Federal Realty Investment Trust. (FRT) — Q2 2017 Transcript

Thank you. Good morning. I'd like to thank everyone for joining us today for Federal Realty's second quarter 2017 earnings conference call. Joining me on the call are Don Wood, Dan Guglielmone, Dawn Becker, Jeff Berkes, Chris Weilminster and Melissa Solis. They'll 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 stated 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. 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 the call and if you have additional questions, please feel free to rejoin the queue. And now, I'd like to turn the call over to Don Wood to begin our discussion of our second quarter results. Don?

Thanks, Leah. Good morning, everyone. Hope you are all enjoying the summer and hopefully have taken a little bit easy this time of year. I assure you we're not. In an industry that's been under siege at least from an equity valuation standpoint for the last six months in particular, we're performing particularly well and not just measured by plugging holes for today, but most importantly, measured by positioning and investing in tomorrow. So here's a list of seven initiatives that we've been up to that will surely position us well. First, our recently announced, and in our view forward-looking, $345 million investment in the partnership of Primestor, a Los Angeles-based operator and developer of retail centers serving the underserved and densely populated Latino communities out west. I'll talk more about that in a bit. Second, the decade-long creation, expansion and improvement of live, work, shop, play communities at Pike & Rose, Assembly Row and Santana Row. Third, the most active core repositioning program in our 55-year history with planning and construction underway in every state where we have a meaningful presence. Fourth, the investment committee approval to move forward with redeveloping and repurposing CocoWalk for approximately $75 million in Greater Miami. Fifth, the $400 million issuance of 10 and 30-year unsecured debt with a weighted average interest rate of 3.6%. Sixth, the sale or near sale of $120 million of real estate as components of Assembly Row and our San Francisco office building at a weighted average low-to-mid forecast. And seventh, a dividend raise for the 50th year in a row, every year since 1967 to $4 a share; the only REIT in any sector to be able to do so and one of the few companies in any business that has done so. By the way, those dividends have grown at a CAGR of 7% over those 50 years. That's pretty amazing. So you take those seven major initiatives, all happening in this retail real estate environment off a base of great quality real estate conservatively capitalized as we report a record earnings quarter of $1.49 per share, beating consensus and beating the prior year by 5%. That's a lot of stuff going on. Much of it is short-term dilutive, but all consistent with our mantra of long-term increased cash flow and value creation. Of course the retail real estate environment remains tricky, but in our experience, it is precisely at times and during situations like this that higher quality real estate puts some distance between itself and lower quality portfolios. Dan's going to do the heavy lifting on this call and discuss the quarter. My remarks will focus on the reporting in the context of those seven initiatives. Digging into the reported FFO per share of $1.49, its comparison to the second quarter of last year and what it means to the rest of the year really requires an understanding of three competing components. First, the accretion that comes from the beginning of the rent starts and the strong leasing that we've been talking about over the past few quarters, along with meaningful contributions from our accretive capital allocations to development and redevelopment. Second, that accretive earnings positivity is somewhat offset by the loss rent from bankruptcies like Sports Authority and proactive property level merchandising. That together contributed over $1.5 million in last year's second quarter and a big fat zero to this year's quarter, hence modestly negative same-store growth excluding redevelopment. But that's only part of the story. Those same spaces that were causing over $1.5 million of dilution this quarter have been re-leased - they're very nearly re-leased to a far stronger tenant with a far better long-term prospect, with new quarterly rental obligations of nearly $2.5 million. Trader Joe's or A.C. Moore at Assembly, Amazon Books for Brooks Brothers at Santana, Burlington for Sports Authority also at Assembly; you get the idea. After considering the capital required to get those deals done, value added exceeds $25 million. The net of those two things, rent starts and new leasing in the core and rent starts in developments and redevelopments, partially offset by old vacancies that have largely been released but are not yet renting are the two primary drivers to our earnings growth this season; both very positive from any real estate-focused point of view. The third component that doesn't impact the quarter but does impact the balance of the year is the delivery of three of our residential developments later in the third quarter and fully in the fourth. Harris at Pike & Rose, Montage at Assembly Row, and our 105-unit project in Towson, Maryland, on excess land that was part of our White Marsh acquisition some years back, will all be turned over to operations from development later this quarter and create the understandable and unavoidable earnings drag common to a partially leased-out building. Leasing has commenced on all three buildings with Pike & Rose pre-leasing starting out strongest; 60 of 272 units are leased already, hitting and beating effectively our pro forma rent with occupancy beginning in September. Followed by Montage here at Assembly; Towson, which just started pre-leasing a couple of weeks ago, 30 units and 20 units respectively. Obviously, despite the dilution in the second half of '17 and '18 the expected value creation in those three buildings alone of over $100 million net of capital makes the short-term hit well worth it. I go through this top-down setup of some of the larger dynamics that affect our reported numbers because in this retail real estate environment it takes a deeper level of analysis to assess the likelihood and extent of future cash flow increases. My comments are meant to make our path here clear and obvious to you. We're getting a lot of leasing done, as Dan will touch on and as our 8-K shows, and our mixed-use developments and shopping center redevelopments are all being done with an eye toward long-term relevance. To be able to report and expect to continue to report cash flow and earnings growth, dividend growth, and most importantly, value creation when looking forward to the next three to five years is a strong testament to the demand that the strong majority of our real estate locations exhibit. As well as the open-mindedness and core competencies that we've developed internally to extract additional value from all the different types of real estate that we own. Now in that vein, we all believe internally that from a macro perspective our country is over-retail, and supply exceeding demand has never been a good formula for creating higher real estate values. That's why we've never been bigger acquirers of commodity-like shopping centers and have basically cherry-picked our portfolio on a one or two off basis over the last 50 years. Now some years back we identified the Latino communities in our largest cities as a place where demographics were improving rather dramatically in terms of education, buying power, and population. But mainstream retail offerings that supported that population were far behind, and those urban population centers were difficult to find land or redevelop even if retailers wanted to compete in them. Our primary obstacles historically in acting on that reality were internal. We didn't have the expertise in-house to build or serve the Latino community, and we couldn't find enough critical massive credit-anchored retail centers to make a difference for a company our size. That changed this year with our newly formed 90-10 joint venture with Primestor, the 25-year-old Los Angeles-based owner and developer of premier retail properties serving the urban Latino customer in Southern California and founded by my fellow ICSC Trustee Arturo Sneider and Leandro Tyberg. We announced the closing of our venture in a separate press release a couple of days ago; check out Primestor's website and our slide deck available on Federal Realty's website that goes through our investment pieces and rationale as well as an in-depth look at the seven properties that will be part of the venture. The portfolio is home to some of the most productive Ross, TJX, and other national retail stores in their respective companies. These are big regional shopping centers averaging about 200,000 square feet and comprising over 100 acres of dense urban land. Jeff Berkes and I are available to answer questions about the prepared remarks and we're just starting to talk about organizing property towards later this year. In anticipation of questions about price and returns on investment approximately $345 million, $325 million now and $20 million to complete the redevelopment of one of the centers over the next two years. We expect the stabilized properties to yield in the low fives and the property under development Olivo at Mission Hills to yield in year six, when complete in 2019. It will be dilutive this year and next until development is complete and rent is commenced at this target center. We believe rents throughout the portfolio are under market as these assets have over time established themselves as dominant regional shopping centers. Certain yield costs that are not capitalizable along with our open financing strategy will limit earnings accretion this year, so please consider that as you update your models. Primestor is right down in the middle of the play for Federal in terms of our most important business principle of owning and developing retail-based real estate properties that have the best chance for long-term cash flow growth and value enhancement. To do that demand has to exceed supply and barriers to entry need to be present to make it difficult for competition to directly change that. This portfolio has those characteristics intact. We'll see - but we also hope to use this platform for future expansion. Now let me turn it over to Dan to talk about the quarter, before opening up the lines for your questions.

