Federal Realty Investment Trust (FRT) 2020 Q4 法說會逐字稿

Greetings. Welcome to Federal Realty Investment Trust's Fourth Quarter 2020 Earnings Call. (Operator Instructions) Please note, today's conference is being recorded.

I will now turn the conference over to Leah Brady. Leah, please go ahead.

Hi, everyone, and thanks for joining us today for Federal Realty's Fourth Quarter 2020 Earnings Conference Call.

Joining me on the call are Don Wood, Dan G., Jeff Berkes, Wendy Seher, Dawn Becker and Melissa Solis. They will be 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 within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any annualized or projected information as well as statements referring to expected or anticipated events or results. Although Federal Realty believes that 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 yesterday, 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 results of operations. (Operator Instructions)

And with that, I will turn the call over to Don Wood to begin the discussion of our fourth quarter results. Don?

Thanks, Leah, and good evening, everyone.

We closed out 2020 just about as we thought we would, with fourth quarter FFO per share of $1.14 and the total year at $4.52 or roughly 29% off 2019's record results. The fourth quarter and total year numbers exclude the debt prepayment charge that we took when early retiring our '22 bonds.

And as miserable as 2020 was, and it was pretty miserable, we're very clear as to our priorities and can see our path forward. There's 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 some loosening of late, have and continue to hurt us in terms of rent collection and the likely business failures that will come from them.

Yet despite that, our growth prospects are really strong when the following 3 things happen: one, vaccinations are delivered to a large segment of the population in our markets; number two, our coastal markets actually reopen; and number three, that consumer behavior reverts to uninhibited freedom and the spending that goes with it, behavior that we are supremely confident will happen.

And while that's certainly not the environment that we're living through or operating in yet, the sheer volume of leasing and other transactions that we executed at the end of last year, 103 retail deals for 469,000 square feet, coupled with the strong leasing demand environment that is evident by the many substantive discussions we're having today and some very important management promotions and alignments that we'd just announced set us up extremely well for a strong post-COVID recovery as those conditions prevail.

All right. So where do we go from here? Well, as previously announced, the sale of Sunset Place and 2 other shopping centers in December effectively generated $170 million of proceeds and debt relief. We put out a press release in January that you should check out for more detail if you haven't seen it. Using that capital, along with cash on the balance sheet, we repaid $500 million of senior unsecured notes, half of which were retired early. The result of which means that we have no public bonds maturing until June of 2023.

So with little debt due in the next 2.5 years, along with nearly $800 million in cash remaining on the balance sheet and a completely untapped $1 billion credit facility, we've got something of a war chest on hand should we find retail opportunities that fit our business model in '21 and '22. And make no mistake, we're actively looking, including in markets with hot job and income growth where we haven't looked before. A little more geographic diversity in our income stream carefully considered is an objective of ours.

But today, with a trader's day -- with a day trader's mentality, rather, so prevalent in so many corners of the investor and analyst worlds, it's hard to look past short-term results, particularly those at higher-multiple companies who are far from immune from the economically devastating effects of government-imposed shutdowns, most notably seen in the heavily populated coastal markets. Heck, 85% of Federal's property operating income comes from California; Massachusetts, particularly Somerville; New York; New Jersey; metropolitan Philadelphia; Maryland and Northern Virginia. These markets have the most restrictive government-imposed COVID laws in the country by far. 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.

But those restrictions sure don't diminish the quality of the real estate that we own in these first-ring suburbs of major metropolitan areas nor the tenant demand for a spot in these properties in the future as evidenced by the leasing volume we're doing along with the conversations we're having with many retailers about their future real estate plans.

So here's an interesting fact: when you bifurcate our entire portfolio between the 75% or so of essential service type shopping centers that we own and the retail component of the 25% or so of our properties that are mixed use or lifestyle oriented, performance varies greatly as far as percentage of rent collected or percentage of operating income diminution from last year pre-COVID. Predictably, it's what you would think. The mixed-use and lifestyle tenancy, heavy in restaurants, theaters, gyms and the like, has been disproportionately hurt by the shutdowns. There's no real news there. You all know that. But the irony is that those assets represent not only some of the best real estate that Federal Realty owns but arguably some of the best and most desirable retail real estate in the country. That's not changing.

So in a nutshell, 75% of our properties, the necessity-based ones, are performing in line or arguably better than other necessity-based REITS despite being in government-restricted coastal markets. Think about that. In and of itself, that's pretty impressive to us. The remaining 25% of our properties, the mixed-use and lifestyle ones, have been disproportionately hurt because of their merchandise mix but represent our best, most desirable real estate and, therefore, naturally have superior growth prospects, particularly for the beaten-down levels they're currently performing at.

That cash growth -- cash flow growth formula feels like a winning one to us when vaccinations are delivered to a large segment of the population in our markets, when our coastal markets reopen and when consumer behavior reverts to uninhibited freedom and the spending that goes with it. Everything we see suggests that it should be a strong 2022. We'll talk more about that in Dan's comments.

And on a celebratory note, I hope you'll join me in congratulating Jeff Berkes and our other executives who have been promoted effective with our Board meeting earlier this week. I hope you saw the press release that we just put out.

