Federal Realty Investment Trust. (FRT) — Q1 2017 Transcript

Thank you. Good morning. I'd like to thank everyone for joining us today for Federal Realty's first quarter 2017 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 earnings 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 our other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial condition and results of operations. These documents are available on our website at www.federalrealty.com. And now, I'd like to turn the call over to Don Wood to begin our discussion of our first quarter results. Don?

Thanks, Leah, and good morning, everyone. Another real solid quarter for us, with FFO per share of $1.45, 5% higher than last year's strong quarter. So this is a tough comparison and above our internal expectations also. Due somewhat to the timing of quarterly expenses, particularly demolition of properties to be redeveloped, those will hit later in the year but also due to less vacancy than expected and low snow removal in Philly and the Mid-Atlantic regions. Now there has been so much talk about the state of retail real estate in the past few months, and I'll leave it up to the experts to whom determine whether valuations have overcorrected. Clearly, as of today, the short-sellers are winning. But I do want to make some observations about the environment that we're operating in. First of all, there's plenty of leasing that's getting done; we're doing a ton. In the latest quarter, we did 102 deals for more than 1.5 million feet of space, more in terms of both the number of deals and square footage leased since the second quarter of 2014, 10 quarters ago. I've personally never been more convinced of the benefit of the highest quality real estate locations and products, particularly in difficult times, than I am today. But all the space that's either on the market today or believed to be coming to market clearly moves leasing leverage to the tenant from the landlord in many situations. That shift manifests itself in negotiations that hurts in three ways: more tenant capital, more favorable deal terms for the tenant, and more time to get the deals done. Not the end of the world by any stretch of the imagination; it certainly makes economic sense to do, but it's helpful nonetheless. The combination of strength in location and strength in balance sheet together make for a huge advantage in an environment like this. So let's talk about the quarter from that perspective. Same-store property operating income rose 4.3%, including redevelopment in the quarter, which is the way we run our business as redevelopment of existing properties is such an integral part and an important part of what we do. Rent starts from Splunk certainly help, as their strong growth is at Melville Mall, Power Shops, and Congressional Plaza. The overall portfolio was 94.6% leased versus 94.4% at year-end, and 94.1% last year's first quarter, a gain of 20 and 50 basis points, respectively. Note that we ended the quarter at 94.6% leased, though only 93.1% occupied, indicative of the signed deals for which rent is yet to start but that's good for later in the year and for 2018. Also, we continue to work through the excess anchor vacancies that we spoke about over the last two quarters. Of the 730,000 square feet of total anchor vacancies that we first talked about in November of last year, we're now over 50% leased in that pool, with the income from many of those deals scheduled to start later in '17 and 2018. Rent from new tenants exceeds rent from former tenants by 36% on those deals. Our team is working diligently on our anchor vacancy lease-up initiative to bring us back to a more normalized level, around 98%, and we're almost there with the anchor portfolio now at 97% leased. We'll have the updated detailed anchor vacancy schedule, including the timing of rent start, available at NAREIT in June. In addition, we expect to have the last two Sports Authority boxes released as part of the redevelopment of both Brook Plaza and Assembly Square, the marketplace portion soon. In our development pipeline, continued construction progress is at the stage where all Phase 2 buildings at both Assembly and Pike & Rose are topped off, with the majority of work going on in the interiors. A higher construction cost estimate at Assembly is largely indicative of the higher leasing capital required there that's more than paid for with commensurate rental income. Preleasing preparation and marketing for the late summer residential movements is underway in earnest in both Assembly and Pike & Rose, and condo sales have picked up at both properties as well. The occupancy there will begin in 2018. Please remember how dilutive the residential lease-up period will be at both properties beginning next quarter, but it certainly works with the value that's being created. 