Federal Realty Investment Trust. (FRT) — Q4 2015 Transcript

Good morning everyone. I'd like to thank everyone for joining us today for Federal Realty's fourth quarter 2015 earnings conference call. Joining me 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 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 the expectations reflected in such forward-looking statements are based on reasonable assumptions, Federal Realty's future operations and its actual performance may differ materially from the information in our forward-looking statements. And we can give no assurance that these expectations can be attained. The earnings release and supplemental reporting package that we issued yesterday, our Annual Report filed on Form 10-K and our other financial disclosure documents provide a more in-depth discussion of Risk Factors that may affect our financial condition and results of operations. These documents are available on our website at federalrealty.com. And with that, I'd like to turn the call over to Don Wood to begin our discussion of our fourth quarter and year-end 2015 results.

Well, thanks, Leah, and good morning, everyone. Thanks for joining us today. Again I certainly look forward to seeing all or most of you in a few weeks at the Citi Conference in Florida, where we can talk more about our company and our industry. I also want to thank so many of you for the recognition and good wishes that you conveyed with the announcement of our admission into the S&P 500 late last month. I think our whole team feels particularly proud, and your nice words made it even sweeter. So thank you all. Now, let's talk about 2015 results and 2016 expectations. To start off by noting that FFO per share of $1.37 in the quarter and $5.32 for the year before early extinguishment costs are both all-time records for our company and represent 7% quarterly FFO per share growth and 7.7% annual FFO per share growth. Now, just to put that growth into context, we always try to walk the top when it comes to taking a long-term view on our business plan. And that includes sometimes doing things that diminish certain quarterly metrics by same-store growth and occupancy from mid and long-term value enhancements. That is why I went out on a limb a few years back before Assembly Row opened to lay out plans to double our income over the next decade. That was in 2013 when we subsequently finished the year with 7% earnings growth, only to follow that with 7.2% growth in 2014, and now 7.7% growth in 2015. If you're aware of the Rule of 72, you'll note that we're on or a bit ahead of schedule, so far, so good. With the first phases of the big development projects coming into their own, and the second phase now underway, along with the raw material for future growth that we acquired in Miami and California lately, we are as optimistic today, if not more so, than we were back in 2013 as to our ability to double by 2023. For us, it's more important than ever to have and execute on our long-term consistent and sustainable plan that relies less on outside uncontrollables and more on the execution within our own portfolio. We are really proud of that. So, what does it mean for 2016 expectations? It means that we're planning on 6% or 7% FFO growth this year, marginally lower than where we've been but strong nonetheless. Because of the conscious and aggressive effort that we spoke about on last quarter's call to actively create anchored vacancy by replacing weak tenants with stronger ones. More importantly, unlocking redevelopment opportunities at a number of our larger core shopping centers. That was before the most recent news about Sports Authority, where we have five locations generating $3.4 million in annual rent. All good news for the future and providing more growth in value long before 2023 becomes dilutive to same-store growth and occupancy. Hopefully, you will remember my remarks from my last quarter's call that attempted to prepare investors for the impact that strategy would have on those metrics in the fourth quarter that we just reported and continuing through 2016. Well, I promise to spare you the five-tool baseball player analogy on this call; I've heard plenty about that from most of you over the last three months. To recap, 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, which, by the way, caused 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. The objective is for the core to produce even more value and continue to act as the strongest possible foundation to the development and acquisition pipeline. In part, that means getting control of space that has long hindered value creation in certain shopping centers. You'll remember that we spoke about the A&P mix, which was the most obvious example. We had four: one A&P, one Pathmark, and two Waldbaum's, all in New Jersey and Long Island. While four leases have significant value to multiple parties, certainly we chose not to participate in that bankruptcy process. I'm very confident that with all four leases, they would have been bought by someone which would have resulted in zero downtime and zero lost rent in any of those spaces. If our business plan were one-dimensional, we might have let that happen. Nearly 185,000 square feet of space—that's nearly a full point of occupancy and over $3 million of annual same-store growth—went out the door with the bankruptcy, and, by the way, we had to pay several million dollars to get the right to lose all of that income. Our assessment is that that several million dollar investment plus a year more downtime would pay back many times over not only in terms of the four walls of those grocery stores, which is how a lot of people look at the leases' value but by unlocking more redevelopment opportunities that improve the entire shopping center. While same-store growth and occupancy were negatively impacted in the fourth quarter and will be in 2016, the future value of these and other centers where we employed a similar strategy will be far higher. We are deep into exploring redevelopment plans on all of our newfound opportunities, and I'm excited about the possibilities. Jim will summarize the impacts in his remarks in a few minutes. Now, I don't know if we could have made that decision if we didn't have a clear long-term plan and same-store growth and year-end occupancy were the only considerations. All right, let's back up and talk about leasing for a minute and there is plenty of it happening. Ninety-nine deals were done in the quarter, 88 of them comparable for over 380,000 square