Many of you have gotten to know Jeff over the years, and I'm sure you share my appreciation for his intelligence, for his real estate savvy and, without question, for his unimpeachable integrity. Jeff and I have been close partners for over 20 years now. And this elevation in responsibility comes at a crucial time given the expected post-COVID retail real estate environment. We need to be as tight and productive as humanly possible.

Now to head off the inevitable speculation, let me get it out there by saying that forming the position of Company President and Chief Operating Officer shouldn't be construed to mean that I have plans of going anywhere anytime soon. I don't. But as I've continually talked about and acted upon, career development and succession planning are always top of mind at every level in our company. This new position is a great training ground.

I'm sure there'll be lots of questions following our prepared remarks. So I'll cut it short today, end mine there and turn it over to Dan for his comments on the quarter before we open the lines to your questions.

Thank you, Don, and hello, everyone.

We are generally pleased with the progress we see in our portfolio as we closed out a difficult year. While all of our centers remain open, with 98% of our retail tenants open and operating in some capacity as of February 1, COVID-19-induced government restrictions continues to provide challenges to their businesses. We reported FFO per share of $1.14, up a couple of cents from third quarter. Now trying to assess what specifically is the direct negative impact of COVID-19 is difficult. But let me walk you through some of the drivers of our results during the quarter.

On the positive side, we continue to see and be encouraged by the resiliency of our tenant base overall as collectibility adjustments continued to shrink from $55 million in the second quarter to $29 million in the third quarter to just $19 million in the most recent. From a sequential perspective, this progress was offset by a number of items, many of which were one-timers: $0.04 of impact from several nonrecurring items hitting G&A, $0.03 of drag from higher property-level expenses that were primarily seasonal in nature as well as $0.03 of headwinds due to the timing of fourth quarter debt capital transactions that we executed. As a result, headline progress versus the third quarter was muted.

Year-over-year, relative to the fourth quarter of 2019, we saw a direct negative net impact of COVID-19 for the quarter of $0.37 per share, a continued improvement over the second and third quarter's direct negative COVID impact of $0.83 and $0.48, respectively. Collections continue to improve on the 72% and 85% levels, previously reported for 2Q and the 3Q, respectively, and are now up to 89% for the fourth quarter, solid progress despite weakness in December and January due to the second wave of government-mandated restrictions in place in the majority of our markets.

As a reminder, our approach to reporting collections is very transparent, and in our view, the appropriate approach. The denominator is comprised of all monthly billed base rent plus charges for CAM and real estate taxes and is not adjusted for deferrals and abatements. In our numerator, all deferrals and abatements are classified as uncollected. Also note that our denominator remained fairly consistent throughout 2020 at roughly $70 million to $71 million per month.

During the fourth quarter, we continued to take a tactical approach as we negotiate and work with our tenants through this unprecedented impact on our businesses. $36 million of deferrals were executed in total for 2020. Of that amount, $22 million is with higher credit accrual basis tenants. Abatement agreements now totaled $37 million as additional rent concessions were provided as government restrictions impacted our tenant's ability to operate at full capacity.

Abatements will continue in 2021, primarily the result of temporary percentage rent arrangements as we have made the decision to partner with many of our tenants to get to the other side of the pandemic together with the objective of longer-term benefits and stronger sustainable growth. As we did in the first 6 months of the pandemic, we took advantage of these negotiations to improve many qualitative lease provisions in exchange for that rent flexibility. Incremental percentage rent upside where we have abated rent, removal of development, parking and use restrictions, eliminating tenant lease termination and cotenancy rights and the deletion of below-market tenant extension options all enhance the long-term value of our assets in exchange for these near-term concessions.

Now following the surge of productivity during the third quarter, we had another solid quarter of leasing. With almost 470,000 square feet of total retail deals and then add in 33,000 square feet of office leasing, bringing our total to over 0.5 million square feet of fourth quarter deal signed, combined with third quarter, that's over 1 million square feet of leasing to close out the second half of the year. We are also very encouraged by the level of activity in the leasing pipeline. As a result, our occupancy metrics have demonstrated surprising resiliency with our leased metrics standing at 92.2% at year-end, flat versus the third quarter statistic, and our occupied metric remaining in the 90s at 90.2%. These levels are off 200 and 230 basis points, respectively, versus year-end 2019 levels.

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. We continue to see strength from the same leasing demand drivers we've talked about on prior calls: first, urban and CBD tenants migrating to top-tier first-ring suburban assets; top-tier tenants upgrading their real estate to the best-in-market open-air locations; and third, new-to-market lifestyle and digitally native tenants targeting our best-in-class, open-air, mixed-use and lifestyle properties.

As Don highlighted, while our lifestyle and mixed-use-oriented assets have underperformed in the COVID environment, new demand from these best-in-class lifestyle tenants has been strong as evidenced by lease deals and openings during the pandemic with brands such as Nike Live, Athleta, Sephora, Warby Parker, Room & Board, Serena & Lily, Arc'teryx, Vuori, Lovesac, Faherty, Bluemercury, NIC+ZOE, Shake Shack, Sweetgreen, Levain Bakery, Salt & Straw and anchor restaurants such as Telefèric Barcelona, Nighthawk Pizza, Chika, Stellina, Spanish Diner and Planta with 2 openings, to name more than just a few, plus many more under negotiation. Needless to say, our best-in-class mixed-use and lifestyle real estate is poised for a significant rebound in '22.

