Federal Realty Investment Trust (FRT) Earnings Call Transcript & Summary

Good day, and welcome to the Federal Realty Investment Trust Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jill Sawyer, Senior Vice President of Investor Relations.

Thanks, Debbie. Good morning. Thank you for joining us today for Federal Realty's Second Quarter 2026 Earnings Conference Call. Joining me on the call are Don Wood, Federal's Chief Executive Officer; Dan Guglielmone, Chief Financial Officer; Wendy Seher, Eastern Region President and Chief Operating Officer; and Jan Sweetnam, Chief Investment Officer; as well as other members of our executive team that are available to take your questions at the conclusion of our prepared remarks. A reminder that certain matters discussed on this call may be seemed to be forward-looking statements. Forward-looking statements include any annualized or projected information as well as statements referring to expected or anticipated events or results, including guidance. Although Federal Realty believes the expectations reflected in such forward-looking statements are based on reasonable assumptions. Federal Realty's future operations and its actual performance may differ materially from the information in our forward-looking statements, and we can give no assurance that these expectations can be attained. The earnings release and supplemental reporting package that we issued this morning, our annual report filed on Form 10-K and our other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial conditions and operational results. Given the number of participants on the call, we kindly ask you limit yourself to 1 question during the Q&A portion. If you have additional questions, please requeue. And with that, I'll turn the call over to Don Wood.

Thank you, Jill, and good morning, everybody. Strong quarter, $1.88 a share, 7% year-over-year growth, 96% occupancy, record leasing volume, 59th year consecutive dividend raises another beaten raise, all validating the optimism for the rest of the year and next, and I'll get into the specifics for modeling purposes. After roughly 4 exceptionally strong leasing years. This quarter set records. Again, early on the second quarter of 2026 and are reporting 124 comparable deals were staggering 819,000 square feet and an average first year cash rent of $33.68, which is 15% higher cash rent than the prior year and 28% higher on a straight-line basis. That sort of volume is record setting and while contribution to it came from all of our markets. Southern California and Virginia were instrumental in signing a few anchor deals that will be transformational to the properties that were done in. The first affects the market-dominant 860,000 square foot Grossmont shopping center in suburban San Diego, where remerchandising this 2021 acquisition is now seriously underway. We've signed our first deal ever with hugely successful outdoor retailer as pro shops to a 20-year deal for 161,000 square feet, replacing an underperforming Macy's and adjacent small shop tenants with a national draw unlike most others. We also signed a new 53,000 square foot deal with AMC at Grossmont for a new state of the art theater, where a shuttered smaller theater operator once was. With an anchor system comprised of Bass Pro, AMC, Walmart and Target and 350,000 square feet of other space to feed off that system. Grossmont will be among the most productive assets in Federal's portfolio once a significant redevelopment has been completed. We're looking at a $56 million comprehensive redevelopment and an incremental 10% cash on cash yield. The second affects the market-dominant 500,000 square foot Barracks Road shopping center in Charlottesville, Virginia, home in the University of Virginia, where we signed a 79,000 square foot deal with Harris Teeter for an expanded flagship grocery store and where additional important merchandising improvements that will be announced shortly will further solidify Barrick's road as the preeminent shopping center in the market as it has been since we bought it some 40 years ago. As we've talked about before, these large market-leading dominant retail centers, not unlike most of the acquisitions we've made over the past few years are our property type of choice in every major market we're in. They tend to provide opportunities for both continued cash flow growth and value enhancement for decades. They tuned for more in the quarters ahead. Opportunities for additional accretive acquisitions net of dispositions continue to be a laser-like focus on the team and are expected to continue to improve our overall growth. We're getting close on a couple of very important deals though a bit too soon to announce on this call. They tuned in the weeks ahead. On the development side, let me give you a quick update on the status of our residential pipeline that, as you may remember, is only undertaken on the excess land at our existing shopping centers. With little to no incremental land costs and higher rents because of the proximity to our shopping center amenities, the math works in the right locations. Currently, we've allocated a total of $400 million for the residential development of the Blair at [indiscernible] which is already 2/3 leased and well ahead of projections for both timing and rate. By the way, that fast lease-up pace has reduced the earnings dilution that normally comes at this stage of resi development. 301 Washington Street in Hoboken, which is on time and on budget, preparing for a 1Q 2027 [indiscernible] Lease-up begins later this year, early renting inquiries spurred on by the construction progress have been far in excess of our expectations. Lot 12 at Santana Row is well under construction on time and on budget for a late 2027 delivery, as many of you saw at our June Investor Day. Hope you found the work that we're doing there to be as impressive as we did and an incremental 261 units at Willow Grove Shopping Center outside of Philadelphia, for which the site has been prepared and cleared and is now fully [indiscernible] Together, the densification of our shopping center assets will add nearly 800 units and $27 million of new operating income to the portfolio once stabilized over the next few years. Our experience with residential development at our retail-centric properties is a skill set developed over 25 years and is certainly a unique differentiator of our business plan. Incremental income in the form of parking revenues, sponsorship opportunities, timed revenues are also benefiting by the high traffic counts at our large properties, including not only our mixed-use assets, but also the broader portfolio, more upside to come here too. We're firing on all cylinders. Leasing operations, including a comprehensive technology-based efficiency program, we'll introduce you to our Senior Vice President of Digital Innovation at some point in the future. A hunt for special acquisitions and a modestly sized but impactful development and redevelopment program are all working. Enhanced internal and external growth using all the tools at our disposal is the name of the game. Quarters like this increased my confidence in our ability to do so. And sincere and grateful thank you to all of you that gave us your time and your attention at our Investor Day at Santana Row either live or on the webcast. We're a proud and talented group of real estate execs who love to share our story. We hope you enjoyed it and found it useful and believe these second quarter results help validate you a focused path that we're on. Let me now turn it over to Wendy and then to Dan provide some additional color. Wendy?

