Federal Realty Investment Trust. (FRT) — Q4 2018 Transcript

Thank you, good morning. Thank you for joining us today for Federal Realty's fourth quarter 2018 earnings conference call. Joining me on the call are Don Wood, Dan Guglielmone, Jeff Berkes, Wendy Seher, Dawn Becker, and Melissa Solis. They will be available to take your questions at the conclusion of our prepared remarks. A reminder that certain matters discussed on this call may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any annualized or projected information, as well as statements referring to expected or anticipated events or results. Although Federal Realty believes 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. We will be hosting an Investor Day on May 9 at Assembly Row in Boston; you should have received the save-the-date, if not, please let me know. Please keep your eyes peeled for an invitation with additional details and registration link in the next few weeks. We look forward to seeing you all there. Given the number of participants on the call, we finally ask that you limit your questions to one or two per person during the Q&A portion of our call. If you have any additional questions, please feel free to jump back in queue. And with that, I will turn the call over to Don Wood to begin our discussion of our fourth quarter results. Don?

Thanks, Leah and good morning, everyone. We finished our 2018 particularly strong with reported FFO per share in the fourth quarter of $1.57, better than we had expected, resulting in a full year 2018 results of $6.23 a share, 6.8% better than last year for the quarter, and 5.4% better for the year. Just to point out right upfront; this is the ninth year in a row that we have reported FFO increases over the prior year, the only shopping centers read to do so, as the fifteenth year of the past sixteenth that we've done so. We also expect to grow in 2019; please let that sink in in today’s environment. A lot went right this quarter and subsequently through today, that both benefited the fourth quarter operating results, and more importantly, cash flow in the future. Everything from record leasing activity in the quarter to stabilized residential occupancy in our big developments, the powerful office pre-leasing at both Assembly Row and CocoWalk, all that is contributing to a business plan that more and more seems right for today's demanding and changing consumer. So let me get to some specifics; revenues grew 5.1% quarter-over-quarter and 6.8% year-over-year. Earnings growth at comparable properties was 2% for the quarter, 3.1% for the year. The combo portfolio remains 95% leased to 94% occupied, and our operating expenses including G&A but not including real estate taxes grew at less than 1% for the quarter, and less than 3% for the year; that's a pretty complete formula for largely organic growth. In terms of leasing; we did 107 comparable deals for 574,000 square feet at an average rent of $32.16 a foot, 15% above the $27.96 that the previous tenant was paying in the last year of their lease. We've never done deals for that square footage in the quarter before, a record by nearly 10%. For the year, we did 374 comparable deals and 402 total deals for almost 2 million square feet; again, an all-time annual record for us at 12% more rent. So despite this location in the retail real estate business, there is plenty of strong retail leasing going on in the dominant quality properties that we know. A few more words on leasing because I don't want to portray it as all rosy. The big difference we see in today's results compared with a few years back is the increased volatility when you look at a large sample size of leases. They grant bumps and redeveloped and modernized retail destinations are stronger or even stronger than they've ever been. But there are also a number of roll downs on anchor or junior anchor boxes where there are legitimately acceptable alternatives in the market. Now, while that basic supply and demand dynamic has certainly been around forever, it feels more pronounced today, so that the spread between good deals and not-so-good deals seems to me to be wider. We've talked about for quite some time now the importance of a well-diversified income stream to sustainable growing cash flow, and I couldn't be more proud of the progress we've made in this regard. Our core shopping center portfolio is second to none, and we're looking harder than ever for densification opportunities in terms of broader real estate uses: retail, residential, office, following the successes we've had or are having at places like the Point in El Segundo, Tower Shops in Florida, Congressional Plaza in Rockville, and many more. We broke ground this quarter on our initial development phase at our Kenwood Shopping Center which includes 87 luxury apartments and expanded planning for the development of the balance of the east end of the site. In the next few months, we're hopeful we'll get investment committee approval to move forward with the redevelopment of the entire western portion of Graham Park