Federal Realty Investment Trust. (FRT) — Q3 2015 Transcript

Good morning. I'd like to thank everyone for joining us today for our third quarter 2015 earnings conference call. Joining on the call are Don Wood, Jim Taylor, Dawn Becker, Jeff Berkes, Chris Weilminster, and Melissa Solis. They will be available to take your questions at the conclusion of our prepared remarks. Certain matters discussed in 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 the expectations reflected in such forward-looking statements are based on reasonable assumptions, Federal Realty's future operation and its actual performance may differ materially from the information in our forward-looking statements. And we can give no assurance that these expectations can be attained. The earnings release and supplemental reporting package that we issued yesterday, our Annual Report filed on Form 10-K and our other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial condition and results of operations. These documents are available on our website at www.federalrealty.com. And with that, I'd like to turn the call over to Don Wood to begin our discussion of our third quarter 2015 results. Don?

Well, thank you, Brittany, and good morning, everyone. So we had a big important quarter for the company here with FFO per share of $1.36, a result higher than we ever reported before, with 10.6% higher than last year's third quarter. Starts on the top line with overall revenue growth of 8.4%, which flows nicely down overall property level operating income growth of 8.7%. Somewhat higher G&A from additional personnel and down below the operating line, the strength of our balance sheet paid huge dividends in the form of lower interest costs. If you sit back and you pause for a minute and reflect on the components of that third quarter P&L, you'll start to recognize that the five million sources of our growth all contribute here, creating what we think is the most balanced and durable set of financial results in the business. Consider that in this third quarter, there are contributions from: Number 1, the big developments that Assembly and Pike & Rose, which added nearly $4 million more rent than last year's quarter. 2, Active redevelopments especially in Mercer Shopping Center in New Jersey, Westgate Center in San Jose, and the Peterson Building in Hollywood which along with others resulted in overall same-store growth including redevelopment of 4.2%. Third, same-store growth from the core excluding redevelopment which was only 2% due to a purposeful and aggressive approach to regain space for redevelopment along with a tough year-over-year comp caused by lower termination and other fees this year. Four, acquisitions like CocoWalk and San Antonio Center which contributed an incremental $2.4 million in rent over last year and most importantly, number 5, our balance sheet and track record that results in one of the lowest costs of debt and equity capital among REITs that really provides a level of P&L flexibility that's enviable. As an aside, our entire debt portfolio has an average maturity of over 10 years from now, with a weighted average interest rate of 4.07%. So excuse my baseball analogy, I know I'm going to be made fun for this, but it really fits here. If Federal were a baseball player, it would be referred to as a five-tool player. Five-tool players are baseball scouts' lingo for a complete baseball player. One with superior arm strength, speed, defensive abilities, and those who can hit for average and hit for power. Lee May is considered one of the best five-tool players of all time. And that's what we are humbly trying to mimic: complete players. It's the completeness of the business plan. We're not dependent on anyone tool that we're most proud of, and that was so evident during the third quarter. Think about that. Even with 2% same-store growth, FFO per share grew over 10% in the quarter and is expected to be over 7% for the year. Again, running this entity with so many arrows in our quiver gives us great flexibility to be able to take the longer view, a view required to maximize real estate value. I'll talk a little bit more about this because I think it's really important to any investors' decision to own Federal. When we broke the company up between core and mixed-use earlier in the year and brought in additional real estate talent to lead the core, Jeff Mooallem, Michael Linson, Jarett Parker, Liz Ryan, and others, this resulted in a higher level of G&A. We did so in order to ensure that the all-important core portfolio got the attention and aggressive asset management that it deserves to create more value and to continue to act as the strongest possible foundation for the development and acquisition pipeline. In part, that means getting control of space that has long hindered value creation in certain shopping centers. The A&P bankruptcy led to strikes; we had four. One, A&P, one, Pathmark, and two, Walmarts between New Jersey and Long Island. All four leases had significant value not just to us, but to multiple parties. And if we chose to not participate in the bankruptcy process, I'm quite confident that all four leases would've been bought by someone, which would have resulted in zero downtime and zero lost rent in any of those spaces. And if our business plan were one-dimensional, we might have let that happen. But we didn't. Nearly 185,000 feet of space and over $3 million of same-store occupancy and rent went out the door, and by the way, we had to pay millions of dollars to get the rights to lose all that income beginning this month. We've taken an educated and calculated gamble that a $6 million-plus investment plus a year or more of downtime would pay back many times over, not only in terms of the four walls of these grocery stores, which is how a lot of people look at the lease's value, but for us by unlocking more significant redevelopment that improves the entire shopping center. While same-store growth and occupancy will be negatively impacted in the fourth quarter and certainly for next year, the future value of Brick Plaza in Brick Township, New Jersey, Troy Shopping Center in Parsippany, New Jersey, and Melville Mall on Long Island will be far higher when we're done releasing and redeveloping. I don't know if we could have made that decision if same-store growth and year-end occupancy were the only considerations. And yet, we could because our FFO per share growth is still expected to be 7% plus in 2015 and we strive to hit FFO per share growth of 7% in 2016. Okay. Let's back up and talk about leasing for a moment. 