Federal Realty Investment Trust. (FRT) — Q3 2018 Transcript

Good morning, I would like to thank everyone for joining us today for Federal Realty’s third quarter 2018 earnings conference call. Joining me on the call are Don Wood, Dan Guglielmone, Jeff Berkes, Dawn Becker, and Melissa Solis. They will be available to take your questions at the conclusion of our prepared remarks. I’d like to remind everyone that certain matters 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 that expectations reflected in such forward-looking statements are based on reasonable assumptions, Federal Realty’s future operations and its actual performance may differ materially from the information in our forward-looking statements, and we can give no assurance that these expectations can be attained. The earnings release and supplemental reporting package that we issued yesterday, our annual report filed on Form 10-K and our other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial condition and results of operations. These documents are available on our website. And with that, I will turn the call over to Don Wood to begin our discussion of our third quarter results. Don?

Thank you, Leah. Good morning, everybody. At $1.58 a share in the third quarter, we generated more funds from operations in a 90-day period than we have ever had in our 56-year history. On an absolute basis, this was simply the best quarter we’ve ever had. More than 5% ahead of last year's quarter, and in excess of both the streets and our internal expectations, contributions came from all parts of our business and on both coasts. Overall rental income grew 5.5% quarter-over-quarter. Earnings growth at comparable properties was particularly strong at 3.5%. The comparable portfolio remains 95% leased and 94% occupied, and operating expenses including G&A, but not including real estate taxes, actually fell slightly quarter-over-quarter despite $12 million more in revenue; real estate taxes, it seems, never go down. The only metric that was underwhelming for us on the surface was comparable retail lease rollover growth at 6%. For the 90-day comparable, 90 comparable deals were 448,000 square feet with an average rent of $38.31 per foot, which is 6% above the $36.22 that the previous tenant was paying in the last year of the lease. Not bad, but it’s not what you’re used to seeing. So let’s take a deeper look by breaking down the overall results: Space leased to new tenants grew at 13% with the previous tenant, while renewals of existing tenants grew at only 2%. That’s the combined 6% rollover. The detail supporting this 2% renewal rollover rate revealed that more than half of the renewal rent came from just two deals, both of whom renewed flat to the prior year's rent, which therefore depressed the reported percentage increase. A strong credit anchor at East Bay Bridge in Emeryville, California, and the Best Buy building at Santana Row. Many of you who are familiar with our portfolio know both of those properties well. So let me spend a minute on the transactions behind the summarized metrics to hopefully help interpret what they mean. So consider this: Rent in the East Bay Bridge anchor lease has been increasing annually at 3% since its inception in 1995 through 2009 and 3.5% annually since 2009. I don’t know of any big anchor deals that have those kinds of embedded annual bumps in them. Most are flat for five or 10 years and then bump 10% or so. Run the math, those are very different economics. So we decided to renew it flat to the grown prior year rent, and from here it will continue to grow at 3.5% annually for the option period. By the way, no tenant improvement dollars from us. Given typical anchor lease tenants, this new rent would equate to a huge bump over the old rent, and our rollover statistics would have reflected double-digit growth, yet we’d be far worse off economically. The strengthening location of the lease terms from the very strong productivity of the store allowed us to get paid millions more in rent along the way; deal terms matter. Next, rent paid by the anchor at the hard corner of Steven's Creek and Winchester Boulevard at Santana Row has more than paid for the construction of the building they occupy by the time the initial terminal lease expired in 2014 and with the exercise of their first option back then, has paid to the building more than twice over. The exercise of their second five-year option came in this quarter at the same rent despite significant supply coming online at Valley Fair across the street, and again no TI dollars paid by us. The real estate economics here are incredibly compelling despite negatively impacting the rollover metric. I go through those two leases at the peak of it because digging behind any and all the reported metrics is increasingly important as all of our businesses get more complicated and harder to compare. But at the end of the day, it comes down to FFO per share growth. We’re particularly proud of the consistency and sustainability of that earnings growth year in and year out, no excuses. It’s widely known that we have worked as hard as we have to diversify our revenue streams and why we are using our existing real estate platforms to create real estate value for redevelopment and intensification on both coasts. The focal point is the exploitation of our superior locations and cash flow streams through the lens of broad real estate perspectives. And this isn’t just about our big mixed-use projects, because it applies to our core shopping centers too. For example, you’ll see that we’ve added to our 8-K redevelopment schedule this quarter a $23 million, 87-unit residential project at Bala Cynwyd shopping center on Cityline Avenue just outside of Philadelphia. This will be our seventh residential project developed internally by our team to intensify one of our core shopping centers. The others being two with Congressional Plaza, Winwood Shopping Center, Chelsea Commons, and London Square with more on the horizon. In terms of Bala Cynwyd, we would expect this residential project to be just the first step of what will hopefully be an ambitious redevelopment there. A great example of how we continue to find ways to extract real estate value in so much of our portfolio. Now let me update you on our largest initiatives. With the 765-unit residential neighborhood in Pike & Rose fully 95% occupied and stabilized. In the 375,000 square feet of restaurant and retail space nearly fully leased but not yet fully open and rent paying until later in 2019, we are ready to move forward with the next phase; a 212,000 square foot Class A spec office building with about 4,000 feet of retail on the ground floor along with a 600-space parking garage that will be used by both office and retail users. The 11-story Glass Curtain Wall building addressed as 909 Rose, will sit on the hard corner of our Pike & Rose Avenue, literally Pike & Rose, and is expected to begin occupancy in 2021. Our investment will be approximately $130 million with an expected stabilized yield between 6 to 7%. Separately, we’re assessing the viability of relocating federal territories into two of the 11 stories, approximately 40,000 square feet of the building. Doing so would validate our belief in the advantages of these mixed-use neighborhoods in general and certainly more specifically. At Assembly Row, we’re now 95% leased at the 447-unit Montage, significantly ahead of schedule with net effective rents of nearly $3.40 per foot. And like our residential experience here, the row hotel of which we own a 50% equity stake opened in August at Assembly and is simply following a similar track. Rates and occupancy are strong right out of the gate, a trend that we hope will continue to the fourth quarter and into 2019. The market's exuberant acceptance of all things Assembly Row has accelerated our plans for future development of additional residential and office products at two of the five remaining development parcels there. We’re hopeful that we will be able to announce the next large phase development at Assembly in a quarter, possibly two. Out west, the third quarter saw software giant Splunk sign a lease for the full 300,000 feet of office space at 700 Santana Row, with occupancy expected about a year from now. If you get a chance to be anywhere near San Jose, be sure to visit Santana Row and feel how the end of the street has been transformed with the construction of this gorgeous building and energized Plaza area below us. We expect to complete this phase of development on or slightly better than budget from a cost perspective and ahead from an income and timing perspective. The enduring strength of Silicon Valley in general and Santana Row specifically, not unlike Boston in Assembly Row, has us nearing a decision to potentially move forward with additional office development at Santana West, the 12-acre parcel on Winchester Boulevard across from Santana Row that we have controlled for the past several years. Pending investment decisions due to its proximity to amenity-rich Santana has been very high, leading us to accelerate our master planning of that site, so stay tuned. In Miami, demolition in CocoWalk is largely complete, and construction begins in earnest this quarter. You'll note a slight increase in expected costs of the project to reflect in the 8-K, as a result of a bit of increased scope and a bit of cost that were not expected to impact projected yields noticeably. Both our retail and office leasing teams are finding strong interest, and we expect to start reporting signed deals beginning next quarter. A few miles away at Sunset Place, we received good news in the quarter as voters approved a ballot measure amending the city charter. So, a four out of five vote of the commission rather than a unanimous one would be sufficient to relax the land use code in the district that includes Sunset Place. We’re working through the entitlement process now to increase the density on the site. Many obstacles remain in the way of our moving forward with a viable project there, but we'll see. And that’s about it from my prepared remarks for the quarter. It’s a really good one that we hope to follow with another and another. And then I’ll turn it over to Dan for some additional color and then open the lines to your questions.

