better than 5% NOI annually for the next five years.
Then we still acquire on the coasts in key markets. We fund these with sales of assets that we have created a lot of value in over the past 15 or 20 years. The ability, if you think about it, the ability to really be able to have a competitive advantage in this business of ours is twofold. One, you want to have the best cost of capital. There's nothing more important in our business, in retail, in anywhere in real estate than cost of capital, as you know.
If the common stock is not trading at a place that you can effectively feel comfortable using it, what are your other choices? You'll hear there being more joint venture use in the world of shopping centers and some other things.
What's better than that is if you can tax efficiently sell off assets that you have created a lot of value in, but for which have limited future upside to, at cap rates that are inside what you're investing in, to the tune of 150- 200 basis points.
We are funding, if you will, this expansion into not only the center of the country, but into faster growing assets with the sale of other assets, and here's the most important thing, in a non-dilutive way. That's a differentiator from anybody.
The ability to sell because of what our business plan has been, because of the quality of the asset, because of the growth that they've created, the ability to sell in the low fives, and reinvest in the high sixes overall makes an awful lot of sense to us. It's a competitive advantage because we have the ability to do that non-dilutively. It's not like we're saying, "Hey, we're going to sell stuff we should have never owned in the first place.
It's going to be dilutive for the next few years, but don't worry, we're going to produce great income. It's not that at all. It is harvesting really good stuff and reinvesting in new raw material that people like that, and throughout the company, can use our relationships, our magic, effectively, what we do well, to be able to create outsized growth.
That's what we're trying to do on the external front. On the internal front, in a couple of ways, we also have a full-blown residential development team effectively in-house that we've employed for the last 25 years because we do mixed-use. And that mixed-use stuff that we do, some of our best assets, some of the best relationships, but can also greatly benefit the average shopping center.
When I say average shopping center, the ones that you're thinking of, that happen to be in better markets with the ability to have unutilized parking lots to be able to go north on. Again, this investor deck shows all of this, goes through this in detail.
But when you think about the ability to harvest assets at a lower cost of capital, a development group that can intensify existing assets with low bases land, and a team that's got relationships on the coasts in some of the best-known assets in America, Santana Row on the West Coast, Assembly Row, Pike & Rose, Bethesda Row on the East Coast.
Imagine, there's not a retailer in America that doesn't know those assets, know them extremely well, and, one, and because of the performance of those, want to expand relationships into places that we haven't necessarily been before.
We're not going everywhere. It's got to be in a metro area of at least 1 million people. It's got to be a big asset. I've said this to everybody as many times as I can. The average shopping center in America is 125,000 sq ft. It's got a grocer, it's got a drugstore, it's got a dry cleaner. You know it well wherever you are.
Nothing wrong with that business. Terrific. We would prefer to do bigger things. Our average assets are more than double the size of that. The reason we like that is that there are more opportunities that you can do on that land over time. And that's proven to be a very good effect for us.
Sorry for being so wordy on the introductory question, but I wanted to set up what the , really , investment thesis is in a shopping center company that often gets kind of lumped into shopping center companies. I'll stop there.
On the external growth and acquisition, that pipeline, clearly there is a lot of competition out there today. You bought quite a few of these bigger assets in the past, and you are looking at the one to close in 60- 90 days. Talk about pricing given. What are you seeing in terms of cap rate and pricing in different markets?
Sure. Listen, there is no question that, I do not mean to sound arrogant about this, it is just factual. When a company like Federal goes in and starts looking at new things, it brings more competition. It brings others to come and look. When you get a year and a half ago, when we started this, there is no doubt that cap rates have come in 50, 75 potentially, basis points inside where they were 18 months ago.
Now, we happen to be funding it with asset sales, which guess what? Have also come in 50 basis points from effectively where they are. That is kind of the beauty of that too, right? Thinking about how you match the growth of the company. Yes, it is tighter today. What I would also say is when you are talking about larger assets, Kansas City was $300 million, effectively, for us.
