Federal Realty Investment Trust (FRT) 2020 Q3 法說會逐字稿

Greetings. Welcome to Federal Realty Investment Trust Third Quarter 2020 Earnings Call. (Operator Instructions) Please note, this conference is being recorded.

I will now turn the conference over to your host, Leah Brady. Please begin.

Good morning. Thank you for joining us today for Federal Realty's Third Quarter 2020 Earnings Call. Joining me on the call are Don Wood, Dan G., Jeff Berkes, Wendy Seher, Don 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 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 packets 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 third quarter results. Don?

Thank you, Leah, and good morning, everyone.

FFO for share of $1.12 in the quarter was right about where we thought it would be. And while pretty miserable compared to the pre-COVID passed, pretty good when you consider the progress we've made over the second quarter, and this is important, that a full third of our tenants are now on a cash basis and therefore, get no benefit from unpaid accrued rent or straight line rents. As an interesting point of reference, the last time Federal Realty was routinely putting up quarterly FFO in the dollar teams was back in 2013 when the stock was trading at or above $100 a share. And while our 2- and 3-year growth prospects back then were pretty good, they were nowhere near as good as they are from today's quarterly levels moving forward.

Let me explain why I think that's the case. Firstly, we solidified the monthly collection of rent as a percentage of the total rent, collected 84% of July billings, 85% of August, 86% of September, and so far, 85% of October. November has started out solid too. Better in all months than we had expected at this point. And importantly, we're fast approaching sufficient cash generation to fund our dividend completely out of operating cash flow.

Secondly, we're attracting lots of leasing interest in our properties, as exemplified by the volume of deals we did in the quarter and even more so based on the high volume of tenant conversations we're having that will likely result in deals to come once occupancy troughs, which we believe will be in the first half of 2021.

And thirdly, the lease-up of our development pipeline in 5 major markets will be added fuel to the core portfolio lease-up for which we're already seeing strong demand. Of course, there's plenty of uncertainty that remains, there's a lot of woods up to chop in the execution of this growth plan, especially in new development lease-up. But the initial signs toward a successful path are clear. That's the 50,000-foot view.

Let's get it a bit more granular. So the heart of the operational stress in our tenant base lies with the futures of a few business categories. As we all know, theater and gym businesses remain question marks as do some percentage of sit-down restaurants and full-priced apparel. Every one of these companies' management teams are searching and modifying their business plans to some extent to find a way to survive, thrive and not only today's but in tomorrow's world, whatever that may be. Obviously, the jury is still out.

But in our case, most of our tenants in these categories at our locations were strong performers coming into COVID. Therefore, when some percentage of these businesses inevitably fail on the coming months, the previously profitable and proven locations will either be in demand to successfully restructure by them or will be in demand by subsequent owners as they transition. The power of strong real estate, and that's what we're seeing already. Short-term disruption, for sure, but proven desirable real estate nonetheless.

Let me give you a couple of examples. No fewer than 7 COVID area restaurant deals from well-known Downtown Washington, D.C. restauranteurs have been signed or are far down the road to either move or have another location in Bethesda Row, Village of Shirlington and Pike & Rose or in Pentagon Ron. And in several health club locations in places like Hoboken, New Jersey and others, we've received unsolicited offers from healthier rivals aiming to improve the real estate location. These are interesting times for sure, and we're encouraged by the demand we're seeing for our space. So let's talk about that.

I hope that the volume of new and renewed leases that we did in the quarter is as encouraging to you as it is to us. 98 comparable deals was more than double the second quarter and back to a normal quarterly run rate. 472,000 square feet was more than 70% higher than the second quarter. But you say the new rent on those deals was basically flat with the old rent, actually down 1%. Well, of course, it was. That's a function of our negotiating and leasing philosophy and leverage in the middle of COVID. But note the average term, 5.6 years versus a normal average of roughly 8 years or 30% shorter on average. Basically, we're trying to lock in strong financially desirable deals for longer term than usual and limiting terms on deals where we're trying to bridge a tenant to the other side of COVID for 2 or 3 years. But in all cases, we want the most desirable retailers and restaurants in our shopping destinations.

The right tenancy is the single most important factor in attracting new clients, leading retailers and restaurants to fill the inevitable vacancy. Why? Because retailers and restaurants, considering new locations today, want to know who their neighboring tenants will be and how well leased up the center will be over the term of their lease. Providing clarity relating to that tenancy is paramount.

Here's the big point. COVID has accelerated everything. The consolidation of retail to the best centers in the trade area that began pre-COVID has and will continue to accelerate during and after COVID. If you believe that as I do, then you know how important it is to have the best-in-class tenants, and not just any tenant in those centers. Accordingly, as we've said since our first quarter call, we're willing to structure deals with those successful and important retailers and restaurants, allowing them contractual flexibility so that they remain the attraction for new class-leading tenancy on the other side of COVID. That means some deferrals, some abatements, some percentage rent deals that convert to the old rent with time or unnatural breakpoints, et cetera. All negotiated one-on-one based on a tenant's importance to the center and their financial viability. Dan will provide more details on this in a few minutes.

