Federal Realty Investment Trust

NYSE:FRT

Earnings Call Transcript 2020-Q3

[Operator]

Greetings. Welcome to the Federal Realty Investment Trust Third Quarter 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question and answer will follow the formal presentation. [Operator Instructions]. Please note, this conference is being recorded. I will now turn the conference over to your host, Leah Brady. You may begin.

[Leah Brady, Investor Relations Senior Manager]

Good morning. Thank you for joining us today for Federal Realty’s third 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’ll 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 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.

Given the number of participants on the call, we do kindly ask that you limit your questions to one or two per person during the Q&A portion of our call. If you have an additional questions, feel free to jump back in the queue.

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

[Don Wood, President & CEO]

Thank you, Leah. Good morning, everyone. FFO per share of $1.12 in the quarter was right about where we thought it would be. And we're pretty miserable compared to the pre-COVID task. Pretty good when you consider the progress we made over the second quarter. And this important that our full third of our tenants are now on a cash base, and therefore get no benefit from unpaid accrued rent or straight-line rents.

As an interesting point to 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 two and three-year growth prospects back then were pretty good, they were no where near as good as they are from today's quarterly level moving forward.

Let me explain why I think that's the case. Firstly, we solidify the monthly collection 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 off solid too. Later, in all months we had expected at this point. And importantly, we're fast approaching sufficient cash generation under our dividend completely out of operating cash flow.

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

And thirdly, the lease up of our development pipeline in five 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 wood left to chop in the execution of this growth plan, especially in new development lease up. But the initial sign toward successful path are clear.

That's a 50,000 [Indiscernible]. Let's give a bit more granular. So, the hard the operational stress in our tenant base lies with the futures of few business categories. As we all know, the theatre and gym business remain question marks as we do some percentages sit down restaurants and full price apparel.

Everyone of these companies management teams are searching and modifying their business plans to some extend as final way to survey, thrive and not only today's but in tomorrow's world, whatever the maybe. Obviously, the Jury is still left. But in our case most of our tenants in these categories at our locations where strong performance coming into COVID.

Therefore, on some percentage of these business inevitably fail on the coming months, then previously profitable and proven locations or either be in demand to successfully restructured by them or will be in demand by subsequent owners as they transition.

The power of strong real estate and that's we're seeing already. Short term disruption per sure, but proven desirable real estate nonetheless. Let me give you a couple of examples. No fewer than seven, COVID restaurant deals from well-known Downtown Washington D.C. restaurants tours has been signed or a far down the roads either move or at another location in the Bethesda Row, Rose at Shirlington, Pike & Rose or Pentagon Row.

And in several health club locations in places like Hoboken and New Jersey and others we've received unsolicited offers from healthy arrivals; Arlington, the real estate location. These are interesting times for sure and we're encouraged by the demand we're seeing from our space. Let's talk about that.

I hope that the volume of new and renewed leases that we did in the quarter is encouraging to you that to us. 98 comparable deals was more than double the second quarter, and that took 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. As a function of our negotiating and leasing philosophy and leverage in the middle of COVID. But note the average term, 5.6 years versus the normal average of roughly eight years or 30% shorter on average.

Basically, we're trying to lock in strong financially desirable deals for longer term than usual, and limiting term on deals where we're trying to bridge a tenant to the other side of COVID to two or three years. But in all cases, we want the most desirable retailers and restaurants at our shopping destinations.

The right tenancy is the single most important factor in attracting new class leading retailers and restaurants to fill inevitable vacancy. Why? Because retailers and restaurants considering new locations today, wants 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 tendency 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 as 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 break points, et cetera.

All negotiated one-on-one based on a tenant 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 in 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 and Rose office building is complete today. 45,000 square feet serves as Federal Realty's new headquarters, Benefits Advisor one digital took most of another floor and moves in next week.

We just signed a deal with co-working leader industrious [ph] for two full floors or 40,000 square feet, leaving about 110,000 square feet released. And Assembly Row where PUMA will anchor that 275,000 square foot office building beginning in late 2021, 110,000 remains the business.

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

All of these new buildings are expected to achieve legal status. Their state-of-the-art buildings with enhanced clean air system in affluent suburban communities, most the job centers and have both access to public transportation, but are also drivable with convenient parking. Most importantly, they're integrated in only magnetize 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 convictions, 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 and 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 or properties, but also from single family home sales data. In the third quarter, U.S. home sales volume was up 12% were in the Repin's residential database, yet the number of homes sold in Bethesda, Maryland were up 26%.