Our residential portfolio has held up reasonably well during the pandemic with collection levels up towards 98%, the only exception being our 450 units at Assembly Row where [the Montaje's] felt some weakness as expected. Average comparable leased occupancy for our 2,700 comparable residential units stood at 95.1%, down only 60 basis points from year-end 2019.

Our existing office portfolio has performed solidly during the pandemic as well, with collections averaging 97% and occupancy remaining stable. As we've discussed previously, however, lease-up of office space in our development pipeline will be slower than we had expected pre-COVID as corporate decision-makers postpone space planning [needs] by at least a year to 18 months.

That being said, preleasing at CocoWalk stands at 75%, with South Florida office demand remaining strong. At Assembly, PUMA is building out its new headquarters space in 55% of Block 5B on Grand Union Boulevard. And PUMA, at this point, plans to move all of their employees in this summer. Pike & Rose has 63% of 909 Rose Avenue is spoken for. One Santana West lease-up remains speculative, however, openings are not expected until 2022.

Now to a quick discussion of the balance sheet and an update on our further enhanced liquidity position. The fourth quarter was an active one on the capital markets front. In early October, we raised $400 million of unsecured notes in a green bond. The second half of December, we repaid $500 million of unsecured notes. In December, we sold $170 million in assets that at a blended in-place yield inside of 4%. This left us with $800 million of cash available and an undrawn $1 billion credit facility, providing $1.8 billion of total liquidity at year-end with no bonds maturing until 2023. With our $1.2 billion in-process development pipeline continuing to be executed upon, we have just over $400 million left of that to spend. As Don mentioned, we find ourselves today sitting with significant dry powder.

And with Don's and my remarks today, we hope we have conveyed to you the optimism that we have for the future of our business and the strength of our portfolio to truly thrive on the other side of the pandemic. Our ability to generate outsized cash flow growth is fairly clear when, as Don said, vaccinations are delivered to a large segment of the population in our markets, those coastal markets reopen and consumer behavior reverts to uninhibited freedom and spending.

But the timing for those 3 things to occur is from clear and certainly not clear in 2021. As a result, for 2021, we are not providing formal guidance at this time. The best we can do for you, if you need a stake in the ground, is that it's roughly going to be flat to 2020 with the first quarter of 2021 at roughly $1 per share and build each quarter from there.

We do ironically feel significantly more confident in providing an outlook for 2022 than we do for the current year. Based upon the leasing activity and demand we see for our real estate, the strength of our essential retail portfolio, the significant upside in our mixed-use and lifestyle retail assets, the resiliency and stability of our existing residential and office and the phasing in of POI from our $1.2 billion development pipeline in 2022, '23 and into '24, we expect 2022 FFO per share will be in the low $5 range, representing double-digit FFO growth year-over-year. So stay tuned.

With that, operator, please open the line for questions.

(Operator Instructions) Our first question will be coming from the line of Alexander Goldfarb with Piper Sandler.

First, Jeff, congratulations. So awesome for you to get the new title, business cards and all the fun stuff. And then congrats to Barry and the rest of the folks who have gotten promotions.

So 2 questions here. Don, just thinking big picture, you're not alone in traditional coastal REITs who are now exploring other markets, presumably down South, the Sun Belt. But it's interesting because, for the past 2 decades, there's been this whole coastal, coastal, coastal, and then suddenly with COVID, everyone's looking elsewhere. So my question is, is it really COVID or you guys have been thinking for several years now about expanding to new markets? Maybe they are down at the Sun Belt, but the COVID and what's happened was just sort of the catalyst, the expeditor.

Yes. Alex, that's a great question. It really is. The -- first of all, I don't want to -- my comments to be construed as not being positive with respect to the coastal markets. At the end of the day, it's jobs and good paying jobs at that. And when you sit and you think about kind of where we are in those markets, in those first-tier suburbs, that looks really strong.

Now when you go forward and you say, okay, where would you like to put incremental capital, it doesn't mean 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 that there will be other job center growth places that were starting pre-COVID but, like almost everything, have accelerated as a result of it. So when you think about markets like Phoenix, when you think about markets more like Florida and what's happening in South Florida and a couple of others, I do think it would be wrong of us to not effectively understand the dynamics in them and to be able to act on it to the extent we get comfortable with the highest-quality stuff in those markets. You'll never see us going down quality, Alex, and that's a really important point.

Okay. And then the second question is, it also seems like, recently, there's a lot of demand from entrepreneurs, people starting up, whether it's new restaurants or new concepts. And yet, at the same time, there's still tenants who are struggling, and I don't just mean like movie theater or gym but some others. So can you just sort of walk through what's happening? Why is it -- or how is it that we're seeing these spurts of new tenants forming at the same time that you're still seeing a bunch of people struggle? It just seems to be this odd paradox. I just want to better understand it. Is it purely just the categories themselves, and that's it? Or are there other dynamics at work that are driving some of these new leases that you're seeing?

Well, first of all, there are certainly lots of dynamics. But one of the single most important things to remember is companies that are struggling at this point and continue to struggle on here, I cannot say enough about the impact of the government restrictions. I mean we're a business of contracts, and when the government steps in and effectively doesn't allow the contract to be performed -- it's the weirdest time I've ever been involved in.