478,000 feet of comparable deals executed in the quarter at an average rent of $26.98, 19% higher than the $22.69 per foot prior tenant was paying; the leasing strength was broad with both new deals and renewals registering double-digit growth as did both anchor and small shop leases. In addition, 19 non-comparable deals done largely on the new developments represented an additional 82,000 square feet of space. So over 560,000 square feet of deals in a three-month period. There is plenty of productive leasing being done these days in virtually all markets that we do business in. That's an important point to focus on at this particular time as we assess the sustainability of the strong retail leasing market. We're betting that demand for solid retail real estate remains strong due primarily to the limited amount of great real estate locations that are available. Most good spaces are pretty well leased out. You can see it from the occupancies of most high-quality portfolios. Here is why that represents a particularly good opportunity. We're going to consciously take it the other way for a while. As I mentioned earlier, we're aggressively tasking our core team to go hard after space from retailers because we want to use these favorable economic conditions to release them now. We expect to have more anchor vacancies to attack in the next few quarters than we've had in years. The A&P supermarket I discussed is only one example. LA Fitness's former Valley's location and our Grant Park Shopping Center in Arlington, Virginia, is another example. We're getting pretty close to our redevelopment plan that makes financial sense at that center, which requires us to get that and adjacent space back in order to control enough of the shopping center to be able to execute the redevelopment. Of course, it's downtime and lost rent in the meantime. The Hudson Trail closure resulting from that company's bankruptcy at Montrose Crossing that many of you remembered from the Investor Day is another that could give us just the flexibility we've been looking for at that end of the shopping center. Of course, it's downtime and lost rent in the meantime. But basically, because of our big developments beginning to contribute, our redevelopments already in process, acquisitions like CocoWalk and Sunset Place, and a low leverage balance sheet with a favorable cost of capital, we believe that the inherent balance of the plan will continue to allow us to grow earnings at roughly 7% annually, which is necessary for us to double earnings over 10 years—the foundational goals of our company. So far so good. And when it comes to those acquisitions and developments, we have a lot going on. From continued advancement of the construction and leasing at both Pike & Rose and Assembly to the opening of the Point Development in El Segundo to critical acclaim this quarter, to the largest office deal that we've ever done with data mining technology powerhouse Splunk at 500 Santana Row, which by the way will create an immediate $75 million or so of value. So that closing on October 1 of the previously referenced Sunset Place in South Miami, we've got more going on to keep our five growth buckets fully productive than ever before. Let me give you a few more updates on those big projects and then I will turn it over to Jim. At Pike & Rose, we had a strong quarter in terms of residential leasing, and by the way, I want to thank many of you for joining us there for the Investor Day about a month ago. As we reported in the past per se, the first residential building of the project is and remains 95% leased up and you remember that leasing began on the high-rise building we call Pallas over the summer. We currently already have 100 of the 319 units in that building leased, which is faster than we anticipated and rent is in line with our pro formas. The update is positive on the construction site as cost overruns largely on and around the façade and the skin of the high-rise building both material costs and labor will overrun by approximately $10 million. Accordingly, we reflected that in the 8-K but still expect to complete Pallas lease up as scheduled throughout 2016. Construction is underway on the second phase. At Assembly, construction on the Partners Healthcare Complex is proceeding very well and we're hopeful that many of the 4,000 plus employees expected at that location will begin occupying the space by mid-year 2016. The balance of the second phase of Assembly Row is now underway. Turning to 500 Santana Row, in addition to the strong financial return from this Splunk deal, the return rate of trust we're really excited to have the incremental daytime office traffic and the added complementary parking that it adds surrounding Santana Row. With Apple's new headquarters being built just four miles down the road and the Splunk deal signed at Santana, the rest of the build-out at the balance of Santana Row as well as the 12 acres across the street that we call Santana West will be lower risk and more valuable. Construction remains on time and on schedule for 2017 rent starts in the Splunk building. And finally in South Miami, the deal that we have been referring to all year finally closed on October 1, and I trust you've all seen the detail in the acquisition press release. The demographics surrounding this 10 acres that make up Sunset Place are among the strongest in our portfolio and we're actively looking at redevelopment and re-merchandising plans and schemes. I'm going to resist talking about those redevelopment plans and schemes until we're confident in what it is that we can do, but in the meantime, we should yield above 6% on our nearly $100 million investment for 85% before our interest costs. That is it for my prepared remarks, I will turn it over to Jim, and I look forward to your questions afterward.