So let me move to our construction and progress, where the completed lease-up timing of the office portion of our large mixed-use developments is less clear than the retail or residential components because of the pandemic. While the 375,000 square foot Santana West office building is in the earlier stages of construction and won't be ready for occupancy until 2022, the 212,000 square foot Pike & Rose office building is complete today. 45,000 square feet serves as Federal Realty's new headquarters. Benefits advisor, OneDigital, took most of another floor and moved the next week. We just signed a deal with coworking leader, Industrious, for 2 full floors or 40,000 square feet, leaving about 110,000 square feet to be leased. And at Assembly Row, where PUMA will anchor that 275,000 square foot office building beginning in late '21, 110,000 remains business.

And while the long-term impact of the pandemic's work-from-home mandates have created uncertainty in office leasing, and so timing is hard to predict, there's clearly a growing sentiment as to the necessity of in-office collaboration for most business plans. In our view, we have the best and most desirable product in the market. Come see for yourself at our new headquarters at Pike & Rose.

All of these new buildings are expected to achieve lead gold status. They're state-of-the-art buildings with enhanced clean air system in affluent suburban communities, close to job centers that have both access to public transportation, but are also drivable with convenient parking. Most importantly, they're integrated in fully amenitized mixed-use environments that business leaders say is essential.

So what else gives us confidence to continue to operate as we have? Frankly, it all comes down to our conviction, not only in that first-ring suburban location of our real estate, the sweet spot, in our view, but also in the dominant open air, heavily amenitized product type of environment that we've created in those locations over the last decade or more. Evidence of the desirability of those first-ring suburbs comes not only from our leasing volumes and relocation and expansion of downtown central business district retailers and restaurants to our properties, but also from single-family home sales data. In the third quarter, U.S. home sales volume was up 12% according to Redfin's residential database. Yet the number of homes sold in Bethesda, Maryland, were up 26%; Falls Church, Virginia, up 18%; Bala Cynwyd, Pennsylvania, up 38%; Downers Grove, Illinois, up 39%; and Los Gatos, California, up 60%. All first-tier suburbs that are home to big Federal properties. It really feels like this migratory trend from downtown CBDs to first-tier suburbs is going to stick for a while.

Of all the things that worry me as a result of this pandemic, and there are plenty, filling that space with great retailers and restaurants and good economics that provide future growth is not one of them. I know that our properties' positioning in those first-ring suburbs of major metropolitan areas will be more desirable post-COVID. I know that the decades of focus on creating comfortable and attractive open air places at those centers will further enhance business viability. Consider that nearly every discussion we've had or are having with brokers and prospective tenants in every major market that we do business, the prospective deal is premised around tenants improving their real estate, their location, their co-tenants, their environment, and importantly, their landlord. Tenants want to be with landlords that have money, investable financial wherewithal, vision, execution prowess and of category of partnership with. Long-term customer-friendly service improvements like your coordinated customer pickup program matter today a lot. A lot. All of these considerations are more important now and will certainly be on the other side of this than ever before, and we're set up for that.

Now before I turn it over to Dan, let me address the Sunset Place impairment loss that we recorded this quarter. No secret that we've struggled realizing our vision of a redeveloped mixed-use community since we bought it back in 2015. First, the fits and starts of the entitlement process with the city resulted in precious time lost securing existing tenants and setting up new ones in the strong retail market of 2015, '16 and '17. By the time those entitlements were received, box rents were under more pressure, construction costs continued to rise, skinnying down value creation estimates.

But even with all that, we were hopeful that we had a viable project with some reconfiguration of the master plan. Then came COVID. The previous strength of the Anchor system, a full-size gym in LA Fitness, a big AMC theater and 2 large entertainment tenants named Splitsville and GameTime, along with the required hotel component as part of the intensified site, became obvious weaknesses that are likely to continue to remain so for some time. Accordingly, our partnership didn't pay at maturity our $60 million nonrecourse note in September, and the lender has declared default. Given the other opportunities within our existing portfolio to invest capital, we've decided not to pursue redevelopment any longer there. Accordingly, we're evaluating all of our disposition options.

Okay. That's about all I have for my prepared comments. Let me turn it over to Dan for some final remarks, and we'll be happy to entertain your questions after that.

Thank you, Don, and good morning, everyone.

We are very encouraged by the progress and the constructiveness we saw in our business over the course of the third quarter. All of our centers remain open, as they have throughout the pandemic, and over 97% of our tenants are open and operating.