feet at an average rent of $31.88, which is 23% higher than the $26 per foot the prior tenant was paying. The leasing strength was broad, with both anchor deals and small shop renewals registering double-digit growth. The tenant improvement dollars per square foot associated with those leases require explanation because most of it comes from two redevelopment projects: the Saks OFF 5TH deal at our headquarters site of Congressional Plaza and the Dick's Field and Stream deal at Melville Mall on Long Island. Capital for those deals is both included and considered in the overall return thresholds of the projects, so be careful not to double count that capital as both leasing capital and redevelopment capital; it's one and the same. Anyway you look at it, these are strong leasing results. In addition to the 88 comparable deals, we also executed 11 non-comparable deals, largely on the new development, representing an additional 58,000 square feet of space—so 440 square feet of deals in a three-month period. There is plenty of productive leasing being done these days in virtually all markets we do business in. And we're betting that that will continue in 2016 for our product type and our locations. And it's why we're consciously trying to get back on the performing anchor space. We want to use these favorable economic conditions to release. We see a good sampling of mediocre retailers that have been holding on for years either giving up A&P, Hudson Trail, City Sports, or who will soon. We're fine with that. As I've said, we are anxious to either release or redevelop. So I haven't touched on acquisitions or development yet, so let me get to the highlights. We've got a lot going on, from continued advancement of the construction and leasing at both Pike & Rose and Assembly to the continued opening of more and more tenants at the very successful Point development in El Segundo, California, and the continued disciplined construction of fully leased 500 Santana Row set to house data mining technology powerhouse Splunk by the end of this year, to the closing on October 1, of Sunset Place in South Miami, where we're aggressively working to develop a plan to better exploit this A-1 location. We have also unwound our 11-year joint venture with Clarion through the acquisition of their 70% interest in six shopping centers in suburban Boston, New York, and DC which, by the way, creates more fresh powder for redevelopment. So, we have more going on to keep our five growth buckets fully productive than I can remember in my 18 years here. Let me give you a few more updates on those big projects and then I'll turn it over to Jim. At Pike & Rose, residential lease-up continues to progress quite well with over 40% of the building leased at The Pallas as of today at rents that are inline or even a bit better than our underwriting. The remainder of that residential leasing will require the rest of 2016 through re-stabilization, which again is consistent with our expectations. Secondly, we are well underway on the next phase. The phase II garage is done and open, and we've just broken ground in the two largest buildings in phase II this month. It will take two years to get it all open with a 700-foot-plus long Main Street and a sense of place long missing from Rockville Pike. In Somerville, Massachusetts, Assembly Row continues to get better and better. One of our biggest concerns during the second phase construction was adequate parking, and serving surface lots are now under construction. That's a high-class problem for the initial phase of the Massachusetts project, but it's because this is already a very successful new neighborhood in the Greater Boston Area. It's about to get a whole lot better as partners and employees begin occupying the new building by mid-year '16. Very exciting progress there, which has clearly spilled over to the adjacent power center where we hope to be making some important merchandising and economic upgrades in the next few quarters. In San Jose, construction at 500 Santana Row is progressing a bit better than we expected in terms of both cost and potentially schedule, which if it holds, will result in 9% cash-on-cost yields upon stabilization. That would make 500 Santana Row the third project in a row with Santana and residential projects, Lavare and Misora being the first two where the initial revenues exceeded our underwriting. That is not a fluke; it speaks to the big picture point about mixed-use projects done well. While the initial phases that need to create the environment are complicated and often a little less smooth than we would like, the long-term value created through mass duration and incremental development of these ambitious projects is extremely rewarding and incredibly enduring. Similarly, at the Point in El Segundo, the successfully initial tenant openings at the end of last summer have continued and grown as more and more tenants have opened. The final couple of spaces are expected to be leased and opened in 2016 again on time and on budget. I don't have a significant update for you today on our property acquisitions in South Florida, which are performing as planned as we underwrote them. Our most senior team, including Don Briggs, Chris Weilminster, and Dawn Becker, along with our partner Grass River and Michael Comras, are fully immersed in redevelopment mode, exploring the art of the possible with city officials, retailers, and others, and that applies to both CocoWalk and Sunset. Stay tuned there. Finally, last month we concluded a very successful 11-year shopping center joint venture with Clarion Lion Fund by acquiring their 70% interest in Atlantic Plaza, Campus Plaza in Suburban Boston, Greenlawn Plaza on Long Island, and Free State Shopping Center, Plaza del Mercado, and Barcroft Plaza in Suburban Washington DC. We felt this was a very fair and favorable purchase price of $154 million. All of these assets are located in markets we know well and have seen strong growth from. We've got a number of redevelopment and releasing opportunities with these properties that our new core team is focused on—more raw material for future growth. Okay. That's enough for me now. 2015 was a very gratifying year for us, full of not only measurable accomplishments but also, more importantly, the solidification of our planned and structured focus on accelerated value creation throughout the second half of this decade and beyond. Thank you all for your interest and support. And I'll now turn over to Jim and look forward to your questions afterwards.