Thank you, Don and Leah. And good morning, everyone. Federal had another record quarter for FFO per share in the face of an increasingly challenging retail environment. Our second quarter FFO per share of $1.49 represents a 5% increase over the 2Q 2016 result of $1.42. We had another strong quarter on the leasing front with 432,000 square feet of total leases signed and 398,000 square feet signed on a comparable basis, which drove an average increase of 13% on a cash basis. This represents 18% on new leases and 12% on renewals. On a GAAP basis, we put up a 27% increase. Our same-store NOI grew 3.9%, which was well ahead of our internal forecast. This is impressive in the face of roughly 130 basis points of drag from our value-creating releasing efforts that Don alluded to in his remarks as well as drag from a difficult term fee comparable relative to 2Q 2016. Our overall portfolio stands at 94.5% leased and 93.0% occupied, which is flat with last quarter when you back out the impact of our recent acquisition in Berkeley, California, which is just 55% occupied; more on that later. Please note that the 150 basis points spread between our leased and occupied rates at quarter end highlight leases that have been signed or rented as yet to commence and which should enhance growth over the next 12 months. On the anchor leasing front, we continue to make progress working for our excess vacancy. Of the 730,000 square feet of space we initially highlighted in November of 2016, we are up to 70% leased on that pool with releasing spreads at a positive 37%. The leases that are currently under negotiation will raise that lease percentage to north of 80% in the coming months. To highlight some of the activity, Burlington is taking the former Sports Authority space at Assembly Square in Boston next to Trader Joe's, which opens next week. Target is taking the former Pathmark space in Parsippany, New Jersey, where an $8 million capital improvement plan is underway, and Michaels is taking a portion of the old A&P space in Brick, New Jersey, joining the new lineup which includes DSW and Opra. On the development front, Phase 2's at both Pike & Rose and Assembly Row are in the process of opening this quarter. At Pike & Rose, Rose Avenue and the extension of Grand Park Avenue have opened creating greater vehicular access to the property. REI's flagship has opened, Pinstripes opens this coming weekend and H&M, Sahora, and Sur La Table among others are all set to open later in the third quarter. The 272-unit Henry Residential Building is scheduled to open later this quarter with strong pre-leasing momentum as Don mentioned. The Phase 1 residential units of Palace and PerSei stand at 97% leased and the condos continue to make progress with 34 of 99 under contract and activity picking up meaningfully as we're beginning to get perspective buyers up into the building for hard hat tours. At Assembly Row, the retail openings are in full swing with Colombia Sportswear, Mike's Pastry and the FitRow boutique fitness tenants among others all open. About two-thirds of the projected retail rents are expected to commence by year end. The 447-unit Montage residential building is scheduled to start delivery in September. And on the for-sale front, 97 of 107 market-rate condos are under contract, that's 91% complete, well above our expectations. As a result, this quarter we began recognizing gains on the sale of these condos under the percentage of completion method, and expect that it will begin closing in the first quarter of 2018. Please note that these gains will not be reflected in FFO. Additionally, during the quarter we closed on the sales of the land under both the Partners' office building and the Avalon Bay Phase 1 parcels with total proceeds of $53.4 million, a blended implied NOI yield of 4.25% and a gain in excess of $15 million. At 700 Santana, construction continues on time and on budget for our 284,000 square foot office building. And you will see in our 8-K, CocoWalk has been added to our redevelopment schedule with a projected incremental cost of approximately $73 million to $77 million, a targeted incremental yield in the 6% to 7% range and an expected stabilization in late 2020 or early 2021. We're about to commence redevelopment on the west side of the property and expect to commence demo on the east side of the property in early 2018. On the acquisition front, as Don highlighted earlier, we invested in a roughly 90-10 joint venture with Primestor Development to own a seven-property portfolio totaling 1.3 million square feet located in urban Latino neighborhoods in Los Angeles, California. But we also acquired a 90% interest in a 71,000 square foot retail asset located on Fourth Street in Berkeley, California for $22 million. While this asset is only 55% leased, it is located in one of the Bay Area's premier street retail districts and has significant redevelopment potential over a long-term, which could include other usage. Given the existing vacancy, there will be some modest near-term FFO dilution until we lease up the asset. Now with an update on the balance sheet. In late June