78 of the 107 market rate condos are under binding contract at the Assembly, and 27 of the 99 are under binding contract at Pike & Rose. CocoWalk came to the investment committee and the Board just yesterday, and we're going to go forward with its redevelopment subject to finalizing the GNP contract shortly. We expect to add to the redevelopment schedule next quarter, but expect the project to be between $73 million to $78 million. Darien shopping center's redevelopment is up next later in the year; we'll be talking about that. We're still working through the Sunset Place entitlements, and 700 Santana Row construction continues. Our core belief throughout our company is that investment in great real estate is increasingly necessary to position it for relevance in the next decade, and we have a lot to do. In terms of restocking our shelves with raw material for development in the coming years, the first quarter was productive with the February closing of Hastings Ranch in Pasadena, California, which we discussed on our February call; and the March closing of Riverpoint Center in Chicago. We signed a press release a couple of weeks ago about that acquisition on 17 acres on the western edge of Lincoln Park. And except for the fact that it's the first acquisition we've made in Chicago over 20 years, it's right down the middle of the plate for the type of opportunities we look for. It's very infill, it's very unattractive as it currently sits, other anchor markets with limited term and a big piece of land that's subdividable. Chicago, as opposed to Chicagoland suburbs, has been a magnet for the continuing trend that many major cities in the U.S. are experiencing. Nowhere in the country has the trends been more pronounced than in Chicago, where numerous companies have moved their headquarters since 2008, including ConAgra, Google, Kraft Heinz, Motorola, and even McDonald's is moving in. Those 17 acres on the Chicago River and Lincoln Park can only get more valuable in our view. And it looks like we may not be done with acquisitions this year. I can't fill in all the details just yet, as deals aren't fully negotiated. But the reasons I'm bringing it up on this call are twofold. First, with all the hand-wringing and concern for the fast-changing consumer shopping and behavioral patterns that we're witnessing, we are firmly demonstrating our commitment to the future of high-quality real estate. Over the past 20 years at Federal, there has simply never been a time where our poor quality real estate outperformed our better assets. The future locations like that look better than ever. Secondly, because uncertain times like these sometimes provide that final push to convince sellers to part with long-held properties. The property is well-located, desirable, and has redevelopment possibilities, and cap rates remain extremely low, as they always do at times like this. The mere availability is a huge opportunity. The strength of our balance sheet allows us to selectively exploit those opportunities. Now, on a personal note, we'll be losing Jeff Mooallem as our Senior Vice President, running the core portfolio, as he takes on the CEO role of a new venture with a long-time veteran. Just a good man who's done a terrific job of setting up our decentralized core over the past couple of years, and I wish him all the best in the top job he's taking. As most of you know, our bench is deep, and I'm thrilled to replace Jeff with 15-year Federal Realty veteran and Senior Vice President, Wendy Cyr. Wendy previously ran leasing for the core with Jeff; she is widely respected both inside our company and out by peers, brokers, and tenants nationwide. Asset management, core leasing, and tenant coordination were all very important to her. Many of you already know Wendy, but she will be more visible to you in the quarters and years ahead. That's it for my prepared remarks. We've got a lot going on around here and a massive investment in our future. Over $600 million of construction is in progress on the balance sheet, in the right types of products for a future with some of the best pieces of real estate in some of the best markets in the country. We will never take for granted the balance sheet that's been set up over the last few years that provides exactly the flexibility and cushion when things don't go exactly as planned. Let me turn it over now to Dan before opening up the lines to your questions.

