Federal Realty Investment Trust. (FRT) — Q4 2016 Transcript

Good morning, everyone. I would like to thank you for joining us today for Federal Realty's fourth quarter and year-end 2016 earnings conference call. Joining me on the call are Don Wood, Dan G., 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 the supplemental reporting package that we issued yesterday, our Annual Report filed on Form 10-K and 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 www.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 of our call. If you have any additional questions, please feel free to rejoin the queue and we’ll be happy to answer them. And now, I would like to turn the call over to Don Wood to begin our discussion of our fourth quarter and year-end results. Don?

Thank you, Leah. Good morning and happy Valentine's Day, everybody. A real solid quarter for us with FFO per share of $1.45, the highest quarterly earnings we have ever reported and 6% better than last year's fourth quarter, which at the time was our highest quarterly earnings we ever reported. We ended 2016 with FFO per share of $5.65, 6% better than 2015. We feel comfortable reiterating our 2017 FFO per share guidance range of $5.83 to $5.93 despite plenty of uncertainty surrounding the changing policies of the administration coming out of Washington. So let’s dig into the quarter for a bit. Same-store property operating income rose 3% in the quarter as it did for the year, and perhaps more importantly, total property income rose 7.4%, reflecting the progress we are making on the income generation side of our new profits, more on that in a few minutes. So far as leasing goes, we did 77 comparable deals for 275,000 square feet at an average rent of $37.10 in the quarter, 15% higher than the tenants they replaced on a cash basis; last year the old lease versus the first year of the new lease. When you look back at the entire 2016 year, it was amazingly and unusually consistent. Lease rollovers were up 13% in the first quarter, 12% in the second, 14% in the third, and 15% in the fourth, totaling nearly 1.5 million square feet of comparable space compared with 1.4 million the year before. Add to that 214,000 square feet of non-comparable leasing on the new products in 2016 compared with 188 the year before, and you can see that productive leasing continues to be executed. The business was solid, despite overall retail headwinds and deals taking longer to get done. We ended the year at 94.4% leased; there are only 93.3% occupied, indicative of the signed deals for which rent is yet to start and is good news for later in the year and 2018. After the quarter was over, we also executed two leases that continued the important progress in our anchor vacancy lease-up initiative, including the former Sports Authority space at Crow Canyon Commons in San Ramon, California, and the former Hancock Fabrics space in Westgate Shopping Center at San Jose, California. Both the Sports Authority and the Hancock Fabrics spaces were leased to far better uses for the long-term relevance of properties in both a healthy increase over the prior tenant. Crow Canyon Commons and Westgate Center are being repositioned. We merchandised and transformed them into modern and relevant retail destinations for decades to come. Rent will commence on those two deals in late 2017 in one case and mid-2018 in the other as the occupancy in the repositioning is all completed and tied together. Of course, this property investment initiatives and a number of our properties will continue and always result in some dilution to our redevelopment. Right now that leaves us with two vacant Sports Authority boxes left to incorporate; it’s the property repositions. One, Brick Plaza in New Jersey, the other is Assembly Square Marketplace in Somerville. We are in active negotiations with multiple tenants at both, but both vacancies are being integrated with broader property redevelopment, so they are not done yet. We do expect them to be completed this year. The earnings drag from those two spaces alone is almost $0.03 a share annually. On the acquisition front, you may have noticed the press release that we put out last week announcing the ground lease that we purchased