Thank you, Don, and hello, everyone. Our $1.58 per share of FFO for the quarter was $0.07 above our expectations and $0.03 above consensus. This outperformance was driven by higher POI through more rent and forecasts and continued expense controls at the property level. Higher termination fees than we had forecast, as well as lower G&A, but once again offset by the drag of early ramp-up at our two new hotels with Pike & Rose and Assembly, the latter of which just opened midway through the quarter. Our comparable POI metric was 3.5%, which bested our forecasts as a result of the items I just mentioned. You probably remember from our last call, we had expected this quarter to be the weakest of the year. Our continued proactive releasing activity this year provided a drag of 110 basis points. Although this was partially offset by the benefit of our 2017 proactive releasing efforts. Our better-than-expected termination fees enhanced the results by roughly 1%. As a reference, our former metric same-store with redevelopment came in at 3.4%. Don discussed in detail our lease roll-over number for the quarter at 6%. But please note that on a trailing third-quarter basis, our roll-over stands at a solid 12% in double digits and in line with 2016 and 2017 levels. And to reemphasize, let’s remember this is real estate, where true value creation should be measured over 3 to 5 to 10-year horizon. Let’s not get overly focused on any one quarter's or even any one year's metrics. With respect to occupancy of a strong momentum in the second quarter, our overall lease and occupied figures were 94.8 and 93.7 respectively, essentially flat to down slightly, but consistent with previous comparable quarters. New leases of note include industry on Third Street in St. Monica, Four Good a show at Pike & Rose in North Bethesda. New openings of note include Uniqlo with its Montgomery County flagship location at Pike & Rose, LA Fitness at Del Mar, and Boka and TJ Maxx at West Gate in San Jose. With departures from our one Toys R Us box, which is already released but not open, and our one Bon Ton box weighing on the metrics. Also, when you’re next in DC, please check out the new Anthropologie flagship location at Bethesda Row that opened earlier this month; it’s truly impressive. With the stronger-than-expected quarter, we are again in a position to raise our FFO guidance, increasing and tightening the range from $6.13 to $6.23 to a range of $6.18 to $6.24 per share. That represents a $0.03 increase at the midpoint from $6.18 to $6.21. At $6.21, this implies FFO growth for 2018 just above 5%. A testament to the continued consistency that Federal Realty has demonstrated over its long history, even through challenging retail and economic environments. With respect to our comparable PIO metric, we are also revising our outlook higher from about 3% to the mid-3% range driven by another strong quarter of 3.5% to go along with the 3.8% and 3.6% we had in the first two quarters of the year. Now, on to some preliminary goal posts for 2019. We are still in the midst of our 2019 budgeting process, so I’m going to keep this very directional in nature. We expect to grow in 2019 in line with the past couple of years despite continued industry headwinds due to a changing consumer and a general oversupply of retail space in the US. We will also face some company-specific headwinds next year. First, our G&A will grow into 2019, with more detail on that on our next call. Second, we will have drag on FFO as we refinance our $275 million term loan, which had been locked at 2.62% since its 2011 origination. Lastly, the negative impact from the new lease accounting standard is estimated at $0.07 to $0.10, which I mentioned on our last call, and that is reflected in these preliminary 2019 numbers. Despite these headwinds, we expect to have a solid base of growth of roughly $0.15 a share, which should get us into the mid-630s as a lower end of the range. It is still too early in our forecast process to predict how much higher we can push the upper end of the guidance range; however, given the diversity of our cash flow streams and the number of different avenues that we can grow through, I would expect an appropriate target for 2019 is to achieve growth consistent with what we have realized in 2017 and 2018, which implies high 640s as an upper end of the range. As I just mentioned, this takes into consideration the negative impact from the new lease accounting standard of $0.07 to $0.10 drag of roughly 1% to 1.5%, and that’s an estimate that we continue to refine. Note that on an apples-to-apples basis, for 2018 FFO adjusted for the new lease accounting standard, this implies growth in excess of roughly 4% to 6%. Again, this is preliminary and as we did last year, we will be providing formal guidance on our fourth quarter call in February, where we will refine these targets and provide details on submissions behind it. Now on to the balance sheet, which continues to improve and is very well positioned from a capital perspective as we head into the next phases of new development in the coming years. We continue to make progress on the condos, having already completed 107 market-rate units at Assembly Row. At Pike & Rose, we are roughly 70% complete and close on a contract basis on almost 99 units, with only roughly $20 million left to go. During the quarter, we closed on the sale of a small non-core asset and are under contract and post-closing on another before year-end for a total of $42 million in gross proceeds. These two sales were executed at a blended mid-5s cap rate. We also closed on a 50% joint venture interest with our JV operating partner for the new Row Hotel at Assembly, generating $38 million of proceeds to us. As a result, our credit metrics continue to improve, our net debt to EBITDA ratio moving lower to 5.4 times for the third quarter, down from 5.9 at the start of 2018, and our fixed charge coverage ratio edging higher to 4.3 times versus 3.9 at the start of the year. The weighted average maturity of our debt remains above 10 years, and we are on pace to generate roughly $80 million of free cash flow after dividends and maintenance capital. We expect these credit metrics to continue to trend in a positive direction through the balance of 2018 and into 2019 as we raise additional capital cost-effectively through opportunistic asset sales. We currently have roughly another $125 million of non-core, tax-efficient sale prospects in the market, which we target to close over the coming quarters. With that, operator, you can open up the line for questions.