Thank you, Don and Leah, and hello, everyone. As Don mentioned, we had another strong quarter despite the increasing headwinds facing the retail sector overall, due largely to an active quarter on the leasing front, with 592,000 square feet of total leases signed and 524,000 square feet signed on a comparable basis. For comparable results, we drove an average increase of 11% on a cash basis and 23% on a GAAP basis. The 11% on the cash basis, and that's 11.49% to be precise, is in line with our expectations. The breakdown for the quarter was 17% on new leases and 5% on renewals. Our same-store NOI grew 4.3% despite a drag of roughly 70 basis points from lower term fees, with only $300,000 of same-store term fees during the quarter versus $1.1 million in the first quarter of 2016. This 4.3% is also impressive given the impact of our proactive leasing efforts. If you recall on last quarter's call, I highlighted a few examples of our proactively leasing activity, which would negatively impact near-term operating metrics. On Third Street Promenade in Santa Monica, where Adidas will replace Express, switching out A.C. Moore for Trader Joe's at Assembly Square up in Boston; and at Santana Row where we traded Bay Club Fitness for Broad Soft. All three deals were at meaningful increases to previous rents, so add to that the recently publicized deal at Santana Row to bring in Amazon Books, replacing Brooks Brothers. Those four leased deals alone represent over 50 basis points of negative impact on our first quarter same-store growth metrics, as well as 30 basis points in occupancy drag, both representing $18 million to $20 million of value creation when considering the increased rents, and the impact on real estate value after deducting capital. That's $18 million to $20 million value creation through four leases. Clearly, a trade-off we would make every time from a short-term dilution versus long-term value creation perspective. Plus, the benefits of significantly upgrading our tenant mix further solidify these properties for the future. Also creating drag in our same-store pool are the activities of our two South Florida properties, CocoWalk and Sunset Place, which we intend to significantly redevelop in the coming years. For example, during the first quarter, Sunset Place produced a drag of 30 basis points on our same-store growth, a drag we fully expected and underwrote when we acquired the asset in 2015. As we prepare to execute on these extensive redevelopments over the coming years, occupancy and NOI are forecasted to decrease meaningfully as we tear down and rebuild significant portions of the existing structures. As a result, as we get to late 2017 and early 2018, we will begin to provide occupancy and other operating metrics with and without CocoWalk and Sunset to better isolate the performance of our portfolio. Now on to Assembly and Pike & Rose. As we highlighted last quarter, Assembly Row's Phase 1 is fully stabilized. Pike & Rose Phase 1 continues to make progress, with Dallas and PerSei being 96% and 97% leased, respectively, and the office being 100% leased at quarter-end. The property overall continues to be on track to deliver 75% of projected stabilized POI in 2017, in line with our guidance. On the redevelopment side, we continue to find opportunities to redevelop our core portfolio, creating value and positioning our centers to outperform in their respective markets. Two new projects have been added to our redevelopment schedule in the 8-K. At one site in Richmond, we are demolishing small shop and anchor space and relocating another anchor to accommodate Dick's Sporting Goods at the property in a new, 9,000 square foot store; and at another mall outside of Princeton, where we acquired an office building adjacent to the center and are redeveloping the property for retail use. With respect to AFFO for the quarter, it increased 8.4% over 2016. FFO per share was $1.45, which represents a 5.1% increase over the first quarter in 2016 and is $0.02 above both our internal projections and consensus. As Don mentioned, this was largely due to the timing of demolition expense between the first and second quarters, which were roughly $0.01, as well as forecasting higher tenant bankruptcies that actually occurred during the quarter, with our portfolio having minimal exposure to many of the troubled retail names declaring bankruptcy thus far in 2017. This, coupled with lower removal expenses, represented another $0.01. On this point, let me highlight: we have no Eastern Mountain, no Gander Mountain, no Gordon, no Family Christian, Route 21, Limited, or Gas, no American Apparel, Wet Seal, or Crocs. We have only one tenant on the potential closure list, and the rent is well below market. Just two BCBGs, one of which we presently expect to keep open and another we have already backfilled. Just one RadioShack, and only one of our six Payless stores is currently on their closure list. Plus, our total exposure to Payless is just 0.11% of total revenues, although we do have three additional locations that closed last week. Of what we know today in terms of closures from those tenants, it represents just 0.16% of total revenues, and our total exposure to those tenants is just 0.44% of total revenues. While we forecast to give back part of this outperformance over the balance of the year as the delayed demolition commences this quarter and the challenging retail environment continues, we are revising upwards our 2017 FFO guidance to between $5.85 and $5.93, increasing the bottom end of our guidance range by $0.02 to $5.85. This is being driven largely by our recent acquisition activity from Hastings Ranch in Pasadena and Riverpoint Center in Chicago, accounting for about $0.015 of the guidance with Hastings Ranch providing an NOI yield in the low 6s and Riverpoint in the mid- to upper-4s. Please note, we left the upper end of the range unchanged at $5.93 given the uncertainty still facing the retail sector and remain cautious in our forecasting for the remainder of the year. Despite the strong first quarter, we still expect same-store growth with redevelopment for 2017 to be around 3%. The second quarter is not expected to be as strong given the difficult comparable relative to 2016. Now with an update on the balance sheet. We had $217 million outstanding on our $800 million credit at quarter-end, driven in part by our acquisition of Riverpoint on the last day of the quarter. Our credit facility is the only floating rate exposure we have. Our weighted average maturity remains an industry-leading 10-plus years, and our weighted average interest rate is now at 3.9%. Our debt-to-EBITDA is at 5.6, and our interest coverage ratio remains very healthy at 4.5x. Before we turn the call over for your questions, I would like to share with you another discovery we've made at Federal since joining late last summer. During our Board meeting earlier in the week, we took a look back over 15 years to review how Federal has performed during some of the previous difficult cycles in retail, and again came away extremely impressed by the resiliency of Federal's portfolio as well as the performance of the company as a whole. We compiled numbers for report publicly every quarter showing FFO, FFO per share, and same-store growth quarterly over the last 15-year period, and the performance is remarkable, particularly when considering that the great recession occurred in the middle. Remind me to show it to you next time we are together. For many of you who will be at NAREIT next month, Leah tells me there are a few slots still available given we have three schedules running, as Jeff Berkes will join me and Don at the Hilton in New York. And with that, operator, you can open up the lines for questions.