under 15 acres in a Sears, Marshalls, and CVS-anchored shopping center, right off the 210 in Pasadena, California. We bought it at a six cap. This Sears is paying virtually no rent, and while we have no direct path toward getting to that box today, we're patient and optimistic that we will. In the meantime, consider this an attractive acquisition candidate in our portfolio. It seems that attractive acquisition candidates are potentially becoming more plentiful than they have been in recent history. So not at better prices, at least not in the markets we are most interested in or at the properties we are most interested in today. We hope to have more to share with you on the acquisition front for the next few quarters. In the development pipeline, there’s a lot of solid news; Assembly Row continues to perform extremely well, really cementing itself as a substantial and important live, work, play shop environment. There are now over 300 to 400 partners employees working there, up from 1,800 last quarter, and the daytime traffic increase is palpable. Adding a boutique hotel, condos, our own residential offerings, and a larger and richer retail experience will only enhance it. Construction of Phase 2 remains on time and on budget. 66 of the 107 market-rate condos are under binding contracts, and we'll start leasing the apartments this summer. If you find yourself in the spring, check our Assembly and then are being created - really impressive. In Maryland, Pike & Rose continues to progress. I will not at the pace of Assembly Row, due to weaker Washington DC markets, particularly Montgomery County. We're just as confident in its long-term value creation. By year-end, the residential product was over 96% leased but only 90% occupied, so income will build there during the year. In office and retail, we’re now 100% leased and occupied. We've been an important objective here by getting ourselves in the strongest position possible in terms of leasing before beginning to open pieces of the next phase earlier this year. We'll see how that goes when we start the residential in early summer. 21 of the 99 condos are under binding contracts, again certainly not at the peak of Assembly, but where we expected to be at this point. And importantly, costs and schedules for the second phase remain on budget. Work continues to get CocoWalk investment committee later this year for approval to move forward with this redevelopment as do our plans for various shopping centers. 700 Santana Row broke ground a few weeks back. The core belief throughout our Company is that investment in great real estate is increasingly necessary to position if it’s relevant in the next decade. Consumers are demanding high levels of service; consumers are demanding an environment to spend time in that they choose, not a necessary evil. You don't have to look any further than the predicament many department stores are in today; consumer behavior is changing at an accelerated pace. It is our strong view that under-investing in great real estate today for the purpose of generating higher current cash flow, at the expense of the properties longer-term relevance is extremely shortsighted. Thus, I will not pass up on opportunities to re-merchandise, redevelop, and reposition shopping centers for long-term sustainability, even though it hurts short-term earnings. So I'll take a holistic view of our portfolio and are actively working to better position each and every one of them in places where we can, and you'll see us look for other ways to add value. So that's it for my prepared remarks. We've got a lot going on around here, and a huge investment in our future, nearly $600 million of construction in progress on the balance sheet, in the right type of product for the future, some of the best pieces of real estate, in some of the best markets in the country. In addition to that, acquisition opportunities may be opening up that allow us to apply our core competencies to add value there. We surely never take for granted a balance sheet that we have set up over the last few years that provide flexibility and cushion when things don't go exactly as planned. Now let me turn it over to Dan for opening up the lines for your questions.