Thank you, good morning. Dan, just going back to the goal post for 2019. When you are talking about growth in line with the past several years, was that referring to FFO growth, or is that also same-store comparable NOI growth?

Yes, generally it’s FFO that I was referencing there. We’re not providing any same-store guidance at this point and probably won't until our February call, similar to what we did last year.

Okay, and the second question is just on the releasing spreads, and Don, you gave a lot of info there. I guess the question is whether you have more of those types of leases which those escalations, sounds pretty attractive; that’s one part. And then separately, maybe we can get a preview of how you expect the releasing spreads to work next year. I know they’ve been volatile, you highlighted that they could come down. Any numbers you could share there?

Let me frame it, Nick, this way. First of all, those two leases; I think normally I wouldn’t break out a couple of leases and give you that kind of specifics on it, but that is just so economically compelling that I felt the need to do that. Now, do we have lots of big anchor boxes that have those kinds of bumps? No, those kind of bumps, I don't know if there are any others, to tell you the truth. I mean they are, that’s really unusual, but the only reason that happens is because of the productivity of the store and the strength in the market, the strength in the location. The reason I talk about things like this is because you probably get sick of me saying those contracts are business contracts, and those contracts are just critical in terms of what they say to determine the value of the real estate that's underlying it. And when you have deals like that, I’m sure there are other people on this call saying wow because they don’t have deals like that of that kind of significance. Now generally, every quarter, there is something that as you know I like to highlight or talk about that builds the case for the value of the real estate. There’s no doubt that overall pushing rents is an issue industry-wide because supply exceeds demand in terms of retail rents—it's a key reason that we look hard at office and residential as a big part of our business plan. Once you create the overall environment on the ground floor, it’s awfully nice to be able to capture real estate value by being able to do the right merchandising downstairs, you’re going to get paid for it upstairs in the form of higher residential or higher office rents. So how much we believe in that? Alternatively, in addition to that, it really does come down to the leverage of each of the individual shopping centers that we have and we own good ones. So, do I expect there to be the next year or two to be years of 20%, 22%, and 24% rent low little bumps? No, I don’t. Do I expect us still to be able to do double-digit rent bumps? Yes. I don’t see why not; that doesn’t mean any particular 90 days, but certainly when we look at our loss to lease overall on this portfolio, and I love the slide that we do in our deck that shows what leases have been done at versus what the in-place is, it sure shows you that compared to almost anybody else, there’s a whole lot of upside left there. But that doesn’t mean across the board and everywhere, that gets tougher. I hope that helps.