Plaza, our long-time owned 19-acre shopping center that sits inside the beltway on Route 50 in Fairfax County, Virginia; that plan includes the addition of about 200 apartments and twice the retail incorporated into a reinvigorated shopping destination. And we're getting closer in Darien, Connecticut with negotiation feasibility of a residential over retail mixed-use community right at the train station in this New York City suburb. But for a building permit, we now have all local and state entitlements to develop 75,000 square feet of new retail space and 122 rental apartments; diversify and intensify wherever feasible. The big development news over the past few months involved Assembly Row and CocoWalk. After achieving stabilization in 2018 as the big residential component of our second phase at Assembly Row, and higher rents at a quicker pace than we had expected, we were anxious to capitalize on that success with the start of our next phase. In addition, the maturation of Assembly as a first-class office location solidified by Partners HealthCare and the active T-stop enables us to add more office products there too. So we're underway; we're driving forward. Two high-rise buildings; one directly at the foot of the T-stop with 500 rental apartments above ground floor retail, and the second, a 300,000 square foot Class A Office Building, half of which is leased to German shoe and apparel maker Puma for their North American headquarters. I hope you saw the separate announcement on Puma several weeks back. Together, a $475 million Phase 3 expansion at one of the country's most successful mature developments that we're conservatively underwriting to combine a 6% yield with full infrastructure allocation and near 7% on an incremental cash basis. With the commitment of West Elm to take the final 12,000 square feet adjacent to Pinstripes and Pike & Rose, our retail space has all been leased, at least once. As West Elm and the remaining tenants open throughout 2019 and the residential units remain 95% occupied, the first two phases of Pike & Rose will be fully stabilized, while construction on the 212,000 square foot spec office building and the 600 parking space garage in Phase 3 is now fully underway for tenant occupancy in 2021. At CocoWalk in Miami, we made very strong progress on both construction and leasing on this 256,000 square foot redevelopment over the past several months with the signing of a 430,000 square foot office lease executed with Regis for their space concept at the project, along with an additional 21,000 square feet of new deals, both restaurants and retailers, which when combined with existing tenants gets us to well more than 50% leased on this important redevelopment. The office demand here in particular is validating our thesis of consumers wanting to be in a monetized environment close to home. This property is going to be very special when it's completed. No significant development at Sunset Place over the last few months as we continue to work toward entitlements that would allow greater density; tenants will continue to leave the property as it sits in its existing condition, and so Sunset will be a significant year-over-year earnings drag in 2019. West Coast construction continues on schedule and on budget as we prepare to deliver 700 Santana Row at Splunk later this year. The next step should be the first of two 350,000 square foot office buildings at Santana West, the 12-acre site that we control across Winchester Boulevard from Santana Row. We expect the investment committee consideration of that project in a couple of months with construction start later this year if we get comfortable with the numbers. Also, Jordan Downs, our 113,000 square foot grocery-anchored development in Los Angeles with joint venture partner Primestor, is well under construction with its full anchor program on their lease; 30,000 square feet of signed leases in the fourth quarter alone with Nike and Blanks Fitness joining grocer Smart and Final and value retailer Ross to round out the offerings, resulting in more than 75% of the GLA leased at this point. Attention now turns to the small shop space. And finally, a quick shout out to Wendy Seher, Jan Sweetnam, and the other 11 Federal Realty executives that were promoted last week coming out of our board meeting including investor favorite James Modell. There was a separate press release that lays out the details. You know there's very little about running this company that is more satisfying to me than being able to develop and grow human capital from within. It's not always possible but we strive to be able to do so. To me, it's indicative of the depth of our team and pays off in spades in terms of the continuity of our business plan and our ability to not miss a beat. And yet, as Dan Guglielmone, our G&A will go up a bunch next year. And that's about it for my prepared remarks for the quarter and for the full year of 2018. It was a really good one. Let me now turn it over to Dan for some additional color and then open the line to ask your questions.