Thank you, Don and Leah, and hello everyone. Don covered almost everything in his remarks, which should surprise no one on the call. Let me provide some additional color. Despite continuing to work through the drag caused by our excess anchor vacancy, same-store NOI growth was solid, as we posted a 3% for the quarter and 3.1% for the full year, which is in line with the guidance we provided previously. Please note that the same-store pool of assets, which includes those under redevelopment, represents 93% of our total POI for the quarter. Lease-up at Pike & Rose residential increased markedly over the quarter at 96% overall. Although those revenue gains were somewhat offset by higher marketing costs in the quarter in the final push to achieve full occupancy. As a result, Pike & Rose and Assembly Row contributed $6 million for the fourth quarter versus $3 million in the fourth quarter of 2015. As it relates to 2017, the new disclosures we introduced in our third quarter 8-K relating to the progress we are making at each of these developments is unchanged. Assembly Row Phase I is running at 100% of stabilized POI and Pike & Rose Phase I is on track to deliver 75% of projected stabilized POI in 2017. The Phase IIs are on budget and are on schedule to begin contributing POI in 2018. At 500 Santana Row, in early December, Splunk moved into its recently delivered 234,000 square-foot headquarters building. We are already seeing the benefits of increased daytime population and traffic at Santana. Our 2017 FFO guidance provided last quarter of $5.83 to $5.93 remains unchanged. We also reiterate our expectations for the same-store growth in 2017 of around 3%. This guidance reflects the continuing efforts to reposition our portfolio to outperform the long-term in a rapidly changing retail environment. While we don't provide specific quarterly FFO guidance, we do expect first quarter 2017 FFO per share to be lower than fourth quarter 2016, driven in part by a step up in our anchor repositioning strategies, which I will touch upon in a moment. As relates to our anchor leasing, in addition to the deals that Don mentioned, we continue to aggressively look to reposition and re-merchandise our portfolio by proactively upgrading our tenant mix. At Santana Row this quarter, we are preemptively taking back third-floor health club space, terminating the current tenant and converting the 34,000 square feet, which has great bonus space. Publicly traded technology innovator Broadsoft will move in during 2018. While compelling from an economic perspective, this lease is also a testament to the power of having great real estate. This location, combined with the amenity base and sense of place we have curated at Santana Row over the last 15 years, allows us to consider uses such as office, which currently command rents significantly higher than comparably located upper floor retail. Plus, we receive the added benefit of increased population. In the wake of this success, we are moving forward on the conversion of 32,000 square feet of vacant second-floor health club space at Pentagon Row in Arlington, Virginia, where we hope to produce similar results. Other examples of proactively upgrading our tenancy can be seen. At Assembly Square where traded euros will open in late 2017 at a healthy uptick in rent replacing AC Moore who vacated in early January, at Westgate in San Jose, where you will see us replace two non-credit apparel tenants in early 2018 with TJ Maxx taking possession later in the year, and in Santa Monica where Adidas will replace Express. As you would expect, these preemptive re-merchandising initiatives create short-term drag on occupancy and cash flow in 2017 and 2018 due to downtime as we deliver the space to the tenants. However, this activity will make the assets more relevant to the consumer, provide cash flow growth, and provide long-term value creation. Further demonstrating our balanced business plan, we are thrilled with the West Coast team’s acquisition in Pasadena that Don outlined earlier. It will be an attractive addition to our West Coast portfolio, providing a strong yield, the low market in-place rents, and an additional 274,000 square feet on 15 acres, raw material to potentially drive longer-term growth in our portfolio. However, it will not materially increase FFO per share in the near term solely due to its relative size. Accretion will be less than a penny, so it will not impact our 2017 guidance. Now to the balance sheet. We finished 2016 continuing to have a strong liquidity position with our $800 million credit facility completely undrawn. Our debt-to-EBITDA ratio is at a comfortable 5.25 times for the quarter, and our fixed charge ratio remained steady at 4.5 times. From a capital standpoint, during 2017, we project to spend approximately $400 million to $450 million in development, redevelopment, and releasing, and $30 million for our recently completed Pasadena acquisition. We expect to fund this capital through a combination of free cash flow, draws on our lines of credit, and opportunistic issuances on our ATM program. An unsecured notes offering is still slated for late 2017 or early 2018. We did modestly utilize our ATM program during the fourth quarter, raising $29 million at an average price of $1.41 per share. Now let's stay on this topic for a moment. One of the things I’ve come to appreciate in my first six months on the job here at Federal is appreciating federal skilled management of its balance sheet. As I work through the refinancing of our mortgage at Plaza El Segundo, which should be completed in early June, a new ten-year loan with a rate inside of 4% I realized that we do not have another sizable debt maturity until late 2019, almost three years away. I then began looking back over the last five years and I have noticed a meaningful average spend on development, redevelopment, and other property investment of roughly $350 million annually. That’s roughly $1.7 billion in total and another $500 million in acquisitions. Federal’s funding of these investments included $1 billion of equity, $700 million of 30-year debt at a 4.2% blended rate, and roughly $350 million from free cash flow and asset sales. As a result, over this five-year period, we have maintained a debt-to-EBITDA steadily in the 5.2 to 5.4 times range. We have increased our fixed charge coverage from 3.2 to 4.5 times, achieved an A-minus rating from all three major credit rating agencies, and we've lengthened our weighted average debt maturity to a current 10.5 years, all while producing FFO growth and a rock-solid five-year CAGR of 7.2%. Truly an impressive track record of stability and consistency, further evidencing our long-term focus and commitment to a balanced business plan. Now before we start with the Q&A, I'd like to congratulate my colleague Craig Klimisch, Federal's Controller, on his promotion to Vice President. This is a clear recognition of the value he brings not only to me and my partner Melissa Solis, but to the finance and accounting function as a whole and to the entire Federal organization—well deserved, Craig. And with that, operator, you can open the line for questions.