Thank you, Don, and good morning, everyone. As Don alluded to, this quarter represented yet another record for us at $1.36 per share, and just pausing on FFO for a moment, I would like at the outset to recognize the contribution of the entire Federal team from leasing, operations, development, and investments—many of them you got to meet at our Investor Day last month—who delivered these outstanding results. Turning to the numbers overall, POI grew at 8.7% over the prior year in line with our long-term plan. The largest single driver of that growth was our core portfolio, which grew at 4.2% on a same-store basis including redevelopment. Given the volume of properties that we have under redevelopment, that pool represents approximately 95% of our total POI. Our same-store pool excluding redevelopment activity, which is a smaller percentage, grew at 2%. We realized about 70 basis points of drag from year-over-year differences in term fees and certain one-time fees. Other drag on same-store POI growth which began to show this quarter, and will accelerate as Don alluded to and I will cover in guidance associated with rollover contributed another 30 basis points of drag. When you consider the rollover that we are achieving from a leasing perspective, which was 19% on a cash basis and has averaged 70% over the last four quarters, this timing lag or downtime is very opportune as we release the space in a very strong market. The balance of POI growth was driven by development deliveries collectively Pike & Rose and Assembly contributed $3.5 million of POI this quarter and the successful integration of the San Antonio Center and CocoWalk acquisitions, both of which are performing very well against our initial acquisition underwriting. G&A increased $1 million year-over-year largely due to higher personnel costs and placement fees as we invest in our platform for growth. Again, we will cover in guidance but we expect our G&A margin to remain below 5% of revenue. Interest expense declined $1.7 million primarily due to the reduction in our weighted average interest rate from 4.7% to 4.1%, which was offset by a lower interest capitalization as we continue to deliver development. Bottom line, FFO per share grew at 10.6% in the quarter, following the long-term plan. Turning to the balance sheet, we opportunistically accessed the debt markets in late September, capitalizing on favorable pricing dynamics at the five-year part of the curve and issued $250 million of 2.55% senior notes and at an all-time low spread for us of 110 basis points. This issuance moved our weighted average tenure beyond 10 years versus the peer average closer to five. We utilized the proceeds to term out borrowings under the line of credit, which had full capacity of $600 million at quarter end providing more than enough liquidity to fund the growth that we have underway. Our debt to EBITDA remains strong at 5.25x and our fixed charge coverage improved to 4.5x. On the acquisition front, as Don alluded to, we successfully closed on October 1 on the acquisition of Sunset Place for a total price of $110 million. As we discussed in our Investor Day, we are pleased that within the last six months, we have successfully deployed almost $200 million of capital into two infill assets in Coconut Grove and South Miami. These two assets not only provide an attractive current yield in a 6% range, but importantly present great upside potential through redevelopment and repositioning to better serve the affluent and year-round populations of South Miami-Dade. Looking at the balance of 2015, we've increased our FFO guidance range to $5.30 to $5.33. This range is based on our expectation that we will achieve same-store NOI for the full year of 3.5%, which reflects the downtime Don mentioned for approximately 184,000 square feet on the three A&P locations as well as an additional 60,000 square feet of box space associated with Hudson Trail and City Sports that we're taking over this quarter. Assuming our leasing remains static, which never is, that would represent about 120 basis points of occupancy as we expect our same-store NOI to be low in the fourth quarter. Looking ahead to 2016, this is another big year for the company in terms of NAV creation. For somebody who has to provide guidance, it doesn't make it easy but the level of activity just blows me away. First, as Don alluded to, we expect to complete the lease-up of the 319-unit Pallas high-rise of Pike & Rose. Initial leasing, as Don alluded to, is going well and we expect that building to stabilize in the fourth quarter of 2016. We will experience drag through early 2016 as the building achieves breakeven occupancy. The office space at both Assembly Row and Pike & Rose, which represents approximately $80 million of investment, is fully committed and we will continue to see rent commencing through 2016 and early 2017 as those tenants take occupancy. 