Thank you, Don. This quarter, our leasing platform once again delivered record volumes, signing 819,000 square feet the most comparable square footage in a single quarter in company history. Rent spreads for these deals were 15% over prior in-place rents, and that 15% is not a 1-quarter story. In fact, the trailing 12-month comparable rollover 17%, the highest in any 12-month period in more than 10 years. This tells you everything you need to know about the desirability for our high-quality shopping centers. What I'm most proud of this quarter is occupancy. Despite the timing of expected anchor transition, the strength of our small shop leasing held occupancy neutral to last quarter. We delivered over 100,000 square feet of net small shop occupancy this quarter, increasing our occupied rate by 100 basis points in just 3 months. Our small shop portfolio is now 93.9% leased and 92.3% occupied levels we haven't seen since 2007. Put that alongside a record leasing quarter and you get a clear picture. The demand for our centers is not slowing down. The natural question is how much upside is left and I would say more, much more. At these occupancy levels, we can drive small shop rents in the double-digit range on average something we've done consistently for the past 3 years. Our current pipeline, which is always a good indicator of future leasing momentum remains strong with over 1.5 million square feet of space in lease negotiations. In addition, our pipeline -- to our pipeline, we have fully executed leases that will contribute an additional $31 million in revenue, delivering over the next 18 months. Just as important, our high lease rate led us pre-lease well in advance of vacancy. This translates to less downtime from 1 tenant to the next, a metric we're focused on quarter after quarter with clear progress being made as highlighted by our 100 basis point jump in small shop occupancy this quarter. Foot traffic across the portfolio is up, reinforcing the health of our consumer and the collections remain strong across the portfolio. Our retail redevelopment pipeline is delivering the same story. In Philadelphia, Giant just opened a brand-new prototypical 45,000 square foot grocery store in our Andorra shopping center with small shop leasing rents coming in 16% over underwriting. And Andorra is not -- is just 1 example. We have another half a dozen centers in various stages of reinvestment with many more in the pipeline. Historically, these reinvestments have produced 10%-plus returns on average with a single objective, drive productivity and rents at our centers, making our existing portfolio, a continuous source of multiyear growth. And finally, our business development platform that we highlighted at Investor Day had a standout quarter with our incremental income initiatives on track to be up 20% for the year over the prior year comparable pool. That is extraordinary given the fact that our occupancy continues to decline and it proves this program is much more than leasing temporary space. It is a sustainable source of revenue unique to our property set of large dominant and/or mixed 2 assets. Parking revenue alone, which is very unique to our portfolio, is expected to be up almost $3 million year-over-year, driven by higher rates, events, activations and partnerships. The true line across all of it is the same, dominant, durable, high-quality real estate creates value. And in this K-shaped economy, our centers are thriving. Now let me turn it over to Dan to dive into the numbers.

