Federal Realty Investment Trust (FRT) March 3, 2026 Conference Transcript

Hello, everyone. Welcome to Citi's 2026 Global Property CEO Conference. I'm Craig Mailman with Citi Research. You're pleased to have with us Federal Realty and CEO Don Wood. This session is for Citi clients only, and 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 GPC26 to submit questions. Don, I'm going to turn it 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, and then we'll get into some Q&A. Don, hit the button on your microphone.

There you go. Is that on?

That is on. Now we're good. Now we're good.

So none of that was recorded, right? So I'm going to start all over again. Time to invest in hard assets. And 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. But 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. And it is unheard of. It's the only REIT that can say that. And so 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. So 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 fours, selling some more stable retail product in the fives, 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 26. Everything that we see suggests that that will continue into 2027. So 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 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%. And 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 what we're doing look hard at us these days it's it's a little different than it was a year ago or two years ago um 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 uh to think about us great um that was that was short versus history greg you're going to ask another question and i'm going to go on for 35 minutes so 29 minutes and 50 seconds um no all jokes aside the you highlighted the capital recycling

which has been um 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 balakinwood right how should we think about the incremental unit growth is that going to be the merchant building model where you guys are building it realizing it selling it or is there a part of it that you need to keep for the mixed use component where you want to control it so you know one of the core competencies um of this company that has not changed um in the 30 years that that i've been there is the notion of how to intensify

real estate, and that doesn't mean that public companies that are primarily developing companies are very easy to run, so we're not primarily development companies, but we do incrementally add to the intensity of our projects, and 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, And that is, Federal Realty's properties are generally larger than the average shopping Therefore, they have excess parking lots, et cetera, on them. What we've been able to do is to incrementally, without land cost, 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 Ballackinwood, Pennsylvania, to a new project starting in Willow Grove, Pennsylvania, Hoboken, New Jersey, etc. 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. Now, 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. But 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. And we've done that a few times this year at Santana Row, at Pike and Rose, mid four caps Santana Row, low five caps at Pike and Rose, pretty important stuff. The tax gains associated with those are large, as you would imagine, to be able to tax efficiently, 1031, into assets that we find like Kansas City, like Annapolis, Maryland, like Omaha, that have higher growth projections. Why? Because they've been under-managed for a long time. Because the tenants that we can bring to those properties with retailers who want to be there but have not found the landlord and the property that they're comfortable with is where we're making great strides. So that bit of recycling will continue, Craig. And today, if you look at the income stream of federal, 80% of it is retail, And the reason 80% of it is retail is because that's who we are. That's what we do. And bringing those communities together and creating higher sales for higher rents. But while we have 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. So 10% of our income stream is from residential. 10% is from office, only on the large mixed-use properties that we have and some of our better shopping centers. That should continue. That's how you should think about it, with a couple of hundred million dollars put to work each year in a repeatable income stream, where in 26, for example, our Ballot Kinwood residential project next to the balakinwood shopping center has just been completed we're just starting the lease uh now that will start contributing in the second half of 26 certainly into 27. there'll be another part you'll see hoboken um in 27 uh you'll see santana where we sold those two assets we're building another 260 some odd units um on the third periphery the third block of Santana Row that will be contributing 27 and 28 so and there's and we just announced Willow Grove Pennsylvania which will be 28 and 29 so you'll see each year the 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. But if $2,700 a month, $2,800 a month, you can't.

That's the incremental value that we're exploiting by owning great shopping centers in marketplaces that will support incremental intensification and just to clarify so um think about like at least a two-year whole period to get through a safe harbor at post development and then you guys decide what to do with the resi um i'm sorry say it again simplistically you're not gonna be a merchant builder you said you hold on to it a while i'm assuming to get through the safe harbor so you can 1031 it and do all that so like a two year plus hold period and then you yeah I think that's I think that's a fair way to look at it and then and then even at that point um there's always

consider 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 i guess i really want to make sure that 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 to set of decisions that that we make and and so it's why i i sound sometimes like no i'm not going to 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 uh on the market at that time where we can be very opportunistic and on the other side of it you guys have entered omaha leewood as you said you clearly or 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 want to 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. And the reason we had that and the reason we wanted, I guess we had 35 investors or so and 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. And 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. And 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. And 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, and same plan, different dirt. So entering, and 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 to five. Three to five. Kansas City is one. Omaha is a 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 a hundred million dollars 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. Now, when we enter a new market, Craig, to your point, it's with a large dominant asset. There could be a great 125,000 square foot grocery anchored shopping center, but I'm not going to enter a new market with 125,000 square foot grocery anchored shopping center. We're not, it doesn't, first of all, it's not big enough to spread costs. Over to be efficient in terms of that, but more important than that doesn't make you a player When you own the best shopping center in the on the Kansas side of Kansas City You're a big deal and we're already seeing that so the notion of the Influential people in that market is out there looking For additional ways that we can invest so yes now that we own the two best shopping centers in the marketplace, the notion of adding Grocery Anchored, adding another different type of retail center in a different format throughout the MSA makes all the sense in the world. Same as Omaha. There's nothing that's close right now, so they work in tandem, Craig, between the opportunities to build out, if you will, those new markets that we're in and looking for the large new asset in a new market to be able to expand. The market will determine which way we go and how we go into that.

And a shameless plug for tomorrow. We are going to Pembroke Pines with the federal folks to kind of see where, at least you hinted, this is where this started, right, the thought process to do some assets or markets that weren't traditional because of the success you saw there?

