Federal Realty Looking To Expand To New Markets With $1.8B 'War Chest'

With its retail portfolio in coastal U.S. markets still facing pandemic-related restrictions, one of the largest publicly traded retail owners is looking to deploy capital to expand into new parts of the country.

Federal Realty Investment Trust CEO Don Wood said on the firm's fourth-quarter earnings call Friday it has $800M in cash on hand, an untapped $1B credit facility and relatively little debt due in the coming years, giving it the ability to make new investments.

"We've got something of a war chest on hand, should we find retail opportunities that fit our business model in 2021 and 2022," Wood said on the call, according to a Seeking Alpha transcript. 

"And make no mistake, we're actively looking, including in markets with hot job and income growth where we haven't looked before," Wood added. "A little more geographic diversity in our income stream carefully considered is an objective of ours."

Roughly 85% of Federal Realty's operating income comes from the coastal markets of California, Massachusetts, New York, New Jersey, Philadelphia, Maryland and Northern Virginia, Wood said. He said retail in these markets has been heavily impacted by the coronavirus pandemic. 

"These markets have the most restrictive government-imposed COVID laws in the country by far," Wood said. "And they make 2021 more uncertain than at some of our peers, nothing we can do about that. Serenity Prayer comes to mind every day that I grapple with that."

Asked by analysts which new markets he's looking to invest in, Wood mentioned the Phoenix and South Florida markets, adding that he has some other areas in mind. 

"It doesn't mean that we still won't look in the markets that we're in that we know, but it does mean that, through COVID, it's pretty darn clear there will be other job center growth places that were starting pre-COVID but, like almost everything, have accelerated as a result of it," Wood said. 

While the REIT is looking to expand in South Florida, it did just take a major loss on a retail property in Miami.

The firm Dec. 31 sold The Shops at Sunset Place for $65.5M, after buying it for $110M in 2015. The sale came after Federal Realty defaulted on a mortgage backed by the mall in October, and it abandoned plans to redevelop the asset in November. 

"No, look, we made a bad deal on that one," Wood said after an analyst mentioned the Miami sale. "But that doesn't change the fact that job growth, migration, business-friendly environment could be good for us going forward."

The REIT is also redeveloping a shopping center in Coconut Grove, Florida, and it owns the Tower Shops retail center in Davie, Florida, properties Wood said are positioned to be two of the company's strongest assets.

Federal Realty reported net income of $123.7M for the full year of 2020, down from $345.8M in 2019. 

The company's portfolio was 92.2% leased as of Dec. 31, down roughly two percentage points from the prior year. The REIT signed 336 retail leases in 2020 totaling 1.8M SF, including 103 leases totaling 469K SF in the fourth quarter. 

The REIT didn't provide earnings guidance, something the analysts on the call made a note of as many of Federal's peers, after withholding guidance for most of 2020, have started to make some predictions on 2021 performance.

Federal Realty Chief Financial Officer Dan Guglielmone said he expects the company's occupancy will continue to drop this year before it recovers for a strong 2022. While not official guidance, he said he expects the REIT's earnings in the first quarter to underperform its Q4.

"While we still expect continued pressure on our occupancy over the next few quarters and expect to dip into the upper 80s at the trough, as we have previously discussed, continued leasing activity at the volumes we achieved in the second half of 2020 will set us up for more pronounced growth in 2022," Guglielmone said on the earnings call.

The REIT had collected roughly 89% of Q4 rents as of Jan. 31. It has reached rent deferral agreements totaling $36M and rent abatement agreements totaling $37M. 

The financial impact from uncollected rents in Q4 totaled $18.9M of losses, the REIT said. Roughly 85% of this impact came from restaurants, fitness centers and entertainment tenants.

Wood said the restrictions put in place as COVID-19 cases surged in the final months of the year have damaged its tenants' ability to pay rent. 

"There is no doubt that the second wave of government shutdowns in our coastal markets that ramped up around Thanksgiving last year and largely continues through today, though there are at least some encouraging signs of loosening of late, have and continue to hurt us in terms of rent collection and the likely business failures that come from them," Wood said.