So absent that, you do have new businesses being formed with new bases. So legacy costs of old businesses and having to be able to figure out how they're going to make money going forward with all those legacy costs is sometimes much harder than a new business coming in. If you take a look at what some -- what's happening in the gym space, for example, you'll see new purchases of gyms -- with packages of gyms at a fraction of the cost that you thought that, that gym company was worth 12 months ago. Now when you come in with a new low basis, you've got a completely different P&L, you've got a completely different business plan, different balance sheet and the ability to afford and to pay what you need to do to get in some of that high-quality real estate.

So it's a natural cleansing that won't just be in 2021. It'll -- this is a phenomenon that will take a number of years to work through. What you will see, the single biggest thing from my perspective, is businesses coming in with a lower cost basis to start versus their existing legacy competitors.

Our next question is from the line of Steve Sakwa with Evercore.

Don, I guess on the leasing. I was just wondering if you could provide a little bit more color. I appreciate what you and Dan talked about in terms of the activity in Q3 and Q4. And I'm just curious if the strength is concentrated by region, if it's concentrated more by product type or price point within the portfolio. I'm just trying to get a sense for maybe where you're seeing the greatest [demand] and areas where you're maybe seeing less demand.

Well, that's -- let me start out this way. So on the call, Steve, are Wendy Seher, who as you know has the biggest part of our portfolio, and a lot of that is essential-based assets and let -- and some boxes and let her speak to that. And then Berkes is also on the call. That can give you a much better idea on the mixed-use kind of stuff, if you will, in that. So listen to those 2, and then I'll try to put it all together. Wendy?

Steve, thank you. On the Eastern region, I've been looking at -- as I've been looking at our pipeline, and if you look at our pipeline in January of this year versus January of last year, before the pandemic happened, we actually have more activity on the East and more in our pipeline. And when I say pipeline, I mean new deals. So I'm very encouraged by what I'm seeing.

I talk to retailers all the time, and I continue to see an interest in a flight to quality. They are -- when you think about it, it's very logical, right? So a lot of the retailers coming into '21, maybe into '22, maybe they're going to make less new deals than they made before. So the deals that they make are important, from a risk mitigation standpoint, that they go for properties that they know and have a history of strong sales, whether they're highly amenitized, whether they're general essential properties, because I have both on the East Coast, they want to mitigate that risk. They want to make the right choice. And where we're going to have the advantage is the history pre-COVID of a very strong sales, high-quality real estate, and people believe that, that high-quality real estate is not forever changed because of COVID. So I'm very encouraged by what I'm seeing.

Yes. And Steve, I'd add onto that by saying it's really no different here on the West Coast. The demand is very broad-based whether it be in our more traditional essential centers, including the Primestor portfolio or Santana Row or, quite frankly, our other lifestyle and mixed-use projects on the East Coast, which I've had some involvement in over the last couple of years as well. The list of tenants that Dan read off, that's from our entire lifestyle mixed-use portfolio, and all of those properties have active leasing and active negotiations going on right now. We've got 2 retailers under construction at Santana, third to start shortly, 3 restaurants under construction at the moment, and we're about to sign a lease with a noteworthy operator out of San Francisco that's doing their first restaurant outside of San Francisco. So we're very encouraged by what we're seeing.

And to key a little bit off of Alex' prior question -- and thank you, Alex, by the way, for the congratulations. We're not necessarily a financial crisis this time around, so there seems to be plenty of capital for some of these newer concepts to get capitalized. We're seeing that very specifically in the restaurant business right now. So there doesn't seem to be a shortage of capital. And like Wendy said, everybody wants the best real estate. So whether you're kind of new and somewhat starting up or you've been around for a while and you can open fewer stores now than you could a few years ago, a lot of focus on our real estate, and this is very broad-based.

Great. Good color. Maybe second question, Don. Just in terms of -- it sounds like you've got a lot of capacity on the balance sheet.

Just what are you seeing in the transaction market? What's happening in terms of distress? And how are you sort of weighing that against potential developments down the road in your mixed-use assets that you've got Phase IIIs and IVs?

Yes. Well, listen, first of all, the last part of your question first, Steve, the -- we got plenty of development to do. And so first of all, you are years away in terms of development product coming online.

Let me now take it to the acquisition side. So we learned a real good lesson in 2008, '09, '10. And Jeff and I were just talking about and lamenting about it last time. And that was, how is it, in the end of the great financial crisis, that there are not going to be a ton of distressed assets for us to acquire? And there weren't. There weren't at all because great assets are often not distressed and not distressed in terms of price.

And so it wasn't about us going down quality and earning a lot and getting a lot of stuff, which is kind of why, at this point in time, we're looking for the best stuff around. We -- there are people willing to talk to us about that. Prices do seem to be firm but a little bit better than they were certainly pre-COVID. But those prices are not cap rate prices because what NOI are you capping as you look at it. They're really great real estate prices. And that's kind of how we're looking at potentially using some of that. What -- I mean the cash that's on our balance sheet is insurance. The reason there's so much of it is insurance. That's why we did it that way. We believe, going forward, given what we just told you, we need less insurance.

And so accordingly, I don't have a treasure trove of transactional information that -- on deals that have just happened that we can really talk to you about in terms of where we're trying to go. But suffice it to say, we do believe we'll find some opportunities in the markets we want to be in, including our existing markets and 1 or 2 new ones that effectively let us get deals done in a way that will be accretive now and certainly accretive to value with more development opportunities associated with them going forward.