When you are talking about that, and what we are buying is larger than that. There are obviously far fewer buyers than for a $40 million grocery anchor shopping center, obviously. In a rising interest rate environment, it makes it harder for the leverage buyers to be able to make the numbers work.
When you talk about the real competition for assets like that, it is often private people that kind of do what we do on a bigger scale. Our largest competitor, frankly, is a private developer out of Boston named WS Development. It is a great company. We run into them often on these type of deals. They do a great job. Again, there are fewer of them.
I sit and I say, "Well, okay, what kind of competitive advantage do we have to be able to get our more than fair share of assets like that?" And there are two. The one is what I have already said, competitive advantage in cost of capital by funding it effectively with 5% asset sales. Clearly, an advantage.
Number two, we can underwrite better results for where we can take that assets because of Santana Row, because of Bethesda Row, because of the relationships that we have that have been brought in.
We have completed 40 deals, 40 new deals in the last 13 months on the assets that we purchased in Omaha and Kansas City, far ahead of where we thought we were going to be because of the momentum of doing the first couple and then having those other tenants follow because of what we own on the coast. It is really a pretty interesting business model. We are onto something here.
I think we can be pretty darn competitive in places like that. All of this talk about acquisitions, I do not want you to miss how strong the core portfolio of the company is, because it is. And by very definition, if you look at the demographics of our properties, where the affluence is, where the population centers are, we are pretty much off the charts. Does that always matter, particularly in a post-COVID environment in the early years?
No, it does not. Does it matter more and more as the economy gets a little, you get a little unnerved by what is happening and there is more uncertainty? You bet it does. It is why that if you looked at our company over its long history, other than closing down the country in our markets and particularly for COVID, we have outperformed during every down cycle. I would expect that to happen again should that happen again in time.
With Kansas City and Omaha, which you mentioned, talk about kind of the things you have done there, remerchandising or what are the things you have done at the centers to create value?
Go, Tiger.
Yeah, Don touched on the deals. That's really where we're doing it, and I think where we've been really successful is getting started in the diligence period. Because of the relationships Don's talking about, there's another stat.
We have 36 relationships we've created through the four assets he mentioned on the coasts that have turned into 155 deals, not just in the central properties, but also in our peripheral shopping centers, grocery anchored and otherwise.
We're meeting these tenants really early in their gestation period, getting really deep relationships with them, so we're able to vet these and get deals started way ahead of even closing, which is happening on the new acquisition as well. It's really not even physical stuff on the property yet.
It is just truly digging into these relationships, getting people who were excited about these markets, knew this was the right center, but didn't have the right owner and are ready to now jump in. In the case of Kansas specifically, ready to jump in, there were two sides of that center.
To the side that had been sort of less well-maintained and had a big rent spread down, and we were seeing that. Our thesis was we could quickly bring that up to the same levels as the other side, and we've been able to do that very quickly, quicker than we thought.
On the dispositions, what is the growth profile? Where's the line, and then that's what you're willing to sell?
It's a complicated answer because it's not all one type of disposition. When we look throughout the company, there's a few buckets. Bucket number one is at our mixed-use properties, peripheral residential. Residential, as you know, Santana Row, for example, we've been building for 25 years.
It's crazy. It's that amount of time now. But there's the main street and the retail and residential over that doesn't get touched. But we've gone into block 2, block 3, block 4. Two of those assets were sold, the same thing at Pike & Rose, at sub 5 cap rates. Pike & Rose is a 5.25. On the West Coast it was mid 4s. Incredible. There's still some of that to go. Not right now. I don't think it's the greatest time to do that right now.
That's a bucket of money that can be monetized and accessed at very favorable cap rates. The second is more what you would think of. Assets that we have done the best we can with. The markets have changed, and they don't fit any longer. They're assets that have little or no growth profile at all.
Those assets get sold, like Hollywood, California, where we own stuff on the street, and the place is just not where you want to be anymore. We sold to a local owner. The same thing at Santa Monica, California, where we made a lot of money over a lot of years. But the condition of the competition in Santa Monica and other things said, "Get paid and get out." We did. So improving the company's growth profile by selling those.
