Federal Realty Investment Trust. (FRT) — Q1 2016 Transcript

Good morning everyone. Thank you for joining us today for Federal Realty's first quarter 2016 earnings conference call. Joining me on the call are Don Wood, Jim Taylor, Dawn Becker, Jeff Berkes, Chris Weilminster, Jeff Mooalem 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 first quarter 2016 results. Don?

Thanks, Leah, and good morning, everyone. Thank you all for joining us today and I look forward to speaking to all or most of you in a few weeks at the conference in New York where we can talk more about our Company and the many changes affecting our industry. As most of you are aware by now, this will be the last earnings call with my good friend and colleague Jim Taylor who will be on as the CFO of Federal. The team is certainly going to miss him but I for one am genuinely proud of him and the opportunities he is going to get at Brixmor; their board made a great choice. I am also personally grateful for his many contributions to the Company, his wise counsel and most importantly his friendship. Enough about Jim for the moment. Onward to the quarterly results and to our prospects for the future, it was a really good quarter all the way around for us. FFO per share of $1.38 is the highest quarterly result of all time and 9% better than last year’s quarter. Same center growth of 4.2%, again validating how important our redevelopment program is to us. We don’t expect to maintain this level for the year, given the significant investment for the future initiatives that we have underway and lease termination fees that helped us this quarter by about $600,000 or so, more on all that later. We have done 85 possible deals for nearly 400,000 feet of space at $3,353 per foot, which is 13% higher on a cash basis than the deals previously, that’s up 23% on acre space, 10% on small shops, it's up 21% on new leases, and 9% on renewals. Strong consistent leasing progress throughout our operations is our trademark and we don’t expect that to fall. Overall portfolio occupancy is at 94.1% leased but only 92.7% occupied. Those numbers are down by 130 and 180 basis points respectively from a year ago. Much of that is due to the inclusion of lower occupancy acquisitions in South Florida and from the Clarion acquisition, together that’s 1.5 million square feet added with a combined occupancy in the mid-80s. Of course, it's also affected by the planned AMC and other vacancies that we talked about last quarter. Yet we still had a record quarter, growing earnings with decreasing occupancy whether planned or unplanned speaks volumes about our business and our Company. Speaking of that occupancy, we made strong progress as it relates to proactively taking advantage of weak tenants to improve the anchor merchandising at certain of our key shopping centers. That initiative took a big step forward this quarter with the signing of TJ Maxx to take over the failed Hudson Trail Outfitters space and the signing of Dick’s Sporting Goods at Melville Mall, which along with last quarter’s Field and Stream deal, is some real good news to share. L.A. Fitness is also taking over a host of obsolete small shop spaces at Del Mar Village in Boca Raton. Three great deals all at far higher rents than they were previously placed, actually near 30% higher in total with far better retailers for our future and just the initial part of the redevelopment of these three extremely well-located shopping centers. Remember though those are just signed leases and rent contributions won’t start from them for a while as each particular center is developed. All the evidence so far suggests that this proactive approach towards creating vacancies is going to work out overall as we’d hoped, in creating far more relevant shopping centers even though it will put pressure on same-store growth for the balance of ’16 and ’17. I also want to report strong progress on the lease-up and rent start for the phase I completions of our three big and active development projects. Let’s talk about them individually. At Assembly Row, the first phase is basically finished now with the last group of office tenants moving into our small office building and the retailers and restaurants solidifying our only success. We’ve really moved on the pace to execution, the first sign of which begins next month. Assembly has been so thoroughly accepted by the community as a place to live, work and shop, and we expect long-term value creation here to exceed our expectations. At Pike & Rose, we’ve leased up a ton of apartments since the end of the year and now stand at a phase I residential percentage leased at 73% heading into a strong summer leasing season. I couldn’t be more pleased with the rate of lease-up that we’re achieving. Pike & Rose is creating a lot of buzz and getting a lot of recognition in the community, and I am optimistic that we’ll have the building practically full by year-end or soon thereafter as we forecast. Non-residential demand will hit our rent dollar forecast given the rental rates we’ve been assuming for the higher floors in the Palace building. So far we’ve been close to our forecasted rents at $2.40, which is at a premium to the market. However, due to construction, we have been leasing from the bottom up. We've been skeptical about whether we’ll be able to lease the higher floors to the extent we had hoped, given the significant supply in the market and the fact that we are still a major construction site. We’ll see over the next six to eight months how that impacts our initial yield, which may be under pressure by