we were opportunistic in accessing the unsecured bond market issuing $300 million of 10-year notes at a yield of 3.36% and reopening our 2044 notes to issue $100 million at an effective yield of 4.14%. That's $400 million of debt capital at a blended 3.6% rate with a weighted average maturity of almost 15 years. That issuance lengthened the weighted average maturity of our debt portfolio to a sector-leading 11-plus years and brings our weighted average interest rate to 3.95%. It positions us at quarter end with significant liquidity. As our $800 million credit facility was completely undrawn and with almost $100 million of cash on the balance sheet as well. At quarter end our net-debt-to-EBITDA remained flat at 5.6 times and the fixed charge coverage sits at an extremely healthy 4.4 times. As we move forward, we will continue to manage our balance sheet conservatively looking to operate over the long term with leverage metrics in line with our A-minus rating. As a result, we will access both the debt and the equity markets opportunistically. We also look to take advantage of the continued strong investment sales market for assets of Federal's quality, and selectively step up our asset disposition activity. In addition to the $53-plus million of dispositions completed so far this year, we expect to have up to an additional $70 million to $100 million sold by year end at a blended pricing which will not be dilutive to FFO. Also note, we forecast that we will generate free cash flow after dividend to maintenance capital of roughly $75 million in 2017. With respect to guidance, we are pleased with our outperformance this quarter, beating our internal projections and consensus by a few cents. Please note this outperformance was fairly broad-based with stronger operations forecasted from both a revenue and expense perspective as well as failing retailers having less of an impact on our bottom line than forecasted. Also note that similar to the first quarter, a portion of this outperformance is timing related, with respect to demolition and other operating expenses pushing into the second half of the year. Roughly $0.01 is projected to be given back later this year. As a result, we are increasing our 2017 FFO guidance to $5.86 to $5.94 increasing both ends of the range by $0.01. Additional considerations going into that upward revision are, one, the acceleration of our unsecured debt issuance relative to our forecasted timing of November, plus the fact we raised $100 million more than our forecast will be dilutive by almost $0.01 for the balance of the year. Secondly, we do not expect our recent acquisition activity Primestor and Fourth Street in Berkeley combined to be added to FFO for the balance of 2017 due to deal costs over expense on Primestor and the initial dilution from the Fourth Street purchase. As it relates to same-store, given another strong quarter, we are slightly modifying our expectations for same-store growth in 2017 from about 3% to 3% or better. As you know, this guidance includes redevelopment as this is the way we run our business with redevelopment being a critical and integral part of our operating and investment approach. Please note that we continue to contemplate and refine a revised approach to same-store reporting and we will update you on this effort in the coming quarters. Before we go to Q&A, as I come upon my first anniversary at Federal, like I have done on past calls, I would like to share with you another observation I've made about Federal in what will be the final installment of this series. And that relates to the strength and the breadth of Federal's diversification, which is key to our balanced business strategy. Whether there's diversification by tenant or no tenant that is greater than 3% of total revenues or by retail format, where we are essentially retail format agnostic with the exception of closed malls or by market; where we operate in nine of the top MSAs in the U.S. Our diversification by tenant category, however, is something I would like to emphasize further, as managing our exposure to various segments is also central to our strategy. Federal's largest tenant categories by revenue are through discount apparel at 9%, full-service restaurants at 9%, full-priced apparel at only 9%, grocery stands at just 8%; fitness, health and beauty at 8%, office at 8%, residential at 7%, which is heading higher as we deliver Phase 2s at Assembly and Pike & Rose. Home furnishings at 7%, entertainment at 6%, limited-service restaurants at 4%, all the other categories totaled 24% with no single category accounting for more than 3%. Balance in our approach has always been a keystone of Federal's business strategy, whether it's related to capital allocation, balance sheet management, operational initiatives as well as merchandising and tenant exposure. This focus on balance has resulted in Federal not having significant revenue exposure to any one tenant category and positions us to outperform as we approach a more difficult and challenging retail environment moving forward. And with that operator, we can open up the line for questions.