Thank you, Wendy, and hello, everyone. Our FFO per share of $1.88 for the second quarter reflects 7% growth versus last year and highlights another exceptionally strong quarter operationally. This result came in $0.03 above the midpoint of our guidance range, highlighting a business plan that's delivering across all of its components. Drivers for the outperformance this quarter include $0.03 from higher rental income and recoveries, $0.02 from stronger percentage rent, parking remedies and the incremental income initiatives, Wendy just referenced, almost $0.01 from better term fees than we had forecast as well as another $0.005 further benefit from our capital recycling activity. This was essentially offset by $0.015 from a onetime investment write-off, $0.01 from straight-line write-offs and $0.01 higher G&A than we had originally forecasted. Net-net, a $0.03 beat on the shoulders of $0.05 of better-than-expected rent recoveries and incremental income. Adjusted comparable growth, our cash basis comparable growth metric was 4.2% for the quarter and stands at 4.6% year-to-date. Our GAAP metric was 2.8% for 2Q and 3.7% year-to-date, both outperforming the expectations we set out on our call in May. Also the result of the drivers that we just highlighted. Gas basis revenues increased 3.6% for the quarter. And all of these metrics, all these variations of same-store metrics were ahead of our expectations highlighting the solid first half of the year. Now let's turn to our balance sheet. With the exception of $30 million maturing in August at a 7.5% interest rate, we currently have no debt maturing until mid-2027 while sitting with $1.2 billion of liquidity at quarter end. We continue to see strong free cash flow after dividends and maintenance capital forecasting over $100 million for this year, with that figure heading towards $150 million by 2028 as we convert straight-line rent to cash paying rent. If you'll recall, we outlined these figures at our Investor Day in May. This will also have a positive impact on AFFO through 2028 and beyond. During the second quarter, we closed on another $66 million of retail asset sales bringing the year-to-date 26 total to $225 million at a blended 5% cap rate. When combining 2025 and year-to-date 2026 asset sales, our total stands at $540 million at a blended initial cash yield of 5.4%. And note that the estimated or gone unleveraged IRRs on this pool blends to an average of less than 7% with no assumed terminal cap rate compression. All metrics which reflect a very, very attractively priced source of capital. Through this active and disciplined asset recycling program, our debt metrics remain solid. Second quarter annualized net debt to EBITDA has improved to 5.4x, and fixed charge coverage stands solid at 3.9x. Now on to guidance. As a result of another solid FFO beat for 2Q on the heels of a robust first quarter along with an encouraging outlook for the balance of the year, we are raising guidance for both NAREIT and core FFO to $7.48 to $7.56 per share. At the $7.52 midpoint, this increase represents growth for core FFO when compared to 2025, with the range being roughly 6% and 7% at the low and high end of the range, respectively. Drivers for the guidance increase include: our comparable GAAP-based POI growth outlook improving to 3.25 to 3.75 from the previous 3.8 to 3.5 days. Our cash comparable growth or adjusted comparable for our disclosure is expected to be 75 basis points higher to a range of roughly 4% to 4.5%. That's a 35 to 40 basis point. Small shop momentum helped us maintain our occupied rate during the second quarter, and we continue to forecast a spike in our overall occupied rate to the mid to upper 94% range by the end of the year, powered by leases that have already been signed. We continue to see stronger-than-expected contribution from the $750 million of dominant high-quality properties acquired in 2025. And our outlook on term fees also moved higher to $10 million to $11 million as the second quarter fees were roughly $600,000 to $700,000 higher than our forecast with better visibility into the second half of the year. This roughly $2 million increase is offset by a $2 million rise in our forecasted G&A as we make investments in our digital innovation and business development teams. Incremental development POI is up $500,000 to $14.5 million to $15.5 million as we deliver space to tenants ahead of forecast. We're keeping our credit reserve as is at 60 to 85 basis points of rental income as we effectively run near the midpoint year-to-date. And lastly, we have adjusted our interest rate outlook to reflect more conservative current market expectations. Additional guidance assumptions remain unchanged and are outlined on Page 27 of the 8-K. This updated guidance also reflects the $66 million of asset sales completed during the quarter with the foregone yields in the mid- to upper 5% range. Please also note that we issued $61 million of equity during the quarter for our ATM program, further enhancing our capital base. We continue to be active on capital recycling, with additional acquisition and disposition opportunities targeted for the second half of the year, and we will adjust guidance for those likely upwards as we go. To summarize, our guidance increase is driven by the following puts and takes, $0.03 of forecasted operational outperformance, driven by parking, percentage rents and incremental income and stronger occupancy than we forecast, plus $0.02 from term fees, offset by $0.02 of higher G&A in the aforementioned investments in digital innovation, business development and $0.01 to $0.02 from a more conservative interest rate outlook. With respect to our expectations for quarterly FFO cadence over the remainder of 2026, we've set the third quarter at $1.82 to $1.86 per share in the fourth quarter at $1.91 to $1.95 per share, primarily driven by the aforementioned contractual occupancy growth. As a result of the strong year-to-date and our bullish outlook Federal will continue to lead the REIT sector as its only dividend [indiscernible] , a distinction of 50-plus consecutive years of annual dividend growth as we once again increased our dividend for consecutive year to $1.16 per share per quarter or $4.64 annually. You've heard me say since I joined the company a decade ago. For every year I've been alive, Federal Realty has increased its annual dividend. Think about that, since 1967 and roughly a 6.5% cap, that's a record, the Federal team continues to be tremendously proud. With that, operator, please open the line for questions.