So two questions. First, Dan, you mentioned the $125 million of dispositions that are in the pipeline. I’m not sure if that’s sort of guidance for full-year dispositions for 2019 or not. But can you just sort of give a breakout? How much of that are sort of, I’ll call, free assets like condos, things like that, that have no NOI impact versus how much of that will there be an NOI impact from?

I mean, I think the $125 million is just what we have and probably represents what we’re targeting for the first half of 2019. They are kind of income-producing assets. We view them as non-core that we don’t have to own long-term, and we think we should be able to achieve pricing kind of in the mid-5s on those as well. So that’s a color on those two.

And then the second question is, having been toward Pike & Rose recently, one, the asset has definitely come down more. But two, just sort of curious, you announced the second office there. Don, how do you think about the mix of residential and office as far as driving restaurants and the other elements of the projects in general? Do you view each item on its own merit, meaning which maximizes NOI for that particular land parcel, or is there a view of which what’s the right mix of office, residential, et cetera, that drives the overall NOI of the center? Just trying to figure that out?

Yeah, it’s a combination of both. I mean, look, at the end of the day, when you’re doing these types of projects, the real trick is the path to maturation. All of these mixed-use projects take time, take years to mature, now do they mature in two or three, or do they mature in six or seven or somewhere in between or differently? One of the key ingredients to get that maturation is daytime traffic. Office is a key user for us. So, that daytime traffic coupled with the incredible efficiency that comes from parking that you build for office—that’s necessary for office but it's also used by the retail and other uses in the evening—is the incredible part of the efficiency of how a mixed-use project works. So, everyone of these and Pike & Rose, because of the time that you’ve spent there, when you look at Pike & Rose, you think of what’s coming on from a retail perspective and you see how we’ve done on nice weekends from the residential base that’s there and the retail base that’s there, you can see that there needs to be some daytime traffic, and that office is a critical component to that. And that’s part of the reason that we continue to invest that way.

Okay. Thank you.

Hi. Good morning. Dan, I just wanted to follow up on the $275 million term loan you talked about refinancing next year. I think that the two swaps on that expired today and now that’s floating. Do you plan to keep that floating through the maturity next November? Or when do you plan to sort of refinance that, or what are your plans for that?

Yeah. It will float at LIBOR plus 90. I think we’ll look to be opportunistic in terms of refinancing that term loan. I think by extending it into 2019, it avails us to get into a little bit of a sweet spot of the market and the bank market to potentially refinance it as another term loan. Or it gives us the optionality to look at it in the bond market. So, I think that we’ll be opportunistic in terms of refinancing that. It will be pretty open to repayment, and so we can—there won’t be any access cost that we look to be opportunistic ahead of the November 2019 maturity.

Okay.

But likely '19, Christy, not '18.

Right, right. So, keep it floating for the year and then refi to something fixed next November?

Or before that, but what I’m saying is it won’t be a refi in the fourth quarter of 2018; it will be in 2019 opportunistically.

Got it. Okay. And then just regarding the termination fees, recognizing that this is a recurring part of your business, they did seem a little higher in Q3 than you had originally thought. What was that related to, and that speaks to whether you were proactively trying to get back or did this unexpectedly come back to you?

A little of both. This is a good conversation. And listen, I absolutely know how you feel about termination fees. I appreciate your starting out by saying that you do know the recurring part of our business because it’s a business of contracts, and we want to use those contracts to our best advantage as a tool in various numbers of ways, including the ability to proactively get tenants out. But also recognizing—and this is a big part—there is a changing consumer. We don’t want the same retailers over and over again. As you look over the next five, seven, nine years, we’re probably less than others about simply trying to backfill an existing box with another tenant than we are about having an opportunity to redevelop a shopping center. So, one of the tools that we use for this is a strong lease, and it's just so critical to what it is that we do. When you look at this quarter, they were higher and it’s a combination of everything you’ve mentioned; we lost some tenants that didn’t think we were, when we gave a forecast for termination fees, but we also went hard after a couple of them to ensure that we were able to redevelop and keep the pipeline growing. So, you see in both places, I don’t expect termination fees to be low over the next year or two. I mean if you think about the business, there is a changing of the business and a changing of retailers. I don’t know if you have seen the list of retailers that we actively go after who are digitally based retailers that have figured out that, you know what, we need a bricks-and-mortar presence. That’s a long list of tenants, that’s a list of tenants that particularly for street retail-oriented, mixed-use-type products that we’d love to have access to. Things like Parachute Home, and others that you haven’t heard necessarily a lot about but are part of the future. So, having a strong contract in place with existing tenants gives us the opportunity to have some leverage to create places for the future, and that's much more significant than any other comparison with any other company—it drives us in terms of what we report and what our business plan is. I know I’m long-winded, but it really is important for us to talk about that.

Go ahead.