The next question comes from the line of Derek Johnston with Deutsche Bank.

How have development yield expectations changed for the current projects or even the entitled projects? Can we get an update on some of the key inputs, like land prices, maybe construction, labor, materials and, of course, importantly, rents? So do you expect a compression in yield of, say, 100 to 105 -- 125 basis points, possibly?

Derek, we don't see it as that much. There will be some compression. And I think if you look at the 8-K that we put out, we did get more conservative on a couple of those assumptions. There's still a lot to figure out yet. And again, it depends on the product. It's certainly hard to figure out on the office side today. But it's not in construction costs. It's certainly in a holding period, so your carry -- you can certainly expect it to add to a longer period of time. It's most likely in build-out costs from a TI perspective, if you will, for office space there.

And then in terms of rents -- you know, man? I got to tell you it's -- you can -- it's anybody's guess to some extent, but our office and residential development, which is most of what our development is, are all in mixed-use properties that are well established and effectively are the best product that is available coming out of COVID. So you shouldn't expect us dropping rents in any significant way because I don't think we'll need to do that. There may be some. There'll be some extra carry costs associated with it, maybe a little bit more TI. But everything we still see says that the developments that we are completing will be accretive to value and accretive to earnings.

Okay. That's pretty helpful. Just I guess changing from office over to maybe the watch list, like, how does it stand today post the pandemic? To me, I mean, it seems like a lot of companies previously on watch lists have gone dark.

So the question is, is the watch list pretty washed out at this point? And if so, are we a couple of quarters away, maybe third or fourth quarter this year of trough occupancy and then, of course, growing, albeit from a lower base?

Well -- and let me go first, and anybody else who's got a perspective, please add into this here. But I do think there's truth to the way you phrased that question, with a couple of exceptions. And the biggest exception really is in terms of small business.

And when you look at small shop and small business -- and I could not tell you -- you'll never talk to anybody more frustrated than I am with respect to some of the restrictions that are extremely severe on our properties. And it's not only restaurants. It's other uses also from government entities. And so to the extent that -- I don't know when they'll be lifted. I don't know when -- how long those businesses can last. I suspect stimulus is coming soon, but it's February, whatever it is, 11 or something. And we've been talking about it for months, months and months.

So on the small business side, those are the people who are being hurt the most. And that's different than the big companies that are national chains. But frankly, we make our money on the small businesses that effectively turn over, become successful and can pay more rent. So I do see that being a very positive catalyst as we look out going forward. I just don't think it's right now.

And that's where maybe it's a good time for me to say what I say that -- the silly thing that we put out there today, and that is, in all my years, I've never been able to say that I'm more comfortable with a forecast, with a view to the future, 1 year out than I am today. But I am, which is why we're not giving 2021 guidance, which is why we're effectively talking about 2022 with more specificity. That's kind of crazy in my history of kind of doing this job. But it is the way it is today. And so we thought we'd get out there and try to get both the sell side and the buy side to realistically start looking, at least from Federal Realty's perspective, at our growth profile, which to us inside, to our Board of Directors, looks extremely positive but certainly not in February 2021.

Our next question is from the line of Nick Yulico with Scotiabank.

This is Greg McGinniss on with Nick. Dan, I just wanted to confirm your comment on the not-actually guidance numbers. Did you say around $1 flat for Q1 '21? It seems like a fairly significant drop versus Q4. So I just wanted to get some clarity there.

Yes. No, I think that's fair. You heard me right, roughly $1. I think that, look, the government restrictions, the second wave that come on -- that came on in December has impacted kind of our momentum on collections and so forth. And we expect it to impact our business -- the business of our tenants in the first quarter.

Heck, Nick (sic) [Greg], I just gave this whole big impassioned speech about '22, and you took me back to February of '21. Go ahead.

But yes, so I think we will likely take a bit of a step back. But I think you can build off of that and get back to where we. Look, we don't have a lot of visibility, and that's why we're not providing guidance on '21.

Okay. That's fair. I guess I'll let you be a little more impassioned about '22 here on the next question. So rent collection...

Thanks, Nick.

Rent collection right now is trending near the bottom of the peer group, which as you've mentioned, is kind of a product of portfolio geography. But as we have the vaccine get disseminated and restrictions are lifted, is there any reason that, by the end of the year, rent collection shouldn't be in line with everyone else?

Assuming those 3 things that I talked about, no. But again, if you kind of go back to the conversation, right, 75% of the company is right there now, right? Go back to the comments I'm making. So understand that, certainly, the same thing or better with respect to the residential and the office, so it leaves the retail of 25% of the company, which is the mixed-use and lifestyle side. That is really dependent upon stuff that is out of our control.

And so as an investor, an investor's going to decide whether he believes in that real estate, if that growth is coming or not, dependent not on me but dependent on what he believes about vaccinations, what he believes about the openings from government restrictions and what he believes about the consumer. So that's kind of where I would leave it.

Yes. Our essential-based assets basically are at or better than our peers. 92% collection levels, only down -- basically at about 92%, 93% of last year's numbers. They have performed as well in worse and more restrictive markets. So we feel as though their performance is at or as good as anyone out there. And it's really the lifestyle mixed-use where we felt that impact.