500 Santana Row, our 234,000 square foot office building which represents approximately $120 million of investment is 100% pre-leased and will deliver in 2016 when rent commences in 2017. The Point redevelopment at Plaza El Segundo, which opened successfully this quarter with strong tenant performance, will stabilize in the latter half of 2016. In addition to the Point and 500 Santana Row, this is important, we have approximately $85 million of tactical redevelopments stabilizing over the next five quarters. The Partner's building at Assembly Row, as Don alluded to, will deliver with over 4,500 employees taking occupancy in the latter part of 2016. We will grand open Saks OFF 5TH in our old headquarters basement space at Congressional, in addition to stabilizing the storage residential building. We'll be well underway on the second phase at Pike & Rose and Assembly that will represent another $600 million of investment and we will begin delivering in 2017 and 2018. And finally, as we've covered in some detail, we will be re-leasing the LA Fitness and A&P and other boxes in our core portfolio that we have recaptured this year. We expect our 2016 FFO per share to be in the range of $5.65 to $5.71 per share or approximately 7% growth at the midpoint. That growth of 7% remains at the top of the estimates for our peer group, none of whom have yet provided 2016 guidance. It is consistent with our long-term plan and reflects some critical investments in future value creation and consistent growth that we discussed at length at our Investor Day. Those investments include a balance sheet with a weighted average debt tenor of over 10 years. Debt to market cap of 21% that importantly provides us maximum flexibility to fund our long-term value creation at the lowest possible capital. Downtime associated with the targeted recapture of the A&P and LA Fitness in 2016 represents approximately $5 million or almost $0.07 per share or 100 basis points of same-store NOI. That targeted box recapture is on top of an additional $6 million or almost $0.08 a share of downtime associated with the rollover of larger box spaces in our portfolio. To provide some overall context, the average downtime in our same-store portfolio associated with all rollover in the last five years has been on average about $10 million to $11 million of impact. That downtime impacted in 2016 is approximately $70 million. That's importantly, as Don alluded to, we are investing in NAV creation, while our near-term same-store NOI is expected to be in the 3% to 3.5% range for the year. Approximately $2.5 million of incremental marketing spend that we are investing to ensure that the critical first phases of our mixed-use developments open successfully as well as starting to market the condos that we will deliver in the second phases of the Assembly and Pike & Rose. As I discussed at our Investor Day, as these new urban neighborhoods successfully stabilize, this cost center becomes a potential revenue opportunity. Over $1 million of redevelopment R&D as we continue to fill our pipeline of redevelopment—excuse redevelopment R&D, as we continue to fill our redevelopment pipeline. We expense these costs until the projects are probable. As Don mentioned, our core team is actively engaged in executing upon needs and identifying new opportunities for the future. And then finally, higher G&A that we expect to be approximately $34 million to $35 million as we invest in growing the team. But we will always stay disciplined as we maintain the G&A margin among the lowest in our peer group. As always, our guidance for the next year does not include any acquisitions or dispositions that are not already closed. However, we do expect to remain active on both fronts and will update guidance as those transactions occur. We've covered a lot but before I turn it back to the operator to open the line, let me thank all of you who attended the Investor Day last month. Your turnout was terrific. We've had great feedback and as always greatly appreciated the opportunity to connect with our earners and analysts. We look forward to seeing many of you again in a week or so at NAREIT. To the extent you haven't reserved a spot on the calendar, please do so soon. With that, operator, I would like to turn it over for questions.