Yes, Christy. I just wanted to add, of the tenants that terminated in the third quarter, over two-thirds of that income has already been replaced with executed leases of tenants who are coming in. So, not only did we get those outsized termination fees, we have already been nimble enough to backfill over two-thirds of that space before we even reported in the quarter. So, I think that’s a testament to how proactive we are in managing the process and limiting cash flow downside.

Great, that is exactly what I was looking for, thank you.

Hey, good morning. Going back to the 2019 guidance, at least the rough goalposts you laid out there. Could you walk through some of the bigger pieces that could swing you from one end to the other? I know you mentioned the term loan and the G&A; any other bigger pieces there and then maybe how you’re thinking about bad debt in relation to this year? It sounds like from your comments and Christy’s question, that you’re more or less expecting a similar level of headwind on that front?

Yes, I think it’s a whole host of things. As I said, this is preliminary. I think how quickly the hotels continue to ramp up at Assembly and Pike & Rose can move things around a little bit. I also think kind of where we see our watchlist performing over the course of 2019. Just going back to the two items, I mean I think even now at LIBOR plus 90, we’re going to have roughly a 100 basis points of drag. If we keep it floating, and based upon where kind of 6 and 12-month LIBOR is projected to be, there will be some drag over the course of the year, which looks to be up to roughly $0.03 to $0.04 in that ballpark. And G&A will grow. I’m not going to get too far into the detail there, but G&A will be higher in 2019, and we’ll provide more color on that in our February call.

Yes, Jeremy, let me just add two things to that. First of all, welcome to BMO; it’s good to have you back. And secondly, the developments are the single biggest mover. I mean, we’re going to deliver to Splunk at some point around a year from now. A month one way or the other or two months one way or the other is important to how that works through. And secondly, I do want to add one thing to the G&A piece. With Mr. Enbriggs leaving, it’s an awesome opportunity for the next generation here. So, we’re going to be doing a bunch of promotions, and that’s why G&A is going up; it’s good stuff. It’s the reason to be able to bet on that Federal Realty 2.0, if you will, with respect to the next level management. So, we will talk more about that in February. But it’s a critical part of us setting up for the next 10 years.

And then you talked about the ramping dispositions as a source of capital. Dan, you mentioned $125 million in the first half of next year. Beyond that, we look at dispositions being more opportunistic, or as markets accommodate, and equity is attractive, you may pull back from selling and finance on that. I mean, are you baking some equity into the plans at this point?

I mean, as I said, it’s preliminary; I think that will be opportunistic on the equity side as well. I think that a very limited small amount is kind of what’s figured in to our 2019 calculus for providing; those goalposts will have a greater refinement on kind of what that detailed assumption is in February.

And let me add one thing, if you don’t mind. In my prepared comments, I think I led you to a discussion of the next phases of development at Assembly, the next phases of development at Santana. You saw what we’re doing at Bala with respect to the residential project. They’re very strong redevelopment pipelines and core. So, as that stuff comes to fruition, this company looks at funding, including potential dispositions. But it’s different from other companies in that we don’t have a bunch of shopping centers that we don’t want to own. So, it’s a smaller pool effectively to look at. No, we don’t have equity in the numbers in a significant way at this preliminary point, but we might—again very modestly as a part of the balance sheet program. But a lot of it is dependent upon whether we go forward, and I expect we will, on building out some of these big de-risked development projects, those de-risked because the places are already there and successful.

From a capital perspective, we have multiple arrows in the quiver, in terms of—I mentioned $80 million of free cash flow in 2018. We should expect similar levels in 2019, or from where we sit today. I think also the balance sheet capacity, as we’re down positively trending from a debt-to-EBITDA perspective. I think that as cash flow continues to grow, as we continue to ramp up at Assembly and Pike & Rose in 2019, and as they further stabilize, that will add greater debt capacity just very naturally on a leverage-neutral basis. So, we’ve got a number of different ways that we can fund the development pipeline and feel really, really good about how well positioned we are heading into the final quarter of 2018.

Okay. Thanks.

Hi, guys. Good morning. Don, can I ask you to take a step back and maybe talk about your watchlist today and compare that to last year? I mean, I look at, as we kind of go through your top 20, it certainly feels like there is less exposure to the tenants that are willing to anchor or liquidate, which tells me that kind of that 2% to 3% of same-store probably still is applicable for next year. But then you look at Bed Bath or you look at Kroger that continue to top down rents. Is there a risk that your releasing spreads could kind of start to decelerate a little bit here going into maybe the next 12 months to 24 months?

Yeah, Samir, it’s a good question. Look, I love the way you started it because that’s exactly how I look at it. I start out with that list, that watchlist, etc., and try to predict to the best as we can what would effectively happen. I mean, do I worry about Bed Bath & Beyond long-term? Sure, I absolutely do. And do I worry about that Bed Bath & Beyond not honoring their commitments and paying rent? No, not at all and somewhere. And that’s a great example of an operation where, I don’t know how they will change their business plan, I don’t think anybody does at this point, whether how successful they’ll be, what that new prototype will be as they move forward in the coming years. But certainly, I want to make sure we have tenants that are our tenant of the future that we believe in that are there to the extent we’re not part of the plan going forward. So, certainly with any tenants that are not performing as well as they were, the rent pressure ramps up—it's an obvious statement, but it's certainly the case throughout a lot of these boxed tenants. The key with us is the balance, and I’m going to start to show you a little more of how our residential performs, going to show you how our office performs. We’re going to try to get the community to understand our company in its broadest perspective because there are pressures coming in terms of retail lease rollover, certainly there are pressures. Do I see them as oh my god off single-digit lease rollovers or what we roll back? No, I don’t. Consider this within the context of the whole company in terms of how we’re moving. I think you’re going to feel really good about an investment that is very likely to continue to grow for years simply based on what we have in the pipeline today. And I don’t know if there is anybody else that can say that.