about 50 basis points or so. More on that with another quarter of leasing under our belt. One thing we’re particularly confident about is the real premium to market that we’ve been getting even during this initial phase of leasing. The Palace average monthly rent to date of $2,500 a month or $2.40 a foot reflects a 20% premium over the North Bethesda-Rockville submarket. For penthouses that we’ve delivered at over $6,000 a month, we are setting new high water marks for this market. The pace of leasing is currently outpacing that competitive product. While excess supply in the market has caused us to miss our initial rent projections, it is indeed disappointing. We are also projecting more conservatively on phase II as you’ll know from our 8-K. The premium to that market is clearly attainable because of the environment we’re creating at Pike & Rose. We’re building the right products for the future. Pike & Rose is going to be around for a long time and becomes more and more integral to the community’s shopping, living, and working habits every day. We’ll have many opportunities to increase some residential income streams in the years ahead from these mostly month-to-month leases. And down in Escondido, California, we’re wrapping up the last few leases and remaining rent starts in a shopping center that clearly hit the bull’s eye of what was missing in the market. This property will only get better over the years, and at 500 Santana Row, affectionately known as the Splunk building here, we have topped off the $112 million project and remain on time and on budget. Looking back at the quarter and the execution of the business plan that we’re passionate about around here, I couldn’t be more encouraged that we’re on the right track to double our income in the next decade but also realistic about the investment necessary in people and real estate needed to do it right and protect our downside in an inevitably cyclical business. The latest curveball lies in the uncertain future of Sports Authority. As you know, we have five locations and none of them are on the closure list in the first round. We reserved most of our prepetition bankruptcy receivables, approximately $400,000 in the first quarter, and we have been fully paid for April’s rent. The latest conjecture of liquidation is a different story of course. Depending on how it plays out and the specifics of each location, a short-term hit is likely and might affect our existing guidance if leases were immediately rejected as opposed to being assumed by another retailer. However, we are quite confident that we would more than replace the cumulative rent which totals $3.4 million on an annual triple-net basis at $17.65 per foot and $4.8 million gross. The average market rent for the triple net box lease in these locations exceeds $25 per square foot, and we are already in conversations with replacement tenants just in case. The other big evolving change is of course the changing shopping, living, working, and entertainment habits of today’s consumer. As you’re all well aware, we have been, are, and will continue to be investing heavily in the best people, real estate and types of products that we believe put us in the best position to capitalize on those changes going forward. The downside is that in doing so, we are making investments that have and will continue to dilute current earnings. A couple of things on that front. First, the centralization efforts that our company is currently undertaking are progressing quite well. Jeff Mooalem is settling into his role and in the process of building four quasi-independent geographic teams to grow our core shopping center business. We are now investing in incremental talent and IT systems infrastructure and expect an additional $1.5 million to $2 million in annual investment to support this effort. Secondly, plans for our new Miami acquisition, Sunset Place, and CocoWalk are progressing well and being vetted by our senior team and partners. Decisions regarding direction and initial phases should go to the investment committee later this year, at which point we’ll lay out what we have in mind. In the meantime, we are heavily focused on grassroots engagement with the local communities and are increasingly optimistic that we’ll be able to present viable and value-creative changes at both locations. At Sunset, we’ll need zoning changes that permit more height to come up with a viable plan—fingers crossed. Finally, the search for a senior business partner that carries the CFO title for Federal is in full swing. I am grateful for the robust interest from candidates wanting to join our team after Jim’s announcement, and I’ve met with several terrific prospects who will be outstanding partners to me and our senior team. I just don’t want to rush that important decision, and I am giving the process the attention and serious consideration it deserves. I hope to be prepared to make an announcement regarding that in the next 30 to 45 days. In the meantime, Melissa Solis is our principal accounting officer and as those of you who know Melissa, we remain in very good hands from an accounting and overall financial point of view. Separately, I know that many on this call are friends and colleagues of James Milan, portfolio analyst at APG. We haven’t put out a separate press release, but James will be joining us next month as the Vice President and Director of Finance for the Mixed-Use division and will be relocating to our headquarters in Rockville, Maryland. We’re thrilled to have him. Now let me turn it over to Jim before answering your questions.