Thank you, Don and Leah, and good morning everyone. As Don highlighted, our team delivered yet another record for the Trust in terms of FFO per share, which is $1.37, representing 7% growth over the prior year quarter or 7.7% for the full year. For many of you parked at the top or just above our guidance, that $1.37 was just below the top-end of our previously provided range. In a quarter where we continued to invest in the future by intentionally taking down additional box vacancy, adding to our team, selling non-core assets, and incurring transactional costs for favorable acquisitions, we are particularly pleased with the bottom-line results driven by our operation, leasing, acquisition, and development team. Turning to the numbers, overall property operating income grew at 5.9% over the prior year, even with the decline in occupancy reflecting higher anchor rollover. Our core portfolio continues to be a significant driver of POI growth. That core grew at 2.6% or approximately 3.8% for the full year on a same-store basis, including redevelopment. As in prior quarters, allow me to again emphasize that our same-store pool represents approximately 94% of our total POI. In other words, it represents substantially all of our portfolio and truly reflects underlying core performance. This quarter, the downtime associated with the anchor rollover we discussed, as well as other one-time items, produced about a 150 basis points of drag. We highlighted this trend last quarter and as I will discuss further in guidance, we expect this rollover drag to begin to ameliorate in the later part of this year, resulting in 2016 same-store NOI growth, including redevelopment of approximately 3% to 3.5%. Allow me to pause for a moment. I can think of very few portfolios that show growth even while taking down occupancies. That speaks to the bumps embedded in our leases, double quarters or double-digit rent rollover growth and the successful delivery of our redevelopment. Our first phases of Assembly and Pike & Rose contributed approximately $3 million of POI in the quarter, down slightly on a sequential basis as the Pallas high-rise opening and the office space deliveries triggered full operating expenses. The office lease up is complete and tenants will continue to take occupancy through this year and early next. Additionally, as Don mentioned, the leasing up at Pallas is going well, and we expect to hit a stabilized occupancy in the fourth quarter of this year. Finally, our acquisitions of CocoWalk and Sunset Place, which are performing well against our acquisition underwriting, also contributed significantly to our overall POI growth. G&A remained stable at $8.1 million and interest expense declined $1 million, reflecting the lower average rate achieved through our refinancing during the year of 4.1%, offset by lower capitalized interest during the quarter as we continue to place development into service. Again, bottom-line FFO grew 7% for the quarter or 7.7% for the year. That absolute bottom-line performance while we continue to invest in the future is something that our team takes great pride in. From a balance sheet perspective, we ended the quarter with $53 million drawn under our $600 million revolver that set the EBITDA at 5.3 times, with a weighted average debt tenor of 10 years, which together provides maximum flexibility and liquidity to fund all of our growth in NAV creation underway. Turning to guidance for 2016, we affirm the previously provided range of $5.65 to $5.71 a share, representing a range of growth of approximately 6% to 7%, slightly below our long-term plans. As we discussed last quarter, this was a true range that will be impacted by several variables during the year. As Don covered in his remarks, the targeted box recapture in all of our vacancy drives a significant amount of drag this year. The targeted anchor rollover, which represents approximately 6 million of downtime in the year or approximately $8 million of annualized rents, is driven by 10 of our properties. The notable spaces include the A&P leases at Troy, Melville, and Brick, the former Hudson Trail space at Montrose Crossing, and the former Valley space at Grant Park. In total, the targeted anchor rollover represents approximately 465,000 square feet at some of our very best assets where the investment and downtime this year should pay significant dividends in the future. And as Don discussed in his remarks, we are very excited about the opportunity to unlock value at these centers through redevelopment, repositioning, and releasing. Overall, we expect to significantly exceed the prior in-place rent of approximately $1,350 a foot on these larger spaces. In short, we believe we will drive or deliver better retailers at better rents and significantly improve these assets. In addition to this investment in future growth, there are several other investments in growth to consider from a timing perspective if you look at the year. I mentioned Pallas and we expect a stabilization of that approximately $100 million investment to occur in the fourth quarter from an occupancy perspective. The office space at Pike & Rose and Assembly, which represents approximately $80 million of investments, is now fully committed, and we will continue to see rent commencing throughout the year and early next, as tenants take occupancy. 500 Santana Row, our 234,000 square foot office building that represents approximately $115 million of investment, is 100% pre-leased and will deliver late in the fourth quarter with rent commencing in 2017. The Point redevelopment at Plaza El Segundo continues to perform exceptionally well and is expected to stabilize in the fourth quarter of this year. Our acquisition of our joint venture partner's 70% interest in the six core assets that Don discussed is expected to be neutral to FFO this year, after transaction costs and factoring in the sale of Courtyard Shops, which we completed in the fourth quarter. We do expect this acquisition to contribute approximately $0.02 to $0.03 in 2017. Finally, we are well underway on the second phases at the Pike & Rose and Assembly, representing another $600 million of investments, and expect those spaces to begin delivering in the latter part of 2017 and 2018. From a capital standpoint, we expect to fund approximately $350 million of development and redevelopment with a mix of funds from operations, long-term debt, and equity under our ATM. Finally, consistent with our process, our guidance does not factor in any further acquisitions or dispositions that we may execute during the year. Before turning the call over to questions, I would like to introduce Leah Andress, our new Investor Relations Associate. Leah was formerly with Phillips Realty in DC and prior to that was an analyst with FBR Capital Markets. I look forward to having all of you meet Leah very soon. We also look forward to seeing many of you at the Wells and Citi conferences in the next few weeks. With that, operator, I would like to now turn the call over to questions.