The third bucket, if you will, of sales are the more mature assets, good assets, that are stable. They're lower growth. They're still in great markets, if you will. Some of those, my best example of that is a recent sale of an asset called Barcroft Plaza, a nice grocery anchor shopping center in Northern Virginia.
Great market, fine center, little growth going forward. Get paid really well because of the disconnect. To me, grocery anchors trading at numbers that are pretty darn strong relative to their growth profile, if you will.
So those are the three buckets. The notion is always to effectively take that capital and deploy it into higher IRRs. When we look at IRRs, we don't mess around with exit cap rates. We don't lie to ourselves, or anybody else about what those unlevered IRRs are.
We look to be in 8.5-9, 9.5% unlevered IRRs. That means you need to grow if you're buying in at a 6 or 6.5, something like that. You have to grow pretty darn significantly to get there. And we like that over the first 5 years. It's a 5-year IRR and a 10 year that we run, but I want the growth early.
The stuff he's talking about, what we love about it the most is there was a way to get at a larger part of the income stream sooner than you would necessarily be able to get to. So those are the buckets in total.
The timing and the ability to sell ties very much to the timing and the ability to buy. The asset that we're buying will be a 100% fee-owned asset, which gives us a lot of 1031 tax-efficient ability to sell assets, and move the tax basis for effect.
But to cut further along, what we're selling is probably at a growth rate, which is 200-300 basis points less than typically what we're buying in terms of a five-year CAGR, in terms of NOI CAGR over that first five years.
Question, in terms of tenant book relationships, are there any implications from the sales on tenant relationships? If there are, how do you manage that?
Yeah, it's a good question. No. The notion of retailers and where their business plans are, and what they're trying to do is really at the forefront of our business strategy. To the extent tenants are looking much beyond the current interest rate environment, these are longer term decisions that they're making.
By the way, they're making them in our properties, kind of special properties, so that if there's an opportunity to get in, they can't just say or they don't say, "Nah, we'll wait until the next." If you get an opportunity to get in, you get in. On the sale, it's as I said, kind of relationships that are. The relationships are fine, but we've done all we can with respect to the asset. They fully understand that, and on we go.
Okay.
Is there a maximum percent that you've determined in terms of the dispositions and acquisitions, meaning as you transform the portfolio from those historical Federal Realty markets to the new markets?
First of all, Jeff, I got to say it a couple of ways. First of all, I don't want this to be a transformation from the existing Federal Realty markets to new markets, because that's not what's happening. This is simply an expansion. I mean, the acquisitions we made have largely been in our existing markets, recent acquisitions.
Monterey, California, with Del Monte, Annapolis Town Center in Maryland. There's a balance. This is an expansion, and not a transfer. I think that's really important, because if you short the coasts, good luck with that. I think you're making a mistake. Again, that's a big generic comment. The real estate's local, got to be in the right places. You got to do the right deals in those places. There are plenty of those opportunities remaining on the coast.
We were saying, why are we limiting ourselves to that, particularly post-COVID? That's what I'm most excited about because it is fresh, new, raw material that I can sick the dogs on and create some money, create some real value..
Now, practically speaking, in terms of what the limitations would be or anything, it's likely to be as much as $700 million or $800 million a year or as little as $200 million a year. The marketplace determines that. We're not buying generic volume-oriented stuff. It's harder for investors to get your arms around because it's lumpy.
When something like Kansas City comes up, grab it, because you're not going to get another chance to grab it. It's not like if you're looking for a typical grocery anchored center, and you say, "Eh, I'm not real comfortable with the market today. I'm going to wait six months.
There'll be another one." Which there will. It's not that. When we have a chance for the most dominant center in a marketplace, existing or new, we're going to grab it best we can. Just practically speaking, because of the size of those assets, it's lumpy. Two to seven or eight. I'm sorry for the range, but that's practically how it works.