Good morning, guys. Actually, Don, I don't mean to gloss over the upcoming investment and work ahead of your Pike & Rose and Assembly, but maybe the bigger question is that for many years, I'll call them mega projects like those as well as Santana have been the focus for investors and your organization. In a little over a year or so from now you're going to be in the final innings of the Phase II investments there. And I'm just wondering what seeds you’re planting today and how that bodes for that period beyond 2018. I'm just curious if you think going forward we should expect a similar type of commitment to these kind of chunkier projects or do you see yourself cycling more to smaller projects or even more external growth?

That’s a great question, Jeff. I appreciate you asking it. It’s funny. While I absolutely agree that Pike & Rose and Assembly get the most attention and are the things that sit at the top of the company, you have to know how hard I try to fight to make sure that everybody understands the balance of this $15 billion portfolio of real estate. So I never want to gloss over that we do with core and the redevelopment. Having said that, without question, we also talk about Pike & Rose and Assembly as being a decade-long project, and certainly in the case of Pike & Rose with the second phase opening up starting later this year and then into the next. We still have a ton more entitlements to do; we have a bunch more to do the same thing at Assembly. So thinking about those two projects as time being done from a value creation perspective is way too premature. On top of that sitting here and looking at what we'll be doing with CocoWalk and sitting and looking at what we are doing on the West Coast at Santana with a $200 million plus project at the end of the street effectively there—sunset, a little bit further down the road, but coming after that. And inside our company, the amount of redevelopments has never been higher. So the combination of using all those arrows in the quiver from the larger projects to the smaller redevelopments to the core is all really important. So don't think about Pike & Rose and Assembly as being done after 2018, please. In addition, when you see the type of acquisitions we've made, what we bought, when we bought San Antonio center a number of years ago, if you were at that property today, you would be as sure as we are that there is a whole lot more to do there. And maybe that will be done in one big way; more likely it will be done in phases until it ultimately is a mega project, if you will. Similarly, when we look at what we just bought at Hastings, it's all about big pieces of land that really should be a whole lot more than they are today. Obviously, it takes time to get to them, and I know it’s a long-winded answer, but I wanted to give you a full and complete answer to all the tools that we have in our toolbox.

Just to clarify maybe not done, but I guess is it fair to say that beyond these two projects we will begin to see your development and redevelopment pipeline becoming maybe broader with each asset being a little bit smaller in scale, a little less chunky?

Until the next great mega project makes a lot of sense for us to do. I mean, as I sit here today and look at that, yes, I would expect it to be, if you will, broader and less chunky. But the right opportunity avails itself at San Antonio center or Hastings Ranch or at Pike & Rose, and I go back on what I’ve said. So it's about finding the right risk-adjusted project and everyone separate the projects of size because obviously it's a whole lot different thing to be talking about a $1 billion investment on one piece of land or more. So just by definition, how many of those things there are, it's likely to be smaller, but I don't want to count out that possibility of finding the next one.

And just one last question: many of the assets you guys have historically targeted have been privately held for an extended period. With all the discussions that are going on out there right now, about changes in tax policy around 1031 elimination or deductibility of interest, are you finding any rumblings from owners being more willing sellers or is it just too early to know?

Well, I will say, I mean, I don't know if that's it. Listen, there is no question that this new administration and whatever happens with respect to tax reform and not just 1031 depreciation rules, it’s the board of tax that retailers will have to pay. I mean there’s a lot of stuff out there that could impact the real estate business that time and so having a presentation by NAREIT and by our own efficiencies is critically important. That’s not even talking about changes to immigration law or what it does in California; retaliation. There is a lot out there. So there is no question that there is more uncertainty in our business as I think about looking forward in the next year, 18 months, two years, than there’s been. And that has to impact the way sellers think about their real estate. I will tell you what we have seen is we have seen more opportunities for acquisitions. What we have not seen is any weakening in the pricing that those sellers expect. I don’t expect that to change in any of the locations.

Hey, good afternoon. Don, just two questions here. First is maybe just following up on Jeff’s. As you guys have been restocking the redevelopment kitty for some time, Darien a few years ago, Coco, the latest one in Pasadena, as you guys stockpile these and work through entitlements, how long do you say that you work on something versus you say, look, we've tried this thing, we're not getting where we want to go and it’s time now to put the asset on the market and move on?