Thank you, Don and Leah. Hello everyone. We are really pleased with our results for the fourth quarter and the full year 2018. With FFO per share growth of 6.8% and 5.4% respectively, versus 4Q and full year of 2017, we'd hit consensus for both the quarter and for the year by a decent margin. The numbers in the fourth quarter were driven primarily due to lower net real estate taxes offset by a greater net impact from failing tenants than was forecast heading into the fourth quarter, as well as higher demo and higher G&A. Our comparable POI metric came in at 2% for the fourth quarter as a result of these drivers. The average comparable POI growth per quarter for the year was 3.2%. A solid result in light of the challenging environment. With respect to our former same-store metrics, the quarterly average for the same-store with redevelopment was 3.1% and same-store without redevelopment at 2.7%. We are officially retiring these metrics, having provided them over the course of 2018 during our transition to a more relevant comparable POI figure. With respect to asset sale and other activity during 2018, we raised over $200 million of proceeds in the aggregate as we closed on over 85% of the market rate condos at Assembly Row and Pike & Rose, raising roughly $130 million in proceeds. We sold Chelsea Commons residential and Atlantic Plaza Shopping Center in our Boston region at a blended mid-fives cap rate, raising $42 million and closed on our 50-50 joint venture at the Row Hotel at Assembly, bringing in $38 million of gross proceeds. On the acquisition side, our discipline was once again evident in 2018 as we aggressively scoured the market for opportunities but continued to find better risk-adjusted capital allocation alternatives in our own portfolio from a redevelopment and development perspective. However, we do have a pipeline of attractive acquisition targets and are optimistic we can bring a couple of them over the finish line in 2019. Now onto the balance sheet. 2018 was the year where we positioned our capital structure exceptionally well to handle the next wave of value-creating development and redevelopment activity for the company. We finished the year with roughly $50 million of excess cash and nothing outstanding on a credit facility. We reduced our overall net debt level by over $100 million. We generated upwards of $90 million of recurring free cash flow after dividends and maintenance capital in 2018. As a result, our net debt to EBITDA at year-end is 5.3 times, down from 5.9 times at year-end 2017. Our fixed charge coverage ratio stands at 4.3 times currently versus 3.9 at 4Q 2017. Our weighted average debt maturity remains at the top of the sector at 10-plus years and the weighted average interest rate on our debt stands at 3.88% with over 90% of it fixed. As we push forward with the next wave of development and redevelopment at Federal Realty over the coming years, development which has been significantly de-risked through solid pre-leasing with Splunk at 100% of the office, and 97% of the total building at Santana Row, delivery set at the end of the year. Puma with 55% of the office space leased and multiple tenants competing for the balance of the office space as Block 5B in Assembly Row delivery is slated for late 2021. And Regis with its IWG space concept having pre-leased 50% of the new office space at CocoWalk, delivery scheduled for late 2020. Our E-rated balance sheet equipped with a diversity of low-cost funding sources leads us extremely well positioned to execute our multifaceted business plan and drive sector-leading growth through 2019 and into 2020, '21 and beyond. Now, I will turn to 2019 FFO guidance. We are formally providing a range of $6.30 to $6.46 per share. This guidance takes into account the impact of the new lease accounting standard which we estimate at $0.07 to $0.09. While on other items we will be expensing internal leasing and legal costs that were previously capitalized. Please note that on an apples-to-apples basis adjusting for the new accounting standard, our FFO growth forecast for 2019 would be roughly 2.5% to 5%. Behind this growth are the underpinnings of a very solid 2019. Occupancy and rental rate gains in our comparable property portfolio will be meaningful. Proactive leasing activity in 2018 will drive growth in 2019 as major tenants like Anthropologie in Bethesda, 49ers Fit and TJ Maxx at Westgate and San Jose, Bob's Furniture at both Lowe's Hardiness and Escondido in Southern California target at Sam's Park in Shop, NBC, among others all contribute more fully over the year. Continued stabilization of our signature mixed-use projects, Assembly Row, Pike & Rose, and Santana Row will all drive meaningful growth to the bottom line in 2019. These items together would drive FFO per share growth into the 6% to 8% range if not for some discreet but somewhat disproportionate headwinds. The leasing impacts on our non-comparable properties, CocoWalk, Grand Park, and Sunset Place will weigh on this year's results. Proactive redevelopment and re-merchandising activity at some of our dominant regional assets in order to further consolidate their market-leading positions will also have an impact. Assets which include Plaza El Segundo in Los Angeles, Huntington Shopping Center on the Island, and Congressional here in Metro DC. In addition, a recent initiative to establish the next generation of leaders at Federal will meaningfully increase our G&A in 2019 beyond the lease accounting changes. As a result, our guidance underscores a very constructive 2019 for Federal. Now to the detailed assumptions behind our guidance: comparable POI growth of about 2% and total POI growth of 4%. A credit reserve which includes bad debt expense, unexpected vacancy in rent relief of roughly 100 basis points. Non-comparable redevelopment, i.e. CocoWalk, Grand Park, and Sunset will create about a 60 basis point drag relative to 2018 as we work through the continued de-leasing impact of these assets. With respect to G&A, we forecast roughly $10 million to $11 million per quarter. This reflects $0.07 to $0.09 impact from the new lease accounting standard taking effect this year, and about $0.05 to $0.06 in higher G&A, primarily relating to the promotions in new additions we mentioned. On the capital side, we project spending on development and redevelopment of $350 million to $400 million. As is our custom, this guidance assumes no acquisitions or dispositions. And finally, we are projecting another $70 million to $90 million of free cash flow generation after dividends and maintenance capital. As I close out my comments on guidance, I would like to highlight that Federal's diversified business model continues to insistently churn out sector-leading FFO growth by a wide margin. When you assess the projected apples-to-apples FFO growth for 2019, let me have you pause and think about the following statistics: Federal consistently produces outsized bottom line FFO growth relative to our peers, not as adjusted but SEC-endorsed new redefined FFO growth. Over three-year, five-year, ten-year, and fifteen-year horizons, Federal's FFO growth has outperformed its Bloomberg shopping center peer average by a margin of roughly 8%, 6%, 8%, and 7% respectively. That's per annum and that's compounded. With that, we look forward to seeing many of you in Florida in a few weeks and please be on the lookout for the invitations to our investor day, which will be held on Thursday, May 9 at Assembly Row in Boston.