Dan, I guess, if I could just stick with you on sort of the source of the headlines. Can you just walk us through how you're seeing that for the remainder of this year? Just I was thinking between development spending and debt obligations on the horizon that it might command a lot of your cash flow this year, and I'm wondering whether it intensified any of these asset sales or equity issuance or due to some cash at refinancing?

Well, from where we stand right now, I think we have about $206 million, or $217 million, of mortgages, which we'll refinance at the property level. So that's any of the near-term debt maturities that we have. With respect to our development spend for the remainder of the year, it stands at around $300 million roughly. We will utilize our free cash flow, which is projected to be in the $70 million to $75 million range for the year, as well as we do have some assets under consideration for sale currently. I think we'll look to be opportunistic with regards to issuance of equity as necessary. But I think that is generally how the rest of the year lays out.

And maybe just a follow-up, I recognize you guys aren't here to give us guidance on 2018. But current consensus estimates for this year about 4% FFO growth and next year, it accelerates a little bit about 6.5%. I recognize you have some major developments opening and some capitalizing cost coming into the mix. I'm just wondering how you're thinking about this current retail environment; is there sort of a chance? Or how we should be thinking about maybe a slowdown or a slowing of stabilization on some of those new development assets? And just how that can flow through your FFO growth into '18?

That's a good question, Jeff. When I sit back, we think of it in two buckets. The same-store portfolio and, when I say same-store, I certainly mean redevelopment; I mean the stuff that we do day in and day out. And then the hedge is to create value, and not only is that obviously that Pike & Rose and Assembly and also CocoWalk, but there are a whole bunch of other smaller initiatives that fit in there. I'd like to break those things out going forward, and Dan and Melissa and I are talking about that to be able to show kind of the base case of the wheel of the company and then what those other initiatives are doing. The reality is, as we've been saying for a couple of quarters, you've got dilution in the period of time that we're talking about, the end of '17 and into '18 from building those things and doing those. Frankly, I'm more confident than ever before, even given the current environment, Jeff, that what's happening with the type of product that we're building is being accepted. So this bifurcation, if you will, between the haves and the have-nots—be it quality real estate—is becoming more pronounced to tell you the truth. So as long as we do a good job disclosing and showing the difference between kind of the base portfolio and the other initiatives, I think you'll like what you'll see. And the reason I'd say that is, I don't know whether because of that some level of unpredictability, if you will, is how Henry leads us up, Montage leases up, et cetera, being as precise as we'd like to be for 2018 is not possible. But when you bifurcate it between the stuff that's more predictable and the stuff that's longer-term value creative, it will give you the tools to decide what you think about the value being created, and that's the most important thing that we want to do to improve our disclosure that way. So I'm not just being pinned down, if you will, to a specific number, which is really hard to do at this point in time. But the value creation part of it is, frankly, easier to see than it's ever been before.