Good morning, and Leah, don't be afraid to give Jim some grief back there. So a few questions here. First, on the West Coast, perhaps for Jeff, can you just give us an update on what you are seeing as you are talking to Splunk for their space as well as I think you guys are contemplating building some office across the street? And just given the headlines, curious if that is still the plan or maybe there has been some change?

Yes, Alex, no change to long-term development plans for Santana Row or Santana West. Obviously before we make a capital decision, we're going to make sure we're confident that there is going to be a market there when it's time to lease buildings, so no change. As it relates to Splunk, we don't have any special information about what's going on at Splunk or any of the other tech companies for that matter. But what we do see on the ground, if you will, is them being very aggressive about doing what they need to do to get into the building as soon as possible. They need the space; they need it as quickly as possible, so everything that has gone over the last couple of weeks hasn't affected that at all.

Okay. And then, as far as the Clarion JV, Don, I think over the years you have been asked numerous times about buying that in, and it always seemed like it was more of a steady Eddie portfolio rather than something that would be more interesting to wholly own. So can you just provide some perspective? Was this a case where a JV partner wanted to get out, or perhaps given some of the recent retailer things that have come up, maybe there are some new opportunities that made it a little more exciting for you guys to buy in now?

Yes, Alex, that's a very fair question. The single biggest thing, or first, you need both parties to want to do a deal. From our perspective, one of the biggest things that changed was it's all about prioritization. As you know, what we did do last year was setting up the core and the way that we set up the core we are kind of freeing up that achievement building on that team to be able to create value in it while taking Don and freeing up Chris and Briggs over on the mixed-use side, there is more capacity. So, from our perspective, I'm feeling great about being able to actually get to something we would like to get there. Secondly, a lot of it is just timing, too. We've already, at Plaza Del Mercado, for example, been able to do a deal that was in the works last year and has been in the works the last couple of years, with respect to LA Fitness to redevelop that site, so that's great news. It’s really about management of pension afforded by the new reconfiguration of our companies. In addition, Alex, too, the timing for Clarion, we were ready to develop that partnership for their own reasons and we were ready to take it out.

Okay. So how much more should we look for in terms of upside potential regarding the yield from where you purchased and where you think it could go in the future from a modeling perspective?

Yes, see I'm not going to give you a particular answer on that, I can tell you that we are working real hard to that, particularly Mooallem and that team is looking particularly hard as that portfolio. If Mooallem and Wendy Seher, who I don't know, if you know, she is a critical part of our company, Senior Vice President of Leasing just on the core, which is so important when we're saying just on the core. It also ties into what we're doing with respect to aggressively going after space. Having that ability to focus and move on that core—timing is just right. So, we will give you more, I'm not sure whether Mooallem we're going to bring him down to the city or not, but if we do or if we don't, there will be more exposure for you and folks like you to him to be able to get some of that specifics as we get closer.

Yes, thank you. I am just wondering, are your better redevelopment expansion opportunities going to be internal with a company like Pike & Rose or may they be external like your shops at Sunset Place and CocoWalk?

You know, Craig, I think that again, as we laid out at our Investor Day, by far the large preponderance of our investment opportunity exists in what we earn and control today, and we went through that in some detail. We augment that tactically with perhaps an acquisition or two; I think this past year we found three strong ones in San Antonio Center, Sunset Place, and CocoWalk, which really kind of build our pipeline. But the preponderance of what we're focused on and executing on and what you see in the 8-K, as we not only detail the projects that are underway but then begin providing for you on that second page what the future pipeline is, is in real estate that we own.

Yes, Craig, and just the only thing I would add to that is the type of acquisition we make, I think it's a differentiator for us. I don't think we look at deals. It's not just about buying stable shopping centers; in fact, it's not about buying stable shopping centers. It truly is about looking at it with a more broad real estate point of view to be able to take advantage of skills that we've grown in and developed over the past decade or so in redevelopment. I mean there aren't a lot of companies that are going to go take a shot on Sunset Place. But when we look at it—and we may succeed or we may fail, we'll see. But we handicap it in such a way, we're looking at it in such a way that it provides opportunity that is consistent with the skill sets that we've learned all the way up from Bethesda Row until today. So that's the balance Jim was talking about.

Yes, from my perspective, I wonder if it would be better for you to take on projects with greater potential outside your current portfolio, or to play it safe by improving the properties you already have.

Yes, I don't know how to tell you which way it will be. I can tell you it will be a balance of both. And how that moves depends on where the opportunity is. One thing we do—and I think it's important, is we truly—if you were in our investment committee meetings for each of those types of opportunities, it's still capital. As it pertains to capital where we risk-adjust those returns and what we think we're going to do, is the critical part of that balance. You're going to see both as we go forward. I just can't tell you whether it's 60/40, 70/30, 50/50, because that depends on the specific opportunity that comes up.

Great. And then just quickly, it sounds like you have more appetite for some repurposing of anchor space. Is there a point, though, where the economy gets too rough that you may not want to take those gambles from a timing perspective?

