Federal Realty Investment Trust 2026 Q2 Earnings Call

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 deemed 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 condition and operational results. Given the number of participants on the call, we kindly ask that you limit yourself to one question during the Q&A portion. If you have additional questions, please re-queue. With that, I'll turn the call over to Don Wood.

Well, thank you, Jill, 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 beat and raise, all validating the optimism for the rest of the year and next. Dan will get into the specifics for modeling purposes. After roughly four exceptionally strong leasing years, this quarter set records. Again, here we are in the second quarter of 2026 and are reporting 124 comparable deals for a staggering 819,000 sq ft 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 contributions to it came from all of our markets, Southern California and Virginia were instrumental in signing a few anchor deals that'll be transformational to the properties they were done in.

The first affects the market-dominant 860,000 sq ft Grossmont Shopping Center in suburban San Diego, where re-merchandising this 2021 acquisition is now seriously underway. We've signed our first deal ever with hugely successful outdoor retailer, Bass Pro Shops, to a 20-year deal for 161,000 sq ft, replacing an underperforming Macy's and adjacent small shop tenants with a national draw unlike most others. We also signed a new 53,000 sq ft 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 sq ft of other space to feed off that system, Grossmont will be among the most productive assets in Federal's portfolio once the significant redevelopment has been completed. We're looking at a $56 million comprehensive redevelopment and incremental 10% cash on cash here.

The second affects the market-dominant 500,000 sq ft Barracks Road Shopping Center in Charlottesville, Virginia, home of the University of Virginia, where we signed a 79,000 sq ft deal with Harris Teeter for an expanded flagship grocery store, and where additional important merchandising improvements that'll be announced very shortly will further solidify Barracks 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. Stay tuned for more in the quarters ahead.

Opportunities for additional accretive acquisitions and net of dispositions continue to be a laser-like focus of 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. Stay 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 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 Blayr at Bala Cynwyd, which is already two-thirds 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 delivery. 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. 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 underway.

Together, this 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, signage 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 and Innovation at some point in the future. The hunt for special acquisitions and a modestly sized but impactful development and redevelopment program are all working.

Thank you, Don. Enhanced internal and external growth using all the tools at our disposal is the name of the game. Quarters like this increase my confidence of our ability to do so. A 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 to you the focused path that we're on. Let me now turn it over to Wendy, and then to Dan to provide some additional color.

Wendy? Thank you, Don. This quarter, our leasing platform once again delivered record volume, signing 819,000 sq ft, 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 one-quarter story. In fact, the trailing 12-month comparable rollover sits at 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 high-quality shopping centers. What I'm most proud of this quarter is occupancy. Despite the timing of expected anchor transitions, the strength of our small shop leasing held occupancy neutral to last quarter. We delivered over 100,000 sq ft of net small shop occupancy this quarter, increasing our occupied rate by 100 basis points in just three 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 three years. Our current pipeline, which is always a good indicator of future leasing momentum, remains strong with over 1.5 million sq ft of space in lease negotiations. In addition 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 lets us pre-lease well in advance of vacancy.

This translates to less downtime from one tenant to the next, a metric we are 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 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 sq ft grocery store in our Andorra Shopping Center, with small shop leasing rents coming in 16% over underwriting. Andorra is just one 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%+ returns on average with a single objective: drive productivity and rents at our centers, making our existing portfolio a continuous source of multiyear growth.