Federal Realty Investment Trust. (FRT) — Q3 2016 Transcript

Thank you, good morning. I would like to thank everyone for joining us today for Federal Realty's third quarter 2016 earnings conference call. Joining me on the call are Don Wood, Dan Guglielmone, Dawn Becker, Jeff Berkes, Chris Weilminster, Melissa Solis, and James Milam. 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 earnings, 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 operation. These documents are available on our website at FederalRealty.com. Given the number of participants on the call we kindly ask that you limit your questions to one or two per person during the Q&A portion. If you have additional questions, please feel free to jump back in the queue. And now I'd like to turn the call over to Don Wood to begin our discussion of our third quarter 2016 results.

Thank you, Leah, and good morning, everyone. Last night we reported third quarter 2016 FFO per share of $1.41, which is 3.7% higher than last year’s strong quarter and above our internal expectations. Based on these results, we are comfortable reaffirming our previously issued guidance range for full-year 2016, narrowing it slightly to $5.63 to $5.67. I want to address the third quarter's reported results, expectations for the remainder of the year, and, most importantly, what this means for 2017 since we released initial guidance last night that fell short of Wall Street expectations, primarily due to value-enhancing initiatives with short-term costs. Let's begin with the quarter. At $1.41 a share following $1.38 in the first quarter and $1.42 in the second, we are pleased with this result considering that this quarter shows the full impact of the significant vacancies we have discussed recently. Sports Authority, A&P, Hancock Fabrics, and Hudson Trail boxes are all gone and were all paying rent a year ago. When combined with a particularly strong quarter last year, where FFO per share increased by 11%, this made for a challenging year-over-year comparison. The vacancies this quarter, along with poorly leased properties like Sunset Place and CocoWalk, resulted in a decrease in our portfolio’s lease percentage of 120 basis points to 94.3%, and a physical occupancy decrease of 200 basis points. These vacancies, along with some strong bad debt recoveries and percentage rent positives from last year’s quarter, resulted in weak same-store growth comparisons, approximately 150 to 200 basis points lower than they would have been otherwise. Nonetheless, it’s notable that same-store growth reached 1.5% in a quarter when occupancy dipped significantly. It would be misleading to conclude that leasing activity has declined, as evidenced by the leasing done this quarter. We completed 93 comparable deals, more than any quarter in the last couple of years, for 427,000 square feet of space at an average rent of $31.25, which is 14% higher than the rents of the tenants they replaced. Over the first nine months of this year, we have completed 269 comparable deals or 1.2 million square feet, which is 17% more than the same period in 2015. This leads me to discuss our initial guidance for 2017 of $5.83 to $5.93 per share. We are one of the first to issue guidance this year, which particularly requires explanation. I want to be clear that despite projected FFO growth of 4% at the midpoint of guidance for next year, our outlook on achieving or exceeding our long-term business plan goal of doubling income over ten years remains unchanged. In fact, it is precisely because of the items that may dilute 2017 that I feel more confident we will meet that goal. We have included a schedule in this quarter’s press release and 8-K regarding the reconciliation of FFO guidance that aligns with my forthcoming comments. To provide background on why we are actively repositioning much of our portfolio, we have seen significant changes in consumer behavior, affecting nearly every business, including retail real estate. This is why, a couple of years ago, we intensified our initiatives across our business, taking advantage of the cost-effective capital available at that time to optimize our portfolio for markets where consumers expect high service levels and environments integral to their lives. This process requires time, often more than we would prefer, but we consider it essential for the long-term strength of our real estate portfolio. Given the quality locations of our properties and our successful track record in transforming various retail real estate types, we believe we are well-positioned for this challenge. We accelerated the start of the second phases of our mixed-use developments, even at the expense of first-phase performance, to ensure we establish a sense of place. We also launched two new retail projects in Miami to revitalize