Falls Church, Virginia, up 18%, Falconwood, Pennsylvania up 38%, Downers Grove Illinois up 39%, 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 year suburbs is going to stick for one.

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 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 their ability. 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 proving the real estate, they are location, they're co tenants, their environment, and importantly, they are landlord.

Tenants want to be with landlords that have money, investable, financial wherewithal, vision, execution privies and a pedigree of partnership with. Long term customer friendly service improvements, like a coordinated customer pickup program matter today 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.

And before I turn it over to Dan, let me address onset place impairment loss that we recorded this quarter. It's no secret that we've struggled realizing our vision of a redeveloped mixed use community as we bought it back in 2015. First, the fits and starts with the entitlement process with city resulted in precious time loss securing existing tenants and setting up new ones in a strong retail market of 2015, 2016 and 2017.

By the time those entitlements received we'll received box rents where under more pressure, construction costs continue to rise, skidding down value creation estimates. But even with all that, we were hopeful that we had a viable project with some reconfiguration of the masterplan. Then came COVID.

The previous strength of the anchor system, a full size gym and LA Fitness, a big AMC theater, and to large entertainment tenants name Splitsville and game time, 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 non recourse 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.

[Dan G, EVP & CFO]

Thank you, Don. Morning, everyone. We are very encouraged by the progress and constructiveness we saw on our business over the course of the third. All of our centers remain open. They have throughout pandemic and over 97% of our tenants are open and operating.

FFO per share per for the quarter through eight sequential progress over second quarters number of 45% to $1.12 per year. I'll still welcome 2019 third quarter levels, you're encouraged by the progress as our collectability adjustment was almost cut in 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 the 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 non-recurring.

Collections 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 at the corporate level.

As a result, this totals a net $0.48 of COVID-19 related negative impacts of the third quarter, a meaningful improvement over 2Qs negative COVID impact of $0.83. Collections continue to improve from the 68% level recorded on our second quarter call, up to 85% for this call for the third quarter as of October 30. I think our uncollected rent by more than half.

Progress continues in October, with 80% already collected. But ahead of the September collection page and September 30. Please note that the denominator for our collection metric includes all monthly recurring rent bills and base rent charges for cam and real estate taxes and is not adjusted for deferrals and abatements. As it relates to the numerator, all deferrals and abatements are classified as uncollected.

Also knows that the denominator has remained fairly consistent throughout the first nine 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 referrals were executed in total for the second quarter and third quarter combined, of that amount, almost two-thirds or $22 million with higher credit pool basis tenants.

With selected agreements, and through our anchor restaurant program, we also upgraded $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 one or more of the following; enhanced credits of the guarantors backing the leases, incremental percentage rent upside where we have abated rent, removal of development, parking and use restrictions and other tenant approval rights.

Eliminating or pushing out tenants lease termination and co-tenancy rights, reduction or deletion of below market tenant extension options. And we were even able to finalize some agreements to open new stores at Federal centers. All of which enhances the long term value or assets in exchange for these near term concessions.

As we did last quarter, we have provided disclosure relating to the impact of COVID-19 and a summary of collectability and accounts receivable which is provided on page 10 of our 8-K financial supplements, and an updated investor presentation which incorporates an update for COVID-19 that can be found for 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, then in over 60,000 square feet of office leasing, bringing a total of almost 545,000 square feet of deals sign, our highest combined quarterly volumes since 2018.

We are also encouraged by the level of activity in our leasing pipeline. This activity buttressed our leased percentage 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 three very specific leasing demand drivers of 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 and Rose and Village at Shirlington, two best-in-class restaurants and two primarily urban/mall retailers planning openings at Hoboken, as well as numerous concepts in downtown Boston in discussions of both Assembly Row and Linden Square.

Seconds, upgrading real estate to best-in-market open air locations, including a Marshalls, where they are moving from a second tier lower rent location next one failing Vmall [ph] to our Gaithersburg Square asset, main and main location in that sub market, replacing a bed bath and beyond a better economic terms to us and higher rent than they were paying. Several additional deals involving other best-in-class discount apparel, mass merchandisers and grocers 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 location. Santana Row attracting Nike Live, Vuori, Arcteryx, Faherty, Ugg and new restaurant concept Chika. Assembly Row landing new deals with Sephora and Shake Shack, in addition to the CVS as soon to be delivered PUMA building with several other deals in the pipeline.