Good morning, guys, and Dan thanks for the call around guidance. The question is, the guidance that you provided seems slightly more conservative than earlier commentary you gave in late 2018. Is that small delta the result of specific changes in your outlook you can talk about or is that really just kind of a non-specific, I guess it's a desire to be cautious looking out in 2019?

I believe it's a bit of both. When we released our figures, we had a placeholder regarding Depreciation and Amortization. The additional Depreciation and Amortization outside of the lease accounting ended up being slightly higher. As we navigated the budgeting process, which began in mid-November 2018 and was not finalized until January, we anticipated some adjustments. I think we’ll see a 60 basis points adjustment based on a $6.40 basis, which indicates some minor tweaks. This could also reflect a more conservative outlook.

And maybe just a second part on the guidance, can you talk about what your assumptions are on cash spreads on renewals for 2019 just because in 2017 they were up 9% and in 2018 they're up 4%. I guess I'm wondering if there's a trend there if you guys think you saw the bottom here, you know maybe that's not so much a trend other than just a mix of lease maturities that you faced?

Can you repeat the question? I understand, Jeff. I don't have much to add to that. It's a mix; it depends on the upcoming deals and how they unfold. There's no doubt that there are pressures on rents. I tried to highlight this in the prepared remarks. There is more volatility; excellent deals are great, while less favorable deals are not so good, and this affects the mix between top and bottom, particularly regarding renewals. If I look at the fourth quarter specifically, I can share a couple of interesting details from the year. For instance, the CDS deal had a fantastic property in Northern Virginia, resulting in a significant renewal increase. However, we also have an open deal at Recreational Plaza where they had other options, and we agreed to reduce the rent on that, which wouldn't have happened a few years ago. It really is more volatile; I can't provide further insight on how those renewals will unfold, but overall, you should expect to see continued rent growth from us. I just can't give you the mix as precisely as you might prefer.

I think you'll see more volatility. I think you saw that this year with regard to some of the rollover you know in the range of 6% one quarter, 22% you know you'll see more of that I think going forward.

Just one last question for you, Don. I'm just curious how you guys think about office leasing decisions that you know dissemble. You obviously cut the deal with Puma, you know retail brand instead of looking outside of retailing. I'm just curious because for your retail properties you guys have always talked about putting thought behind not just economics but how the tenant contributed to the overall merchandising and other factors. For offices, is it strictly economics? Is it credit risk? Is it, you know what it does to the daytime population? How do you guys kind of think about that?

Yes, that's a great question Jeff, It really is. There is, you know on the weighting of merchandising versus economics, certainly on the retail side, as you know we put a lot of higher weight on the merchandising side. On the office side, it's less; it is more economics but not completely. So at the end of the day, you know again, when we're doing office, we're only doing office at our places where we created that environment on the street. So to the extent the company has a workforce that aligns better with the merchandising that we've done on the retail side on the street, that is clearly beneficial or you know they get a check-up in that type of environment. Credit is certainly the most important thing as we look at it on the office side but you know that merchandising component is clearly the component in the way we approach it.

Good morning, this is Katie McConnell on for Kristy. If you could talk generally a little bit more about the yields you're able to achieve on larger mixed-use development projects and how you're underwriting future phases as well and how you think about it in the context of ultimate value creation and what these assets can be worth upon stabilization?