struggling, well-located retail destinations, understanding that this would disrupt current income streams in the short term. We expedited the full development of Santana Row, including a 12-acre option called Santana West, a fully leased Splunk office building, and the approval to move forward with a $215 million, 310,000-square-foot office retail tower. We restructured our personnel through decentralization and systems investment to ensure we have the necessary human capital to accelerate progress in both mixed-use and core portfolios. By capitalizing on a favorable capital environment, we reduced debt while setting a strong foundation for future developments. We have identified more value-enhancing redevelopment opportunities than ever with our new decentralized structure, and while these may impact short-term earnings, they are crucial for our long-term strategy. The significant amount of anchor vacancies in our portfolio has created a deeper pool for redevelopment, which is one of the main reasons our 2017 outlook seems conservative despite these initiatives driving future value creation and earnings growth. Given the current market softness and rising costs, we believe our high-quality real estate portfolio is the best hedge against these challenges. We currently have 700,000 square feet of anchor and near-anchor vacancies, more than double the historical average. The prior rent on this space was $19.75, which contributed $14.5 million in annual rent or $0.20 per share. Currently, we’ve leased 42% of that space at 37% higher rents. Deals have been finalized with tenants such as Ulta and DSW at Brick Shopping Center, Field and Stream and Uncle Giuseppe's at Melville Shopping Center, T.J. Maxx at Pentagon Row, and LA Fitness at Delmar. Each deal is part of a larger comprehensive repositioning strategy. However, we expect these tenants will not start paying rent until 2017 and 2018, resulting in a forecast for 2017 to be approximately $5 million or $0.07 per share lower than it could have been. The long-term value from these redeveloped shopping centers will be substantial once completed. We also need to address the short-term dilution from the delivery and lease-up process associated with the residential developments at Phase 2 of Assembly and Pike & Rose, as well as the potential reconfiguration of CocoWalk included in our 2017 guidance. At Assembly and Pike & Rose, two residential buildings will begin delivery and lease-up in 2017, expected to result in a dilution exceeding $4 million or $0.06 per share due to operational costs, marketing, and interest expenses surpassing revenues during the lease-up period. This is unavoidable and will cause an earnings drag of about $2 million before interest and an additional $2 million at the FFO line. However, these buildings are projected to generate well over $100 million in value when stabilized. Similarly, we expect to finalize our redevelopment plans for CocoWalk by early next year, enabling us to begin repositioning and construction in 2017. As is typical with redevelopment, occupancy at CocoWalk will likely decrease before improving, and we have prudently accounted for this in our guidance. In fact, if we weren’t proceeding with Phase 2 developments at Pike & Rose or Assembly, and if we were not proactively addressing our anchor space, our 2017 guidance would be approximately $0.16 per share higher. Additionally, our revised 8-K disclosure now reflects a change in our near-term operating income expectations at Pike & Rose due to a slowdown in the Montgomery County residential market and the ongoing construction disruption from Phase 2. We adjusted our yield guidance to a range of 6% to 7% with enhanced disclosure regarding the timeline for achieving that yield. Our updated documentation includes site maps to clearly illustrate the proximity of Phase 2 construction to Phase 1. We remain optimistic about the potential of this project, but are realistically aware of the additional time required to reach our objectives. The combined impact of a lower expected yield and a slower pace is reducing our 2017 guidance by about $0.06 per share. All in all, about $0.22 per share is being pushed back from 2017 to the next 12, 24, or even 36 months, alongside the positive momentum from the various initiatives we are pursuing now and in the future. That wraps up my prepared comments. We are making significant progress and investing deeply in our future, with extensive construction underway on our balance sheet and the right projects planned for prime real estate in top markets. We remain committed and are excited about executing our strategy. I look forward to discussing this further with many of you in a couple of weeks in Phoenix. Now I’ll turn it over to Dan, and then we’ll open the line for questions.