[Operator Instructions] The first question is from Michael Goldsmith with UBS.

You had previously spoken about NOI growth accelerating in the back half of the year after the lower second quarter results. Is that still the case? And then can you provide some color on what's driving that? Is that occupancy growth? Is it increasing rent growth or any other factors?

Yes. I think consistent with what we shared kind of on the May call, the second and third quarter, we'll continue to have some occupancy churn in the third quarter. So that will keep a lid on until an acceleration in the fourth quarter, which we really won't see the benefit of probably until next year as those tenants get open and operating and rent paying. But yes, it's consistent with kind of, I think, what we shared with you at Investor Day and on the make hall.

Yes, Michael, I'd just add to that. Think about the anchor progress that we've been making and the timing of the openings of those stores very heavily weighted to 4Q, which should bring occupancy of the anchor side up into the 98-plus percent range after that.

The next question is from Alexander Goldfarb with Piper Sandler.

Don, the robustness of the leasing and obviously, against the economy and everything else that we that's in the macro, do you get a sense that all the tenants are leasing on full offense? Or do you feel like increasingly tenants are leasing because they have to because there's not enough space left and therefore, they feel more compelled to lease. So I'm just trying to understand the robustness, if it's all 100% offense for growth or some of the tenants are increasingly feeling like they need to take the space because if they don't, there won't be anything left for them out as space windows.

Yes, I think that's a great question, Alex. And as usual, the answer is a balance of both. And it's hard to paint this big broad brush of the reason people lease what they're trying to do. Clearly, in large measure, business plans are long term in nature, expansion plans are long term in nature and accordingly, the offensive nature of growing your portfolio is the driver. Having said that, it's no secret to anybody, that because there's been no new supply that's been added over the last 15 or 20 years at this point that making sure that retailers are in the places they need to be, and that does include any time a great piece of real estate comes available, there is always ample demand for that space. And so I don't know if you define that as defensive or you define that as part of the offensive strategy of the company. I personally don't care -- it's about making sure great space is that the demand for that space exists and exceeds the supply. That is the case -- it's been the case and everything we see suggests that should continue to be the case. So offense is the real answer to the question.

The next question is from Haendel St. Juste with Mizuho.

I wanted to ask you about acquisitions. You guys obviously have been more active the last couple of years. There's a lot more that we're hearing on the market today for various reasons. So I guess I'm curious if you could add some color on your -- broadly your appetite here kind of maybe what inning are we in kind of the sort of portfolio moves you've been making in recycling some assets. Are you seeing more deals that are passing your screening? And maybe some color on target returns and is equity could play a role here?