Pike and 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 in 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 on. 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 stabilized -- stabilizes at 2023 instead of 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 and pursuing equalization for asset sales, with over $200 million deals under active discussion at blended yields and the fives. We'll see how those progressed. As we discussed in the last call, we will remain -- we remain well positioned to manage through the challenging environment. The leveraging the balance sheet will continue to be a priority as we look to opportunistically bring down leverage levels over time to our historical levels.

As you saw yesterday, our board made the decision to declare a regular cash dividend of $1.6 per share payable on January 15, our first dividends of 2021. Now before I hand over to Q&A, let me talk briefly about the Federal's commitment to ESG. Our ESG has always been a key part of our business strategy for more than a decade. Until 2020, we've 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. For publication we're extremely proud of [Indiscernible]. Our green bonds in October further demonstrates that commitment to form of green building design and construction with a commitment to spend $400 million on lead, silver, gold and platinum building. And we have a pipeline of comparable lead development projects, which positions us to potentially issue more green bonds in the future.

Furthermore, as you've may have seen from Navy, we ranked fourth of roughly 100 real estate companies with on site solar capacity in the solar energy industry associations sees annual list of top U.S. businesses utilizing solar energy. Our accomplishments and color to come on the ESG front and kudos to Dawn Becker and Emily Gagliardi will lead this effort.

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

[Operator]

At this time, we will be conducting a question and answer session. [Operator Instructions] And our first question is from Craig Schmidt with Bank of America. Please proceed with your question.

[Craig Schmidt, Bank of America]

Well, thank you. Federal's second quarter -- third quarter same property NOY was down 18.1%. That compares to our average for scripts at about 12 point -- down 12.7%. What's responsible for the somewhat lower same property revenue versus some of your script peers?

[Don Wood, President & CEO]

Let me start with that actually, Dan, and then you go. You know, 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. 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. 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.

[Dan G, EVP & CFO]

Yes. Just from a kind of a mathematical perspective, like the big driver is obviously the collectability 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 an appropriate approach. But that drives our collectability adjustments 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 during this period, and less impact going forward.

[Craig Schmidt, Bank of America]

Thanks. And then just as a follow up. How is the leasing activity surrounding Third Street Promenade? And have the leasing efforts been hindered by LA County's conservative real stance?

[Jeff Berkes, President of Federal Realty West Coast]

Hey, Craig, it's Jeff Berkes. And 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 open 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 ton of leasing activity on Third Street Promenade, whether it's our buildings or anybody's buildings.

[Craig Schmidt, Bank of America]

Thank you.

[Operator]

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

[Ki Bin Kim, Truist]

Thanks. Good morning. So if we put aside FFO and things NOY for a moment. If we had a chance to be [Indiscernible] some of your meetings and what you're seeing on the ground. What do you think is the most underappreciated aspect of what's happening with your tenancy and your portfolio today?

[Don Wood, President & CEO]

Yes. That's a good question Ki Bin. You know, the -- if you're thinking late 202, 2022, 2023, and you put yourself in the kind of position of a retail or trying to do a deal today. If you imagine them, we're asking them to commit to a series of payments for seven 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 can't see in the results.

And philosophically, it's something in my view, that's very different to the extent 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, its roughly 230,000 square feet of space. And you do that on shopping, 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 snooty with respect to Craig, 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 a truly. I think it's the secret if you will to value creation, you're on the other side of this. We don't tend to be a $7 stock on the other side and not -- if we don't see back where we were, it tend to be more and better. So it's not about a percentage of where we were, the percentage of where we're going. And that is a fundamental way of management throughout this building that everybody is focusing on and think that's a little different.

[Ki Bin Kim, Truist]

Thanks. That's helpful. And the second question. I've heard of tenants. I think it was mostly a restaurant that you had belief and that was going really well before COVID and you're providing some facts to support. I know, it's a very short timeframe to gauge any results or activity. But how does that feel right now? 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?

[Don Wood, President & CEO]

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, the period of time that'll we'd see whether the prudence if you will of keeping them strong with smart or not. But it's been an amazing weather here on both of those frankly. The production of our restaurant product has been ridiculously strong. At Assembly Row, they're operating 80% change, 85% of where they were. At Santana Row numbers 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.

[Ki Bin Kim, Truist]

Thank you.

[Operator]

Our next question is from Katy McConnell with Citi. Please proceed with your question.