Thank you, Don and Leah. Good morning, everyone. Don covered a lot in his remarks, so I will fill in just a few places as it relates to the third quarter and the balance of 2016. Then I want to spend some time going through a few specific areas that will help you with your modeling of Federal going forward. First the third quarter, the $1.41 of FFO per share and same-store NOI growth of 1.5% was fully in step with our expectations for the quarter. As Melissa specifically discussed in our second quarter call in August, same-store growth is expected to decelerate in the second half of 2017 with most of that concentrated in the third quarter. Now, that was due not only to the difficult third quarter comp that we faced, but also due to the impact on occupancy and cash flow of our anchor repositioning activity. With portfolio occupancy at 93.1% at quarter end versus 95.1% at third quarter 2015, note that almost 150 of the 200 basis point diminution can be attributed to those eight anchor boxes that Don referenced in his remarks. The three A&Ps, the three Sports Authority's, Hudson Trail and Hancock Fabrics which were all in occupancy in 2015 were gone in third quarter of 2016. Also note that this vacancy totaling over 320,000 square feet is of highly productive centers located in dense in-fill markets, many of which we're redeveloping, re-merchandising like Assembly Square in Boston, Melville Mall on Long Island, Montrose Crossing in North Bethesda, Westgate in San Jose to name a few. Needless to say we feel very good about our ability to reposition these boxes effectively. Through the first three quarters of 2016 our same-store growth stands at 3%, 1.9% excluding redevelopment. We project the fourth quarter to be in line with this run rate and expect same-store growth for the year to remain in the 3% area. Next, on the development front with respect to Assembly Row and Pike & Rose, contribution for the third quarter was $6 million, up from $4.9 million during the second quarter. Assembly Row Phase 1 is 100% leased and now is producing approximately 95% of its projected stabilized property operating income or POI. As Don mentioned, Pike & Rose Phase 1 is behind from a run rate perspective mostly driven by softness in effective rents at the PerSei and Palace apartments and currently we're closer to a 60% projected stabilized POI on a run rate basis. Although we're pleased to be hitting our occupancy projections with PerSei almost 98% leased and Palace almost 86% leased at quarter end. Further we continue to command a premium to the market of 10% to 15%. Out west at 500 Santana Row we're slightly ahead of plan and expect Splunk to open at the end of the fourth quarter. Just a reminder, this 234,000 square foot development is delivering a 9% cash-on-cost yield. Given the success at 500 Santana combined with the continued strong demand for office space in the submarket, we're moving forward with the development of 700 Santana Row, a 310,000 square foot office and retail development located at the end of Santana Row which will effectively finish off the street. We're projecting a stabilized cash on cost of 7% with projected delivery in 2019 and stabilization in 2021. Now, let me cover a few areas to provide additional clarity to your modeling of Federal going forward. As it relates to the core business and the impact of our anchor repositioning initiatives, we expect overall portfolio occupancy to stay at its current 93% through fourth quarter and remain at this level for most of 2017. We project occupancy will begin to improve at the end of 2017 and continue into 2019. With respect to the 730,000 square feet of anchor or near anchor vacancy in effect during the third quarter, 42% or 310,000 square feet is leased. Of that 310,000, 135,000 will be rent paying by the end of 2016 with start dates for the remaining 175,000 square feet coming on over the course of 2017 and into 2018. At this point, I would like to take a moment to highlight the new disclosure in our 8-K regarding Assembly Row, Pike & Rose as well as the recently added 700 Santana Row. In our supplemental information exhibit starting on page 16 we have added detail which provides annual guidance on the timing of property operating income at these developments as each of the phases grow toward stabilization. We have also included site plans on the following pages for both of these communities to provide you with a sense of the progress and the scale of these projects. And also to provide some context to the interconnection between the phases at each development. Now let's turn to the balance sheet. As you know, at the beginning of the third quarter we raised $250 million of 30-year unsecured notes at a REIT record yield for a 30-year of 3.75%. That issuance is now reflected in our quarter end metrics. Let me highlight a few of them. Net debt to EBITDA stands at 5.2 times, our average debt maturity remains at a sector-leading 11-plus years and our weighted average interest rate is just above 4% with almost all of it fixed. On the equity side, we raised $55 million of common stock through our ATM program during the quarter at an average price per share of $159.38 bringing our year-to-date total ATM issuance to $146 million. As a result of this activity, at quarter end we had cash on the balance sheet of $100 million and our $800 million credit facility was completely undrawn. From a capital standpoint this significant level of liquidity positions us well as we close out 2016 and head into 2017. As it relates to development and redevelopment, we expect to spend approximately $150 million in the fourth quarter and $400 million to $450 million in 2017. We will fund these capital requirements through a combination of cash on hand, free cash flow, opportunistic issuance under our ATM program and utilization on our line of credit which we expect to repay through a bond issuance in late 2017, early 2018 or sooner if an attractive window avails itself. This mix will be dictated by our objective of maintaining our debt to EBITDA ratio in the 5 to 5.5 times range. Finally, on the acquisition front, while we don't have anything concrete we can report at the moment, we continue to pursue a number of compelling opportunities. While the market remains frothy from a valuation standpoint, we do see long-term value in these opportunities and will be aggressive in our pursuit. With 13 years of investment experience in my previous seat, I couldn't be more excited to bring that experience to Federal and work with Geoff Burkes and his acquisitions team on the West Coast and with Barry Carty and team as my partners on the East Coast, as well as with the entire Federal Realty investment committee. Lastly, before I turn it over to questions, I'd like to talk to you about my initial impressions from being here for almost three months from a new-to-Federal point of view. First and in my view most importantly, the understanding that the commercial real estate business is constantly changing and changing quickly, especially in retail, is ingrained into Federal's DNA. Federal's approach is proactive and dynamic; it does not approach filling vacancies simply to maintain occupancy and cash flow at a property but where it makes sense uses that vacancy to reposition, re-merchandise and redevelop the entire asset. Each decision that is made is made with a long-term goal of ensuring that each center is relevant for the long term. Second, the real estate really is that good. Before coming to Federal, I was aware that it had a best-in-class portfolio. In my first months here I've traveled the East and West Coast, seeing about half of the portfolio so far, and the properties are even better than I had imagined. Third, I am convinced that we're creating the right environments with the mixed-use properties that we're currently developing. I spent time at Assembly Row, Bethesda Row, and Santana Row. And to give you a little insight into my personal life, I currently live at Pike & Rose, I work a block away and I spend the majority of my free evenings and many weekends at the property. So you could say I have done my due diligence, a real, live, work-play experience, and I couldn't be more confident in the communities we're creating at Pike & Rose and Assembly Row. Lastly, I have been truly impressed with the management here. It would be easy for senior management to sit back and simply rely on the power of its best-in-class portfolio to grow, but there is foresight and dynamism in the way management is looking to implement its growth initiatives and proactively making investments in its people and systems to make this happen. As you can imagine, I have been in the weeds during the first 2.5 months here digging into the details that support these initial observations, so I share them with you with confidence and conviction. I look forward to seeing many of you at NAREIT and spending more time with each of you going forward to help you see what I am seeing at Federal.