Could you just talk about—apologies, I joined a little late—you put out new details on the credit quality of the tenants, which was helpful. Do you have any historical perspective you'd be able to provide on how you think that's been trending over the last 5-10 years?

Well, there’s plenty of data because I do think that Dan was referring to in his prepared remarks with respect to the 15-year history; we've got some good historical trends. That shows how tenants go out, how they are, what’s happening after leasing them. I’ve been talking to Dawn Decker, who’s been here for the longest period of time. We are putting together some analysis. Dan's comment, coupled with mine about over that period of time—10 years, 5 years, 15 years—it's really clear how better quality properties perform in terms of being released and turning over rather than poor quality properties. We’re breaking that up and analyzing internally, and that’s why I said what I said. By the time we get to NAREIT, we may share some of that. But you will see a bifurcation between great assets and the not-so-great.

This is Katie Mcanon for Christy. Can you provide a little more color on what you’re seeing on the demand side of the backfill space today? And how much crossover are you seeing between more traditional mall-based tenants looking for space in open-air centers today and vice versa?

Yes. Let me start. The first part with respect to backfilling and the demand is, I think, pretty well represented by this anchor sheet that you have all seen before and will see again in terms of that 730,000 feet of anchor vacancy that we had. Do I wish it were back in the day when there were three and four tenants competing for every space? You bet I do; that is no longer the case. In my conversation about the leverage, it has moved to tenants from landlords—spatially speaking. That said, as you can see, if you own well-positioned, great quality assets, demand is strong. I think we're demonstrating that clearly with the empirical data from the announcements of leasing that we're doing. Deals are not as good, and that—I hate that. That is what happens cyclically throughout our business, but demand remains strong.

I agree with everything Don said. What I would add is that that's a great example of a tenant we've secured two deals with—one has opened at Santana Row, and the other one we've announced for Pike & Rose—and that's Sephora, which has traditionally been a pure mall-related retailer. They see that there's a core customer that is not shopping at the malls. As they open up at Santana Row, it had no impact at all on what was going on in the Daly Mall. So I do think that that test will turn into more opportunities for well-located real estate that matches the attributes that our portfolio has. We look forward to having more of those conversations, and we would with other mall-related retailers as they look for growth opportunities.

I think the point Chris is making is important: retailers are less discerning as to the format they’re going into, whether it’s a mall or an open-air center, or something in between. It’s about where they think they can succeed. They are more open-minded because they have more leverage too, which is why we’re having success in the locations that we are, pulling mall tenants but also pulling other types of dwindling boxed tenants, etc., that come to fill our properties.

I think you said that the spread on the released anchor space was 36% for the gross, Don, which is around where you had in your prior presentations. Any color on whether there’s been movement since prior disclosures? You talked before about rollover on the remaining square feet being more in the 15% to 20% level. Has that changed with the new deals since that time? Or have those you have done been a little bit better?

Yes, it’s interesting, Paul. There hasn’t been any change at all in terms of what it is that we had told you and were expecting. Although it depends on which deals, obviously. And you have to remember the big schedule that showed kind of what they are. We added a couple of deals to that schedule this quarter, which included A.C. Moore. It included a fitness company that took out Hancock Fabrics space at Westlake. We previously talked about Total Wine being this year but announced last time. Those deals were in line with what we thought, and they tie down into that 36%. As I look at all the remaining anchor space, I think I told you one time the implied role of the remainder was about 19%. The schedule I'll show you today shows that at 21%. Now these are small differences when you're talking about this amount of space. But much of this is happening in products that are under redevelopment. That’s a real positive thing from the standpoint of retailers looking at where to invest their capital today.