Okay, thank you. I guess just big picture. Given many of the changes in the retail real estate environment a concern I often hear is that it can be expensive to accommodate these changes, and I guess, the question is are you seeing the revenues or the rents paid in the position to make these shifts profitable?

Yes. That's a good question, Craig, and it's something we're on all the time. There is no doubt that leverage has moved to tenants as we talked to before from landlords. There is also no doubt that we don't do deals - we don't need to do deals effectively that are - that don't make sense in and of themselves, and that's a really important part. When you look at the value creation that we've got, there is no doubt that even though there is more capital going out selectively, because we're not going to invest capital where we don't believe that income stream is going to be sustainable or maintained. And I will tell you - let me give you one great example. When you look at our numbers this quarter, you'll see that - you'll see a renewal that has a lot of capital in it. That is one specific deal on Greenwich Avenue in Greenwich, Connecticut for our completely redone and extended lease term with better credit that we were able to enhance in terms of the deal that allowed us to put capital in a completely redone facts or looking to do that. We won't do that until obviously it's been supported and it works in terms of the agreement that we have. But would we invest on Greenwich Avenue in Connecticut to be able to lock down that location for the next 20 years? You bet we will. That's different than just saying an overall comment that you're going to throw capital at deals - to make deals, because if you do that those deals often don't work. So the selectivity in terms of where it's being spent during this comes - certainly a change in the - in consumer buying habits has to be selectively applied. With great real estate, you've got more choices to do or not do it. Without that great real estate, it's harder and I believe that's really true. I'm sorry for the long-winded answer but I hope that helps.

And just to change it a little on the Primestor operations, the densities that you're going to be dealing with, will they be in line or even higher than your portfolio today?