Well, listen, Jill just told me as we walked in, we've got, I don't know, 35 people so far that are going to come and see Pembroke, and Pembroke Pines is just 20 miles or so west appear and the the it's a great example of the type of large shopping center that was not fully exploited was not was not merchandised with the the type of tenants that would create higher sales our game is simple create retail destinations where the amalgamation of tenants together create the highest level of sales and that's how you pay the highest amount of rent. Nobody has a problem paying 50 bucks a foot if they're doing $500 a foot in sales. Mediocre tenants who are doing $200 a foot or $250 a foot are not relevant anymore in those categories. Those tenants need to be traded out for better And that's how, in the first, Kansas City's a good example, in the first eight months, Stu has done 24 deals in Kansas City. 24 deals, renewals and new tenants at 28% higher rent than they were paying previously. With a level of tenancy that were, as we did our due diligence calls and talked to Aloe and Viore and SolidCore and others, said, yeah, if you guys are doing it, if you guys, Leawood's been on our map of where we want to go. If you guys are there, we'll give it a shot. and we see that over and over again because 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 you know it costs you millions of dollars to open a store of any size hundreds of thousands if you're small before you 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?

No, 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. So I think, you know, the two dozen deals, I think, even exceeded our expectations in Leawood. And certainly getting some of the tenants like Aloe and Viore to step up when they stepped up is ahead of schedule. And 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 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 22. two, we've signed, you know, you'll see under construction, Pottery Barn, West Elm, William Sonoma, you'll see an open Anthropologie, Lululemon, Kendra Scott, Love Sack. I don't want to steal all of our thunder. Coach just opened, Aries under construction. And so 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 who will consider it.

And so I think you'll see you'll see that's now ahead obviously of leeward but it's a pretty good example of the same direction we're going there as well and maybe just one thing to say on that too when we under wrote pembroke last year we under wrote it based on everything stew 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, it'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. 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 line 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 and and I don't know whether the numbers will work on on on that residential project or not we're darn close and we're working it turn it turning it up, et cetera, but that's the kind of thing that creates growth that is not in the underwriting, is not paid for up front, but tends to happen as long as you've got the core competency to make it happen.

And the returns, when we underwrote Pembroke back in 2022, was targeted, unlevered IRR, just north of 8%, re-underwriting it because it was so undermanaged and because it was we've exceeded kind of our expectations in that underwriting we're now re-forecasted that to be north of 10 percent and that does not even include the incremental returns we potentially could get from the residential that would be take it even further so just uh you know we're really excited to have everybody come visit tomorrow and uh look forward to it and looking forward to having you host us yeah no we're excited and i'm kind of curious you brought up the 28 leases you did at

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 um you know versus how many more are on that list of potential they didn't want to be the first mover but they still want to be in the sub market and so the upside to that center over time could continue all right other other than a handful of 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 what would seven eight months ago we closed so that that I think is why we had such conviction going into it because we we

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 is has built so you know Lego and coach and salad core and aloe now you start to stack those names together you know you're building a bigger bigger list of others that will consider it um but most of them if not all we had talked to in the lead up to closing i don't want to mix apples and oranges because the irr was on pembroke so maybe we'll we'll focus on that but i'm curious when you underwrite that 10 on levered irr like what's your exit cap are you assuming so 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 than 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. So it will be a wider cap rate than what we do 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. And so 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. And to your point, that is the biggest piece of cushion that our underwriting effectively has because 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, we bought Kansas City at, what did we buy that? Six, seven. Six, seven? So we bought it at 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, to take that variable out of that. But 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. So the combination is really where you create your value. It's why, honestly, it's why on all of our dispositions, we have huge gains that have to be tax sheltered to make the most sense. That's why this whole capital recycling program is so unique.

I'm just, I don't want this to come off 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 it takes a couple years to re-merchandise 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, timeframes of seeing that value materialize have compressed, right? And so you do see the numbers from an earnings perspective when developments come on and you do see that uplift, but a lot of the value is still in the dirt over time that isn't realized in FFO. So I'm just kind of curious, Just as you guys continue to evolve the platform, how you bridge those two realities.

The word is bridge or balance or however you want to look at it. I know that I can't run this company 12 months at a time. It's real estate. And the beauty of the investor base is to have that liquidity, to get in and out whenever you want to get in now. And that's our deal. But 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. So 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 etc is the name of the game and and and you know that that is both the benefit to be in public and the the the hit to being public is all summarized with with that balance between owners and and operators and I think we've got that balance really really good right here now any questions by the way could you just hit the button thank you hi this is an Australian question um in

Australia our kind of mall owners are reluctant to um do RISI um because of permitting problems and the concern is that subsequent developments might be impinged by the rights of the RISI 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 kind of getting it permitted to talk about yeah so what would happen would be say you do i think you said something like 212 at santana or something like that and then you know apartments so you do a bunch of apartments near your mall and then those owners have sort of rights or um yeah we negotiate with they become a potential source of um aggravation as it were, if you were trying to expand it more?

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. And it's difficult. It's not easy. And so we're able to accomplish that. And so that is, 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 the neighboring, to be able to figure out how high we can build 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. But that's a competitive advantage in the extent that we can get those entitlements done and approved by the neighborhood, as well as something that is a skill set we have that allows us to create value at these opportunities.

It's also one thing to think about here. And 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. But 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. So for those of you who are in Boston, for example, to me, one of the best assets that this company has is Assembly Row. And 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 3 million square feet 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, a private investor would look at that and say, you've been working for three years on the entitlements. The entitlements will cost us over a million dollars 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 .05 or whatever and sell that asset today because I would be leaving tons of private value on the table. So 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. But there is a time that all of that aggravation and all of that work, that's why assembly rose 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.

That's same story and why for next year? For the mid threes. Same more or fewer companies? Fewer. Thank you guys so much.

Appreciate it, Don. We'll be higher than the industry though.

I'm going to say double in my vote.