I bet you haven't been asked this one in a while, but given your historical valuation premium, what a difference one quarter makes. So my question is, how are you thinking about stock buybacks these days with your stock now trading at a double-digit discount by our estimates NAV? And how are you currently thinking about buybacks versus other capital allocation alternatives?

Haendel, this is a long-term business, and making changes to our capital spending plan or considering equity issuance based on quarterly earnings isn't the right approach. We have clear and established capital needs that are all value-enhancing. We believe in continuing our program as planned. For developments that haven't yet started, like the CocoWalk project I mentioned earlier, any decisions will depend on market conditions in 2017. The key takeaway is that while we may be disappointed with our guidance, it's essential for delivering the value we're aiming for. Therefore, pursuing a significant buyback at this moment is not an option.

And you mentioned getting rents 37% higher on the new leases you are signing for the boxes, 42% of the space. I'm curious if you are expecting similar upside for the other remaining 60%-ish, how those conversations are going and when do you think you will have that space tied up?

Yes, this is all very promising. I have a schedule that outlines the entire 730,000 square feet, including the 309,000 square feet that is already 42% completed. This schedule details the specific deals and their timing related to the 37% rollover. It also provides insights into expected rents, indicating that while they won’t reach the 37% increase, we anticipate them being in the double-digit range or potentially higher. It's important to understand that these efforts are part of larger shopping center repositionings rather than just filling the spaces. This approach is about creating value, not merely defending our current position.

I am curious on Pike & Rose, how do the net rents that you are now putting into 2017 guidance compare to what your original pro forma was? And maybe, Dan, can you kind of walk us through the timing of the NOI and FFO drag in your 2017 guidance at Pike & Rose, just as it opens? I mean, just kind of one of the things here, like that pace and price of absorption and some of the other factors that are going on there.