They'll be higher than the portfolio today.

Good morning. So first question is just going to be the Primestor. Can you just walk us through a bit on the sales productivity, the rent upside? And then when you guys are working with Primestor how the relationship is? The press release indicates they're managing it with you guys on the investment committee, but obviously you guys have a lot of capacity on your own. So how you're going to share that responsibility of managing plus the redevelopment?

You bet, Alex, and make sure you're calling it Primestor, not star. But Jeff Berkes is on the call and I want to make sure that he takes the first shot at this.

Yes. Alex, let's talk about the second part of your question first and how we're going to run this JV. So as is the case in most JVs, you have an operating partner and a capital partner and that's generally how this would set up. And as you pointed out, we're pretty good operators at shopping centers ourselves. So we've worked something out with Primestor where they're going to be doing management, leasing, development, and redevelopment services, and Federal is going to be handling lease documentation and accounting. So that's what the document says. All major decisions have to be approved by the partners and there's perimeters around what those major decisions are, right. That's a pretty traditional setup in a joint venture of this nature. Practically speaking, I think we are going to fit together kind of hand in glove, whether it's me and Arturo on big picture strategic and investment decisions, Juan Felipe and his asset management team with Primestor's asset manager Elena Chavez, Jeff Kreshek with their leasing person, Seth Bland with their development team. So that's the crew of executives out here at Federal and will be meshing directly with our counterparts at Primestor. And it's going to be a very interactive relationship. It's not going to be a situation where like a typical maybe institutional capital partner talks to their partner once a month or once a quarter and gets some reports and makes a couple of decisions and moves on. We expect this to be a very, very active dialogue back and forth between the two of us. So does that cover you on the second part of your question?

Yes. But the first part, Jeff, is on the sales productivity I assume it's typical higher than average and then also what that translates to as far as rent upside.

Yes. I mean if you step back and look at everything big picture, there's a couple of things you need to keep in mind. First is, Primestor was or is the leader of developing high-quality retail space in the types of trade areas that Don mentioned in his remarks, which are very densely populated. To your question, the population density within three miles of a Primestor center is north of 300,000 and the Federal center is a little bit less than half of that. So significantly more dense than our portfolio on average.

And Alex what they had to do to get this going is develop a story for the mainstream retailers, and if you look on Page 10 of the slide deck that we posted on our website, their top 10 retailers are listed in there. The same retailers that you would see in our centers, right? And they started doing this literally 25 years ago but in this portfolio a solid 10 to 15 years ago. So the retailers that came into these centers got first-mover advantage in terms of rents. And if you look at the box rents in the portfolio, the ABR is only 15 and if you look at the overall lands in the portfolio, it's only 21. And I would say two a box, every box in the portfolio is below market and below market by a pretty good margin. The most recent leases that were done at the redevelopment, two of them start with the two and one of them starts with the three. So that will give you a benchmark as to the spread between the in-place box rents and the market rents in these concentrated areas today, and it's significant. Sales productivity, unfortunately, like our portfolio, it's not like a mall portfolio where you have 85%, 90% of the tenants reporting. I think 35%, 40% of Primestor's tenants report. And when we look at those volumes and match them up to the volumes for the same tenant in our portfolio, that's a very, very good matchup and when you look at the occupancy cost ratios and consider my first comment about where the rents are, the occupancy cost ratios, particularly for the anchors and junior anchors are very favorable. We're talking low-to-mid single digits. So does that help?

Yes, that helps. And then just quickly just following up, and then I'll get back in queue. You guys - are you guys paying any management fees to Primestor or is that all part of the cap rate?

No, we're paying a property management fee. And that's typical in a setup like this. Just like we got paid property management fees as part of our joint venture with Clairon that we formed in 2004 and dissolved in the last couple of years. The operating partner just paid management leasing fees.

Okay. Thank you very much.

Good morning and thanks for taking the questions. Dan, you mentioned the prospect of additional asset sales by year end. Federal has not historically been a seller of assets and with the stock at I guess an NAV discount. But the appetite for high-quality product is still pretty robust. Have you guys considered using dispositions as an even larger funding source for your development pipeline or asset purchases in lieu of common equity?