Well, I’m not able to say to you again nine months, 14 days, three hours, and two minutes, Alex, but it – and I’m trying to be thesis there and trying to say we have local teams that as you know by focusing on smaller portfolios within this company. Clearly within that they need to prioritize where they spend their time with – I mean, Darien is a great example. We're still not there completely with Darien, it took time. But we are running the assets anyway that we own. The teams are there anyway. And so everyone of the assets, whether it's something we've just bought or something that we've held for 20 years, but it’s been tied up with leases and things that restrict what we can do all under that pressure here to be able to create value in real estate. So there are clearly times as have happened where we have a base in a specific development plan because they haven't panned out. The latest one I could point to would be for our shopping center where we really thought we'd be able to do a pretty comprehensive residential plan there and that's just not panning out the way it is, so it will remain a retail property. And so that conversation happens in each of these small groups and then up through the investment committee on a regular basis. And that, frankly, is why we're able to turnover in my view as much as we do with a really reasonable size team here. We get to a lot of development and redevelopment.

Okay, that's helpful. And then the second question is, as you guys talked to tenants, there seems to be obviously more interchange from mall tenants going to open-air, maybe some of the larger open-air going to the malls. Do the tenants think of it like a linear relationship, so if their occupancy cost goes up by 2x, they expect sales to go up by 2x or vice versa if they're willing to trade to lower cost venue they don't mind, lower production sales or is it less of a linear and more something else that the tenants trying to drive out when they make a decision whether to go mall or open-air?

I'll let Chris add with respect to what you are seeing out there. But you are asking a really what you are generalizing a specific – generalizing a financial model that really is different for every specific company. It depends on our operating margins; it depends on their online and verticality in terms of their business plan. It's not about percentage of sales, right it's about percentage of products. And our whole industry has been very focused, as you would expect, on occupancy costs for the last 40 years because sales data from stores is something that's askable and attainable, but the reality is that that really just a surrogate for profitability and those metrics are changing. So when any particular company, whether it's a retailer or restaurant or an entertainment source or whoever it is, is considering the best way to distribute their goods or services, it has everything to do with their particular business model where they're going in profitability. So trying out to make it as linear, a conversation wouldn't be helpful; obviously, it would be easier to analyze. If you were aware, we are seeing in almost every case, a tenant that we are trying to convince to come open-air with us, what we are seeing generally is the belief that their customer is shopping in our type of shopping center rather than in a mall. That's almost the driver to everything. Where is their customer? Where are they likely to find their customer? Then the economics in the business plan is huge on that, and they have to find how to balance.

Yes. All I would add to that comment is that from a holistic standpoint with the retailers, a good example just happened out at Santana Row where in Valley Fair, a successful store. They opened a store at Santana Row right across the street. There hasn’t been, as we are hearing, no impact to the Valley Fair store and they picked up a whole new grouping of customers. So I also think the retailers are getting a lot more holistic view of customers that shop all may not be the same customers that shop in the street retail environment. So I think the pool of opportunity for our retailers looking in the types of assets that Federal Realty owns provides a lot of optimism for us on a going-forward basis.

Okay, thank you.

Yes, hi. I was wondering with the Phase IIs at Assembly and Pike & Rose starting to open up soon, I mean, how are you thinking about the initial NOI drag when these types of projects open up compared to what we saw in the Phase Is opened up?

Go ahead Dan.

Yes. Now with regards to the drag, I mean, I think we are trying to outline some of that in our disclosure in the third quarter with regards to the range of about $0.06 to $0.07 of drag from the opening of Phase II in 2017 and likely into 2018. And I’d just point you to how we expect in 2017 and in 2018 and into 2019 how the NOI will proceed in terms of growth at both Assembly and Pike & Rose. I mean, I think that's the best way to kind of express to you how we see that ramp up. But $0.06 to $0.07 that we outlined is the impact on 2017 as they open and as capitalized interest rolls off and as we lease up some of the residential with very limited pre-leasing.

Got it. Okay. And then just one other question for you. In terms of equity in 2017, is it in the range of call it $150 million to $200 million or something which is embedded in guidance, a good proxy?

Yes. We've got a $150 million modeled in for 2017 at this point.

Okay. $150 million, great. That was it. Thank you.

Hi, good morning. There have been some comments by some of your peers this earnings season about a further widening in cap rates between A&B assets. And number one, I guess, if you're seeing the same thing, and number two, is there any signs kind of early on that it might be blending into the types of valuations for the centers that are in your target markets, A centers, and in A markets?

Hey, Paul. Let me start, and Jeff wouldn’t mind jumping in from your perspective. I’d like to say that I recognize a widening in terms what we see between A, B, and C centers, but frankly we're only looking at real estate. And I can tell you that the stuff that we've been looking at and having some more success and hopeful of looking to turning into some substantial negotiations and then hopefully getting deals done that we have not seen any backing up of cap rates on stuff that we're looking at. Jeff, anything further from your side?