Hi. Thank you. I was wondering if you could provide some insight into the direction that new tenants at Sunset Place might take.

I was expecting the question. I was hoping it wasn't the first question. Listen, I do want to talk about Sunset Place a little bit. Look, you may have heard the former owner of Sunset Place, Simon Property Group, is pretty darn good at what they do. If it were an easy fix and there was an easy way to create a lot of value in 12 months or something like that, they would have done it. So I don't want to talk about that just yet. There's a lot of complexity with it. Basically, when you look at the going-in yield and the going-in price, we basically said all right, there is enough cushion based on what that location is and what you would have to pay for a perfect asset. There's enough cushion over that to give us the opportunity. Give us the time to take the chance to see if we can find a better merchandising scheme or better physical plant, see if we can make the numbers make some sense, which will include a new entitlement process, etc. So that will take a couple of years. It will take some time. So I don't want to get out ahead. I don't really want to have anything in your mind. I would love to just kind of take it for what it is. And when we start talking about a way to create value that we see, pay for it, then give us credit for it then. But at this point, I'm really not ready to do that.

Okay. And then, maybe if you have any observations about Macy's backstage opening at Melville, I would like to hear it.

I actually don't know how they opened in terms of numbers. I should know that, but Chris Weilminster, do you have any information you can add?

Craig, it's still a little bit early for us to report on that. We've not gotten much information back from Carl or his team. So unfortunately, I do not have any better answer than Don provided.

Okay.

We will be ready to talk about that next time Craig.

Okay. Thanks. Goodbye.

Thank you. It seems like you made some progress on leasing at Congressional Plaza and Pentagon Row, could you talk a little bit about that? And maybe just putting it all together, your guidance or same-store NOI of 3% to 3.5%, which I assume includes redevelopment. What does that look like if there wasn't someone that is kind of proactively leasing and A&P?

Well, I mean, 100 basis point in and of itself. A&P and LA Fitness alone is about 100 basis points. So again, Ki Bin, when you put the context of what we're doing overall, because rollover happens every year. Downtime happens every year. Over the last several years, our average downtime has been about $10 million to $11 million just in our same-store portfolio; this year it is going to be about $17 million. So it gives you a sense of the scale and scope of the drag on what we're getting after. Just A&P and LA Fitness alone from an occupancy standpoint would be approximately 180 basis points of occupancy. So just those are pretty meaningful. Again, nothing is static. Chris and the team continue to be very active on the leasing front, but even if we get that space leased as you understand it will take some time before that rent commences. So that's what we're forecasting for 2016.

Hey, Ki Bin, the only thing I would add to that is, you may remember from the Investor Day, we did spend a lot of time on Congressional because we really wanted you to see what a dominant shopping center—how it can still store value effectively 50 years after we bought it. And show when Saks OFF 5TH opens up there, we will also do a refresh to the front end of that shopping center which we believe will help us in our re-leasing of all the shop space that is there, not to mention 50 additional residential units on the back of the shopping center. So this is all tied in. That is not specific to LA Fitness or to A&P. But we are getting after those types of situations throughout the portfolio. Not just the two big ones that we mentioned.

Okay. Thank you.

Hey, good morning, guys. I heard you mention a couple occupancy numbers associated with the downtime, was it 120 basis points or was it 180 basis points, I think you just mentioned?

No. I'm sorry, I misspoke. Thank you for clarifying that. With the A&P and LA Fitness, it's about 120 basis points of occupancy.

Okay. And so when should we expect that to be fully in the numbers as we kind of think about as we go through 2016, and what quarter would you expect to be sort of a trough in terms of the year-over-year occupancy decline?

As you look into the year, we are going to be seeing the drag really not only this quarter but at least for the next three quarters into 2016. As we go into the fourth quarter of 2016 we expect to see some of that improve.

Christy, anchor leasing, I'm sure Weilminster is smiling on—he is not in the office with us, he is at a remote location, but I'm sure he is smiling. In anchor leasing, getting those deals done and new deals done, getting that space built out, getting the tenants in and paying rent will take at least a year. That's what it takes. So financially, we are considering a full 12 months and in some cases 15 months of downtime before it's back in the numbers.

Got you. And if you think about sort of all the rent that you're losing on all this space and aggregate, what do you think could be potentially the mark-to-market on that space, or some sort of a range relative to the spreads that you've been generating?