Of course, Craig. It's funny. I was thinking about one of these 10 shopping centers that we are getting to. I mean these 10 shopping centers that Jim talked about in the core, these are shopping centers that we haven't talked much about. We've got 90 shopping centers. The idea of unencumbering through restrictive anchor leases, things like Willow Lawn, Brick, Troy, Montrose, Crossroads in Chicago shows that we have that appetite. I can tell you at Crossroads in Chicago, for example, there is Party City. If this were 2008, we would have done everything we can to keep them there. We would have lowered the rent, we would have done whatever we needed to do to keep the occupancy and to keep the income coming in the drawer. In 2016, we view that differently. We're certainly willing to play hardball on the lease terms effectively and say yes, you got to go, you got to go, because we're much more confident with respect to where it is that we can release and what we can do in terms of unencumbering the shopping center. Is there a point that that changes? Of course. To the extent the economy, it turns around and goes the other way, it's—and we're going to feel a whole lot different about that just like we did back then. But it's not going to be an overnight type of decision. You'll have plenty of time and quarters for us to talk through what we are doing with respect to these centers and what it is that we'll be monitoring with respect to future centers.

Maybe if I can just build on that a little bit just because there is increased concern in the U.S. about a recession today or one approaching, if we are not in it already. I know Jim is inclined to probably make guidance that much more conservative than usual. But what specifically has, Don, you think you have changed in your approach to managing the business to address risks that might not be on the radar screen say six to 12 months ago? Maybe have you perceived any change in the willingness of retailers to commit to space or even just certain aspects of lease terms?

Yes, Jeff, it's a good conversation. Let's start this out by Weilminster is on the phone I think. I'd love for him to give you a prospective of the leasing world today. Then I'm going to build on that with respect to your question, okay?

So Jeff, good morning. My feedback on the leasing world today is that we're very cautiously optimistic with regards to the opportunities that very much align with what we at Federal Realty have. These are best-in-class assets, which we see located in markets that really align with the retailers' desired core customer profile, which is incredibly important to them. They know that it's our Realty's commitment to deliver best-in-class property-level operation, execution, and maintenance, and are focused on delivering really the best tenant mix available aligned with their ability to be successful. That puts us then in the best opportunity to take advantage of the growth that retailers are pursuing. And there is clearly growth demand from the retailers; they are just a lot more focused on finding sites that do align with core customers. The deals that they are doing are taking much longer, the lease negotiations are certainly more difficult, and they are a lot more selective. So we definitely see opportunity with regard to growth in retailers, and we think they are looking in the markets where we have our real estate. For that reason, we're set up to take advantage of what demand exists out there, both on the box side, as well as on the smaller shop side. As Don pointed out, it is very important for us as we unlever some of the restrictions and these opportunities to take advantage of putting in new relevant box retailers, and also that rising tide will allow us to better capitalize on the demand from smaller shop tenants.

Yes. And let me add to that, Jeff. Your question is a great one. To the extent this was—turning it to 2008, you'd have a whole different perspective in terms of what we think and what we're doing in our approach. There is not one side that we see with our discussions with our retailers at our properties and in our locations of anything like that. At worst, it's a—take a deep breath. As Chris said, it's a tougher negotiation, all that, that's fine. The reality is, if you were to see or to know—if I took you for a ride over to Grand Park Plaza, which is inside the Beltway in Fairfax, we have not been able to do anything with that property for a long time because of the leases in place. This is a particular point in time where we have a shot. If we simply released it to keep the same anchor in and extended those existing leases, we would be losing the shot to create significant value for a decade or more. So we—when you overall take a look at it—and this is with the decision, with everything we've done—we are still 93% occupied. This is hardly, oh my God, empty out the whole place, right? But it does take a very measured and careful approach towards ten shopping centers in particular that we wouldn't— we've been trying forever to figure out a way, because demand is there to create value, but they've been encumbered by other demand, fee lease, or an old valley lease or whatever it is; that particular shopping center was calling it to get it back. That seems like a smart approach to me. It's not all the way over on one side or all the way over on the other. Again, it's balanced.

Just maybe thank you for that. Maybe to switch gears, just on the Clarion joint venture one or two questions. All else equal, I would have expected that purchase considering the cash funding to be slightly accretive to earnings but if there is no further dispositions in guidance, I guess what is restraining that possibility?

Jeff, as I mentioned in the call, we didn't have a factor previously in the guidance sale of Courtyard Shops in Wellington, Florida. So when you factor in that asset sale plus transaction costs, it's generally neutral for 2016 and we do expect it to be $0.02 to $0.03 accretive in 2017.

Sorry, I missed the second part of that. I'm just curious, related to that portfolio, occupancy in that JV has been a little bit lower than the rest of the Federal portfolio. Can you just remind us, I guess, how you guys think about the quality of those assets in comparison to your core and is there a future redevelopment potential there that may not be in your schedules today or do you see these assets as eventual sale candidates down the road?

Yes. The demographics are damn good compared to the rest of the portfolio. And I wish I had a better answer for you as to that. What can I show you today that I will say, oh my God, why not the other 70% in that portfolio is a clear home run? I don't have that for you today. What I do have—and again, a lot of it—from a management perspective in a company like this, it's to say all right I know have a very focused team on it. The initial conversations that we've been having with retailers and with communities suggests that there are some good things to do at a couple or three of these shopping centers, and Plaza Del Mercado was the first one that I've mentioned to you. I expect there will be others. Jim, Mooallem, and his team need a little time to run through this, and in the next couple of quarters, we'll have a far better roadmap for you, if you will, as to how it relates to the rest of the products that we have.