I'd love to take that one. Look there is no question I don't think I'm saying anything that everybody doesn't know that construction costs are clearly high end and you know probably will go higher as we go forward and you need premium rents to do that. I can tell you the best thing that we have done in the last decade was to not stop our mixed-use development program throughout the last recession. That put us in the place of having the properties themselves, the street-level places created during that period of 2013, 2014, 2015. And so the incremental mixed-use development stuff that we do at those places, Pike & Rose, Assembly Row, and Santana Row, are risk mitigated in large measure. I very much believe that mixed-use properties, at least the good ones, are completely integrated in terms of those uses and have to be viewed as integrated in terms of their Cap rates, what they would be sold for, what those income streams are valued at? And so when we have a chance to jump on, take Assembly, the next big piece for residential and office at a combined 6, on a fully loaded basis, and closer to a 7 on a cash-on-cash basis. There's no doubt in my mind we're creating significant value. And that's in a market where construction costs are about as high as any place that we've seen and given what's happening in and around us with the casino and other things that are taking that construction workforce and employing them. So if you just step back then and say all right, do you view these mixed-use properties that we're dealing as sub-5 capital, you know assets in total? Absolutely we do. We absolutely look at those things as being 1 plus 1 plus 1 equals 4 in terms of office and retail. Accordingly, to the extent we can put our capital, work 6% or better certainly at assets like that. We think we're getting a sufficient premium to our cost of capital plus it's been demonstrated at Santana and in Bethesda as these things are open. Yes, they take a long time to get up and yes, they take a long time to mature but they are the gift that keeps on giving. So the growth rate of those assets we've experienced to be higher than other stuff. So the IRR's are effectively higher than other stuff. So I hope that answers and I hope that puts in context for you.

Thanks, two questions. I guess Don, to follow up on that, you know, as you think about places like Santana Row in the next days and an office. I mean are you sort of raising the bar at all are you getting a bit more cautious, we're getting later in the cycle particularly on the office side as it relates to pre-leasing?

Yes, that's a valid question, Steven. We evaluate this market by market and property by property when making decisions. For instance, at Santana Row, we had an opportunity to sign a tenant for the entire 350,000 square feet available, effectively pre-leasing one of the buildings. We chose not to proceed due to concerns about the tenant's credit and the viability of their business plan, even though the rents were strong. It's crucial that when we allocate capital and assess underwriting, we consider the quality of the tenants. While we've minimized risks due to the environment we've established, they are not entirely eliminated. Therefore, we scrutinize tenant credit, diversity, and their potential impact on the shopping center. Overall, we maintain a positive outlook on Silicon Valley's opportunities over the next few years, though conditions beyond that time frame are uncertain. In contrast, Montgomery County, Maryland isn't as vibrant, which is why we are developing a smaller building there. We intend for office space to be part of the mixed-use project, focusing on smaller, more diverse tenants. While market conditions will influence our decisions, we are willing to turn down tenants who don't meet our necessary underwriting standards.

Okay. And then I guess one for Dan, just on the guidance. I guess I understand you've got a lot of balance sheet flexibility but is it fair to assume that you've got, you know some equity raised in the model to fund the $350 to $400 on the development spending in 2019?

Yes, that is not a lot and I think that we positioned the balance sheet and call it $80 million to $90 million of free cash flow. After dividends I mean it's capital, you know we positioned the balance sheet to be able to raise leverage neutral incremental debt of $125 million to $150 million. You know we have some dispositions in the market now. We'll see how we'll look to kind of bring those over the finish line but also we've got, you know capacity on our line of credit and you know we'll be opportunistic with regards to use our ATM program to the extent that it's opportunistic.

The only thing I'd mention is that, Steven, when we look at our history with digital equity issuance, it's not something we enjoy, and I don't think anyone does. However, it all balances out. The ATM program has worked well in aligning with our development spending. We're in a strong position where we don't need to rely on that. If you consider all the alternatives, we have some properties on the market, and we're looking at around $125 million in dispositions that we anticipate will successfully close. We'll see how that unfolds. It's important to have multiple options available and to choose wisely and carefully, without any single option becoming too significant.

Okay, good morning. Just got two questions here. First, Don, just going to the office side, you guys have obviously now done some pretty big deals with Puma and Partners Health, and Splunk. Are you guys thinking that maybe as you look at your pipeline going forward that you want to have more office or do you feel that you guys are still leading with retail and office is, I don't want to say an afterthought, but office is the second component? Just trying to understand because obviously you've had some pretty big wins here.