But your investment in, say, the central time zone assets and whatnot, is the opportunity here to buy an under-managed, under-performing asset, but you're going to give up on the long run, effectively give up some, the demographics that you might see come from the coast, as you mentioned, in terms of earnings, income growth and population growth and whatnot. How do you
I don't see it that way. I think traditionally you would've said, "My God, there's a trade-off." I don't see the trade-off. I guess what I'm saying is, if you've got a chance to buy the dominant asset in a marketplace that is at least 1 million people big. I'm not talking about small markets here. Kansas City has 2.2 million people in it.
But if you've got an opportunity to do that, and you look at what is happening in the marketplace with jobs, you look at what's happening in the marketplace with overall business moving.
I mean, the Kansas City Chiefs moved out of Missouri and into Kansas. That's not a flash in the pan. That's a 50-year investment that's being made there. When you can start it out with a mark to market like we've talked about and get that immediate.
By the way, immediate is, it'll take five, six years to effectively get there, the way we're doing it, but that's fast when you're creating that kind of growth. With that initially and the overall macro trends of good, steady growth throughout the place, I don't think you're trading anything off. Dennis, I don't.
The demographics of the markets that we're buying in terms of household incomes, median household incomes and so forth, is higher than the rest of our portfolio.
I want to talk about that for a second because where you're probably going is, "Yeah, but where's the population?" This industry uses a 3-mile convention. Why do they use the three? What are demographics for income? What are demographics for population within 3 miles? You know why that's the case? Because that's right for a grocery anchor shopping center of 125,000 sq ft.
Because you want to be within 3 miles of your grocer or something like that. That's cool and it makes a little sense in the world. What we're talking about here, the Kansas City Chiefs asset pulls from 25 miles.
The Omaha asset pulls from 15 miles. The asset we're talking about pulls from 100 miles. So the affluence piece of it is critically important because that's the neighborhood that it's in. Think about it if you're the retail.
If we're buying an asset of 500,000 sq ft or 900,000 sq ft, big stuff there, you're not going to make your money by pulling from the 3-mile radius. You got way too much to make a living based on people that live within 3 miles.
You have a true regional operation, and you look deeper of people that come into an area that feels really good. Because there is affluence and great neighborhoods and great ability around them. That's kind of the secret sauce.
How are you thinking about using JV partners potentially for some of these larger $500 million asset, active-
It's a real question, and it's a question that I fight myself with, in a number of ways. Part of the thing with me and Federal has always been, because we have all these arrows in the quiver, because we have a full integrated asset plan, I felt that as a public company, the simpler the capital, simpler the right side of the balance sheet was, the better it would always be for transparency.
I still believe that. I would love it if there was no need for JV capital because either through asset sales or through sale of common stock, you had an advantageous cost of capital. What is becoming clearer is with the lack of appreciation for NAV versus the way it used to be and other changes, there's a place for JV Capital. There's a place for it.
Now, do I want six JVs and six new hands in the till, if you will, for how we run the company? No. But I could see one or two, and I could see one or two at the larger assets where we don't lose control of the asset.
I'm kind of a control freak, apologize. Where we don't lose control, but do monetize 30%-40% of what it is that we've created over the last 20, 25 years at a cost of capital that is far advantageous than what would be available otherwise.
So I've switched a bit in my thinking. Needs to be a little bit more work done in understanding the marketplace and the opportunity. The devil's in the details. What does the JV agreement say? How exit paces and all the things that need to be understood, but I'm more open than I've ever been.
Just how about on street retail? Obviously, you're not big there, but you have some presence there. How has it been for the company, looking back retrospectively in terms of returns versus the other parts of your portfolio? Then, obviously you've been doing a lot of big, I wouldn't call it, but elephant hunting, if you will, bigger assets in recent
Yeah
years and whatnot. Is that something, street retail, that you would consider at this point in time?
When you say street retail, are you talking about
Hoboken, that kind of stuff.