Thank you, Don, and good morning everyone. As Don highlighted, our team delivered another record for the Trust in terms of FFO per share, which is $1.38, representing 9.5% growth over the prior year quarter. In a quarter where we continue to invest in the future through commencing future development phases, adding to our team, taking down box vacancy, etc. we are particularly pleased with the bottom-line results driven by our operations leasing, acquisition, and development team. Turning to the numbers. Overall property operating income grew 7.9% over the prior year, even with the decline of 130 basis points of occupancy, reflecting the higher anchor rollovers we’ve discussed. Our core portfolio continued to be a significant driver of our POI growth. That core grew at 4.2% on a same-store basis including redevelopment. This quarter the downtime associated with anchor rollover produced about a 130 basis point drag. We highlighted this trend in the last two quarters, and as I will discuss further in guidance, we expect this rollover drag to continue this year. Our first phases at Assembly Row and Pike & Rose contributed approximately $4.5 million of POI in the quarter, up on a sequential basis as the Palace high rise opening approaches breakeven occupancy and office spaces continue to rent up. Finally, our acquisition of Coco and Sunset Place, which are performing very well against our acquisition underwriting, also contributed significantly to overall POI growth. G&A remained flat on a sequential basis at $8 million for the quarter and down year-over-year principally due to higher transaction costs in 2015 with respect to our San Antonio center acquisition. We do expect our G&A line item to grow as we continue to invest in our platform. Interest expense declined by $400,000, reflecting the lower average rate achieved through our refinancing during the year, offset by lower capitalized interest during the quarter as we continue to place development into service. Again, bottom-line FFO grew at 9.5% for the quarter, which is above our long-term plan. That absolute bottom-line performance while we continue to invest in the future is something we take great pride in. From a balance sheet perspective, we raised approximately $182 million of equity through an overnight offering as well as issuances under our ATM during the quarter, at a collective weighted average price of $149.18. This represents over half the equity we plan to raise this year. We ended the quarter with $53 million drawn under our $600 million revolver, which we upsized after the quarter to $800 million and extended to 2020 while reducing our borrowing cost by 10 basis points. Our net debt to EBITDA was 5.3 times and our weighted average tenor was almost 10 years versus the peer average closer to 5, providing us maximum flexibility and liquidity to fund all the value creation that we have underway. Turning to 2016, we affirm the previously given range of FFO per share of 5.65 to 5.71, representing a growth range of approximately 6% to 7% or slightly below our long-term plan. As we discussed last quarter, this is a true range that will be impacted by several variables during the year. The targeted box recapture and rollover vacancy drives a significant amount of drag in the year. However, that drag was offset this quarter by some positive timing items, which included marketing and expense recovery, as well as higher year-over-year lease term fees of $600,000, as Don mentioned. Given that, we do expect same-store NOI to moderate in the second and third quarters of this year. As Don discussed in his remarks, we are pleased to announce the signing of TJ Maxx at Pentagon, the Dick’s Sporting Goods leases at Melville, and the L.A. Fitness lease at Del Mar, all of which will unlock significant value at these centers. Overall, our leasing team is making great progress under a captured box basis, which we will continue to report on over the coming quarters. In addition to this rollover, as discussed in prior quarters, there are several other investments in growth to consider from a timing perspective as you look into the year. Our leasing pace at Palace continues to go well, with current occupancy for that building alone at just over 60%, and expected stabilization occurring in the fourth quarter. The office space at Pike & Rose and Assembly, which represents approximately $80 million of investments, is fully committed and leased and we’ll start seeing the rent commencing throughout this year and early next as tenants take occupancy. 500 Santana Row, the Splunk building, represents approximately $115 million of investment and is 100% pre-leased. We’re delivering that in the fourth quarter and rent commencements will occur 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 six core assets is expected to be neutral this year after transaction costs in the sale of Courtyard shop. We expect this acquisition to contribute approximately $0.02 to $0.03 in 2017. We are well underway for the second phases at Pike & Rose and Assembly that represent another $600 million of investments and expect those phases to begin delivering in the latter part of ’17 and early ’18. From a capital standpoint, we expect to fund approximately $300 million of development and redevelopment with a mix of funds from operations, long-term debt and equity under our ATM, much of which we’ve taken care of in the first quarter. Finally, consistent with our practice, our guidance does not factor in any further acquisitions or dispositions that can be executed during the year. When you consider all that the Company has going on, you will understand why I continue to emphasize that our guidance this year is a true range. In fact, factors that may drive us towards the low end of that range include the timing of the anchor box backfill to rent commencement, the potential for additional rent concessions at Palace as we lease penthouses in the upper floor. The opportunistic capital raise that we completed in the first quarter front-ended a significant part of our capital needs for the year. The ultimate resolution of Sports Authority, as Don discussed, is another factor. While none of our locations have been on the initial closure list, we believe it is unlikely that the Sports Authority will continue as is and that we may have the opportunity to get some of those locations back. We continue to invest in our platform as Don mentioned, both in systems and people as we drive decision-making closer to the real estate. These efforts may drive an additional $1 million to $2 million of annual G&A above our current assumed run rate of $34 million to $35 million on an annual basis, even with that growth, it remains below 5% of revenue. Finally, the costs associated with backfilling my position have not been determined or forecast; again, each of these items that influence where we will land in the range are positive for the Company in its long-term growth prospects but may impact our final numbers. Before turning the call over to questions, I’d like to briefly thank Don for his friendship, counsel and support that has made a great deal to me over the last 18 years, and now as I turn to the opportunity at Brixmor. Thank you, Don. I would also like to thank my partners at Federal who are the best in the business: Chris Weilminster, Dawn Becker, Jeff Berkes, Don Briggs, Jeff Mooalem, Wendy Seher, Debbie Colson, John T., Deirdre, Barry, and last but certainly not least, Melissa. Thanks to each of you for inspiring me with your excellence and your commitment to the Trust and its shareholders. With that, operator, I would like to turn the call over to questions.