I would hope that you see something like 25%, 30% or maybe more percent.

Okay. And then just lastly, how do you think about selling assets today just for the fund growth versus accessing the ATM?

Well, let me talk about asset sales for a second because this is something that it never—always kind of hangs underneath the radar for us. But when you look back, there is always a level of asset sales, no, not as much as our competitors. We don't need to do as much as our competitors in there. But when you see the assets on Houston Street and San Antonio, Texas sold this year, you will see by the end of the year—I suspect we have got another one on the contract to sell—you will see that too if that deal goes through. You'll see another one next year. There's going to be approximately $50 million or so of trading up. One of the things you kind of get me a little bit earlier than I wanted to talk about it. But I'm going to be showing you maybe not for NAREIT, but maybe we will see if we can be ready. The past couple of years of assets that have been sold versus what it is that we have bought. And you will clearly, although it is a little dilutive, it's not as dilutive as most of our competitors would necessarily be because we get good prices even on what we are selling vis-à-vis what we are buying. You will see a real improvement in the overall portfolio if you just think about San Antonio Center that we brought in Northern California in and Houston Street, San Antonio, Texas out, the difference is night and day and we're going to show you two or three or four more examples like that on a portfolio basis. But figure around $50 million.

Thanks.

Hi, it's Jim. Sticking with the occupancy. So just to clarify, are you saying in Q4 that's where we're going to start to see it's going to be down about 120 year-over-year? That's the first part. And the second part is, I think Don mentioned possibly accelerating this and recapturing being more practical recapturing some other boxes. So if we're thinking about 2016, if you got the 120 dip for those two tenants should we expect more on top of that?

Yes. Thank you. In fact, of the fourth quarter, that dip could be as low as 150 or as high as 150 basis points of occupancy based on some of the other boxes that we're getting after. So as we look forward, and as I mentioned and put it in context, we are seeing substantially more downtime and lag in the coming year associated with this targeted recapture and taking over the space.

Got it. Okay. And then going to Pallas, the apartments, I think you said stabilized in the fourth quarter, you mentioned breakeven to occupancy. What exactly is a breakeven occupancy at what level and do you think you'll open there?

Our breakeven occupancy there is going to be 40% to 50% range somewhere in there before we begin to cover the operating cost. It depends of course on the mix of units that are in that 40% to 50%. We expect to be there towards the end of the first quarter or early second quarter. So my comment is meant to point out that early in the year that building will be dragging from an NOI perspective. As Don mentioned, we are on target in terms of our pro forma rents. And as we deliver units, we're seeing good appetite. But with this building, we're delivering units as we go up the building. And it's the pace of construction more than anything else dictating that timing.

Got it. And one last one here. For 2016 guidance what's assumed for equity raise?

We expect to raise probably about $150 million for the year.

Got it. Okay. That was it. Thank you.

Hey, how you doing? Just a couple of quick questions. The first part as you look at the anchor boxes, you are taking down and remerchandising, what portion of those do you expect over the next year to be ones that come back to you that you didn't really seek out, and then how much that's proactive? And then, I guess, the second part of that is, why now on the proactive front? Is this what you feel like is kind of the peak leasing season over the cycle or is it just now is as good a time as any?

Jason, let me take the last part first, and yes, there is no doubt, look this for 2009 or 2010 the approach would be a different approach. And it would be about maintaining that income stream the best we can. When we look at 2016, it's not only that we feel strong. I'm going to ask Weilminster to comment on this when I'm done. But it's not only that we expected to be—to remain strong in terms of demand exceeding supply on the particular location and in the particular boxes that we're talking about. But we have other ways to grow the company. And so on balance, I mean I'm not sure how many of the competitors are out there are going to grow at 7% next year or certainly 7% this year, 7% two years ago more. I mean it's probably 25% over the last three years something like that. I don't know how many competitors have that, and I do think that's because of all of the tools we have. So when you take the other ways we have to grow coupled with what we believe about the particular anchor boxes that we are purposely trying to upgrade the tenancy on and upgrade the shopping centers on, this seems like the right time to do it aggressively. And by the way, we are paying more G&A for more individuals who have smaller portfolios from which to create value and thus better jack up more aggressive management of those particular anchor boxes. It all works together at this particular time. That is our bet.