That's a great question, Alex. It's important to remember that we are a retail company. When developing a large mixed-use project, such as those at Santana, Assembly, and Pike & Rose, the first step is to create a community. We've successfully done this in all three locations, incorporating residential spaces, since having a local population is a clear advantage. As these areas mature, and if we are fortunate enough to own significant land with opportunities for added value, the logical next step is attracting a daytime population. What's truly remarkable in the current market is that it has become almost essential for innovative companies to have a presence in locations with a full range of amenities, especially when trying to attract younger talent. We have the advantage of having established ourselves over many years in creating vibrant communities, and now we can see how office spaces can complement this daytime population and strengthen these communities. For example, we might not have Puma without our partnership deal, and it's worth noting that we don't own the building; we took on the responsibility through leasing. While a more aggressive approach could accelerate our growth, we prefer to be prudent, focusing on areas where we have already established a solid understanding of the environment. So, consider our office developments as integral parts of a long-term community-building process that includes all elements of lifestyle, including office spaces.

And then the second question is, and maybe my, you know, with old age, maybe I'm forgetting things but I thought previously you guys have spoken about just what the experience of the second phase of Pike & Rose and Assembly that the next wave of projects would be sort of smaller in scale but the capital spend for phase 3 of Assembly is significantly bigger than either of the other 2 on an individual asset basis. So just curious how you're thinking about it as far as the stabilization period, the impact it has on earnings? I know you guys are all about growing regardless so just want to understand how this bigger capital spend factors into that and if you expect a longer stabilization period or because it's a lot of office maybe that's not really as much a factor because they move in sort of quickly.

You don’t need to worry about your age or memory; everything is perfectly fine. Regarding the incremental adjustments that enhance existing properties, these are usually smaller than what we see in the initial phases. We identified a great opportunity at Assembly, and I hope you'll join us for our Investor Day on May 9. The marketplace is performing exceptionally well. We were surprised at how quickly we filled the residential building with 477 units; it was much faster than in other markets. The rising construction costs and the need for cost-effective residential units made it sensible to proceed now. This large building is crucial, and we are optimistic about its performance. Our deal with Puma was already in place before construction started, which encouraged us to move forward. We decided to develop both projects simultaneously. While the residential building isn’t pre-leased, we perceive it positively given our successes in the past 18 months. Its uniqueness is driven by both the strong market and our achievements in the earlier phases.

Thanks, good morning everyone. So if I think about some of the troubled tenants out there, and I'm generalizing here; you know, obviously you've talked about it but we've seen some that always work with these tenants to restructure leases to keep them viable and often cost rationalize and so forth but it's a little bit more one-off. But my question is, if I were working at the real estate department at TJ Maxx or the gems that are expanding our Palatine and any of the kind of expanding very strong retailers and I see other tenants getting a 30% discount on the rent, I would think and come to you and say, 'You know what? We're bringing customers into your center. There's a lot more value for us to be there. Why are we not getting a discount?' Now, I will answer my own question and I know it was different by property and quality and all that but do you see this as a risk and is that increasing?

I'll keep in. I mean there is no doubt. By the way, if you were hired at any retailer’s real estate department and you did not try to take advantage of an oversupply situation in the country, you probably wouldn't be there that long. So there is no question that every retailer has adopted the position of getting the best deal. That's not different than it's ever been. There is no question that in a more oversupplied environment that they play that card higher. Answer now your own question, when there are no other opportunities, you can play it all out but you don't win. On places where there are more opportunities, you do win. And that goes back to my volatility point from earlier on. I see a bigger spread between good deals and not-so-good deals from that perspective. I don't think there's a company out there that can say that the retail real estate industry is not in a position of change, does not have an overall oversupplied phenomenon associated with it. So you have to look at two things; in your specific real estate, what leverage do you have to a deal and at what terms? And then secondly, outside of basic shopping center leasing, where else do you have to grow? What other ways do you have to grow? If you can't answer those two questions, then you've got a growth problem. We don't have that issue, and that's a big deal. So the last couple of questions have been about all those. Think about this for a second; we have half a million square feet of signed off deals that are going to create over $23 million of NOI over the next couple of years. They're locked. That's a lot of pizza shops and TJ deal, dry cleaners and stuff; that's a pretty good down payment on future growth. And that's because of a vision of the overall importance of place that has been a 20 year or longer view for us. So what you say is, of course, it's a risk, it's a risk to the entire industry and you have to look at what you have to negotiate against that. I think we've done pretty well.

This is Justin on for Jeff this morning. First is congrats on a good quarter and solid year. One for Dan, we saw portfolio occupancy tick down a little bit in fourth quarter, both sequentially and year-over-year. Can you just drill into what happened in the quarter? And then second, just from a guidance perspective, where you sit today, how should we expect occupancy to trend over the next four quarters?