Yeah. We don't do much of it.
Yeah.
There's a reason we don't do much of it. We're a pretty big company. I don't want to do anything that doesn't move the needle, man. It's hard to get an accumulation that is large enough for it to matter. I don't want to do $15 million deals and $20 million deals. It takes as much work as a big deal and doesn't move the needle.
Hoboken was a case where we were able to get 40 assets and truly be the dominant retail landlord on Washington Street in Hoboken. I love that deal, and to the extent those type of things happen, sure, I would love them. The premise of your question, though, is an interesting one. It's very asset specific. It's very hard to say that street retail grows better than this or that.
It depends. All I would say is in a smaller grocery anchored portfolio, of which we have a bunch, great stability, wonderful tenant base, good stuff. But it's hard to grow those things to the extent you can grow a 300,000, 500,000 square foot asset with 300,000 square feet of small shop, all of whom want to be there.
If you've got the skillset to be able to exploit that type of tenancy, man, use it and lean in. Let's make some money. It's just hard to do on a nine-acre piece of land with a grocer who's flat for 30 years and a drugstore. Nothing wrong with that from a credit perspective, particularly. It's harder to grow.
Let me ask-
I love the balance, man. Love the balance.
Let me ask about the balance sheet. Just given-
Speaking of balance
where rates are today and talk about kind of the refinancing as you kind of go through the-
Yeah. We are actually in a, I think, in a really good spot.
Yeah.
We have $1.4 billion undrawn, completely undrawn and available credit facility, and we are sitting on a couple of hundred million dollars of cash very well. And we have nothing really, no material maturities until the middle of next year. The next bond that comes due is in July of next year.
So I think we do have the luxury of being able, I think, to be a little bit more opportunistic, be a little bit more patient with regards to accessing the market. I think we want to extend duration as a goal.
I think we went to the convertible market in our most recent transaction because I think it afforded us the best opportunity to be opportunistic in that moment, given where the rate environment is and so forth.
I think that was always part of our capital plan. I think we just moved it up to the front of the line. You will see us in the unsecured bond market at some point in the future, but we have got the ability to be patient given the significant flexibility that we have. We are generating free cash flow. North of $100 million is the expectation this year.
That should grow to $150 million by 2028. That is a meaningful and very attractive source of capital. We are also creating significant leverage-neutral debt capacity in terms of growing EBITDA at the clip that we are growing it. It is significant in the hundreds of millions of dollars with regards to providing an additional source of capital.
We have multiple arrows in the quiver in addition to the extent the stock, if it does trade, not at 114, but if it trades at a level that is more attractive, we will look to access the market appropriately. But we have multiple arrows that allow us to not have to go to the market when the stock is not trading where we would like.
Anything, I know you put out a, you had your Investor Day, you put out a sort of a growth plan. Any shifts? It is early, right? But given what interest rates have done, are you thinking a little bit differently?
Look, I think that we are doing well. The core portfolio-
Good
building blocks feel as though kind of the 3%- 4% is the range, and that should transfer to contribution to FFO growth of 4%- 5%. Feel as though we are on track with regards to our redevelopment and how that is coming along on time, on budget. Actually, ahead of pace in many situations. I think that getting this most recent large acquisition over the finish line, I think we are continuing-
Yeah.
-to find opportunities to recycle capital. The one place is, look, the higher interest rate environment will probably be on the wider end in terms of the refinance headwind that I alluded to in our building blocks for growth from our Investor Day. That is kind of the framework.
Okay. I know we are out of time. Rapid fire questions here. We have three. One, long term rates stay higher for longer. Which has the biggest impact on your sector? Is it higher refinancing costs, lower transaction activity, or less new supply?
Higher refinancing costs.
The second one is, over the next three years, will third-party capital become a more important source of growth for public REITs than balanced capital? Yes or no?
Yes.
Third is, for your sector, will the next years, 2027, same store NOI growth be higher, the same, or lower versus this year?
Sector? Lower.
All right. Thanks, everybody.