Good morning, guys. Don, I am sorry, I should have told you when you hired Jim, he is a bit of a floozy and it wouldn't last.

You've seen it before Jeff.

I have. I have. Congratulations, Jim, and hopefully you didn't just read off the list of the names of people you're going to target when you are at Brixmor. A question about Pike & Rose. I am just curious what is driving the reduction in the stabilized yield? I got on a minute late so I'm not sure if you guys talked about that in your remarks.

Yes, Jeff we did. It is really all about residential, as you know that first phase and the second phase has a significant residential component to it. The bottom line is we were too aggressive in thinking what we were going to be able to get for residential rent and the marketplace has an awful lot of supply on it and this place is absolutely a construction zone and will be for some time. What I always worry about when changing numbers like this is that there's a tank on the project itself. Because that’s not the case; the project is going as well or better than expected in terms of its acceptance, even in terms of its performance. However, when performance on the residential side compared to the marketplace is just that the marketplace is significantly lower than we had hoped and thought it would be when we underwrote this. So that's what is causing that. Now obviously the good side of that is we’re not locking into 15-year deals or 20-year deals, these are 12-month leases. It just wouldn't be right for me to have the same expectations of being able to lease up the rest of the buildings we have on phase one and the residential building in phase two at rents that our team doesn't think we can hit. And that’s what is causing that. I really don’t want to see that as a failure of the project, it’s just market timing.