Okay. Thanks. And as we think about next year, what are sort of the drags we need to think about, especially from the same-store perspective? I mean there is one, certainly, Toys R Us, but I don’t think you had a lot of exposure to those. Are there any other tenants that will lead the company to be kind of moving on to a level where you’ll be proactively maybe taking back space like you did a couple of years ago? So, is that something to think about for 2019?

Very much so. I mean you know when you go down the list and you look at what we've got, you've got to feel really good about this income stream. Toys might be the best example at all. One that was completely released at significant bumps to where Toys was, and yes indeed within an incredibly short amount of time, that’s done. So, you know what happens with respect to Mattress Firm—we’ve got 14 of them. You know when I look at the 14 and know where most of them are there on out parcels or in caps in great locations. That’s not something I particularly worry about. It doesn’t mean there’s not going to be some dislocation depending on what happens with the evolution of the company, but we deal with that all the time, always have been. I don't see any amounts of those type of income stoppages, if you will, in a significant way any different than we've managed through in years past certainly, and certainly better than 2016. So, yes, you ought to think about proactively leasing to—we do constantly. It's not a switch that we turn on and off; it is a dial that we turn up when we see opportunities and turn down when we don’t. Yes, you could see that turned up a little bit again.

Thank you. Don, I was wondering if you could give us some description or background on RevUp, the third-party platform that Mike Kelleher is setting up?

Very good for picking that up, Craig, that’s cool. Not a big deal at this point at all. What that’s about is, you know, when you look at this industry and you think about temporary tenant income, ancillary income, sponsorships, all of the kind of nontraditional leasing revenue generation. I'm really proud of what we’ve built as a company over the last decade or decade and a half. And yeah, Mike Kelleher has been a big part of that to be able to grow it. We think we have capacity there and we think we've figured out how to do that maybe better than some other folks have. So, we'd like to in the markets where we do significant business already pick up some third-party work and spread that platform across a bigger base. It’s just something that we're rolling out. We probably won't do that service for some of our direct public competitors, but there's an awful lot of regional real estate companies that really could benefit, and we could share the income with them. So that’s what we're messing with. I think it's cool. I don't know if it turns into anything or not. If Kelleher were on the phone right now, he’d be telling you it’s the greatest thing you’ve ever heard of and we’re going to do really well with it. We’ll see. But it's I think more importantly, Craig, it's indicative of the creativity and the way we look at trying to add value in various different ways, big and small, throughout the company.

Great. And then lower G&A, I'm sure was helped in some part by Dan and Christian’s exit. But it looks to be more significant than that. Can you tell me what you're doing there in terms of maybe getting some more cost savings?

Yes, look, it's a big part of one of the things that I always wonder about, and I think you can appreciate this is, as a company with our longevity, right, we’ve been around a long time and we’re relatively powerful in the few markets that we’re in. And I think vendors and others get comfortable with that in terms of dealing with Federal. I don’t think we use our leverage as much as potentially we could have to be able to renegotiate some of those deals and effectively reexamine scopes, reexamine financial terms with some of our partners. No, when I say partner, I mean vendor; I mean people necessary to create great shopping centers. We pushed hard on that in 2018, and we pushed hard on that with some very favorable results. That’s what you’re seeing coming through. I don’t think those are one-time favorable results. I think those are benefits that are all about relooking and leveraging the power of Federal Realty in again the five or six critical markets that we do business.

Don, I think you might have touched on this in the call, but I had heard that concerning Santana West, that was a site that even Apple might have been looking at perhaps for one of their projects, that maybe market chatter. But I guess my question is, do you think that’s that office opportunity needs to be a single-tenant development opportunity like you had with Splunk, or is it possible that could have something that's a little more ground for retail or residential or office on it?

Yes, just going to add, Jeff will add to this, just make a comment or two on it. No, this is an office product. It’s an office site. It’s entitled for office; any retail that we do would be relatively insignificant. And this is very simple, and this is a 12-acre piece of land directly across from one of the most iconic, if you will, mixed-use destinations in the country. It happens to be in the middle of Silicon Valley, and it’s really valuable. So, whoever the tenant or tenants are—it doesn’t have to be one tenant; it could certainly be several. What we know is we’ve got a piece of real estate there that is getting an awful lot of interest from some—I'll say typical or users that you would think of and some niches, certainly would. And it just shows the broad value of the real estate because of what's created across the street. So, there's all this has to be valued a little bit more, but there’s no denying the value of the real estate business that’s there.