FFO per share for the quarter showed great sequential progress over second quarter's number, up 45% to $1.12 per share. While still off from 2019 3rd quarter levels, we are encouraged by the progress as our collectibility adjustment was almost cut to half, from $55 million in 2Q to $29 million in the third quarter. Other drivers which impacted the quarter include $0.07 of drag due to higher interest expense given the incremental liquidity and balance sheet strength we are carrying during the pandemic. On the other side of the pandemic, we expect this drag to be nonrecurring. $0.06 of drag due to the impact of COVID-19 on our hotel joint ventures, parking revenues and percentage rent, and this was offset by $0.03 of upside from lower expenses for the quarter. As a result, this totals a net $0.48 of COVID-19-related negative impact for the third quarter, a meaningful improvement over 2Q's negative COVID impact of $0.83.

Collections continue to improve from the 68% level reported on our second quarter call, up to 85% for this call for the third quarter as of October 30, cutting our uncollected rent by more than half. Our progress continues in October with 80% already collected but ahead of the September collection pace at September 30. Please note that the denominator for our collection metric includes all monthly recurring rent build and base rent with charges for CAM and real estate taxes, and is not adjusted for deferrals and abatements. And as it relates to the numerator, all deferrals and abatements are classified as uncollected. Also note that the denominator has remained fairly consistent throughout the first 9 months of the year at roughly $70 million to $71 million per month.

We have continued to take a tactical approach as we negotiate and work with our tenants through this challenging period. $34 million of deferrals were executed in total for the second quarter and third quarter combined. Of that amount, almost 2/3 or $22 million is with higher credit pool basis tenants. For selected agreements and for our Anchor restaurant program, we also abated $21 million of second and third quarter rents.

In conjunction with all of these negotiations, we have restructured many of these deals to often include 1 or more of the following: enhanced credit of the guarantors backing the leases; incremental percentage rent upside where we have abated rent; removal of development of parking and lease restrictions and other tenant approval rights; eliminating or pushing out tenant lease termination and co-tenancy rights; reduction or deletion of below market tenant extension options; and we're even able to finalize some agreements to open new stores at federal centers. All of which enhances the long-term value for our assets in exchange for these near-term concessions.

As we did last quarter, we have provided disclosure relating to the impact of COVID-19 in a summary of collectibility and accounts receivable, which is provided on Page 10 of our 8-K financial supplement and an updated investor presentation, which incorporates an update for COVID-19 that can be found through a link on our investor website.

As Don mentioned, leasing volume was back in full swing with over 480,000 square feet of retail deals in total, adding in over 60,000 square feet of office leasing, bringing a total of almost 505,000 square feet of deals signed, our highest combined quarterly volume since 2018. We are also encouraged by the level of activity in our leasing pipeline. This activity buttressed our leased percent occupancy metric, which stood at 92.2% at quarter end. However, we still expect continued pressure on our occupancy metrics over the next several quarters and expect to dip into the mid to upper 80s at the trough, as we talked about on our second quarter call.

We do expect to see meaningful growth from those levels starting late in 2021 given current and projected demand.

We are seeing 3 very specific leasing demand drivers in our portfolio. First, in the category of urban to suburban. Specifically, the restaurant deals in D.C. that Don mentioned that are in the works at Bethesda Row, Pentagon Row, Pike & Rose and Village at Shirlington; 2 best-in-class restaurants and 2 primarily urban/mall retailers planning openings in Spokane as well as numerous concepts in Downtown Boston in discussions at both Assembly Row and Linden Square.

Second, upgrading real estate to best-in-market open air locations, including a Marshalls deal, where they are moving from a second-tier lower rent location next to a failing B Mall to our Gaithersburg Square asset, a main and main location in that submarket, replacing a Bed Bath & Beyond, at better economic terms to us, and higher rent than they were paying. Several additional deals involving other best-in-class discount apparel, men's merchandisers and groceries are in the pipeline along that same vein.

And third, new-to-market lifestyle and digitally native tenants targeting our best-in-class open air, mixed-use and lifestyle locations. Santana Row, attracting Nike Live, Vuori, Arc'teryx, Faherty, UGG and new restaurant concept, Chika. Assembly Row landing new deals with Sephora and Shake Shack, in addition to the CVS and the soon to be delivered PUMA building, with several other deals in the pipeline. Pike & Rose, attracting a new concept from the founders of CAVA, also with more deals in the pipeline. Overall, this activity is diverse and very encouraging.

Now to a discussion of the balance sheet and our further enhanced liquidity position. As you saw in early October, we raised $400 million of unsecured notes due 2026 at a 1.38% yield, bringing our total pro forma liquidity at September 30 to over $2.25 billion, comprised of $1.25 billion of cash plus our undrawn $1 billion credit facility. We did this as a green bond, which I will discuss in more detail a bit later.