And maybe to switch gears, I want to circle back on the decentralization plan. I think we've been talking on the call maybe a year, year and a half ago about why it is difficult for the industry or seemingly difficult for the industry to produce future leaders, and then you announced that plan. I guess I am just curious what was the impetus for it? What do you think it accomplishes for Federal? And I guess not to bring it back to dollars and cents all the time, but how do you think we should be thinking about the ultimate effect on G&A as we sort of reorganize people?

It's a good, probably my favorite question, Jeff. Look, the bottom line is this company has consistently grown for the last 15 years in terms of its value, in terms of what it does for a living, and its breadth and growth. We had to effectively get management closer to the real estate because the real estate is so different. Managing Pike & Rose and managing Assembly Row and having opportunities like Sunset and Coco Walk is just so different from the core shopping center business. We needed to align management more closely with the real estate business, as our business is really not about being a portfolio manager; we look at it asset by asset. Now when you do that, there’s going to be incremental overhead to set it up that way. That overhead is not just front-of-the-house stuff, but back-of-the-house systems and reporting, accounting, and all of that. We’re in the middle of that transition and it takes some time. If you think about an incremental few million dollars per year, we’ll need to make that up in incremental value. Now where will that incremental value come from? It comes from every part of our business, primarily by getting things done more quickly. By getting tenants through the leasing process, tenant coordination, and opening their doors to rent commencement, that’s done significantly better if the leasing agent, asset manager, and developer/tenant coordinator are all working together, which we can achieve at this new structure. Secondly, at that level, we'll know our markets better, and we do. This helps us focus more on assets that require more attention because they are out of our typical range. This is truly an evolution of our business, an investment in the next decade where the combination of creating outstanding products through new developments and a more actively managed core will ensure that a few million dollars in incremental G&A will be worth it compared to the incremental value we will create. That’s what it is that we're trying to do.

To put the numbers in a little bit of context, still well below 5% of revenue which has grown substantially.

Okay, thanks, Jim. Maybe one last question. Don, do you have any specific goals going into ICSC? I think typically you guys go in there with one or two things you really want to walk away with.

The goals are not—it's so funny, we don’t go into ICSC thinking we are getting leases done. The goals you go into ICSC with are to ensure that you bring as many people to the critical parts of the Company as you can. For us, it is our redevelopment pipeline, and in the core, it's our Florida properties, which we want everybody to see and understand. It’s the future basis of Pike & Rose and Assembly, as well as our West Coast assets. It’s all about focus; it’s not about getting any specific lease done, because it just doesn’t happen that way. What normally occurs is that somewhere in the next 30, 60, 90, or 120 days after ICSC, there are many more deals that get done because they were germinated and taken to the next level at ICSC, that’s what we’re doing there.

First, congrats, Jim. We won't miss you because we still get to work with you. So sorry, Don. Maybe just an update on your plans for the center in Noroton Heights, given that you recently proposed plans and renderings to the community?

Here is where we are. As you remember, at Darien, we are talking about Stop & Shop controlling the corner shopping center. We have to come far more encouraged that there will be a way to work with Stop & Shop long before that period of time. We hope to create a specialty shopping center with residential as part of that plan, over on top and around to create a really great community shopping center. As you know, there's a lot of work to do with the community itself through the entitlement process and certainly then with tenants like Stop & Shop and others in the center, so I am not ready to quit out; it's not on the redevelopment schedule yet. However, it will be on the redevelopment schedule to the extent we can make headway with the community, and so far, so good.

Just a follow-up on your comments on occupancy, just looking at the residential occupancy it is at 95.5, and the same-store pool has declined 180 basis points year-over-year. In terms of trying to keep track of what is in the same-store pool versus out of the same-store pool, what were the main drivers of that decline for the properties that were in the pool?

You will note that I am looking directly at Melissa Solis right now. So if you can grab Melissa, we can answer that, if you can’t we’ll follow up...