Okay, thanks. And one last question. I'm curious why do Federal's renewal TIs run so much higher than peers? I guess I wouldn't— the majority of your tenants—it is a costless proposition to renew. There is a little incentive or disincentive for them to leave the property, and yet your renewal TIs tend to be $8 to $9 a square foot versus sometimes less than $1 for a lot of your peers. I'm just curious what you think drives that?

I'm not sure I have an answer; I'm not sure. The one thing I would pass, here, is these shopping centers are better shopping centers in areas that were effectively the economics of the deal on a net basis make a whole lot of sense. I suspect in return for some of that higher rent there is an expectation for certain small shop tenants wanting more done to the space, can we get a redone bathroom, can we effectively refresh et cetera at the space? I suspect that, but I don't know for sure. Chris, do you have anything to add to that?

Yes, I only would add; I think it just varies. I think this period, as Don mentioned, we did a transaction up in Melville where we have an in-place tenant where there is going to be a downsizing of GLA in one area of the store to bring another one of their brands in. So that is the Dick's deal that was mentioned. A lot of it has to do with making sure of maximizing the opportunity within the space, whether that's expansion, a shrinking and/or really an improvement to some of the infrastructure that we see going beyond just a tenant. We're very proactive in analyzing every single step available to make sure that we're getting the best out of each space. You think about the amount of our portfolio of 100-plus assets, we got to squeeze every bit out of juice out of each one of them, and we do analyze them and that is how I think you will see the variation that I think we get into defining why on each deal we made those decisions. Don mentioned our investment committee, and we do analyze them thoroughly. I hope that helps, Don.

Hi, good morning, guys, and thanks for all the free advertising for our conference.

Sure, Christy, keep Alex informed, okay?

Absolutely, first priority. Jim, just following up on some of your comments on delivery and stabilization of the active redevelopment projects. I think you mentioned $3 million of NOI in Q4 from Pike & Rose and Assembly. As I think about the rest of the pipeline, the $290 million of cost at 9%, that's $26 million of incremental NOI from those projects. How much of that flows through Q4 NOI, and maybe you can break out the point specifically?

I'm going to need to get you that number specifically in your follow-up Christy; I don’t have that with me right now.

Okay, right. And just secondly, regarding, I think you mentioned $6 million of downtime impact from box recapture. Just wondering as you think about the occupancy trajectory in 2016 and the re-tenanting of some of those anchor boxes, and it sounds like you could potentially have more that you could do on that front, where would you expect physical occupancy to end the year? What's sort of embedded in your guidance?

I think you're going to see occupancy dip a little bit in the first part of the year and then begin to recover towards the end of the year. I'm not going to give specific percentages because that's a difficult thing to predict based on how particular space can move at a particular period.

In Sports Authority too, we're going to have to figure out what happened there.

Yes.

Would you have any sense at this point for how many of those five Sports Authority locations you would divest?

I don't at this point. You know, we've got five, Christy, and an average rent of $17 box or something like 17 box and anywhere between 11 and 25, I suspect we would love to get back to the ones at 11, and probably won't. The ones at 25 we will want to get back and we will have to figure out what else we have there. I tell you when I look at it; I take anyone of them back, anyone of them even ones to 25 because of where they are and what we could do with them.

And Christy, those are Assembly, Brick, Montrose Crossing, Crow Canyon, and East Bay Bridge.

Okay. And then just sorry if you mentioned this already on the Assembly phase two condos, the increase in the number and the cost there, anything that we should read into that in terms of demand at that site for multifamily housing, the increases go for the project?

Certainly, some of that, but much more, this is a much more efficient building. The outside of the building that we were building is no different, and accordingly being able to refine and tweak the mix and efficiency of the building is what that's all about; it is some variance in terms of economics and we would not have done that blue if we did not feel the market would absorb that and able to handle 17 more condos.

Good morning. Just a quick question along the lines of, with some executive positions floating around out there that are open, how do you look at your talent on the bench in terms of keeping those bodies and maybe succession planning if you do happen to get somebody stolen away?

Frankly, I couldn't feel better. I mean there is—we've spent a whole lot of time over the last two years working exactly what you're talking about, Jason, putting comp arrangements into place to make sure that we're doing the best we can to retain. The key with Federal, as always, has been from our perspective you can get the best and the brightest if you give them the autonomy and the lease so they are able to run their businesses. That's effectively what it is that's how we are set up. You can have a couple of cocktails with any one of them to get their point of view that way, but I feel real good about not only choices that will have for succession down the road but also the ability to execute this business plan that we've simply articulated about.

Okay. And then last question for me. If you could maybe just contrast tenant health from three or four years ago versus today. It is obviously a Darwinian business and you are always replacing weak tenants with stronger tenants. But just overall kind of state of the retailer space, do you feel better today than you did three or four years ago relative to your tenant? Or is there a little softness that is developing with some of these bankruptcies?