With our $1.2 billion in process development pipeline continuing to be executed on, we have only $500 million left to spend against this roughly $2-plus billion of dry powder. Note that this pipeline is forecasted to deliver $70 million to $80 million of POI when it fully stabilizes out in '23 and into the 2024 timeframe. As evidenced by our decision to not move forward on the Sunset Place redevelopment, rest assured that we will continue to demonstrate discipline with respect to all capital and resource allocation decisions moving forward.

As it relates to managing the balance sheet, we will continue to be opportunistic in pursuing equitization through asset sales, with over $200 million of deals under active discussion at blended yields in the fives. We'll see how those progress, however.

As we discussed on the last call, we remain well positioned to manage through the challenging environment. Deleveraging the balance sheet will continue to be a priority as we look to opportunistically bring down leverage levels over time to our historic levels.

As you saw yesterday, our Board made the decision to declare a regular cash dividend of $1.06 per share payable on January 15, our first dividend of 2021.

Now before I hand the call over to Q&A, let me talk briefly about Federal's commitment to ESG. While ESG has always been a key part of our business strategy for more than a decade, until 2020, we have never prioritized communicating the breadth and depth of this commitment to our stakeholders. Our inaugural corporate responsibility report was issued in late March 2020, unfortunate timing with the pandemic, but a publication, we are extremely proud of, nonetheless. Our green bonds in October further demonstrates that commitment in the form of green building design and construction with commitment to spend $400 million on LEED silver, gold and platinum buildings, and we have a pipeline of comparable LEED development projects, which positions us to potentially issue more green bonds in the future. Furthermore, as you may have seen from NAREIT, we ranked fourth of roughly 100 real estate companies with on-site solar capacity and the Solar Energy Industry Association's, SEIA's annual list of top U.S. businesses utilizing solar energy. More accomplishments and color to come on the ESG front and kudos to Dawn Becker and Emily PacIolla who lead this effort.

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

(Operator Instructions) And our first question is from Craig Schmidt with Bank of America.

Federal's second -- third quarter to same-property NOI was down 18.1%. That compares to our average for strips at about 12 -- down 12.7%. What's responsible for the somewhat lower same-property revenue versus some of your strip peers?

Let me start with that, actually, Dan, then you go. Craig, Dan is going to follow, but I don't know. And I almost don't care. And I don't mean that tongue in cheek. I -- what we are trying to do is not to kind of get back to where we were. But to effectively, in an over retailed environment, make sure that on the other side of this, we have better [shopping centers]. In order to do that, we're effectively cutting the deals that we need to cut with tenants that we think will be critically important on the other side. We are actively, frankly, not helping out the tenants that won't make it and will produce more vacancy.

And so there is very little focus in this company right now on comparable POI. Because in our view, it's not relevant. It's relevant from the standpoint of overall cash flow to make sure we can pay our bills, we can pay our dividend and set ourselves up for the future. But that's it. So from a comparative perspective, I know I have no answer to your question in terms of us versus the peers, maybe Dan does. But I wanted to get that out first.

Yes. Just from a kind of a mathematical perspective, the big driver is obviously the flexibility adjustment. And look, our approach, I mean, the fact that we have more -- the highest percentage of tenants on a cash basis and take what we feel is a very prudent approach and appropriate approach, but that drives our collectibility adjustment as a percentage of build revenues to be one of the highest in the sector, and that's the biggest driver. Look, I think it's going to allow us to probably have less -- more transparency during this period and less impact going forward.

And then just as a follow-up, how is the leasing activity surrounding Third Street Promenade and have re-leasing efforts been hindered by LA County's conservative reopening stance?

Craig, it's Jeff Berkes. Yes, I think that's absolutely true. We obviously have some space on Third Street that we need to deal with, and we are. But until things are opened up and we can kind of see a little bit clearer to the other side of the pandemic, I don't expect to see a total leasing activity on Third Street Promenade, whether it's our buildings or anybody's buildings.

And our next question is from Ki Bin Kim with Truist.

So if we put aside FFO and the same store NOI for a moment, if we had a chance to be applying the law in some of your meetings than what you're seeing on the ground, what do you think is the most underappreciated aspect of what's happening with your tenancy in your portfolio today?

Yes, that's a good question, Ki Bin. The -- if you think of -- if you're thinking late '21, '22, '23, and you put yourself in the kind of position of a retailer trying to do a deal today, if you -- imagine they're them. We're asking them to commit to a series of payments for 7 years, 10 years, et cetera, where they have less visibility today of who their co-tenancy is going to be probably than they've ever had. And so the notion of the work that we're doing today to make sure the right tenants are there in that center to effectively give them confidence to be able to enter into an economically strong deal is something that you cannot see in the results. And philosophically, it's something, in my view, that's very different to the extent that we do it because we're doing that everywhere.