Let me address the first part of your question and Dan can tackle the second part. One challenge we've faced recently is that Washington DC tends to slow down significantly before elections. We've really seen this impact over the last three months, not just at Pike & Rose but also with other residential and real estate projects. Decision-making has noticeably slowed down. Currently, we are 86% leased at Palace, with a rate of about $2.40 per square foot. We anticipate that this rate will increase, but at a much more modest pace than we initially expected. We're looking at a growth from $2.40 to around $2.55 over the next few years, whereas we earlier projected figures closer to $2.85 or $2.90. I’d like to take a moment to discuss our residential operations. If you examine what we've accomplished in Bethesda, Santana Row, and Congressional, it's clear that we know how to successfully build residential properties. For example, when we launched the upstairs product at Bethesda Row in 2008, we expected to achieve $2.55 per foot and ended up around $2.40. Given the market conditions in 2008, this was understandable. Fast forward to today, we're at $3.10 per foot, which represents over a 3% annual growth rate in a market with increased supply. The change in our expectations—from 7% to 6% to 7%—reflects not just the supply in the market but also the realities of developments going on nearby. It didn’t feel appropriate to maintain our previous projections. However, I hope you understand that this does not reflect poorly on our residential strategy. If you look at Bethesda, examine the numbers from the West Coast, and consider our Congressional projects, I think you'll have a more positive perspective on our approach. Our expectation is to move from $2.40 to the mid-$2.50s over time, instead of aiming for the higher figures we previously considered.

I would like to direct you to our supplemental document on page 16 for more information about the ramp-up. This provides good guidance on the property operating income at Phase 1 of Pike & Rose. We anticipate a stabilized property operating income of approximately $17.5 million for Phase 1, and we expect to achieve around 75% of that income in 2017. This will continue to progress into 2018 and stabilize by 2019. We have made an effort to provide similar guidance for each of the phases, showing how the ramp-up will unfold.

And just sticking with Pike, where, Don, where are the retail rents that you are sort of achieving for Pike today compared to original pro forma? Have you seen sort of differing trends versus the residential? Just curious how that is sorted out.

Yes, that's a good question. They are right where we anticipated them to be in the initial phase, although slightly slower than we had hoped. In the second phase, for the major components we have in place, where is the schedule indicating what has been leased? The significant elements are on track, but the smaller components that will follow are expected to be weaker. Therefore, I anticipate a slight decrease in the retail rents we're receiving. Overall, for the project, we are currently at 64% of the Planned Occupied Inventory, with 48% plus 16% already leased or in advanced lease negotiations, representing 77% of the Gross Leasable Area. A lot of this is secured, including essential retailers like Porsche, Pinstripes, H&M, Sur La Table, Lucky, REI, and others.

And you kicked off condo sales at Assembly in I think Q2. How has the pace and price of sales there performed versus your expectation?

Yes, the straightforward topic is Assembly. We're making great progress, having already secured about 55 units, which is ahead of our expectations. At Pike & Rose, we're on track with approximately 19 or 20 out of 100 units completed, and these are aligned with our underwriting projections. However, there has been a slowdown similar to what we've experienced in the rental segment over the past three months. I'm hoping for the election to conclude so we can have a sense of normalcy in the greater Washington DC area, particularly in Montgomery County.

And just the last one, and I will yield the floor. You guys have a lot on your plate going on. Are you still active in the acquisition market or are you kind of stepping back a little bit until all of this gets digested?

It is not an on/off switch as we've talked about before, it is a knob. And you turn it up as those markets look more attractive, you turn it down as they look less attractive. Certainly the stuff we have been looking at when you start talking about forecast and low forecast on a lot of this stuff is hard for us to make sense of. We absolutely remain in the market, we're on a couple of things right now that if they make I think are a real positive but we have got a ways to go to see if they can make. But again, it is not an on-off switch. It has been deemphasized because you compare it to the premiums even at 6%, obviously that you are getting in development.

Maybe I missed this, but what is your overall same-store NOI growth guidance for 2017? Considering the expected trajectory of that growth rate throughout the year, especially with some of the anchor re-leasing starting around midyear to year-end, presumably you will have much easier comparisons year over year. In addition to the closures that have already happened, do you anticipate more closures next year? So, Don, whether proactively pursued or otherwise, as you mentioned in the release?

Well, I will take the first piece of that first. With regards to our overall same-store growth guidance for next year. Given some of the volatility and just the amount of moving pieces in our anchor repositioning initiatives, we think that kind of staying in line with this year, kind of a 3% area is what we have in our model. There are a couple of boxes that we project will be coming back. One is already re-leased. The AC Moore box at Assembly Row which effectively we proactively went after, it is still occupied and they will vacate at the end of the year. That space will be vacant for most of 2017 until Trader Joe's takes a big chunk of it.

Same with Bay Club here at Santana Row which is being converted out and transferred to another use. It is going to be a very big closet, but it is going to come out in 2017. So that process is and I think should continue. Net-net you should see increases overall, particularly as you get into the latter part of the year, though.