Yes. Now I think it's something that certainly we've stepped up this activity this year. I think this year we expect to achieve the total asset sales we've made over the last five years. We are still constrained by the fact that we have significant gains embedded in our assets, so that gives us a little bit of limitation on how much we can step up that activity without kind of using 1031s to mitigate those gains. However, this year, I think we expect to - we have one asset under contract we expect to close as Don alluded to. We've got…

On that contract, just to be clear to Dan's point, Jeff, that's because we bought River Point earlier in the year. We're able to 1031 into this. So we have a huge gain to the extent this property closes which we expected to. So we are limited by that in terms of creating cash beyond this. But there are some cases that we can cover it and that's what we're working through.

I guess as a follow-up. Are there any lack of a better term sacred cows in your portfolio? I mean do you see opportunities to dispose of some assets that might frankly be trophy quality but are fairly low growth and I guess I’m wondering can your 2018 disposition potential exceed what you're planning to do in '17?

It's a great question, Jeff. There are absolutely no sacred cows in this portfolio. But what we do believe, I mean this is a handpicked portfolio, one off. And so when it comes to - I hate using the word trophy. But to the extent we've built something or created something which we believe is the future, which is a real big part of what you should be thinking about, right, 2022 instead of 2012 out there. We believe in the long-term growth of those assets. It's not because they're sacred cows, it's because we love them; it's because of the future potential on them. So I hope that helps.

Hey, good morning. Just a follow-up on Jeff's question in regard to asset sales, the $54 million plus another $70 million to $100 million of sales that helps you keep Primestor at an almost leverage-neutral basis, it doesn't get you all the way there. How are you thinking about leverage given all the irons in the fire you have in the redevelopment side as well? And just to clarify in the $70 million to $100 million maybe some more color on what you're planning to sell on timing?

Well, I think the $70 million to $100 million is inclusive of the West Coast office building that Don alluded to, and we've got another asset or two that are in the market and in the queue. But with regards to - I alluded to it in my remarks. I think we positioned the balance sheet to allow us to be opportunistic with additional issuance of debt and equity. Be opportunistic on the asset sale front, utilize the free cash flow that we'd continue to increase and generate in our business. And the A minus rating affords us other opportunities to tap into the capital markets. We'll be opportunistic but we think we've positioned the balance sheet to absorb Primestor very, very comfortably.

Christy, the only thing I would add to that is, if you look at our track record, this whole notion of balance where it's so critical to who we are. So we do equity we don't do big amounts of equity. We do debt deals, a big source of debt in relation to the overall market and even on the asset sales for other reasons. We try to use all the tools in the toolbox here. So it's all on the table of course, as we run our business plan including finishing out the Phase 2s of these assets. But you shouldn't expect to see anything that makes us say, oh my god, well - crazily diluted or anything. The choices that we make are balanced, it's just critical to what we do.

Got it. And then just Dan, you might have then used 3% or better forecast for same store NOI growth, how should we take that? I think you were previously expecting a deceleration in the second half, has that changed now? How should we think about the trajectory there? And how much of this Splunk lease is really contributing to the growth rate?

Yes. No, I think that given in combination with a lot of the proactive releasing activity that is a drag on our portfolio, I think that we will see some deceleration in the second half of the year, but we still feel comfortable that we'll exceed that 3.0% number. And Splunk, over the course of the year, is kind of in that the ballpark of about 200 basis points. But we fully - if you think about the drag that we have of about a 130 basis points on our proactive releasing efforts relative to last year, I think that we felt comfortable, given the first half performance on the same-store basis to provide a little bit of increased and modified expectation of 3% or better.

Christy, I want to add one thing if I can about Splunk. It's important. It's hard if you think about all the irons in the fire and the office stuff that we do, the residential stuff that we do, all the proactive redevelopment. It's hard to kind of put a matrix up and have Federal's numbers on an apples-to-apples basis with every other shopping center company that's out there. You know I don't believe in it in terms of how we look at the overall module on same-store. But Splunk, the ability to put - you guys, our investors gave us $112 million that we put to work at a nine, and we put that to work here at Santana Row because of all the decade and a half of work that created the environment in the first place to allow that to happen. So I never want to sound or feel anyway apologetic for that investment - actually the investments that we make, and that it's at a stabilized property of ours. And I just want to make sure that when you look at Federal in total it doesn't fit the box exactly of a shopping - a grocery and a shopping center company which we're offering compared to. It sure checks every box in terms of growing cash flow and value creation. That's the only point I want to make.

Great. Thanks, Don.

Hi, and good morning. About the Primestor acquisition and to say that's part of your strategy, I mean how specific is this to the opportunity that you sourced and how would you consider expanding that type of focus in terms of your investments to the rest of Coastal California or South Florida or other markets that have kind of similar markets where there might - those opportunities might exist for you?