Okay. So on the first part what's the breakdown of—as you look over the next 12 to 18 months, is it, most of these came back to you because the retailer is underperforming, or is there a larger chunk that you are proactively seeking? Could you give us a couple of examples but just in terms of magnitude?

Yes. On the anchor stuff it's by far mostly stuff that we are proactively going after. It is the A&P. It is the LA Fitness. Some of those smaller stuff which is included in there, Hudson Trail which is a local or a regional sporting goods company going bankrupt, is—we wouldn't have aggressively wanted it back. Now it opens up some good things, but we wouldn't have aggressively wanted it back. The same with City Sports, which is in both Bethesda and Pike & Rose. We wouldn't have chosen this timing. But we get it. Because we're in the right locations, we still think it will be a good thing, but it's a lot on top of those anchor boxes that are primarily proactively aimed for.

Okay. Then when you look at Pike & Rose, yields have gone from 8 to 9 to 7 to 8, down to 7, and I think that's largely because of some rent from the first part, and then some apartment rents, and then some cost overruns. Is this just pretty typical of complex mixed use? Or would you say these are more one-off related to Pike & Rose that shouldn't be kind of extrapolated across many of your mixed-use projects going forward?

I would not. I think when you specifically look at Pike & Rose, Pike & Rose in the first phase is largely residential. When you are talking about largely residential, you are talking about 12-month leases. And we had a Board meeting down in Miami yesterday, and I was talking to the Board about this. The reality is, and I don't mean to say this in a cavalier way; I don't mean to come across that way, but so what. To the extent we missed the rent in a 12-month lease on a residential product to start because of more supply in the market, because of whatever economic conditions, 12 months from now we'll have another chance, 12 months from then, we will have another chance since that. And they would have been no different investment decision made. It takes seven years from beginning to end to do this. You're never going to get. Sometimes you get lucky and you are in the peak part of the cycle where the residential rents are higher; sometimes the opposite. But you wouldn't have made a different decision. In terms of the cost, I feel differently about that. I mean we've got cost overruns on that high-rise in particular that I wish we didn't have. That is value that is gone. So it is a different type of thing. I think that's a mixed-use thing? No. I don't. I think that's a screw-up on that particular design and implementation and construction project. So I wouldn't take that and extrapolate that for all along. When you are talking about retail deals, we're dealing with much longer-term leases; and retail, you are certainly talking about longer-term leases. So I view them a little differently.

Great. Thanks.

Hi. What's your total dollar value invested in redevelopment next year and your funding mechanisms for that? You mentioned $150 million in the ATM, but how far do you think in terms of your redevelopment cost?

Our total spend is going to be approximately $400 million of development and redevelopment. Of that, probably $50 million to $60 million of spend during the year is going to be pure tactical redevelopment. And from a funding standpoint, we do expect to be issuing about $150 million of equity. We will potentially have some asset sales as Don alluded to, and then as always, free cash flow to fund that.

Okay. Great. And then just a little bit more macro, I mean can you talk about how you are seeing the supermarket business at the moment? I mean there's been a lot of news over the past quarter between the bankruptcies and whether it's Walmart on one end or Whole Foods on the other. And maybe then kind of more narrowly as you look at things like the A&P spaces, do those necessarily go in the supermarket direction or could there be other uses as you look at really the anchor space or doing something similar to redevelopment there?

It's a good question, Paul. And Chris, I'd like you to chime in on this start. Let's start on the macro question with—what you see in the supermarket business.

We are observing certain demand within our portfolio, particularly at a macro level. Our assets are attracting interest, especially from larger companies exploring various growth options. For instance, there are small store concepts aiming for more urban locations, Kroger is strategizing to expand its footprint and differentiate its brands, and Whole Foods is focusing on its 365 brand. This indicates that numerous brands and companies are actively seeking different platforms for growth. When considering what this means for Federal Realty, our high-quality assets are situated in areas with excellent demographics, making them appealing. The three A&P locations we have are experiencing interest from grocery retailers. Additionally, there is interest from other market players. During the Investor Day, we discussed the growth potential in soft goods categories, including Macy's, Nordstrom Rack, HBC, and Saks OFF 5TH, which all exhibit demand, as do certain category leaders in pets, shoes, and cosmetics. These players are all looking for growth opportunities, and with the limited new supply in the market, Federal Realty is in a strong position to capitalize on this demand. We may see some grocery retailers filling the spaces previously occupied by A&P, but we are exploring all possibilities. Fortunately for us, there is strong demand across various categories. Don, would you like to continue?