[Katy McConnell, Citi]

Great. Thanks and good morning. So assuming you no longer building for Sunset redevelopment. Do you have any other plans for that capital? Or is it just reinvesting and 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?

[Don Wood, President & CEO]

Yes, it's a good question. First of all, we have a lot of development in progress. And so certainly, we have used to that capital that are certainly identified for. Do I expect over the next year or two for there to be opportunities with assets that we'd love to own? You bet. I do, I really hope we see that. We're starting to -- it'd be interesting even with our on the other side of that with our assets 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 to me then the Sunset Place failure. There's a lot of good reasons for the failure, but 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 as we expect to additional opportunities with great real estate going forward, you'll see exactly.

[Katy McConnell, Citi]

Okay, great. Then, since the tenant base, people are waiting to walk away from that. I'm curious if you're thinking about your exposure to fitness, or other experiential tenant categories differently today. Those are going to be targeted asset sales going forward?

[Don Wood, President & CEO]

Yes, no. I don't -- so there's a couple of things about that in the fitness category and 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's out on what their business models will be able to be. 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 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, you can do another use in our case, in other ways, it's completely different than starting afresh and building a new one.

And the -- obviously the Sunset investment would be putting a lot of faith on those users 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.

[Katy McConnell, Citi]

Okay. Thank you.

[Don Wood, President & CEO]

Thanks Katy.

[Operator]

And our next question is from [Indiscernible]. Please proceed with your question.

[Unidentified Analyst]

Hey, good morning out there?

[Don Wood, President & CEO]

Hi.

[Unidentified Analyst]

Dan, I guess, on your comments on the dividend intriguing, I believe you said you're fast approaching sufficient cash flow to fully cover the dividend. So, I guess I was hoping to expand upon that a bit more on how you and the board is thinking about the dividend here? Obviously, you don't want to cut it like most of your peers have. But 3Q gap episode, the $1.12 implies a mid $4 share-ish outlook for next year, which pretty comparable to this year. So flat earnings. And you're sitting here without coverage already above 110%. So I guess I'm curious if you guys, even the board think maintaining the dividend yield is the right move, even if you can afford to give them a strong liquidity you outlined before and how long you might be willing to overpay it? Thanks.

[Dan G, EVP & CFO]

Yes. We talk so much about this over the past six months, but the there has to be a guiding philosophy. And ours may be a little different than yours. We believe that dividends at that bargain that's been put out there for investors is a key portion of their total return. And 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 -- and that is exactly how the board and we talk about it, we think about it. It's clearly an important part of total returns.

So nobody knows how long COVID will go and what story is. And at some point we may not be able to do that. But certainly in November of 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 it will certainly have more than $80 million of taxable income next year. And that probably applies to February too.

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, get out of that hole into later in 202, 2022, et cetera. And we'll make decisions at that point, as we do, frankly, every three months, but to me the November one in particular was a pretty -- that's helpful.

[Unidentified Analyst]

It is. Thanks. And also you mentioned [Indiscernible]. I'm curious if there's any commonality, the geographic focus or product speculative sell here. And what you're seeing in the market today in terms of buyer demand? And any insight into the cap rate and what level of NOY the buyers are underwriting? Thanks.

[Dan G, EVP & CFO]

Yes. Jenny.

[Jeff Berkes, President of Federal Realty West Coast]

Yes. I'll handle. Its Jeff. Maybe the best way to say assessing 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. And 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. What more to talk about on it on a 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.

[Unidentified Analyst]

Got it. Anything other NOY?

[Jeff Berkes, President of Federal Realty West Coast]

I'm not going to comment on that. No.

[Unidentified Analyst]

Thanks.

[Operator]

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

[Alexander Goldfarb, Piper Sandler]

Hey, good morning down there. 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 you think that you'll expect going forward meaning, do you think that maybe it's just a little bit of a trim where maybe you want to dial back exposure to some of these areas boosted in these areas? Or do you think that your exposure that you had before really will continue to take hold on a go forward?

[Don Wood, President & CEO]

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 and then in that regard. The answer is not holistic as you might like it to be. It might be easier, understandable or 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 as well, I'm sure, for a number of years, there will be far less restaurants, effectively doing this and making money doing business. Where will those restaurants go? And where will they be? It is in the process of being figured 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? You know, there is really good product in the first year suburb. Frankly, I think we've had a lot to do with that over the last 40 years. And so the ability of a restaurant tour 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 they're 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. ___ is our key leasing person on that. And they certainly don't surprise him and tell me this was going to happen all the way along, but surprise 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 diverse, certainly diversified income stream five 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, so it's going to be an important part of what Federal does.