That's a great question, Paul, and let me put it in this context. Our job is to on a risk-adjusted basis make investment decisions that give us the best chance to create an increasing stream of cash flow and value creation. And when it comes to thinking about 2022 and not 2012 and you think about the fact that there's a lot of retail in this country that, mind you, is obsolete in terms of where we are going, not today, where we are going. And when you sit and think about that with a community that has basically 6.5 square feet of retail space per capita and a ridiculously low number compared to everywhere else in the United States, it's pretty clear to us that the serving of those customers is behind the income generation and the population growth and the education increase that have happened within that population. So sure, we love that. In fact, as I said in my prepared remarks, I wanted to do this in Miami six or seven or eight years ago. We just couldn't find - first of all, we didn't have the expertise and second of all, we couldn't find enough critical mass. The fact that Primestor has been doing it and getting it to this point over its period of time, and that we can have this relationship with them is really important to the future. When you think about the high-end mixed-use stuff that we have on one side of the company and that's 25% or 30% of the company or so, this part in terms of demographics and density is so important to us on the other side and growing. Yes, I certainly hope we can use this as a platform to increase first in Southern California and then over time we'll see about other markets. But there's clearly more to do in Southern California.

Great thanks. And then to my other question, Dan you mentioned going from, I think, it was 70% to over 80% soon in terms of the 730,000 square feet of anchor space. And I was wondering if you could give me an update about kind of the cadence of those openings and how much will kind of hit in the fourth quarter versus various points in '18 and into '19?

Yes. That schedule that we've been handing out does exactly that and it does do exactly that. And actually I'm just buying time for Dan to get that out in front of him. So you can get a pretty good idea as Daniel, if he can layout just in rough numbers how much in balance of '17, how much in '18 and then '19. '19 on those deals - yields are when do you've got most of it in there. But it will be coming up rather strongly through the second half of '18 and that's probably the deal - is the second half of '18 deal, for example, at Assembly.

Yes. And just to go on and in terms of - I think we had talked previously that we would expect kind of the balance of the leasing and the lease rollover on the latter half of the pool of leasing to be done to be lower than the first half. The first 70% was done at 37%. We still expect the lease rollover to be north of 20% on the balance of this based on what we're looking at, and kind of a handful of deals that we expect to sign over the next quarter or two that won't start producing until and rent commencements until later in the year in 2018. We would expect that in the balance of '17 roughly 35% of the prior rent would hit go up to 66% in total for 2018 and then hit a run rate and hit a kind of more stabilized level in 2019.

So those newer deals are more consistent with that kind of 20% range than what you've done in…?

It's probably, yes, more kind of in a - on a blended basis call it in the mid-20s as opposed to kind of what we had talked about 15% to 20% previously. So we continue to see on our anchor releasing strong productivity for that pool of 730,000 square feet that we talked about last November.

Great thanks.

Thanks. Good morning, everyone. So going back to Primestor, I think you guys mentioned that this might be your vehicle to do more deals and it is a vehicle, right, versus wholly-owned on the balance sheet. So I'm just curious why would you choose to use this vehicle versus wholly-owned, and if there is also a promote going back to the GP?

Yes. Let me start and then Jeff, please feel free to join in. Look, all the conversations that we've had on this call so far do talk about how it is that we can best execute on a principal that we believe in. The principal that we believe in is clear. Demand exceeding supply in those markets. Now you have to ask how you go get it done, what's the best way to get it done, and we have - personally, we've had little success previously to this and - as I said in Miami, where this was the specific thing that we've been looking at. And frankly, and let me just jump in for a second, Art Coppola is a great guy to talk to about this at Macerich, I know you're jumping on his call later. Ask him what he thinks about this strategy. Because the issue has always been how to execute under this strategy and to be able to take the work that was done for basically two decades in this space by folks that understand their customer way better than we do. It makes it such a risk reducer from a Federal Realty perspective to have a near 90% interest in these real estates - but more importantly this real estate; but mostly to have a partner. Primestor is a real company, I mean there's 30-35 people of that company who are out there every day working at this. We can't duplicate that on our own. And so if you believe you've got something or you've found something where demand exceeds supply, and I challenge most of the stuff you're talking about in our business over the next five years to give you comfort that demand will exceed supply. This one is the easiest to do that. And so the execution of it this way gives us the best choice. Jeff, you want to add anything to that?