Every shopping center is about how to make sure the inevitable additional vacancy, which, by the way, we've never had. So this will be the first time where the ability to get into a Federal Center is actually practical. If you're 93% leased and you're trying to lease up to 95% or so, you have -- we have 23 million square feet. So every point of occupancy is roughly 230,000 square feet of space. And if you do that on shop, it's a lot of deals, et cetera. If you're down at 88% leased, and you're going to get back to 95% over a period of time, then for the first time, we've got the ability to put tenants in that have tried to move up to a Federal Center but have been unable to. For that to be successful, we better have the right tenants as the foundation in each of those shopping centers, and that's effectively where we spend all of our time.

And I truly -- I wasn't being snarky with respect to Craig up the first question. Trying to compare that to what other people are doing and how they're doing it is not something we're focused on. So that I think is, truly, I think it's the secret, if you will, to value creation on the other side of this. We don't intend to be a $70 stock on the other side and not be -- and we don't intend to be back where we were. We intend to be more and better. And so it's not about a percentage of where we were. It's the percentage of where we're going. And that is a fundamental way of management throughout this building that everybody is focusing on, and I think that's a little different.

Okay. That's helpful. And then second question, for the tenants, I think it was mostly restaurants that you had belief in that was doing really well before COVID and that you're providing some financial support. I know it's a very short time frame to gauge any results or activity, but how does that feel right now? Do you feel like you've made the right investments? And are those tenants starting to show signs of life where they're going to come out the other end?

Yes, very much so. Now look, the big question there is will we feel the same way through January and February and March, right? I mean, that is still -- whether anybody wants to talk about it or not, that is certainly, with respect to that category, that period of time that will see whether the prudence, if you will, of keeping them strong was smart or not.

But it's been an amazing weather year on both those, frankly. The production of our restaurant product has been ridiculously strong. At Assembly Row, they're operating at 80%, James? 85% of where they were at Santana Row. Numbers of them are more than 100% of where they were because we've done so much outside seating and expanded their capacity, et cetera.

So has it worked so far? Sure. But the real test will come in the next few months.

Our next question is from Katy McConnell with Seven.

Great. So assuming that your lines are moving forward with the Sunset redevelopment, do you have any other plans for that capital? Or is it just reinvesting in leasing CapEx at this stage? Or are you seeing any interesting opportunities in the market right now for other investments, given all the disruption that's going on?

Yes. It's a good question. First of all, we have a lot of development in progress. And so certainly, we have uses of that capital that are certainly identified for.

Do I expect over the next year or 2 for there to be opportunities with assets that we'd love to own? You bet you. I do. I really hope we -- I hope we see that. We're starting to -- it will be interesting even with our -- on the other side of that with our asset sales to see what the market value of them are as we sell a couple of them. None of which have obviously closed yet at this point. So we'll see how that plays out.

But yes, we do see opportunities that way, and we're judicious users of capital. I mean, there's nothing more embarrassing for me than the Sunset Place failure. There's a lot of good reasons for the failure, but it's still a failure. So we take very seriously where we allocate capital. Why we think the dividend is so important from that perspective and to the extent we find it, as we expect to, additional opportunities with great real estate going forward, you'll see those acting on it.

Okay. Great. And then, since the tenant base is the reason to walk away from that, I'm curious if you're thinking about your exposure to fitness or other experiential tenant categories differently today? And if those are going to be serving as precedent asset sales that you see going forward?

Yes. No, I don't -- so there's a couple of things about that in the fitness category, and frankly, in the theater category. So I believe both categories will exist? Do I believe both categories are important for communities going forward? You bet I do. But certainly, the jury is out on what their business models will be able to see what they will need to be profitable, how they will be able to -- what levels of rent they'll be able to pay. So you bet you, that's what I worry about.

It's one thing when you're talking about an established retail center that's got a place and is important to a community to have a tenant like that where you can backfill or you can do another use in our case -- in other ways. It's completely different than starting a fresh and building a new one. And the -- obviously, Sunset investment would be putting a lot of faith on those uses in terms of what they can pay and what their [job] is going to be in the future. While there's -- from a completely new investment, and that was just a bridge too far for us to take.

And our next question is from Haendel St. Juste with Mizuho.

Don, I just found your earlier comments on the dividend intriguing. I believe said you're fast approaching sufficient cash flow to fully cover the dividend. So I guess, I was hoping you could expand upon that a bit more on how you and the Board are thinking about the dividend here. Obviously, you want -- you don't want to cut it like most of your peers have, but the 3Q GAAP FFO was $1.12, implies a mid $4 share-ish outlook for next year, which is pretty comparable to this year, so flat earnings, and you're sitting here with ample coverage already above 110%. So I guess I'm curious if you guys -- if you and the Board think maintaining the dividend here as the right move, even if you can afford to, given the strong liquidity you outlined before and how long you might be willing to overpay it.