Question on the disruption I guess at Pike & Rose. How come we keep hearing about the disruption there but we don't necessarily hear about it at Assembly? What is unique to Pike & Rose where it is becoming more of an issue than it is at Assembly?

It is very clear that the market is not as strong compared to Assembly. In construction, similar challenges exist at Assembly, but there is a robust residential market. People have the power to choose where they want to live, influenced by their supply options. At Pike & Rose in Montgomery County, we don't have that same advantage; there are alternative choices and lower rent options available, which can create issues in the current environment. Considering the situation from various perspectives, a strong market allows for certain behaviors, especially in places like Silicon Valley. The experiences people are willing to endure when supply is limited are astonishing. There is significant choice in the markets, and it makes a difference. Yes, we contemplated whether to include that in our guidance. Let's discuss what's happening in Miami for a few minutes. The simpler topic is CocoWalk. The dilution from CocoWalk is part of a plan to partially demolish and physically redevelop a significant section of the shopping center. This process will incur costs due to demolition, lost rents, and disruptions, which are indeed dilutive. If we can’t make the numbers work—this will be reviewed by the investment committee next year—we won’t proceed with it. However, I felt it was important to include it in our guidance if we can achieve it. On the other hand, the situation at Sunset is different. Sunset is a distressed property, which we have acknowledged from the start. We initially generated some revenue and funds from operations from that property, but as the redevelopment discussions have progressed and tenants have not performed, that income stream has diminished. We anticipate needing at least another year of entitlement work to facilitate a more substantial redevelopment. The only effect in 2017 will be a gradually decreasing income stream from that property. Therefore, most of our discussion here pertains to CocoWalk, with a slight mention of Sunset in 2017.

Just going to the 700 Santana that you talked about the 2019 opening and 2021 stabilization. Obviously in the case of the Splunk site there it was pre-leased. Could you give any kind of color about how you think about the tenancy for 700 Santana, how much you would look to pre-lease, how kind of chunky it might be?

Remember on 500 Santana Row we did not pre-lease that building. We started at spec and after construction was underway we leased 100% of the building. So just want to make sure you understand that. Before I get into specifics on how we intend to approach the leasing of 700 let me tell you what 700 is. 500 Santana Row was adding an office building to Santana Row and a bunch of parking spaces that we can use nights and weekends. 700 is a lot more than that. With 700 Santana Row we're capping off the end of Santana Row. And really for all intents and purposes, except for our last residential project over on the east side of the site, we're finishing Santana Row. So 700 Santana Row is some 30,000 square feet or about that of additional retail and a restaurant on the ground floor with a magnificent plaza in front of it that is really going to complete how Santana looks and feels. And it is a 1,300 space parking garage which is going to significantly add to the parking pool at the end of the street and help us drive rents and sales for the south end of Santana Row. So, unlike 500 Santana, it is not just a spec office building, it is kind of a signature development that really caps off and finishes 700 Santana Row. Now, as it relates to the lease up of the office space, we're already out in the market; it is way early, we already have a couple of nibbles which are exciting. But leasing really will kick off in earnest, like it does with every building in Silicon Valley, when there is actually a hole in the ground and construction activity and that is not going to be until sometime next year. As we get into the year and we start to do tours and field interest in the building, we will be making a decision about whether we look to lease that building 100% to one tenant or whether we break it up. When we leased 500 we were very intent on leasing that building to one tenant. 700 we will have to wait and see. I think there is a higher likelihood we go multitenant at 700 which is why you are seeing an extended stabilization period vis-a-vis a building like 500.

The only thing I would add is that we have been discussing the requirement by tenants to be in fully amenitized and environmentally friendly spaces, which is significant. The plan to finish the back parts overlooking Santana Row is very appealing to many office developers. There is no other product that compares, which is why we got positive feedback from Splunk, along with AvalonBay establishing their West Coast headquarters here and Cushman & Wakefield being involved. 300 Santana Row is fully leased, making this a validated office location. Out of all the options at Santana Row, that is the best spot. Considering all of this, we decided to move forward.

Thank you, everyone, for joining us today. We do have a few additional meeting slots open for NAREIT. If you would like to meet with the team, please reach out to me directly. We look forward to seeing many of you in two weeks at the conference. Thank you for joining us today.