Yes, Jason, I do have a very specific point of view with respect to this. I mean three or four years ago, not just coming out of the recession, you're nervous. You're nervous with respect to what those tenants' business plans are going to be, how they are going to work in the new world, did the cuts that they made in their staffing got their organizations with respect to be able to do all that. What has happened, and it's predictable if you kind of take a look at it, is if you could be in every boardroom of all those major retailers and smaller retailers along the way you would—some of them with respect to what they changed and where they're moving into a new economy became extremely good at it and got stronger, a lot of them kind of found mediocre success in certain areas and not in other areas. But with an improving economy, they held on. They held on. They held on. There is only so long you can hold on if your business plan is not affecting revenue. I think that what we see and we felt that in '15, not normal for what we're talking about for '16 was that those tenants that simply did not have business plans that resonated with consumers going forward we're not going to be able to hold on interest. We started to see that in the second half of '15; we decided then to specifically aggressively target them. It's—we don't turn that on and off; and this is a continuation of that into '16. The better tenants are better tenants, and those better tenants are doing very well. There is more of a bifurcation, is what I'm saying, between good and not so good today than there was three or four years ago. That's the distinction and that's why I'm talking my own book here, but it’s what I believe—that's why the bifurcation between the desirable real estate and not desirable real estate is wider than it certainly was three or four years ago. Those things work in tandem, and that's why we are probably a bit more optimistic with respect to our leasing strategy in '16 and '17 than some others are.

So with your long-lived leases, do you feel like there is a number of years of kind of pain to come from a retailer standpoint or are you working through the lion's share of that in the last couple of years?

Jason, I do believe that, but I believe that for only the better portfolio. I don’t believe that across the board three years ago and four years ago, across the board, didn't matter. Today it matters.

Maybe a question for Chris Weilminster here, but you mentioned the broad strength you've seen on the leasing front both from main present in line and you talked at length earlier about being still optimistic about the retail environment. So I'm just wondering if you could give us some more specifics or color on where demand is coming from on both the shop and the box side.

Sure. I will say that the soft goods retailers, Nordstrom Rack, has made announcements about their growth plans, so there is a lot of demand out from boxes in that category, Rack TJX you talk about what's going on HTC, and growth expectations, I think for Saks, be it Saks OFF 5TH brand, I think they are rolling out or talking about some brands as it relates to Lord and Taylor. There clearly is a box component that is looking for opportunity. We see the grocery category looking to get more nimble and do more urban-oriented stores, so smaller. I think there is a new concept out by Ahold called BeFresh which is taking some of what they have learned over the European market about providing more deliverables on home meal replacement, more convenient environment. That clearly provides opportunity. And in the QSR business, as we've been talking about for long-term on smaller shop, we really continue to just amaze at how they are kind of cutting out the mid-tier casual dining category and providing, as quite you know, high-quality products more curated by the consumer in a faster environment.

You know, Jeremy, the other thing you gotta keep your eye on, which I think is a real positive for the open air space, is there is certainly more women’s apparel tenants that are considering open air versus or developing new concepts for open air versus just malls. I mean we did a couple of Lemon pop deals over the past few quarters, one in Melville Mall that I just love how it's performing, one in Ellisburg, that we did. Those retailers' open-mindedness to where, with respect to their business plans they can create value, I think is a real positive to the type of products that we have.

Good. Appreciate that color. And then Don, in terms of these Sports Authority, I know it is a little early here and hard to put a probability on, but assuming you could get those back, do any of those have the potential to lead to some bigger redevelopments here given that they are in some of your better centers?

Yes. It is funny. I mean Brick isn't doing well. We are working hard at Brick Plaza to redeploy that shopping center, and one of the Sports Authority locations at Brick Plaza is opened, it's a box, big box that opens up another set of opportunities. You know what we’ve been doing with respect to re-merchandising East Bay Bridge, we would love to get that back to be able to re-merchandise it. More Assembly Square, Assembly Square and that power center is now adjacent to a pretty successful mixed-use project. So even though it pays a lot of rent, I wouldn't mind that either. When I look down through them, they can turn into some real causes for value perspective but again short-term hits.

And Christy, those are Assembly, Brick, Montrose Crossing, Crow Canyon, and East Bay Bridge. So, those are some of our very best centers.

Okay. And then just sorry if you mentioned this already on the Assembly phase two condos, the increase in the number and the cost there, anything that we should read into that in terms of demand at that site for multifamily housing, the increases go for the project?

Certainly some of that, but much more, this is a much more efficient building. The outside of the building that we were building is no different, and accordingly being able to refine and tweak the mix and efficiency of the building is what that's all about; it is some variance in terms of economics and we would not have done that blue if we did not feel the market would absorb that and able to handle 17 more condos.

Good morning. Just a quick question along the lines of, with some executive positions floating around out there that are open, how do you look at your talent on the bench in terms of keeping those bodies and maybe succession planning if you do happen to get somebody stolen away?

Frankly, I couldn't feel better; I mean there is—we've spent a whole lot of time over the last two years working exactly what you're talking about, Jason, putting comp arrangements into place to make sure that we're doing the best we can to retain. The key with Federal has always been from our perspective you can get the best and the brightest, if you give them the autonomy and you give them the lease so they are able to run their businesses that's effectively what it is that's how we are set up. You can have a couple of cocktails with anyone of them to get their point of view that way but I feel real good about not only choices that will have for succession down the road but also the ability to execute this business plan that we've simply articulate about.