Hey, Paul. Yes, I mean anecdotally, Paul, we hear that B&C properties are not necessarily getting the buyer pool, so they are affecting pricing. But thinking we are not really out looking for B&C real estate; I can tell you there is no change at all of the pricing for A’s; it’s still extremely competitive and expensive.

I will add one thing to you, Paul that you might find interesting. There is a shopping center here in the DC area that has been on our list for a long time. It's not a regional center, but it is more of a strong community center with some opportunity both in leasing and potential into small development. We basically dropped out at a high 3s, 4 cap on our underwriting, and it went for significantly more money than that to a private company, not a public company, but a private company now that is in our business. And when I looked at that and I shook my head and said we’ve been looking really carefully to see if we could see any kind of weakening in or backtracking of cap rates, and that one looked extremely high, and we weren’t able to look at that property either, and it just went for a really big number in the 30s.

Yes. I understand. Thanks. And then just to follow-up on kind of on re-leasing spreads, first on the renewals, they were lower than what you had recently was plus 1% renewals and I just wonder what’s anything about kind of what you're seeing in terms of small shop rent growth. And then on the anchor stuff you’ve provided, I think 15% to 20% expected spread on the anchor leases that were vacant, that were remaining to be leased, and you've done a few more deals since then and I wonder if that number is still what you're ballparking?

Yes. Many questions. Listen, with respect to the fourth quarter renewals, I mean that’s an anemic number, 1% is an anemic number anyway you look at it. I also have to start by saying it's a quarter, so what? And inside of that, when you look at it, there is one particular deal in there where we specifically rolled down a tenant to keep them in the properties that we were looking at to redevelop, and we're not ready yet, so we didn't want to lose them to the center all the way. So we kept them, and that brought us down; without that would be in the mid-single digits still, nothing wonderful to write home about, but a whole lot better than 1%, what that looks like. And then with respect to anchors, the guidance that you just gave is something that we are comfortable with in terms of the rest of the anchor leasing to lease up where those two deals that I talked about were two of the better deals in terms of that rolled up that we're remaining to be leased. So we still expect to be rolling up the balance and the teams certainly but not maybe down to 20s.

Okay, yes. But including the deals you did, I mean overall, it's consistent with kind of what you provided, even though you may have picked off some of the better ones so far?

Completely consistent, maybe a little bit better.

Hi, good afternoon, everyone. Don, you talk about the change in the retail environment and changes in the way people are shopping and realizing that’s more longer-term, but you also an environment right now where you're seeing spending on apparel and accessories, many retailers are struggling, and it could be another tough year for store closures. Aside from some of the occupancy loss that you've already suffered, what impact is the current retail environment having on your business strategy today? How are you thinking about tenanting your centers differently than you were just a year ago?

Yes, everything is around the edges, Christy. I very much believe that this is – what we've been talking about for years, is accelerating, and tenants that have kind of hung on coming through the recovery are under stress; Payless is the next one that has closed, and we’ve got $900,000 or $1,000,000 where the Payless income is, that is certainly the risk at six different properties. So the reality is it gets down to this real belief that in everything I’ve been talking about that we need to provide merchandising that is so much better balanced toward the type of food offerings, the type of entertainment offerings, the type of clothing offerings. We need to be making sure that we're doing deals with retailers as best we can that we’re getting; and a lot of that does mean investing in these properties and making sure that we're giving them the best mousetrap to be able to offer their goods and services. One of the things that, as you know, we struggle with, and I would hope our competitors struggle with, is how much do we take to the short term to be able to make sure these properties are as strong as they can be going out? And we just completely taken the point of view that we're going to take the large approach because we have the real estate where we can get paid back for such investment, and we were going to accelerate that notion of the right type of mix of all of those tenants with the people who are getting it more in terms of providing customers the services that they demand today than with the older brands that are slower on the uptake.

So in the context of your 3% same-store NOI growth forecast, if I think about some of those at-risk tenants, including Payless, which is $900,000 to $1,000,000, and some of the others that may result in further store closures, what is the risk potentially to that 3% forecast or to what extent do you have something embedded in there, some buffer for further?