Yes, it's a great -- it's a great question, and I'd love to turn that over to on Sweetnam to make sure that you get a fulsome answer to that question. Jan, you're there.

That's a loaded question. So I'll do my best to try to get through it. And let me just sort of start with what are we seeing and how big the pipeline is. And so in Investor Day, we were looking at about $1.4 billion of assets that we thought were interesting and provided some of the large centers that we're looking for, the returns and all that and kind of as we go through it in terms of what sort of come out of that pipeline because it just didn't fit for us, couple of assets that we're working on. Don referenced a little bit earlier and kind of what's come in, the pipeline is still pretty robust. In fact, it's probably a little bit bigger than $1.4 billion today. So I think the deal flow is looking and feeling really good for us as we progress through the balance of the year. And so our appetite is still very strong to acquire assets. But look, it's gotten a little bit more competitive out there. Cap rates have come down a little bit in particular, for the best of the best properties. But look, this cuts both ways as we're recycling capital and lower cap rates make our acquisitions more expensive, but they make our dispositions more valuable. But turning to acquisitions, yes, it's more competitive. And I'll give an example where there are a couple of properties that we like. They're really good properties with good mark-to-market on the in-place rents. But they're set to trade at cap rates lower than 5%, breathtaking really, and a steep climb to get to 8% unlevered IRR. And we just couldn't get there. It's competitive, but we remain optimistic that there are properties where we can deliver our returns. We'll look at opportunities in the 6s, 6 cap rates and maybe even a little bit less than a 6% cap rate, if the growth is really good 4% to 5% CAGR over the first 5 years should get us to better than 8% tenured unlevered IRRs. But as Don said just a little bit earlier, it's about is there a material unmet demand and the ability to push rents and get spaces in a reasonable time frame. That's what's going to drive those CAGRs. And that's how we drive revenue. And as we look at opportunities, Wendy our team are laser-focused on understanding demand and our ability to drive rent or not.

Yes, Jan, I'll just jump in here. It's really, as you said, it's all about revenue growth and getting comfortable with our mark-to-market underwriting assumptions. And so when we go through this due diligence process, it's not calling a couple of tenants. We go very deep -- as you know, we are format agnostic, and we have various different properties that we own. So we have a really wide lens of retailers that we do business with. But really, the secret sauce of our due diligence is those relationships and the tenants who are not in that particular shopping center and getting that unfiltered honest in-depth feedback that helps us with not only underwriting, but what's working at the property, what's not working is the property on their list for expansion. Why is it not on their list? Is it lower on the list if we owned it, would it be higher on the list. And we saw that example in Kansas City. I mean we've just -- well, we just bought that property a year ago. We've already done over 20 deals, and we were making [indiscernible] tenant before we even bought the property. So that's why all just opened and Viewer is under construction. So -- and Haendel, you're getting a long answer on this one. But lastly, I I think it's important to mention our operating platform. We know how to operate properties efficiently. We know how to scale management and local operators along with that. And when you're setting up in a situation that might have fixed CAM like Kansas City and Annapolis, that goes straight to our bottom line, very productive.

The next question is from Greg McGinniss with Scotiabank.

So you finished acquiring the entire Kingsdown assemblage. It's not in the redevelopment pipeline. So is this a simple lease-up strategy and doing more in the same space? Or is there a different long-term plan there? And then not to get you too far over your skis, but on the potential 2 deals that you talked about, Don, are those considered kind of market-dominant center into new markets or more of a clustering opportunity?