We’d probably need to follow up with you in more detail. But the bigger drivers in the same-store pool are going to be the multifamily assets, such as Santana, the Crest Apartments at Congressional as well as Rolling Wood. Based on what we’re seeing in terms of the rents, we’re pleased with the trends in Northern California. As Don alluded to, we’ve seen a little bit of softness in suburban Maryland and Washington DC. The other asset in there would be Bethesda Row.

And Christy, Palace and Versailles at Pike & Rose are the two assets that are in the same-store pool.

They are not in the same store pool, right?

They have not been…

And then just lastly on the $600,000 of lease term fees, what was the same-store impact? Was that fully in the same-store and what retailers was that related to?

I can’t tell you the retailers off the top of my head, but that’s about a 60 basis point impact.

They were two smaller retailers, Christy, one in Rockville Town Square and one at Pentagon.

Just two quick ones for me; I would just ask them both at once because they will probably be quick ones. A&P, I think you talked about on the last call. I just wondered generically if you could kind of walk through the progress you are making and maybe just what you are seeing from market rents versus where the rents were in place. Then just jumping over to Santana, Westfield the mall is going to have a big redevelopment; wondering how you see that impacting Santana and if that changes the way you merchandise?

Yes, Jeff jump in on anything regarding A&P. But as you remember, Jason, we have four A&Ps; one of those was assumed, and is underway in terms of being built out on Long Island at Greenlawn, which leaves three more. Melville Mall also on the Island, and I did not mention when I talked about the good stuff that’s happening at Melville Mall today with the signing of Dick’s for example. The last space that we have at Melville Mall is the former Waldbaum's box, and we are making real good progress there, but we’re not in a place where I can tell you it's a signed deal yet, but you will like everything about that. The next one is at Brick where again it’s part of a larger redevelopment and re-merchandising of the entire center. We're not as close at Brick, but we’re making real good progress there. We’ll likely have something to say over the next couple of quarters I think. And the final one is Troy, which is in New Jersey, and we're hopeful. I should not say it exactly this way. I'm uncertain whether we are going to backfill it or whether it’s going to be a bigger redevelopment possibility that would include some residential in a more densely populated shopping center. Obviously, if it comes to something like that, which would add the most value, I would love that, but there's a lot of work to do with respect to the community and figuring out if something like that is viable. That’s what we’re working on there, so that would be the last one of the three that you'll hear about or we would think. Oh, then Cynthiana, let's move to Cynthiana. Valley Fair is doing its redevelopment, and Jeff's on the phone; there will absolutely be an impact. They are talking about adding hundreds of thousands of square feet in a great location. That will perform very differently than what we do, but while they’re leasing up that space for that period, I think that will impact us. I just can’t quantify it for you today, nor can I do that with any significant visibility. They haven’t even started construction yet, nor do I know exactly when that will happen. There will be an impact, but I can't specify how much yet—it’ll be a short-term impact.

The only thing I would add to that, Don, Jason, is we've known about this coming for some time. They received the entitlement before the recession. Over the last four to five years, we’ve been doing the blocking and tackling with Santana to ensure it is in the best position possible, including a lot of re-merchandising of the stores on the street, which I'm sure you're familiar with, and continuing to build out the property, including adding more parking and building 500 Santana Row. When Splunk isn’t in occupancy during the week, it will be available for our retail and restaurant customers on nights and weekends. We’ve been thinking about this for years and doing what we can to position ourselves well, and when it happens, we will deal with it as best we can.

Hi, this is George Hoglund on for Tayo. Just one question regarding REITs getting their own GIC sector later this year. Have you been getting more inquiries from generalist investors? Have you been doing anything to market the company differently in preparation for those inquiries?

Sure, let me start with that, and Jimmy, if you want to add something, please do. Obviously, nobody knows the immediate impact of this change in terms of supply and demand, and that’ll be what it is. It hasn't changed our approach, which has always been broad-based regarding who it is we want to invest with. We have taken regular trips to Europe, for example, to talk to generalists there, and we have done that in New York in a broader way. We are interested in attracting generalist investors to our story, and whether or not that impacts our stock valuation will be seen over time after September when it gets implemented. But that has pretty much been our approach.