[Alexander Goldfarb, Piper Sandler]

Okay. I remember a decade ago you out of the credit crisis, you've made the comment that food is a is part of the debt, he said necessity, but retail is not a luxury, but restaurants are a part of feeding people. Well, a lot of people they spend money to have gorgeous kitchens. But keep them pristine? Don't use them go out. So second question is on. I think, Dan, you said that a 30-year tenants are now cash renting? And if that's correct. So big picture, you've collected 85% of rents overall, presumably that actually pays tenants. But if 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 the take out between the remaining 15% attendance where you haven't collected friends? And that third of tenants for pain patch, collectively out? How do you think that will all shake out?

[Dan G, EVP & CFO]

I think it really, well, we're fighting for every dollar from every tenant, whether they're a cash basis tenant, or an accrual basis tenant. And yet we have more folks on a cash basis in terms of from an accounting perspective, because I think we view them as is 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 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 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 stance.

[Alexander Goldfarb, Piper Sandler]

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?

[Dan G, EVP & CFO]

I think it's really tough for, 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 and backfill it in practice economics.

[Alexander Goldfarb, Piper Sandler]

Okay. Thank you.

[Operator]

And our next question is from Nick Yulico with Scotiabank. Please proceed with your question.

[Greg McGinnis, Scotiabank]

Hi, good morning. This is Greg McGinnis on with Nick. Could you just walk us through the impact that tenant bankruptcies have had on portfolio occupancy and APR 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 tree been shaken hard enough already?

[Dan G, EVP & CFO]

Now bankruptcy on, pull it on our occupancy rates roughly about 80 basis points impact. So far, we've got probably exposure to about 4% of our revenues, as it relates to all tenant to a file this year. If you back out those tenants who have emerged from bankruptcy, and stayed open in our centers, it's probably total exposure of about three and a quarter percent. And of those do we expect to close ultimately, it's probably in the one and a quarter to one and half range in terms of as a percentage of our total revenue.

[Greg McGinnis, Scotiabank]

Okay. Thanks. And then on that. Yes, definitely. And then on the watch list, do you think more fallout this year, early next year? Do we shake tree hard enough during the pandemic that most of the things is already sell out at this point?

[Dan G, EVP & CFO]

Look, I 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 pains to kind of hit. And that's why we've forecasted that our occupancy will go down below the 90% level certainly in the first half of 2021.

[Greg McGinnis, Scotiabank]

Okay. Thanks for that. 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 turned up in the next few months into the year end? Or how should we be thinking about that?

[Jeff Berkes, President of Federal Realty West Coast]

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

[Greg McGinnis, Scotiabank]

All right. Thanks. Appreciate it.

[Operator]

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

[Vince Tibone, Green Street Advisors]

Hi, good morning.

[Dan G, EVP & CFO]

Hi, Vince.

[Vince Tibone, Green Street Advisors]

How do you think increased working from home across the country has impacted foot traffic Shopping Center. In longer term, do you think more of this permanently could change the demand profile for the urban centers or the ideal merchandise unit? Love to get your thoughts on that?

[Don Wood, President & CEO]

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

Well, it's one of our better performing asset. And it's one of our better performing assets because people are home. And so traffic during the day and during the street -- on the street and around is strong. Our collections are strong, our tenants are relatively strong. Yes, there were 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 has 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 that some of the benefits of working for home are helping the community centers.

Do I think it'll 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 offset is normally 150 or 160 people each day. The experience here, the ability to effectively walk around what it's done outside and 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 that doesn't mean that decision makers are deciding today to enter new office leases. But we do see everywhere, the sentiment that a growing percentage of people want to be back and a growing percentage of employers are embracing that. So I think it'll be a balance, 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.

[Vince Tibone, Green Street Advisors]

Yes. Thank you for that color and thoughts. One more for me. Can you discuss just the expected CapEx, the meeting economics that have to return it a former theater with another use?