Yes. Paul, I wanted to say something more macro to you. First of all, and that is, there is not a retail category, and certainly grocers are not exempted from this—that isn't trying to figure out who they are going to be, how they are going to service, how they're going to improve their investment pieces over the next 5 to 7 years. Every category is impacted, and grocers are no different. It's funny. It's why a long time ago, I just did not want to be seen as a grocery-anchored shopping center company. The idea of being opened, when you listen to Chris Weilminster's speech, you can tell that his view of the retail world is not grocery centric. And as that business is struggling in parts of it, just like women's fashion is struggling, just like hard goods are trying to figure themselves out, just like banks are trying to figure out how to reach retail customers. Every industry, the grocery business too. It does come down to having the right place where demand will exceed supply into the extent that demand can be beyond grocers go better. Having said that, it's real clear to us that particularly in at least two of the four and probably more of the A&P boxes, they are great grocery locations. So we do believe there will be negotiations with better grocers for those boxes. In addition, as Chris says, a wider plethora of retailers.

Great. Thanks. That was helpful. Just real quick, is there anything in the acquisition pipeline that you can see closing by year-end?

Not by year-end. No.

Hey, good morning, everyone. Just sticking with the A&P's, I know you gave the average in place rents on those $11.64, just curious what the order of magnitude is on the mark-to-market, do you think?

I said, Vince, somewhere like 25% to 30%, maybe more.

Okay. Sorry, I missed that.

That's okay. That's fine. I mean, let me be really clear. The capital necessary to not only get those boxes but to absorb the downtime and put in the rest of the shopping centers as compared with the incremental rent not just from that box but including that box and everywhere else in that shopping center is the math we're doing to figure out what kind of IRR and value creation we're making at those shopping centers. There will be a time whenever you want to go in the next year or so, I'm going to take you to Brick Township, Brick Plaza, in Brick Township, New Jersey, and you'll see exactly what I'm talking about if you're only looking at those four walls you're missing the point.

Right. No, that makes sense. Just on the—to do just get outbid on that one?

On the fourth one, we did. We thought we put up a decent number, and we were blown out of the water by another grocery operator.

Got it. Got it.

I'm sorry. I just wanted to make one point, I'm sorry, I'm not in the room with Don, but I think one thing is important about these A&P leases with Brick, Melville, and Troy that everybody should understand and Don is touching on it. But we inherited those leases; those weren't leases that we had, and they were very much encumbered with restrictions on other categories and other uses that we know demand exists. So I just want to make sure that in addition to everything Don is talking about, you guys understand that this does unlever our ability to go after categories that we were not able to do, and when we renegotiate leases or when we find replacement tenants, we will maintain that flexibility as well as hopefully future out parcel development. I think it's really important, so it was not only getting it back to control and density of the space, but it really does from a leasing standpoint unlever our ability to really add value with more relevant retail which is what we need to stay connected with our communities.

Yes. That makes sense. Just maybe one last question. For Jim, just I know you've talked about sort of the difficulty in projecting out earnings given the amount of development that's going on and sort of the timing of all of that. And certainly, that can shift to here and there. But I was just curious that guidance range that you provided is pretty tight. I think it's only about a 1% spread at the midpoint. Just curious what gives you the confidence to have it so tight given the—

You are making me nervous.

Vince, I'm curious too.

We feel pretty good that we're going to end up in that range, but you make an important point. And I think it goes to the reputation that some of you have alluded to about our being conservative in our forecast. We have a range for a reason. A lot of the things that in part volatility as it relates to quarterly numbers is what we'll be seeing next year. We are very positive about all of the activity that can generate that, but it certainly can move things around in the year. But we feel comfortable with that range, albeit I'm sure that a lot of you are going to go right to the top of the range and we provide a range for a reason. And so that's what it is.

Okay. Thanks.

Thank you, everyone, for joining us. We look forward to seeing many of you at NAREIT later this month. As we mentioned, if you're not already done so please feel free to reach out to reserve one of the remaining slots in our meeting schedule. Thank you.