Okay. And then last question for me. If you could maybe just contrast tenant health from three or four years ago versus today. It is obviously a Darwinian business and you are always replacing weak tenants with stronger tenants. But just overall kind of state of the retailer space, do you feel better today than you did three or four years ago relative to your tenant? Or is there a little softness that is developing with some of these bankruptcies?

Yes, Jason, I do have a very specific point of view with respect to this. I mean three or four years ago, not just coming out of the recession, you're nervous. You're nervous with respect to what those tenants' business plans are going to be, how they are going to work in the new world, did the cuts that they made in their staffing got their organizations with respect to be able to do all that. And what has happened and it's predictable if you kind of take a look at it, is, if you could be in every board room of all those major retailers and smaller retailers along the way you would, some of them with respect to what they changed and where they're moving into a new economy became extremely good at it and got stronger, a lot of them kind of found mediocre and success in certain areas and not in other areas but with an improving economy, they held on, they held on, they held on, they held on. There is only so long you can hold on if your business plan is not affecting revenue. And I do think that what we see and we felt that in '15 not normal for what we're talking about for '16 was that those tenants that simply did not have business plans that resonated with consumers going forward we're not going to be able to hold on interest. We started to see that in the second half of '15, we decided then to specifically aggressively target them, it's—we don't turn that on and off and this is a continuation of that into '16. But the better tenants, there are better tenants and those better tenants are doing very well. There is more of a bifurcation is what I'm saying between good and not so good today than there was three or four years ago. That's the distinction and that's why I guess I'm talking my own book here but it’s what I believe, that's why the bifurcation between the desirable real estate and not desirable real estate is wider than it certainly was three or four years ago. Those things work in tandem and that's why we are probably bit more optimistic with respect to our leasing of this strategy in '16 and '17 than some others are. Yes, I do believe that, but I believe that for only the better portfolio. I don’t believe that across the board, three years ago, four years ago across the board, didn't matter. Today it matters.

Maybe a question for Chris Weilminster here, but you mentioned the broad strength you've seen on the leasing front both from main present in line and you talked at length earlier about being still optimistic about the retail environment. So I'm just wondering if you could give us some more specifics or color on where demand is coming from on both the shop and the box side.

Sure. I will say that, the soft goods retailers, Nordstrom Rack has announced their growth plans, so there is a lot of demand out from boxes in that category, Rack TJX you talk about what's going on HTC and growth expectations I think for Saks be it Saks OFF 5TH brand, I think they are rolling out or talking about some brands as it relates to Lord and Taylor. I think that clearly is a box component that is looking for opportunity. We see the grocery category looking to get more nimble and do more urban-oriented stores, so smaller. I think there is a new concept out by Ahoid called BeFresh which is taking some of what they have learned over the European market about providing more deliverables on home meal replacement, more convenient environment. That clearly provides opportunity and in the QSR business, as we've been talking about for long-term on smaller shop really continues to just amazed at how they are kind of cutting out the mid-tier casual dining category and providing as quite you know high quality products, more curated by the consumer in a faster environment. That's just a low hanging fruit but that energy certainly are and those types of retailers are the ones that we clearly see taking advantage of it as we release opportunities within our portfolio.

You know, Jeremy, another thing to keep an eye on, which I think is a real positive for the open air space, is that there are definitely more women’s apparel tenants considering open air or developing new concepts for open air instead of just malls. We completed a couple of Lemon pop deals over the past few quarters, one in Melville Mall, which I love how it's performing, and one in Ellisburg. The willingness of those retailers to explore different business plans to create value is a real positive for the products we offer.

Good. Appreciate that color. And then Don, in terms of these Sports Authority, I know it is a little early here and hard to put a probability on but assuming you could get those back, do any of those have the potential to lead to some bigger redevelopments here given that they are in some of your better centers?

Yes. It is funny; I mean Brick isn't doing right. We are working hard at Brick Plaza to redeploy that shopping center and one of the Sports Authority is the Brick Plaza is opened, it's a box, big box that opens up another set of opportunities. You know what we’ve been doing with respect to remerchandising East Bay Bridge, we would love to get that back to be able to remerchandise it. And then more Assembly Square, Assembly Square and you know that power center is now adjacent to a pretty dam successful mixed-use project. So even though it pays a lot of rent, wouldn't mind that either. So there is when I look at it; I take anyone of them back, anyone of them even ones to 25 because where they are and what we could do with them.

And Christy, those are Assembly, Brick, Montrose Crossing, Crow Canyon, and East Bay Bride. So those are some of our very best centers.

Okay. And then just sorry if you mentioned this already on the Assembly phase two condos, the increase in the number and the cost there, anything that we should read into that in terms of demand at that site for multifamily housing, the increases go for the project?

Certainly some of that but much more, this is a much more efficient building. The outside of the building that we were building is no different and accordingly being able to refine and tweak mix and efficiency of the building is what that's all about, it is some variance in terms of economics and we would not have done that blue if we not feel the market would absorb that and able to handle 17 more condos.