[Don Wood, President & CEO]

Yes. It's a good point. It's hard to deploy profitably if it's not enough of theater. And the exception to that, maybe were kind of going back to our last question. Theaters on the second floor and things like that, that are retentive, depending on how they were built, whether the stadium seating is structural, whether it's -- there's a lot of detail, obviously, into 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 we're talking about high office rents, or otherwise, you can make the economics work. It's really tough, because construction costs are construction costs that have low rents, and to effectively -- yes, you can get a bump up in rent. But pretty hard to get a bump up netted the capital. So high rents to your friends, if you're in markets, that can support that when you do have to reconfigure a space, any space, frankly.

[Vince Tibone, Green Street Advisors]

Thanks. Is there any rule of thumb just for like the CapEx per theater? Or just it's too hard to generalize doing all this kind of specs and in the detail you meet him?

[Don Wood, President & CEO]

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 in new development down in CocoWalk. That's one particular set of economics. Here at Pike and Rose with an IPIC and the way that is built out, that would be a completely different set of economics. 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.

[Vince Tibone, Green Street Advisors]

Make sense. Thank you for the time.

[Operator]

Our next question is from Linda Tsai with Jeffries. Please proceed with your questions.

[Linda Tsai, Jeffries]

Hi. thanks for taking the question. Maybe following up on Alex's cash basis question. How much revenue did you collect from cash basis tenants in 3Q?

[Dan G, EVP & CFO]

Roughly about 60% collections from cash basis in third quarter.

[Linda Tsai, Jeffries]

And then how does it compare to 2Q?

[Dan G, EVP & CFO]

Significantly increase. It was about 40% collection for cash basis tenants in the second quarter.

[Linda Tsai, Jeffries]

Thanks. And then just 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?

[Dan G, EVP & CFO]

It remains to be seen Linda. But 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 timeframe. I think they're very important. I think particularly because of the timing here. And I think if you had 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 there's a pickup in consumer spending. Normally there's a pickup and 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'll be VPP money or something like that, that'll be a pretty critically important. I do believe there'll be a vaccine, which even if it's not delivered or completely total efficacy, et cetera, will still be very important. And I do believe that it'll be a tougher winner than it normally is anyway, because of the situation we're in. So PPP is just one piece of I think of number of catalysts that could really make that spring and summer of 2021 better than anything.

[Linda Tsai, Jeffries]

Thanks.

[Operator]

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

[Chris Lucas, Capital One Securities]

Hey, good morning, guys. Dan, just on the cash position, I guess just kind of curious. Should we be thinking about utilization event 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?

[Dan G, EVP & CFO]

I think we're certainly going to use the cash we have to repay the bonds that come 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, won't be judicious in terms of managing our cash balances. But we're going to we're going to keep a cash in place for as long as we feel like we need it.

[Chris Lucas, Capital One Securities]

And then I guess just on the transaction side you had gone under contract with a parcel at Grand Park earlier. Remember if it's earlier this year or last year. But is that transaction still proceeding or this sort of close either later this year into next quarter next year?

[Dan G, EVP & CFO]

Yes. We're still on track. It's probably going to push into kind of next year, with the first half of next year, but it's on track. And we feel reasonably good that that's [Indiscernible]. It will happen in March of 2021.

[Chris Lucas, Capital One Securities]

Okay. And then in the pricing is kind of held up. Nothing's changed on that?

[Dan G, EVP & CFO]

Exactly where we connect.

[Chris Lucas, Capital One Securities]

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

[Don Wood, President & CEO]

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

[Chris Lucas, Capital One Securities]

Okay, super. That's all I had this morning. Thank you.

[Operator]

Our next question is from Mike Mueller with JP Morgan. Please proceed with your question.

[Mike Mueller, JP Morgan]

Yes. Hi. I was wondering, can you talk a little bit about apparel collections. I mean, obviously, fitness and restaurants and everything comes up frequently to slow collection rates. But when you have apparel that's been open, generally, since the spring and collection rates during 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?

[Don Wood, President & CEO]

Yes. It is. You're on it. I mean, that is absolutely another category. The thing is it really depends. So there is more variability in what happens there. We're collecting in the mid 70s, or something of the of the apparel tenant, department stores. And so it's -- it's certainly not bringing up the overall collection.

[Mike Mueller, JP Morgan]

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

[Don Wood, President & CEO]

Very much depends on the particular store. The small shop full price. Apparel stores are probably struggling the most.

[Mike Mueller, JP Morgan]

Okay. Thank you.

[Don Wood, President & CEO]

Thanks.

[Operator]

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

[Leah Brady, Investor Relations Senior Manager]

Thanks everyone for joining us today.

[Operator]

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