Our next question comes from the line of Michael Bilerman with Citigroup.

It's me. I want to come back to the guidance as much as you don't want to talk about guidance.

Who is this?

Who is this? This is Mike Bilerman, Don. What...

Who says, "It's me?" It's -- I mean we're not on Zoom.

Well, he said my name. I guess I'm having a real hard time trying to put your pieces together because you sound, Don, confident, and you can make assumptions for what things could be this year.

You don't have that much of a complicated business. Your balance sheet is in good shape. You've locked all these things away. You have confidence on the leasing front.

I guess I'd like you guys to be a little bit more specific. You have almost an $11 million FFO drop that you're communicating between the quarter that just ended, and we're 1.5 months into the first quarter. Can you detail if there were things in the fourth quarter that are not recurring that would cause that variance? What else is happening to drop from $1.14 to $1?

And then I get that, what you're saying, Don, like you have more confidence in 2022. A lot of 2022 is where you're coming from in '21, and you're embarking on a $5 number that's almost $40 million of NOI -- of FFO. What are the components of that? How much of it is NOI? How much of it's investment? How much is development? How much is the G&A? How much of its interest expense? Give us the pieces that give you confidence to get there.

Michael, Michael, Michael, we're not providing formal guidance, okay? We provided -- typically on our November call, we provide preliminary goalposts, okay, where we don't provide any assumptions behind it. Given today we have provided a goalpost, okay, for 2021, that's what we've provided to you. We're not providing assumptions. I think in light of COVID, I think that we're comfortable providing what we're providing, and the assumptions will hopefully come at some point later this year in 2021 when we have better clarity on kind of the environment and when those things are going to happen that will allow us to have the visibility to provide the level of detail and assumptions that you're asking for.

You know, Mike? It's -- let me go -- let me just add -- say something to Dan's. When you -- what I don't want to do is go down the rabbit hole you want me to go. And let me be very specific about that. When you go line item by line item, as you do, you put a specific amount of exactness or credibility or false understanding that that's actually what's going to happen. We don't know that, Mike.

When you break -- you know the components of this business. You know the development that is underway that we give updates on, on every single call. You know the amount of rent that we're collecting. Effectively, we just broke it out. Between 75% of the company is the essential component and the lifestyle component of the company.

The notion of how we grow earnings and what we've been able to do is definitely a question for an investor to decide. Do you believe in this business plan to be able to get there? But if I do it your way, Mike, what I'm winding up with are billions of questions on individual, line-by-line items that suggests that they are more accurate than we are able to provide at this point. So we're not going to do that.

I respect that, Don, but at the same time, every one of your competitors is taking their best shot at numbers. And the reality if I feel like...

That's up to them, Mike. That's up to them.

No, no, no, I get that. But you put out -- like, my view is you just -- you teased people by saying we're going to get to $5 in '22, and it's going to be $1 in the first quarter '21 without giving the context of how you get there, right? I'd rather talk about how you're going to get there in...

I disagree. I think we've been giving you tons of context on it, Mike. I think we've given you tons of context to the extent, if not enough, then certainly buy another stock or recommend another stock. It's what's been happening anyway.

But when you sit and you think about the quality of this real estate and where it's going, I think our investors understand how they're going to get there because everybody, including you, has a model and can certainly figure out and make assumptions in that model in terms of how that would happen. It's not so crazy to do. It takes some work, but it's not so crazy to do.

I know. We can, and we know where The Street is. The Street's at $1.14 for the first quarter. You did $1.14 this quarter, and you're saying it's $1. All I'm asking is [that in] a narrowly focused way.

[I have -- Mike, Michael.] Michael, on that, the assumptions -- broad assumptions behind the $1 relative to the $1.14 in the fourth quarter, we've started collections in January are down and behind December's collections. December collections were a little bit weaker. We had $3.5 million of term fees in the fourth quarter, another strong year of term fees. We're not projecting that. Our occupancy is projected to go down in the first quarter. Like I had indicated, we expect it to head into the 80s. Percentage rent is down. And plus, we sold a number of assets, and we're sitting with significant cash on the balance sheet relative to where we're putting those proceeds to work immediately. We're building capacity and financial capacity and flexibility, but it will be dilutive in the quarter before we deploy that cash. That is the rough road map from $1.14 to roughly $1.

Our next question is from the line of Juan Sanabria with BMO Capital Markets.

I enjoyed listening to that prior exchange.

Just on the acquisition front, I was curious on the target of assets you're looking at. So it's more the essential, grocery-anchored type of assets or more the lifestyle mixed-use type of assets and if those assets that you're looking at to acquire are more stabilized or maybe redevelopment opportunities where you could see some value. So just curious on kind of the target of what you're looking at and maybe any sense of how you're looking to remix or reshape the portfolio as part of that discussion, [your thoughts].

Yes, that's a fair question. We -- I hope, with a little bit of luck, you see both. And because to us -- and this is kind of the way it's -- we really believe in it. It's not about a particular format or a particular type of shopping center. It's about the growth prospects. And if we think the growth prospects are in a more stabilized asset that has rent upside because it should be remerchandised and kind of -- I don't want to say federalized but federalized, effectively, then we like that a lot. If it's one that's been mishandled, mismanaged and could be redeveloped and maybe there's some vertical investment there, we like that, too. It depends. So the first thing we're aiming for is the right markets with the right barriers to entry with the right demographics so that we can get comfortable -- and job growth so that we can get comfortable that we've got a pretty good chance with doing what we do of creating overall higher sales from the tenants and higher rents, therefore.