Great. I know there are lots of puts and takes going on in same-store number. It sounds like Q2 will be lighter than Q1 based on what you know now. Do you have any color on the expected cadence as you head into the back half of the year? Obviously, I think the comps are going to start to get easier, but any other information you know in terms of openings coming in and how that will impact the number?

Yes. I think that with the demo expense lighting from the first quarter into the second quarter and with a tough comp in the second quarter from a lease termination fee perspective, we're expecting the second quarter to be lower than our first quarter same-store. I think our proactive leasing activity is going to continue to put some pressure on our occupancy levels. I think that we’re making good progress; leasing rates are increasing. However, occupancy is going to tread water for probably at current levels through the middle two quarters and likely tick up towards the end of the year. So that’s why we’re keeping our same-store number conservative; we’re maintaining our 3% same-store growth forecast for the balance of the year.

But you know, Paul, this is my particular area of focus in terms of these numbers. What we are going to do is enhance our disclosure that shows a very clear reason and understanding of what’s bringing same-store up and what’s bringing same-store down. We haven’t worked that through yet. It’s just in this quarter close; as I’ve said to Dan, we've got to talk about this—we can do a better job communicating with you on that.

When I look at your 3% guidance number, how much extra bankruptcy or occupancy loss is baked into the guidance at this point? How much more cushion is there? You've obviously baked in BCBG and Payless. Just trying to see what else; how much cushion is there for occupancy lost?

Yes. I think that we do rigorous forecasting as we talked, Samir, before in terms of where we expect vacancy space by space, property by property, over the course of the year. Our bad debt expense over the last five years has run 2% to 5%, or 0.2% to 0.5%; I think we’re forecasting that same amount. We feel very good about the cushion in our forecasting for the balance of the year based on where we sit today and the fact that we're really not affected by the bankruptcies and the store closures that have occurred so far this year. However, we remain cautious throughout the balance of the year.

Let me point to that, Samir. I don’t want Dan to be mad at me for showing how quickly things can change. As of 1.5 weeks ago, we had three operating stores in one chain, and overnight, the Canadian company decided to close down all its U.S. stores. They’re still obligated on the lease, so we will see what happens. We’ve got some good security. But that’s all got to play itself out yet. That’s the type of environment we're working; that is why you’re hearing caution throughout our industry. That definitely is appropriate. It is a good example; stuff like that happens every single year. And we have cushions to handle that effectively. Can we handle three, four, five, or seven of those? No, but we don’t see that happening.

Just may be continuing that from a different angle. As you guys experience the current environment, do you feel that your traditional credit underwriting model and your grid is as effective as ever? Or have you found that you have to tweak how you underwrite a retailer or tenant's credit?

That's a good question, Alex. Understanding the way we view credit, the way we view our capital, the way we view our allocation of capital is similar with a long-term focus in mind that the left side of the balance sheet and the right side needs to make sense over that period of time. There's no doubt that it becomes necessary to tighten our standards, particularly to the extent that significant capital goes into a space versus a location with little capital. Going through this, I will say our experience from '08, '09, and '10 was invaluable as we navigate through today; it is not the same scenario. But during a time when there’s trepidation, we’ve gained experience in how to take up our credit positions and how we allocate capital. By the same token, when tenants have figured it out, like TJX, they carry more weight with us today. They have always been a large important tenant, but not over a tenant. So, to your point, parts of the cycle we’re in require us to be more discerning, and that control overall weakens our positions.

I think we're all trying not to look at stock prices these days. Second question is, on the investment side, you said there's more of the acquisition on the table. Just curious, given how the stocks are performing and the trepidation over the retail environment, in times like you guys are comfortable buying in the market even if cap rates are in flux or maybe caps are in flux just due to the headlines. But if you could help us understand how you lock in a deal knowing that it won't close for a period of time and, in this environment, there's a chance that cap rates move the wrong way versus where you underwrote.