Yes, sure. I mean, occupancy, as we reported, December 31 documents of 2017 versus December 31, 2018, overall occupancy was pretty stable over the course of the entire year from an economic perspective. And so while you saw some point in time to point in time diminishment, I think that was part of it. I think in the fourth quarter we were hit with a little bit of some bankruptcies on a smaller level that led us down a little bit over the course of the quarter. That's a bit of the color that we could kind of point to. I would say that with regards to some of our small shop, I mean, which trended down a little bit as well, a lot of that is driven by the de-leasing activity we've got going on at Sunset and Coco. Without those two properties, our small shop would be about 150, 160 basis points higher. So, I think it's a little bit specific to some of the redevelopment that we're doing within our portfolio with regards to some of those trends. But I would expect over the course of 2019 occupancy and lease rates will be fairly stable.

Okay, great. Thanks. And then Don, sorry if I missed this, but any updates on the Primestor joint venture? I'm curious that these assets are meeting your internal expectations so far. And if there's anything you've learned there from this venture that you might be able to integrate into the overall core portfolio?

It's a very, very good question. And the short answer is yes. I mean it's been a really good experience all the way through. Jeff's on the phone. Jeff, can you take Primestor on this?

We have been working with Primestor for about 18 months, and we are meeting our expectations regarding the property’s net operating income and leasing activity within the portfolio. We had a minor bankruptcy at G stage, but we quickly filled those spaces at higher rental rates. Overall, the joint venture is performing well. Jordan Downs is our first new investment with them since we started the partnership. Everything is going according to plan; we are currently 75% leased with our larger spaces and are focusing on leasing our smaller shop spaces. I believe everything is on track. As for whether we are learning anything that we can apply to our broader portfolio, I am not sure. Don might have more insight on that. It is likely that we have not yet gathered insights, but considering the significant work involved in establishing this relationship, I would expect we will uncover valuable information over time. Don, what are your thoughts?

I believe the term nugget fits well here. We partnered with Arturo and Primestor because they share similar values with us. If you visit several of their properties, especially the one that comes to mind, you'll notice a strong emphasis on location and tenant mix, which is what initially brought us together. We have a shared perspective on these matters. There will be insights that we can leverage in the future, but that has not happened yet.

Good morning. I'd like to drill down a little further on the comparable property NOI growth guidance. I'm just trying to bridge the gap on how to get to the 2%. Because you mentioned occupancy is expected to be roughly flat this year. We spread in, contractual rent bumps are, it seems like that would imply something greater than 2%; just hoping you could provide a little clarity there.

Sure, sure. I think that kind of our core portfolio overall, we'll see decent growth along with some of the proactive leasing activity that we had in 2018, kind of really reaping the benefits into 2019, kind of getting us north of 3%. So you're right from that perspective. But there are specific things in the portfolio that will weigh on some of those numbers. One, some of the late-year bankruptcies that impacted the fourth quarter. We'll see that carry out through 2019, so that will be about a 50 to 60 basis point drag in our forecast for the year in terms of some of those kind of below-the-radar impacts from bankruptcy. And then also I mentioned the redevelopments at Huntington, Congressional; great pieces of real estate with what we're doing and cash flow coming over 2019 as we do that; long-term we're creating value, and you'll see higher rents and higher property operating income over the long-term there, and value creating projects. So again, similar to our proactive leasing activity, this is more of the same but you know just on a larger scale.

One quick follow-up there, so just, is the redevelopment contribution going to be negative then? Just looking, it looks like you only have a few smaller projects that stabilize in 2018 that would contribute to comparable property NOI in 2019 as well? So given that 80 basis point drag, is the overall contribution to next year's growth negative from redevelopment?

We consider redevelopment and new development as closely related. You can expect to see a balance between the two, with some minor contributions from redevelopment as outlined in our recent disclosures. We anticipate ongoing contributions from the roll-ups of Assembly from 2018 to 2019. However, it’s important to note that redevelopment will have a detrimental impact on our comparable numbers.

Dan, just hoping to get you know maybe a few of the items how we should think about for the AFFO adjustments there like you know recurring CapEx number, how that might trend this year versus last year?

We expect that the transition from AFFO to AFFO will be fairly consistent with our 2018 figures. After accounting for our free cash flow, which is essentially AFFO minus dividends, we anticipate it will remain stable. As previously mentioned, we project that free cash flow after dividends and maintenance capital will keep us in the range of approximately $80 million. Additionally, we expect our AFFO payout ratio to align closely with what we experienced in 2018.