Good morning, guys. First off, Jim, Ki Bin and I just want to congratulate you on your new opportunity. Just a quick question regarding same-store NOI. Given that this year's winter was less severe than last year, I think last year snow removal costs were around $10 million. What was the impact from that on same-store NOI, and can you quantify that?

It was—first, let me just say from a main point and look over to Melissa: it was definitely a benefit, not nearly as much as you think because so much of it is recoverable at least. The total impact was a couple hundred thousand dollars. It was about $150,000 actually. It was $300,000.

Okay. And when you look at your lease expiration schedule, what percentage of your expiring leases is considered vintage leases? Over the next few years, how much of an impact do you think this is going to have on the blended rent spread?

It’s an interesting question because when you look at our lease maturity schedule, the truth is we always get to more space than what would be indicated, and if you look at our trend over the last several quarters, where we’re signing our new deals, you’ve seen that average continue to climb—it gives you a sense of the mark-to-market value over what we have in place. It’s not perfect, but if you go back far enough, you’re going to capture enough of a subset of the portfolio to get to know the vintage leases rolling every year. There really isn’t a particular year where a lot of finished closings are coming to market. The best way to assess that, though, is to look at the marginal rents we’re signing each quarter.

Jim, I guess a quick question. Are you guiding to the lower end of the range, or are you just laying out the laundry list of everything that can point you to the lower end of the range? It sounded like you are guiding toward the bottom end.

I think everyone would be wise to consider this is a range and to think about the lower end of the range. It’s hard to handicap everything, but all the items I referred to again represent investments in the future, but certainly would be a drag on where we end up for the year.

Good morning, everyone. Don, just a couple of quick questions. On the TSA outcome, if you were to get the stores back, are there certain centers that would be helped regarding maybe future redevelopment timing?

Let’s go through. Here are the five centers and what’s happening in that marketplace. Because of what we’re doing in the Mixed-Use project adjacent to it, it's been a very positive thing. Certainly, the interest in that power center has significantly increased since we built the project. Brick Plaza is the next one, again in the middle of a complete rebuild. The timing on that would be great for the future openings of Brick Plaza. Crow Canyon out on the West Coast is the smaller store and that was the last one we've worked on for some years. The last one is smaller in a center we had just redone, which is a good thing in terms of demand. Montrose Crossing is the fourth; that’s directly across from Pike & Rose and over 35 acres where that shopping center would be dramatically impacted to the extent that we can better merchandise it. The last one is East Bay Bridge in Emeryville, where the rents in place there are extremely low, and the upside would be terrific. That's another property that we've re-merchandised extensively. As I look at TSA, this is a good tenant to work through this portfolio and eventually better things across locations—however, it's a lot of rent in the meantime. So, again, we look through the short-term hit for the long-term gain.

And the final question, the Silver Line in Tysons has been a disruptor, providing a boon and an opportunity for some property owners while changing certain patterns to the detriment of others. My understanding is that sales at Pike 7 have been weaker; are there things you can do there that change the scenario, or is there some view to the timing of future redevelopment that you are looking towards?

First of all, I am not with you on the premise regarding the impact on sales at Pike 7; it’s an amazing shopping center. If sales were hit significantly at Pike 7, firstly, those occurrences happened during the original construction of the Silver Line when entrances were closed. If they were impacted then, we would have a lower hurdle to do a larger Mixed-Use project at this site, which would be great. Having said that, your bigger point is stopping right there: Pike 7 is a great asset for us. What we do there long-term will be beneficial. Part of the issue is if we see success with what we currently have, the hurdle remains. In summary, I’d like to credit the discipline we’ve enacted in not jumping at the first moves with what the new Tysons might be as it takes time to figure out its true course. Thanks so much. I appreciate being given a chance to get on my soapbox.

You're welcome, thanks a lot, appreciate the comments.

You bet.

Thank you everyone for joining us today, and we look forward to seeing you at REIT Week in New York in a couple of weeks, thank you.