So you'll see -- I hope you'll see. Look, I mean, who knows what gets done, what can't get done? But we're looking at both opportunities for mixed-use development with some kind of stabilized piece there first and then a development down the road and a more stabilized asset where we think there's some rent growth possibilities and other ways to create value. I hope that's helpful.

Our next question is from the line of Craig Schmidt with Bank of America.

Great. First, I just want to congratulate Jeff and Jan and the others that got promotions. So congratulations.

Thanks, Craig.

I wanted to discuss -- talk about occupancy and where it might trough. I'm assuming that the fourth to first quarter includes the seasonality that would usually come with a lower occupancy number. But it seems like there may be an impact from the second wave of government-mandated closings which could also weigh on the occupancy number maybe extending into the second quarter.

I just wondered if you had any thoughts on that.

Craig, it's -- that's right. And first of all, the first point is exactly right. The first quarter is seasonally always the toughest for our business.

But the other point, again, kind of back to the small business comment. And yes, the longer the government closures are mandated, the harder it is for those small businesses to continue because they're depleting resources day by day as it goes through here. So while I don't have an exact number, I cannot give you a line for the model with respect to how many businesses go out and what that means to the overall occupancy perspective. It is reasonable to assume that there'll be a hit. I don't think you want to put a number out there at all of what it is, but we always thought, frankly, for a year now, which I think is pretty cool -- we thought that our first quarter and maybe into the second quarter, we'll see, we'll be in the high 80s. Certainly on the small shop space, it will be. The anchors are hanging real tough.

Great. And then I just -- what are the retailers telling you about your assets? I mean they're definitely unique. What are the ones saying to you that are kind of struggling to get by and get to the other side of COVID? And what are the new tenants saying about your properties?

Wendy, can I hand that to you?

Yes. I think that, in terms of the existing tenants that we have there in our centers, what they love about the -- so 2 things. Let me back up. When we have restaurants, for example, that have multiple locations, what we're seeing is, because of our highly amenitized projects and our focus on not only the curbside pickup and outdoor dining and a controlled environment that we can help with, we are -- they are focusing more on getting up and operating in our centers versus other choices that they may have. So from the existing tenant standpoint, we were seeing, frankly, a big uptick in the restaurant until we had that second wave of shutdowns again. So our highly amenitized projects where we can influence what's happening to help their businesses has been critical.

On new tenants coming in, what we're seeing -- and one of the things that I want to mention is we have ability to have like a reset button, right? So the retailers are going, hey, I have the ability to look potentially at some other opportunities that I never could get into before because, historically, we've never had the vacancy where now we have some opportunities. On the flip side, and I don't want to lose this point, is that we're -- Federal Realty having the ability to reset as well and look at how we want to upgrade our real estate. So we're -- when I was saying that we have a -- we have a disproportionate activity on those higher-end lifestyle projects from a new deal standpoint, which shows the strength of, oh my gosh, we now have vacancy in these centers that we never had vacancy in before, and we have a host of relevant tenants that want to get in an opportunity in these centers. So it's been positive.

Yes. I'd tag onto that, Craig, by saying I think this is true coming out of the GFC as well. It's never been more important to be a good landlord, and the good tenants know that. And by that, I mean somebody that's going to invest in the property, somebody that's going to be there to pay the leasing commission and the tenant improvement, check when it's due, somebody that is going to continue to operate and invest in the asset and merchandise it the way that particular retailer needs it to be merchandised and managed to maximize their business. That's never been more important. And not having a secured loan or lender to deal with dictates some of those decisions. The savvy tenants are very aware of all that, and I think all of that plays to our strength.

Our next question is from the line of Mike Mueller with JPMorgan.

First of all, a quick clarification. When you talked about occupancy going into the high 80s, were you talking about the 92% lease level or the 90% occupied level?

The 90% occupied level.

Got it. Okay. And then for the new restaurant deals we're talking, Don, is it primarily sitdown full service? And I guess, where do you see the dining mix going a couple of years down the road versus where it was prepandemic?

Yes. It's interesting. So we are doing -- we're all over the place on the restaurant alternatives that we'd like to offer in any particular property. One of the things that we're really doing a bunch of is trying to reconfigure outdoor space and create more of it. We're using -- as part of our property improvement plans, as part of the stuff that we're doing. We're using more pergola. We're using more furniture in areas and landscaping to create those places, which restaurants are asking for. And what -- maybe we'll put you in touch, Mike, because it's a long and complicated answer, actually, to kind of the business plans of new food uses -- but put you in touch with like Stu Biel in our shop who's got the -- has got a lot of these type of properties.

And so while the quick service stuff that we're still doing and will continue to do is pretty much as it was but, again, even there, looking for outside seating, wherever possible, in either common areas or specific to them. It is also the sitdown restaurants. And the sitdown restaurants that have the ability to be inside and outside, I see that not to the extent it is today, but some piece of that is that comfort with eating outside to continue. That's was happening in a bigger way for us pre-COVID and, like everything else, was accelerated through the COVID process. So a big variety in terms of what's going on but definitely more of a focus on outside.