And I will leave the specifics to Dan and Melissa, but just notionally, how we try to do this, courses risk, and on all of these companies today, I do think there is more variability, if you will, in the standard deviation, on all of these numbers that are out there being given in that time of cycle that we are in our business in terms of that. But we do that – when we give a number of 3%, so 2.5% or 3.5%, and you look at the kind of numbers that difference is that it takes to move that; it's not a lot. And so, surely we have some cushion put in there, but we also know we believe some of that if not all of that cushion which we are trying as best we can to give you a balanced view in a time that I believe is less predictable than it has been.

Thank you, and good afternoon. I'm looking at the 2016 acquisitions, and the vast majority of them include a supermarket anchor or supermarket exposure. I'm just wondering if Federal is looking to increase its exposure to supermarkets, and just kind of given those comments you just made, is that part of the draw that will be part of the future federal mix?

Just want to make sure, you said 2006, and I'd love to go back to 2006.

I would too.

I do expect you meant 2016.

Yes, I did. I'm sorry. The six assets you’ve bought, five of them had a supermarket anchor.

Yes. So remember that was us buying out the 70% that we didn't own of our joint venture with Clariant, and that portfolio was meant to be a supermarket-anchored portfolio. And so that's why it – when we look specifically at risk-reward, we make any money with that investment of those net 70%. We said yes. That was not a specific supermarket initiative that we positioned in 2016. So I don't think relating it to that at all. Generally, we are all about the best real estate, and the components of it or the format of it is just playing less important to us. It's about the real estate and what we can get at and what we can do with it. So I don't think we should read into that at all. We are a retail company, although in terms of the way we think about things we want to make money vertically above it in cases with residential and with office, but our bonds are retail, but it's broadly retail and not just supermarket on shopping centers.

Just looking at the development opportunities at Hastings Ranch, is that on existing land or would that be the conversion and repurposing of some of the anchor space there?

Yes. Jeff wants to talk about Hastings a little bit more.

Okay. Sure, Don. Hey, Craig. Yes, I mean I think the best way to look at Hastings is way down laid it out on one hand. We are sitting on 15 acres of land or 274,000 square feet of improvements on it that generates the 6% return that it’s going to grow roughly the rate of the same as the rest of our portfolio over the foreseeable future. And that's the scenario we priced and underwrote, and that’s something we can happen obviously, if we don’t get control over the land or get control over the Sears box. On the complete other end of the spectrum, what you're getting to, Craig, is if we do get control over the land and we do get control over the Sears box, there is a significant opportunity to reposition that property over the coming years. It's got a zoning that allows anywhere from a 1.0 to 3.0 FARs, roughly 650,000 feet three times that. It's right next to the 210 freeway where there are 240,000 cars a day that goes by and walking distance to the metro gold line. So it’s fundamentally great real estate with a wide range of potential outcomes, and we won't know where we're headed on it for several years but it's again what we always look for—the best real estate with protected downside, which in those cases has been sitting there and running like it is today, and running the six and watching it grow or doing something significantly different. And then of course there's two or three scenarios in the middle that could work out, but it's way too early to tell.

Craig, I want to add one thing to that just a—the Sears box has paid very little rent here; it’s partially sublet to HomeGoods.

Yes, correct Don.

And so from a profitability perspective for Sears, this is a great piece of real estate where they pay little compared to what they earn. So we don't think that there is past the day to have basically said we're not interested in giving the space at this point; we just want to be there to the extent that situation changes.

I was just looking at Google Maps; it looks like there could be some interesting opportunity just give us surrounding retail and uses in that area?

Clearly, 15 acres that far is a lot of land.

Yes, it’s a great note, Craig. Great note. That’s a great piece.

Hi, guys. Just wondering if there's any sort of additional color you can give on plans for CocoWalk in some sort of place?