Right. So Jeff, I don’t really have anything to add other than if you look at all of Silicon Valley right now, there is precious little available office space or office space coming anytime soon. Just a matter of time. We’ve got Santana Row, probably one of only a handful or less than a handful of opportunities for that over the next two or three years, just given the entitlement cycle and what’s going on in some of the other submarkets around here. So, we’re like Don said, super bullish on it, and there’s a lot of interest in the site right now.

Jeff, just speaking with that, I mean, are you seeing some of the bigger employers in that market that are actually trying to tie up office space, even though they might not have an immediate need for the space today, just because of that dearth of space they’re sort of tying it up in anticipation of future growth?

Yes and no. But remember, growth is occurring very quickly out here, and the lead time on a development—even something that’s entitled and ready to go—is still a couple of years to build a building. So, a lot of firms are growing into the requirements by the time the space actually delivers. I mean, it’s clearly the case with Apple; their new headquarters building, from what we understand, that’s full. When we look at market activity, we don’t see them giving back any of their other space. So, if you look at big users out here, I think that’s true—that they have to look out a couple of years, and by the time the space is ready, they will fill it.

And maybe, Don, just stepping back more broadly on external growth, I mean your perspective on retail seems to have shifted somewhat sharply over the last few years in what the prospects of it hold. Do you think as a company you’re more open to mixed-use or a mix of users than you have ever been before? And do you think the market focus—just the geographic focus of the company maybe has changed with that? Are there some markets that you’re more open to going into? Maybe one last aspect of it is, will you ever do standalone office or residential development away from retail?

No to the last question. I mean, I’m going to bookend you here for a minute because that was a lot. No, we won’t do standalone or non-retail-oriented residential or office as part of our business plan. I’m going to go back to your last thing; I’m going to say one quick thing about your last question, and that is please don’t speculate about Apple. Don’t speculate that; don’t write that down because that’s probably not the case, okay? Let me be clear. Now let’s get to what you just asked. Here’s the way I look at it: the more predictable the future is, the more narrow you can target your business plan. The less predictable the future is, the more you want to be as flexible, and flexibility is the most important word in our business. As flexible as you possibly can be. Flexibility with respect to what the future holds simply means to me, I’d like to be able to not rely on any one income stream. If that’s the rolling forward of rents in a basic shopping center, that’s one thing. If it is, do I want to have the ability to create value upstairs on land in the markets that we’re identifying anyway? Of course I do. It’s not a battle of liking mixed-use or not liking mixed-use, or liking a shopping center or not liking a shopping center. The reality is what our core competency is, is first-ring suburbs creating great places for people to go to. That can be a grocery-anchored shopping center, it can be a mixed-use project, it probably can be whatever else it is. Once you have the layer, that’s not necessary and in Manhattan, at the corner of 57th and 5th, that environment already exists. There, you can do an independent building of any kind. The people are already there. That’s not the case in the first-ring suburbs where we are doing most of our business. We don’t have to bring people there. Now once you have them, how do you make more money? And that’s where you have to say whether it’s buying adjacent parcels and growing on them, or whether it’s going up in office or retail. I look out at an unpredictable future; I want as many arrows in the quiver as I can possibly have. That's what I think we've done. So I don't see it as a sharp change in believing in retail or not believing in retail. I think it's an evolutionary change in the unpredictability of technology's impacts on the consumer. And so when you're sitting and thinking about it that way, what do you best do about that if you're a real estate company— not a retailer, but a real estate company? You make sure your real estate is valuable in any one of a number of different ways. And I think we've proven pretty well our core competency and the ability to look more broadly as real estate people rather than simply shopping center people.

Thanks, guys.

Hi. A couple of questions. First, Dan, when you’re talking about 2019, you flagged G&A, and then lease accounting separately. So, is your lease accounting expense going to be in operating expenses?

No. They will be a component of increase in our G&A in 2019. Part of it will be lease accounting-related. The lease accounting change geographically will sit up as a G&A item. A lot of it will also be an increase in our current level of G&A.

Got it. Okay. And then I guess just thinking about tenant demand and everything on the mall calls, you constantly hear about retailers and demand moving into the malls. I'm just curious about your portfolio; are you seeing that sort of interest as well from those types of tenants?

Yes, Mike, this is—I’ve talked about it earlier in one of the questions. But just think about this for a minute. All of these retailers basically—or let’s start and say online retailers who have started online. These guys, all of them—I didn’t say all, most—are struggling, and have always struggled with typical things you struggle in a business, with number one being customer acquisition costs: How do I get that customer, and what’s it me to get to them? And of course, then the delivery system. And those two things have led many of them to the conclusion that you know what, we need a physical presence. And I've got some interesting stuff I’ll share outside as maybe at NAREIT next week, some of the quotes and some of the plans that these guys have. Now, when you say okay where are they going to go? The chances to me are looking awfully good for the type of properties that we own. We're close to a lease for one of those tenants that we're talking about in Bethesda Row right now. We're close on two at Santana Row right now. The streets that we have presence are on like Third Street Promenade. I mean these are—it's— I don't know how important a component of the future it is, but it's certainly a component of the future. And going back to where I was before, we want to cast the broadest, widest funnel to be able to be attractive to the largest possible number of retailers. And where we are suggests to me that we'll have more than our fair share of those tenants who are finding the need for bricks-and-mortar stores.