Our next question comes from the line of Chris Lucas with Capital One Securities.

Don, just a simple question. The Board has been committed to the dividend through this whole process. It looks like they're going to continue to be. Do you have a sense as to when you might be able to cover the dividend with just your operating cash flow?

Yes. Hopefully, by the second part of 2022, we'd be there and then all of 2023.

Our next question is from the line of Linda Tsai with Jefferies.

For these younger retailers seeking space, what parameters do they have in terms of occupancy costs? Is it different from legacy retailers? And what flexibility do you provide to help them in their path to sustainable growth?

Well, what we're doing, Linda, to start, is a lot of these deals have a low fixed rent and a high percentage to effectively figure out the question that you're asking. Because while there are lower bases going in, the question of how much volume they're going to be able to do, where their price points are going to be able to be 2 years from now are different than what they will be in the first 12 months when they open up. So I love your question, and I spend a lot of time thinking about that and talking about how those business models are going to work.

And the bottom line is there's uncertainty with it. And so in sharing that risk with them from a percentage rent basis but to the extent they work, being able to actually earn more rent than we used to earn is our objective. Whether we get there or not will depend upon the first 12 to 18 months of the openings of restaurants like that.

That makes sense. And then the 4Q blended leasing spread of plus 1% versus minus 1% in 3Q is an improvement but not where you want to be. In the vein of expecting clarity next year, what sort of average blended leasing spreads are possible in 2022?

Yes. That's a good question. I hope to be in the high single digits at that point. And again, with us, always, it will depend upon the mix of a big deal here versus smaller deals, et cetera. But and that's where I hope to be.

Also, the one thing about what I did just say on the restaurant side, every deal we do, there's a landlord ripe to terminate after 2 or 3 years depending on sales levels. So we're kind of going in this with you, but you don't have 10 years to figure it out, if you know what I mean. So it's a pretty good balance, if you will, of sharing the risk.

The next question comes from the line of Paulina Rojas-Schmidt with Green Street.

As you think about expanding your geographic footprint, how would you describe your appetite for lifestyle centers, community centers or even power centers? I think you have mostly talked about lifestyle centers, but I wanted to have a general idea if you have at all thought of all the other property types.

Yes. Well, that's -- what we should do -- and I think you're new to the retail side of Green Street is covering or no? But I'd like to spend more time with you off-line to kind of go through what our business plan because we are pretty agnostic, if you will, in terms of the retail format, everything from community-based, grocery-anchored shopping centers to more of a power center, to more of the lifestyle center and, obviously, the mixed-use component. So really, what we're open to is -- I mean we're real estate people first and foremost. And so looking at the format of the center is not the first thing we're looking at because we're open to all of it. The first thing we're looking at is the ability with that piece of land and that shopping environment that they have for us to be able to create value either through raising rents or through redevelopment or even then further going vertical.

That makes sense. And then do you even credit at all to the idea that the rise of work from home will facilitate American's migration from expensive cities to more affordable cities, potentially harming the margin, cities like San Jose in California, and some of their assets? Or do you think that you will not suffer at all from this potential trend?

No. Oh no. I very much believe in those trends. We'll change the office environment dramatically in the country. I think the most important thing is the product you have, wherever that product is, is the best in the market.

There's always going to be demand in the markets in which we do business in and certainly for office. It just better be what employers want. And if you kind of look at where our office product is in terms of the mixed-use communities that we are in with being fully amenitized with being brand-new buildings, which is really important with respect to air and HVAC movement, et cetera, I think we're in the right places with the right product. And so office is not generic. And that's what has to be viewed very carefully post-COVID.

Okay. So you believe in the trend, but your assets will be just okay.

That's -- yes, that's our business plan. That's what we believe.

Our next question is from the line of Floris Van Dijkum with Compass Point.

I'll be brief. By the way, Jeff, congrats on the promotion. It's great.

I -- Don, I know -- I sense a little bit of frustration on your part about these questions about guidance, et cetera. And you do have a pretty big development pipeline that should produce, call it, $60 million of NOI over the next couple of years. Have you -- I mean, you have done it in the past, but how about putting out an NOI bridge 3 years hence or something like that to get people more comfortable? Is that something that you would consider doing?

Certainly taken under consideration, Floris. And just to respond to the frustration, the frustration is with the bullying of the line-by-line this is what you should do. You're right. I don't take that well at all because we're running the company the best way we can, communicating the best way that we can. And certainly, we'll take suggestions, but we won't be bullied.

And then maybe a follow-up a little bit about some of the newer markets, I mean, aren't you already in one of those markets that is seeing some heady growth as people go to warmer climates? I'm particularly referring to Miami. And do you see -- I know you just walked away from an asset there or sold an asset, but do you see yourself re-upping in that market over the next 12 to 24 months?

Very possibly. Very possibly, Floris. Yes. No, look, we made a bad deal with that one. But the -- that doesn't change the fact that job growth, migration, business-friendly environment could be good for us going forward. I think you're going to love CocoWalk when you see that completed. I know you love Tower Shops, which is completed. Those are going to be 2 of our best assets in the company. So yes, you bet you we're open to more.

At this time, we've reached the end of our question-and-answer session. Now I'll turn the call over to Leah Brady for closing remarks.

Thanks for joining us today. We look forward to speaking with you over the coming weeks. Thanks.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.