Yes, I gave some last time, and we're workin' the numbers like crazy because of construction expenses. But yes, Coco in particular we’ve settled on a plan that will effectively part of the shopping center down as you're looking at the fund at the right side of down and create office overall retail with a completely reconfigured center if you will of the common area there with the Starbucks today. And overall renovation, not only of the outside areas of the retail part, but inside of the Cinepolis Theatres, which is a critical anchor there. And so as we pull that together we will have a total number down yet, but it will be a $50 million or $60 million redevelopment plan that is that really should set that property up to be a great held asset for the next 20 years and 30 years. And over at Sunset, it’s all about the entitlements, and that is the case in all the markets that we're in; I don't think we are in one market getting the uses in the high-end and the entitlement to do what we want to do is easy. Now one market we're in that’s why we are in those markets, and we don't want to say we want to be hard to get the new investment, but it's hard for us, hard for everybody. And so we still have time. I think I would say into working through that in the meantime, we are doing the best we can operating a less than perfect retail asset. So stay tuned for more on Sunset; I will be more on Coco. But I just told you, it is probably where it’s going to end up, so we can get the numbers, where we need to get the numbers.

Hey, good afternoon, everyone. Just question—we've talked a lot about the changing consumer behaviors and how that changes now accelerating as well as the fact that there's more acquisition opportunities out there, but the pricing hasn't changed. So I'm just curious, obviously you have a very high-quality portfolio already, but any thoughts on taking advantage of the current conditions and making your portfolio a little bit better quality through asset sales at this point.

Yes, great question, Vin, and let me give you the answer—yes, but let me specifically point to what the challenges are in this portfolio. The first I talk about forever as we've got some really significant tax gains in just about every asset that we own. And so without having the ability to 1031, it's hard. So we 1031, whenever we buy an asset for cash as opposed to what units dealer or some other financing. We do look hard at trading out. So I do hope you see that this year starting with using the facing for proceeds. The other thing that you should really keep in mind with respect to this portfolio is when you spin off a big part of the company or sell 20% of the assets. It’s a whole lot easier to make that work when there is a big giant standard deviation between the great stuff that you have and the good or average stuff that you have. And as we have been looking for years and really what that standard deviation is, I mean, we certainly have properties better than others, but I will say that even on our worst assets, they are awfully play in terms of growth rates and things like that. So spending off 10% or 15% of this company, you do all day long, if you could bring in the 3% same-store growth that’s a 4.5% or something like that which you might not do if it was the 3% to 3.2% or something like that if you kind of get my drift. So it will likely continue to be a one-off selective philosophy of improving the quality of the portfolio, which we should always be doing. And just like we buy these assets one at a time, you'll likely see a trade-out one at a time.

Hey, good afternoon. Just Don going back to the acquisition opportunities you're starting to see out there. Has there been any really discernible pickup of deal flow? Any specific markets that has you particularly encouraged or that you're particularly focused in on ongoing back to some of the prepared remarks?

And I don't know if this is the direct impact – if it has had a direct impact or not, but I really do like the fact that we are operating on more of a decentralized basis now. We are in—there is a team in Boston that looks at Boston. There is a team that specifically looks to Chicago. There's a team that specifically is working on the West Coast and in Washington, etc. And so, while I'm constantly frustrated because I'm a cheap guy with the cost of deals, the type of deals that we are seeing in terms of is it real estate that we have the potential to do something with? That does seem to be stronger in all of our major markets. Now whether that converts into actual deal flow or not for billion reasons, including the one that took Hastings Ranch, that small acquisition took 18 months or 20 months to get done. These things are unpredictable in terms of what we're actually looking at. But there is certainly more in each of these teams that is being served up today, frankly.

Okay. And then maybe just switching gears, just given the pressure on labor and then clearly some commodity prices, just maybe a broader update on your overall outlook for construction costs as you pursue potentially some additional redevelopment opportunities or what have you, looking out over the next 12, 18 months?

Yes. You must have our conference room booked, because the last Investment Committee we specifically were talking about expectations with respect to construction costs; Boston in D.C., certainly in California, and we don't see it going down anytime soon there. This is where we are, and probably a little bit more expensive. This is where we're going to be in terms of where we are planning to be in terms of the ability to buy out these jobs on both the material and labor perspective. And that's another area that when you start talking about immigration, when you start talking about workforce changes, there is some unpredictability. And so it’s a reason I’ll always say we're not totally – we're never going to go all-in mixed-use development; we’re never going to go all-in on shopping center acquisitions if you will. We're never going to go all-in on any piece of our business, and we've got to be used to more, but we're certainly not expecting any significant change. There's no change down and no significant change up in the cost of construction over the next year to 18 months.

Thanks everyone for joining us today. Looking forward to seeing many of you as well in Citi Conferences in the coming weeks. Thanks. Goodbye.