Don Wood, president & CEO, and Andrew Blocher, CFO, are reporting for Federal Realty Investment Trust at NAREIT's REIT Week.
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Below are notes from the session.
10:20: Wood: As we sit and look forward, what we're really all about is great management and internal growth of the existing properties plus a development component. We have a couple of great development opportunities—one in Boston, Assembly Row, and one in Bethesda, Md., just outside Washington, D.C. … It's a company that's very careful about our risks. Development is never more than 20 percent of our activity. Acquisitions—we will only buy the best stuff. We will step up and pay up, but it's hard to find that. … I do believe that as a country that we are over-retailed. … That does mean that you have to be really careful about the retail property you are investing in. … Much of the retail property in this country will be worth less in five years than it is today. … When you look at the impact of online and you look at the overall supply/demand dynamics, there are challenges in the retail space.
10:25: Wood: (In response to question about investment criteria and where they are willing to “pay up.”) It's basically in the markets we're in. … In addition, this portfolio has development and redevelopment opportunities. If you can figure out how to create value in the properties you already own, in the markets you are already in. Those opportunities are far less risky.
10:28: Wood: (In response to question why more B and C locations don't close if U.S. is over-retailed.) If you think about, if you have a B or a C mall whose future does not look particularly bright in terms of growth, what are your choices? Those tenants have long-term leases. It's very expensive to turn it into something else. It's a big physical structure that has to be demolished and figuring out the new demands are not easy. … So it might just make sense to milk it and get what you can by financing, rather than selling. … In our portfolio, that's not the case. We don't have that stuff. A big reason for that is the high-barrier to entry markets we are in. There are many places in the country that are not over-retailed. … For outlets, there is generally more demand than there is supply. So you're seeing everybody try and get into that. … The thing that stays constant is that the close-in suburbs of Washington D.C., New York, Boston, Los Angeles … stay strong. That's not to say they don't dip, but they (weather the storms better).
10:34: Wood: (In response to question about leasing strategy.) If you believe this notion of oversupply, you have to create demand. The only way we create value in real estate is competition for space. Yet it seems to me that because of the nature of some of Federal's properties, there are at least 20 of our properties that are very close to a high-performing mall. … (Rent) is significantly higher in a regional mall. … Businesses are looking for ways to be profitable. So they are much more open-minded to doing business in different ways. … We (need to) create competition with mall space. … I don't hear too much talk about the demand side. It's got to be about creating as much demand as possible. … You have to have the product to make sense to do that. It's not the grocery-anchored center that's going to be able to pull a tenant out of the mall. It's going to be mixed-use/town center style developments.
10:39: Wood: It was the best ICSC I have been to in 10 years from Federal Realty's perspective. … There was incredibly strong demand to do deals. … Many ICSCs are just relationship building conferences. This year there was much more traction about doing deals (in 2012 and 2013). It was a very productive period of time.
10:42: Blocher: We've seen a dramatic improvement in bank lending rates over the course of the year. … Today, we're looking at LIBOR + 150 (at beginning of year was LIBOR + 200). We had a bank meeting and had 56 people show up. … Demand is strong. Syndication is going well. … With respect to the unsecured market, we are not a big secured borrower. Only about 12 percent is secured debt. That gives us flexibility to pursue acquisitions. … We are also not highly-levered. … Current market conditions are that a new 10-year inside of 5 percent. So the markets remain very attractive. … We do have a lot of options available to us and use them responsibly.