Yes. Haendel, gosh, we talked so much about this over the past 6 months. But the -- there has to be a guiding philosophy. And ours may be a little different than yours. We believe that the dividend, that, that bargain that's been put out there for investors is a key portion of their total return. And at -- the idea on the other side of this and as I say, we certainly see a path to getting back to an 80% payout ratio or something like that. The idea of giving up on that, as you say, when you can afford to do so, on balance, seems premature.

Now the -- and that is exactly how the Board -- and we talk about it. We think about it. It's clearly an important part of total return. So nobody knows how long COVID will go and what the story is. And at some point, we may not be able to do that. But certainly, in November 2020, which is, as I think you know, the first quarter dividend for 2021, paying $80 million in the form of a dividend, we'll certainly have to ultimately pay that anyway because we'll certainly have more than $80 million of taxable income next year, and that probably applies to February 2. Now by that point, we're going to have a whole lot more visibility as to whether we're able to get out of that hole into later in '21, '22, et cetera. And we'll make decisions at that point as we do, frankly, every 3 months. But to me, the November 1, in particular, was a pretty easy decision. I hope that's helpful.

It is, Don. And also, you mentioned the $200 million potential dispositions. I'm curious if there's any commonality, the geographic focus or product type you're looking to sell here? And what are you seeing in the market today in terms of buyer demand and any insight into the cap rate? And what level of NOI the buyers are underwriting?

Yes. Jeff?

Yes. Haendel, it's Jeff. Look, we're -- maybe the best way to say they're testing the market on a few assets right now. They're all very different in terms of what they are and where they are. So of course, we're seeing different responses from the market. I don't want to talk too much about pricing because we're in the middle of negotiations on all of them. But I will tell you, assets that you think would trade at high prices. We are seeing prices that we think are strong. We'll have more to talk about on it on the topic, hopefully, next quarter. But there are buyers out there just like there are tenants that don't have legacy issues and have capital and they're doing leases. There are buyers without legacy issues that have capital, and they're going to be buying real estate.

Got it. Got it. Anything under LOI?

I'm not going to comment on that, Haendel.

And our next question comes from Alexander Goldfarb with Piper Sandler.

Don, overall, as you look at your tenant base, one, your restaurant comments are definitely super helpful and impressive that experiential tenants have really rebounded that way. But overall, as you look at your tenant base, how much of a shift do you think that you'll expect going forward? Meaning, do you think that maybe it's just a little bit of a trend where, hey, maybe we want to dial back exposure to some of these areas, boost it in these areas? Or do you think that your exposure that you had before really will continue to take hold on a go forward?

Yes. It's a great question, Alex. And when you kind of think about those decisions and what you're doing, obviously, you're making decisions for a decade or more in that regard. The answer is not holistic as you might like it to be. Might be easier to understand if we're holistic, but it's not. It really comes down to the individual shopping center, the individual mixed-use project and what it needs for that community.

And what is interesting to me is while I'm sure for a number of years there will be far less restaurants effectively doing business and making money doing business, where will those restaurants go and where will they be? It is in the process of being -- figuring out now all over the country. And I do think D.C. is a little ahead of that. Because of the geography of D.C., what was downtown, what is in these first tier suburbs, there is really good product in say the first year -- in the first tier suburbs. Frankly, I think we've had a lot to do with that over the last 40 years. And so the ability of a restauranteur who is really hot downtown, but whose customers are not coming there anymore, either because their offices are closed or because they're in the suburbs and there are choices there that they feel better about are causing these restaurants to come and look at us and frankly, in numbers that have surprised us. Stu Biel is our key leasing person on that, and they certainly don't surprise him. He can tell me this was going to happen all the way along. But it surprised me a little bit.

And so overall, when you go kind of market-by-market and what product we have in each market, I think it's likely that we'll have a similar certainly diversified income stream 5 and 10 years from now. Might that change on the gym side or the theater side? Potentially, because I think those are the ones -- those are the businesses that are less predictable in terms of what the profitable business model is going to be. But in terms of food, it's always going to be an important part of what Federal does.

Okay. I remember a decade ago, you -- out of the credit crisis, you made the comment that food is part of the -- then you said necessity, but essential retail is not a luxury, but restaurants are part of feeding people. So...

Certainly, in our market share.

Well, a lot of people, they spend money to have gorgeous kitchens, but keep them crispy and don't use them to go out.

So the second question is, on -- I think, Dan, you said that 30 of your tenants are now cash rent paying. And if that's correct, so big picture, you've selected 85% of rents overall, presumably that includes cash-based tenants. But as you think about the outlook and the trough occupancy that you spoke about in the first half of next year, what do you think is posed to shake out between the remaining 15% of tenants where you haven't collected rents and that 1/3 of tenants who are paying cash? Collectively, how do you think that will all shake out?