First of all, that is a very, very good question. And the first answer to that is always balance, right? That’s why we’re not a giant acquisition shop; we never were, and we never will be. However, we did learn some valuable lessons in 2009, ’10, and ’11. And the key takeaway was that additional great property that’s available to us is rare, and the cap rate often does not change, even in turbulent markets. It’s why we need to maintain a business focus and balance that includes all tools—construction, acquisitions, leasing—to ensure our long-term success.

Don, you mentioned tenant negotiating leverage, and specifically you mentioned that TI's could possibly go up. Can you guide us a little deeper into that? It really feels like that’s the variable that does not get a lot of attention.

I completely agree with you. The notion of capital to get deals done is important from our perspective; often, I don't mean to generalize to redevelopments, but when we can get the right tenant in a space that solidifies a shopping center, we are willing to allocate capital to meet that tenant's demands. Those tenants are demanding more today; that’s a big deal. What hasn’t happened is the understanding of how those costs are structured and the contract agreements, which is critical. Just like we treat tenant improvements or even renovation capital, it’s an allocation of capital. While these trends have negative implications for landlords, we are also saying no more. It's important we maintain our scrutiny and be selective about where we allocate that capital. We won't just build something to fill a deal. I don't have specific percentages, but I can tell you there's a clear trend of those asks slowly increasing, and it’s no longer negligible.

Can you update us on the occupancy cost ratios for the tenants you track? How have those trended lately?

I really don’t have that. I think it's the least reliable metric we have. Something less than 1/3 of our tenants report occupancy. The last time we tried to compile an overview, we were around 9%, and I still think that's about where we would be.

One quick question about the Freight Farms venture. I just want to get a little bit of sense of why you made the venture and what you're trying to achieve. What’s the thought process behind it? On a separate note, could you discuss what might be some potential negative surprises at this point? It seems like the business is doing well, and the same-store does not signify that, so what could be a potential negative surprise?

The two questions are very different. Regarding negative surprises, they would be related to macro factors, such as unexpected changes from large companies deciding to close stores overnight. We track overall conditions very well, but the clarity becomes much harder in a changing environment. Our construction costs continue to remain high, but we've managed to keep them relatively controlled. The issues on potential negative surprises truly tie back to the current macro atmosphere. In terms of Freight Farms, I appreciate you asking, because it’s deeper than that. We always look for ways to increase the value of our real estate, and sustainability is part of our organization's mindset. The back end of shopping centers aren’t the most attractive, and we believe there's a sustainable way to use that space. The idea of growing vegetables in containers that restaurants can use helps us foster a sense of community and contributes to that sustainability.

I want to add one point on that. It’s important internally as well. Don has driven a culture that emphasizes this sustainability internally at Federal, which we’re proud of.

As you guys look to refinance the mortgages, I’m curious about the conversations you're having with lenders. Are they different from what you expected? Are lenders providing perspectives that differ from those you might have expected six months ago?

I would say that we’re pretty locked in on refinancing the Plaza El Segundo mortgage, which comes due in August. We have an open prepayment in June, and we’re expecting excellent execution, at around 3.83% for $125 million while getting the right size mortgage. We had a lot of interest from both insurance companies and lending markets, and the lending market remains strong for retail properties. I think we’re about to launch a refinancing for the October maturity soon.

Just so that I understand correctly, there is about a $50 million gap in GAAP between what the balance is on Plaza El Segundo and what the new mortgage will be. How are you planning to fund that?

We’ll be using cash to fill that gap. We have free cash flow projected in the $70 million to $75 million range for the year, as well as some assets under consideration for sale currently.

Thanks, everyone, for joining us this morning. As Dan mentioned, we do have a couple of slots at NAREIT. Please let me know if you're interested in meeting with the team. Have a great day. Goodbye.