Yes, I mean just following up a little bit Don on what you said. Keep in mind that, like Don said, Primestor is not two or three guys and a New York office that just happened to have a few assets and needed some capital, right. They've been around since 1992, 25 years. 30 to 35 people, and they have a material investment in our joint venture going forward. They are committed, as are we, to growing and expanding this strategy in the Latino community in Southern California and hopefully beyond that and other markets where we operate, provided we're able to find the kind of trade areas like we have here in Southern California where demand exceeds supply. That's what it's all about, that's what we intend to do. And it's important to know that because a lot of times when you hear about joint ventures where a REIT or some other institution is coming in with an operating partner, the operating partner is just that. It's a handful of people that don't really have a real investment in the deal and that don't have the unique skill set and Primestor certainly does. This is not something that really we or anybody else that's like us could go and do. It's taken them years to develop relationships with the communities that they operate in and the tenants to help the tenants understand that they can come into these centers and be very productive and make money and that's very valuable. And without them…

And how much is left at Primestor that you would be interested in buying or is there other California land they own that would be development opportunities, and I'm also just wondering if you have any source of rights of first offer on any future properties Primestor is looking to sell?

Yes, to take the last part of the question first. We definitely have priority on new investments; again, that's a pretty typical feature in any joint venture. In terms of what they have in the portfolio right now that didn't come along with us, I think for the most part we got license that we got - we were able to invest in what we wanted to invest in.

Great, thanks guys. I wanted to follow up on the comment Dan made about the way that your tenant base is mixed up or mixed I should say not mixed up, and how that - how has that changed over the last five years? Have you seen increases in food and entertainment for example, and decreases in apparel? I'd be curious to get your take on that obviously. The malls are rapidly changing as well.

It's a great question, Floris. I mean look, the idea of our overall investments in our properties and what we're trying to do to make them as relevant - and that is such a word, man, that's the word, relevant five years from now. We kind of - everything we do is look forward five and look back five. When you think about the difference between back five and 2012 in terms of where the prospects for the future are and forward five to 2022, they're very different. So obviously we want to use retail. But the reason we use retail as the centerpiece is because that is how we get gatherings of human beings to experience life. So whether that is in a grocery-anchored shopping center that is in very most of our cases the best center in that market or whether it's a big mixed-use project or whether it's in a Primestor asset frankly, what we are talking about is the merchandising that is going to be sustainable and relevant five years from now. So you bet, you've obviously seen because of the mixed-use form of our business, the increase in our residential income stream and the increase in our office rent income stream. So that starts out as 15% of our income stream between the two at this point, and yes, that continues to grow. But you do see additions to entertainment, the right type of food uses, there hasn't been an increase in our grocery business in any significant way. There's been redevelopment and bettering of the ones that are there, there's been investments that way, but not in the overall income stream. That is 8% that has been about 8% more before we had the residential and the office component throughout the company obviously. And when you get down to health and beauty, there is no question. We've made the specific effort to increase health and beauty and fitness as a component. And it all ties into where we see the world going in 2022 in the particular markets that we're in. So I hope that helps.

Thanks, Don. Appreciate it.

Hey guys just two quick follow ups. One, I think Dan, you had said that the drag on same-store NOI in the quarter was about a 150 basis points from the managed vacancy. Is that a similar pace that you maybe expect in Q3 and Q4 this year?

Yes. And I think it should - it may moderate a little bit as some of the proactive releasing of tenants take occupancy and start rent pay. So it should stay healthy but it should moderate as Trader Joe's is opening here at Assembly, kind of this month, and so we would expect obviously that would reduce the amount of drag for the third quarter. But it still will impact kind of the balance of the year generally, but it should kind of diminish over the third quarter and further on the fourth quarter as tenants open.

And on CocoWalk, I'm just curious as you move towards I guess the demolition work at that property, how should we think about maybe the dilution that could hit FFO in 2018 from that?

Yes. It's a real good question. I'm looking at over a bit. I want to make sure that doesn't get lost. I don't want everybody to supply numbers because we do have dilutive value creation of things. The demolition will basically be done in the first quarter of 2018; that goes right to the P&L. Number, rough, pick a number out of your head. I'm looking at - there's all kinds of things happening. I mean that's $0.015. So that's the start. That doesn't include the fact that tenants that were paying rent will no longer be paying rent while we work it through. So that's - I don't know if you want to use two cents on that enough, but you got two cents sometime certainly in that on CocoWalk in 2018.

Thanks, guys.

Thanks for joining us today. Have a great rest of summer and we look forward to seeing you this fall. Goodbye.