I think look, we're fighting for every dollar from every tenant, whether they're a cash basis tenant or an accrual basis then. And yes, we have more folks on a cash basis in terms of -- from an accounting perspective because I think we just -- we view them as not probable to be able to pay for their entire lease, but we're going to fight aggressively to make sure that we get back as much of that rent as possible.

I think it remains to be seen. There will be some shakeout. I think that we will see some shakeout in our local small shop through the pandemic. I think that we'll see continued pressure on some of the weaker retailers across the different categories into 2021 in the first half. And then I think we'll continue to -- we'll see how things play out with regards to the theater and fitness tenants.

But do you think, Dan, is it reasonable if we say half of each of those things goes away? Or is that not a reasonable supposition?

I think it's really tough for -- Jeff.

Tough, yes. Some portion of that, we'll be looking to backfill. I can't give you a number now, Alex. But I think we're pretty well positioned that even if they do go away, it's not permanent. And we'll have demand to backfill it at attractive economics.

Our next question is from Nick Yulico with Scotiabank.

This is Greg McGinniss on with Nick. Could you just walk us through the impact that tenant bankruptcies have had on portfolio occupancy in ABR this year? And then kind of what's still left outstanding in regards to tenants still navigating the bankruptcy process? Also, any additional near-term risk on your watch list? Or has that treatment shaken hard enough this year already?

Bankruptcy on, call it, on our occupancy rate, roughly about 8 basis points impact. So far, we've got probably exposure to about 4% of our revenues as it relates to all tenants to have filed this year. If you back out those tenants who have emerged from bankruptcy and that stayed open in our centers, it's probably total exposure of about 3%, 3.25%. And of those that we expect to close ultimately, it's probably in the 1.25% to 1.5% range in terms of -- as a percentage of our total revenue.

Okay. And then on the...

Did that help?

Yes, definitely. And then on the watch list, do you think there will be more fallout this year or early next year? Or did we shake hard enough during the pandemic that most of those bankruptcies already sell out at this point?

No. Look, I think that the worst of 2020 has hit us, but I think we'll see another wave certainly in the first half of 2021 of more pain to kind of hit. And that's why we forecasted that our occupancy will go down below the 90% level, certainly in the first half of '21.

Okay. And I guess just the other question I had was on -- you've had fairly stable rent collection numbers for the last few months here. Are you expecting much trend up in the next few months into the year-end? Or how should we be thinking about that?

No. I think the high 80s is where we'll probably be, if you're going to -- we're going to continue to calculate it the same way as it's been. And I think that's because there'll be some additional fallout, as Dan and I have both said that we believe will happen this winter. And yet, there'll be deferrals that are paid back that go the other way. So effectively, a balance about where we are and probably a little bit better than where we are is what we're looking at right now.

And our next question is from Vince Tibone with Green Street Advisors.

How do you think increased working from home across the country has impacted foot traffic in shopping centers? And then longer term, do you think more of this permanently could change the demand profile for suburban centers or the ideal merchandise units? I'd love to get your thoughts on that.

It's so interesting to me. And I'll just give you 1 example that kind of goes right to the point of your question. When we're underwriting Hoboken, our Hoboken investment last year, which is a lot of street retail and residential apartments on top of it. We said, gosh, the downfall of Hoboken is that there isn't a lot of office in Hoboken. And so daytime traffic is always the thing that we worry about there because it needs -- nights and weekends are where they make their money.

Well, it's one of our better performing assets, and it's one of our better performing assets because people are home. And so traffic during the day and during the -- on the street and around is strong. Our collections are strong, our tenants are relatively strong. Yes, there are tenants that are going away like everywhere else, and we'll be able to backfill. But that kind of combination of being on that side of the river from New York and having people home, that's been a real benefit.

Now can you take that and extrapolate that all over the country to all kinds of centers? I don't know. I think that's a bit of a stretch. But there is no doubt that some of the benefits of working from home are helping the community centers.

Do I think it will stay at the level that it is? No, I do not. And as I was saying before, I -- as another example, we are in our offices now for 90 days. We're not fully in, but we've got about 50 or 60 people that come in each day for an office that is normally 150 or 160 people each day. The experience here, the ability to effectively walk around what is done outside and what -- how people feel in here has been ridiculously encouraging. I didn't expect this much of a boost to morale, this much of a kind of a good feel from coming into a new office. So I -- that doesn't mean that decision-makers are deciding today to enter new office leases, but we do see everywhere the sentiment that -- of a growing percentage of people want to be back and a growing percentage of employers are embracing that.

So I think there'll be a balance, Vince, as with most things, between where we used to be and where we will be. And I think that diversity of opportunity is what protects the income stream.

Thanks for that color and thoughts. One more for me. Can you discuss just the expected CapEx and leasing economics if you have to retenant a former theater with another use?