Thanks, Greg. A couple of things to talk about. First, we expect that Kingston. That's just good -- that's just good real estate acquisition. That is a piece of land in the middle of our 2 shopping centers that are effectively there that are certainly better off in our hands than anybody else to hands. It is a state-of-art strategy effectively for the near term. But because of where they are and some of the due diligence that we did with respect to alternatives, should there be an issue with the current tenancy, we got a good plan. So in some respects, it's defensive to fill out the nice square of the 2 shopping centers there, but also offensive because of what we think we're -- we've got going on there. Look, on the properties we're looking at, I can't talk to you about it until we're all done with respect to those. I will tell you that I think we've been pretty darn clear over the last year that we'd like to be in 3 to 5 new markets. We've also been pretty darn clear that filling in existing markets remains a priority. It's a combination of both of those things. While I won't comment on 2 particular properties that are referenced, that's the business plan of the company. That's what we're doing and trying to continue that program, frankly, having more success than even at the beginning of the year that I thought we'd have. So things have changed. I'd like Jan's answer on the fulsome nature of all of that stuff that's available. And I hope to provide better news even or more complete news, if you will, as the rest of the year continues.

The next question is from Andrew Reale with Bank of America.

Maybe just to hit on the guidance. Could you provide maybe just a little more color on some of the tenants driving the term fee higher this year? And then on the higher G&A, Dan, I know you mentioned there might be some investments in digital initiatives. So maybe you could just speak a bit more about those.

Thanks, Andrew. Let me tell you about 1 particular term fee issues that I really kind of wanted to get this out there and why it's so important to us. I can't give you the specifics, obviously, for the -- in terms of the tenancy -- but imagine you've got a really strong lease at a good shopping center, where that tenant is obligated. They do a go dark, right, that they can go dark. They have an obligation to pay rent forever. And it's a very important component, obviously, to the long-term lease. They are paying rent and continue to pay rent regularly. However, when you have a really good shopping center, you should be able to back to and backfill hopefully, with a better tenant, a tenant that does more for the shopping center that pays at least that amount of rent and hopefully more -- and so while we were accepting the ongoing rent of this particular tenant, the ability to re-lease it, we're there. So we've got a new tenant coming in, a new tenant paying a better rent a new tenant that will be better for the shopping center. And by the way, the old tenant is paying us 7 years of rent. The math works all day long. So the notion of -- and that's $3 million, that was a $3 million term. That's why that the change in the assumption for the year. I'll take that all day long and hope that somehow that's included in the understanding of what our business is and the strength of our leases. Dan, you may have more in guidance. But Andrew, thanks for asking that because I really do want you to understand the math and the reason of before doing deals with high credit tenants, that have the ability to either continue to pay or because the lease is really strong, when we have another tenant to be able to backfill cutting a deal right then and now so that we can double it. That's what we're doing double digit.

Yes. I'll just add a little bit of color. I mean the anchor tenant was not leaving for credit issues. It is a strong investment-grade backed tenant who made a strategic decision to exit a particular market, okay? And this was, as I said, not a credit issue. In fact, of our $8.6 million of term fees year-to-date, over 2/3 of it were from investment-grade rated or investment-grade back tenants. And so with regards to guidance, we increased the guide for the year, driven by call it $600,000 to $700,000 of beat in the second quarter plus we have greater visibility into the second half of the year, and that implies roughly $1 million per quarter on average in Q3 and Q4. So you have that color for the balance of the year. And then lastly, G&A. Yes. Look, we are making investments with regards to guidance. We are making those investments. We expect to get strong returns. I think we will get returns immediately on some of the business development stuff, which we're really, really excited about. And with regards to the digital innovation side, I think that's a little bit longer term an investment, but -- we've got a really strong group of professionals who have joined us, and we feel really good about making these investments, and that will obviously impact the G&A line item in the second half of the year.

The next question is from Juan Sanabria with BMO Capital Markets.

Just maybe a question for Dan. Same-store NOI implies a bit of a decel from the first half into the second half. So just curious on what's driving that, if that's how we should think about it? And maybe how the builder in-place occupancy should trend for the balance of the year as a subset of that.

Yes. Just with regards to -- we had indicated, I think, previously, some obviously, lower numbers in the second and third quarter and a stronger first quarter, which you saw in a stronger fourth quarter. So you should expect in the low 2s on our GAAP-based metric for comparable and probably in kind of the low 4 ex range, so blended in the low 3s, and that gets us into kind of the low 3s in the second half of the year. That's what it implies. Hopefully, we can do better than that. And then the second piece was same thing. I mean that's really -- occupancy is driving a lot of that and getting tenants open and we'll see kind of a nice resurgence in the fourth quarter on that comparable metric. I feel good about the comparable metric entering 2027.