Lots of calls, lots of detail, much appreciated. But question for you, Don. I guess more of a big picture. We’ve seen a lot of M&A this year in the REITs, but nothing in the shopping centers. Curious why you think that is? And then, is there anything you expect over the next year that Federal could participate in?

Oh, Haendel, this is I mean we’ve been talking about this question for 20-plus years, and that’s just what I remember, so I’m sure it goes back before that. Look, the idea of combining platforms has to have a business sense to it that makes all the sense in the world. Obviously what you saw with Equity One and Regency was indicative of that. You can look at that and say yes, that company is Federal than the two companies separately would have been. But those things are few and far between; they’re hard to do. As you know, I love to tell the story of and I don’t know if Ernst would really be mad at me for saying it or not, but we had a—we have a very good relationship and back before they were public, we were trying very hard to put those companies together; it didn’t work out, they went public, and are doing great. So we’ve come down to the individual business plans; it comes down to the social issues that are part and parcel to it. And when you think about betting on the future, there’s almost always dilution from the buyer's side initially for a period of time. So you have to be comfortable with where that future is going and what it’s going to provide. That’s harder to do today than it’s been in another period. So the combination of other things—Is Federal involved in anything that’s possible for us? You bet. We talk a lot. We talk to a lot of people a lot of the time. But we’re not going to do something that doesn’t improve the prospects versus our existing plan. And our existing plan is really good in terms of this real estate. Our real estate clearly will be worth more in the future than it is today when I see it and I look at the prospects for growth, for domination in certain markets and certain properties.

And just a follow-up on the mid-5 cap rate expectations for the assets under discussion for disposition here. Curious where you think those assets might have traded 12 to 18 months ago? And then how large would you say your bucket of non-core, but tax-efficient potential asset sales bucket is?

I’m going to jump in before Dan here in a minute because I’m cringed when he said that—that mid-5. Because listen, we’ll see based on the marketplace what those assets will trade at and what they won’t trade at. The answer to your question, how does that compare? I don’t know. That’s what I’d love to see as part of this, and it is a small bucket. And I kind of went into that before a little bit; it’s a small bucket because we sit and look at the future earnings prospects of the assets, and quite far and away, most of the assets at this company—and again, there’s only 104 of them—most of those assets have really bright futures. To the extent they don’t, we’ll find a way to effectively recycle out of them, but we’re talking about six, seven, or eight assets based on information that we have today in terms of looking at the future that would fall into that bucket.

Hi, this is Shivani Sood on for Derek Johnson. The office aspect of the portfolio has been a large focus of today’s call. So would you mind just speaking to the leasing front there, how the process and the potential CapEx involved might differ from the retail aspect of the portfolio? And also kind of how you view it from an operating metric perspective?

Sure. It’s a good question. I’m not sure that—I am sure that we don’t have a view on office product in a national way or in standalone office products. What we do know is places where we have created an environment with retail on that ground floor that is amenity-rich are more and more attractive to office users. And as a result, in places where we have the land—and again our average shopping center is 20 acres large, which is big compared to most shopping centers, and we have the opportunity at various places to be able to exploit that retail environment that we’ve created. In some cases, we’ve seen it at Pike & Rose with the first phase; we’ve certainly seen it at Santana Row. Even though we have other opportunities in the marketplace for office, the office user sees those other opportunities as irrelevant and obsolete. And so, we think we have something that’s particularly special that can drive a premium rent; that can drive premium bumps in those rental deals. And most importantly, it’s so integral to the overall property that we’re developing or building—or community that we’re building that it’s really part and parcel of how the retail works, how the residential works. It provides the daytime traffic. As I said before, that’s critical—it is immensely efficient in terms of parking. And so, office brokers bring the product to us. And so, these are negotiated similar to any other office deal with the same criteria for capital, the same criteria for rent, etc. We just feel like we’re in a stronger position to be at the top of the range of those market conditions on all the economic aspects because of what we’ve invested down on the ground floor. So, you won’t see us doing separate office buildings across the country to broaden what our basic core competency is. But we certainly will at the properties that we’ve created great places to exploit that.

Great. Thanks so much for that color. And then just given the more diverse portfolio of assets that you have—centers, for example, power centers, grocery-anchored, mixed-use. Can you just give us an update in terms of retailer demand for the different property types, and has that shifted at all over the past year or so?

Nope. And I’d tell you what, because I know it's simpler to say power centers perform like this, grocery-anchors perform like this, and mixed-use perform like that, etc. It’s just not true. It totally depends on physically where that property is in the supply and demand characteristics and at that particular piece of real estate. So I spend a bunch of time on that call talking about leases at a power center called East Bay Bridge in Emeryville, California. It's an incredibly powerful supply and demand environment for us because there’s no other supply of that. So, no, and I could make those same kind of comments for each one. You really got to get into the individual real estate. It's not a compound; I know it sounds like one. But I really fight hard about the characterization of any particular type, even though I understand it's easier for you to categorize. Sorry.

Thanks. That's it for us.

Thanks for joining us today. We do have a couple of meeting slots left at NAREIT. So please reach out if you are interested in meeting with us. And we look forward to seeing many of you there. Have a good day.