Yes. It's a good point. It's hard to dip it profitably if it's not another theater. And the exception to that -- maybe we're kind of going back to our last question, theaters on the second floor and things like that, that are retenanted, depending on how they were built. Whether the stadium seating is structural, whether it's -- there's a lot of detail, obviously, as to how a building is built and how it needs to be reconfigured. But to the extent you've got high rents in the area where you're talking about high office rents or otherwise, you can make the economics work. It's really tough because construction costs are construction costs. To have low rents and to effectively -- yes, you can get a bump up in rent, but pretty hard to get a bump up net of the capital. So high rent to your friends if you're in markets that can support that when you do have to reconfigure space, any space, frankly.

Is there any rule of thumb just for like the CapEx per theater? Or it's too hard to generalize doing all this kind of specs in the way of details you mentioned.

I can't get you there. I know that in a number of places, whether we're looking at it, and it's still being built out by the theater operator, a new development down in CocoWalk. That's one particular set of economics. But here at Pike & Rose with an iPic and the way that is built out, that would be a completely different set of economics. So I'm not sure I can get you -- I know I can't give you a number that you're asking for because they are very different.

Our next question comes from Linda Tsai with Jefferies.

Maybe following up on Alex's cash basis question, how much revenue did you collect from cash basis tenants in 3Q?

Roughly about 60% kind of collections from cash basis tenants third quarter.

And then how did it compare to 2Q?

Significantly increased. It was a -- it was about 40% collection for cash basis tenants in the second quarter.

And then just 1 more. How do you think the passage of additional PPP loans positively impact some of your tenants on the bubble and get some to the other side? Or do the pressures facing them in the current environment extend beyond what these loans can provide?

It remains to be seen, Linda, but the PPP loans were important. They were certainly important in this first phase. I think you'll see -- I'm sure you'll see more now in the second phase, probably in the January, February time frame. I think they're very important, I think, particularly because of the time of year. And I think if you sit back and you kind of think about it, this will be a really interesting year. You know how you and me and all of us feel coming out of winter into a spring normally. And normally, there's a pickup in consumer spending. Normally, there's a pickup in what's happening.

This year has the potential to be a really good one. Because in addition to that normal feeling coming out of the winter into the spring, I do believe there will be PPP money or something like that. That will be critically important. I do believe there'll be a vaccine which, even if it's not delivered or completely as total efficacy, et cetera, will still be very important. And I do believe that it will be a tougher winter than it normally is anyway because of the situation we're in. So PPP is just one piece of, I think, a number of catalysts that could really make that spring and summer of 2021 better than anything we're doing right now.

And our next question is from Chris Lucas with Capital One Securities.

Dan, just on the cash position. I guess, just kind of curious, should we be thinking about utilization of that for the upcoming bond maturity and then the term loan into next year? Or will you be tapping the markets, again, to maintain your cash position as you kind of face those maturities?

Yes, I think we're certainly going to use the cash we have to repay the bond that comes due in January. Look, we've got the flexibility to extend the term loan for another year from March. And so we're going to maintain maximum flexibility based upon the flexibility, based upon the visibility we see as we go through and work our way through. And so we'll be judicious in terms of managing our cash balances. But we're going to keep cash in place for as long as we feel that we need it.

And then I guess just on the transaction side, you had gone under contract with, of course, parcel at Grand Park earlier. Can't remember if it's earlier this year or last year. But is that transaction still proceeding to sort of close either later this year or into next -- first quarter next year?

Yes. Yes. No, it's still on track. It's probably going to push into kind of next year, probably the first half of next year, but it's on track and and we feel reasonably good that, that should...

We feel great about it. It will happen in March of '21.

Okay. And then -- and the pricing has kind of held out? Nothing's changed in the last...

It's okay. No. It's exactly where we intended it.

And then Don, just -- I'm sorry if I missed this in your earlier comments. As it relates to Sunset, have you guys stopped negotiating with the lender at this point?

We have not yet at this point. We'll see where we go, though.

Our next question is from Mike Mueller with JPMorgan.

I was wondering, can you talk a little bit about apparel collections? I mean, obviously, fitness and restaurants and everything comes up. Frequently, the flow collection rates. But when you have apparel that's been open generally since the spring and collection rates are in the 70s to 80s. I guess, how broad based is the collection rate low? Or is it really just dragged down by a small subset of those tenants?

Yes. No, it is -- you're on it. I mean, that is absolutely another category. The thing is it really depends. So there's more variability in what happens there. We're collecting in the mid-70s or something of the apparel tenant department stores. And so it's certainly not bringing up the overall collection.

Yes. And then last question on that. Anecdotally, what are you hearing in terms of sales, though, in terms of sales conversions there?

Very much depends on the particular store. The small shops, full price apparel stores are probably struggling the most.

And we have reached the end of our question-and-answer session. And I will now turn the call over to Leah Brady for closing remarks.

Thanks, everyone, for joining us today.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.