Okay, helpful. And then Don, I just want to return to Santana Row and the future office development opportunity there; I mean all the stats on the market out there show and you know shrinks, new supply, you know competitive new supply continues to get leased and there's less of it available. So I guess I'm just wondering; you know does a company have an internal time frame on you know sort of go or no-go on the office there? Since you know and then whether you know we should think about you know the separate 320,000 office versus the million square feet across the street, you know whether there's like separate decision-making on that or you could just launch everything once the market receives you think the market strong enough?

It's a great question. As we look at Santana, we would like to make a decision in the first half of 2019 about whether to proceed with the first 350, which is the building across the street from Santana. That's the next priority. We haven't delivered Splunk yet, but it will be delivered by the end of the year, and hopefully, this project may extend into next year; we'll see how that evolves. Aside from Splunk, we'll need to decide on the 350 soon this year because of the strong market. We are aware of the strong interest we've received regarding office space at that site. We've demonstrated success with Splunk 1, Splunk 2, and AvalonBay has chosen to bring their offices to us. Our first office building is fully leased with excellent rollups. We know we've created a successful office environment there. However, we also recognize that the market will soften at some point over the next 5 or 6 years, and we don't want to find ourselves in that situation then. Thus, we definitely want to make progress and start at least part of it in 2019.

Are you seeing an uptick in interest or signing leases or additional leases with online-native retailers and are there any examples you’re seeing proof of concept regarding long-term viability there?

That's a great question regarding long-term viability. It's too early to say, but I can share that we've had some productive meetings and are making good deals with digitally native brands like Casper, Parachute Home, and Allbirds. This is a positive indicator as there is increasing demand for the types of properties we have. Whether these brands will remain strong for 10, 20, or 30 years is something that remains to be seen. This underscores the importance of having a diverse income stream in our decision-making. Clearly, many of these digitally native brands that just a few years ago were reluctant to open brick-and-mortar locations are now changing their stance. Given the properties we own, we naturally attract that demand.

And just switching gears a bit; I know there are no disposals provided in the guidance. But you guys are out there in the market. Any idea of how many assets are currently being marketed and you know the demand profile you're seeing in the private markets and how they're performing and basically are Cap rates coming in at your expectations or what's the delta?

If we're in the market, as Don mentioned, we have two assets, and we expect to reach around $125 million in proceeds. It's an ongoing process, and regarding those properties, the sales are meeting our expectations. We will see if we can finalize those deals, but we are observing relative stability in demand for our assets, with no surprises so far.

Good morning, everyone. In the prepared remarks, the tone appeared to be quite optimistic about possibly finalizing some acquisition opportunities this year. Can you provide any additional insights or elaborate on those comments? Also, should we generally interpret those opportunities as potentially including a redevelopment aspect based on your previous activities? Is that a reasonable way to consider it?

Let me jump on that for a bit because it's so funny when Dan and I were talking about what to do for you know prepared remarks. You know we want to talk about acquisitions because we do have some things that are close. The bottom line is when we do acquisitions we want to make sure that there's an opportunity to create value. We've never been a volume shop as far as I'm concerned; we never will be a volume shop. It's harder to buy today and assume that rents are going up but it's not 2006 anymore. So that kind of leads us to say what we do primarily will have some sort of a redevelopment component to it. It's what we do best doesn't mean we're not looking for under-market rents; of course we're looking for under-market rents but it's hard to find that. So you know you'll see some acquisition activity from us this year. It'll probably be relatively minor but you know mostly because our best use of capital is in the places that we've already created and we have incremental things to do at them. That is the on a risk-adjusted basis clearly the best thing for us to be doing which is why you know you see that development pipeline so full. But one of the things we never want to be is the one trick pony, and so you know on that, on the acquisition side you'll see the occasional acquisition. It will most likely be part of some strategic plan to either add an adjacency or do something to it to be able to create redevelopment value.

And then just going back to Derek's question on disposition activity. Can you guys just touch on the Atlantic sale in the fourth year?

Sure, we completed the acquisition of a grocery-anchored center for $27 million, with pricing around the mid-60s based on a blended approach. For Chelsea Commons residential, we were in the mid-5s on a blended basis for those two, which we consider somewhat non-core. That's the overview on that.

The demos are too light there for us and it came as part of a package I know 10 years ago, maybe even more now that includes a number of assets and that was one of the lighter demos. It was a good area. It is a good area North, but it is what it was, they were light and so when we looked at what we'd be able to do there in the future we said nothing. And had the ability to tax shelter which is what we did and that's what it got sold.

Thank you for joining us today. We look forward to seeing many of you over the next few weeks so again follow up if you did not receive the Investor Day, save the date. Thank you.