Federal Realty Investment Trust. (FRT) — Q1 2019 Transcript

Good morning. Thank you for joining us today for Federal Realty's first quarter 2019 earnings conference call. Joining me on the call are Don Wood, Dan G., Jeff Berkes, Wendy Seher, Dawn Becker, and Melissa Solis. They will be available to take your questions at the conclusion of our prepared remarks. I would like to remind everybody 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 the expectations reflected in such forward-looking statements are based on reasonable assumptions, Federal Realty's future operations and its actual performance may differ materially from the information in our forward-looking statements, and we can give no assurance that these expectations can be attained. The earnings release and 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 operation. These documents are available on our website. Lastly, we would like to remind everybody that we're hosting an Investor Day on May 9, which is Thursday at Assembly Row in Boston. The deadline to register is today. So please reach out with any questions, and we look forward to seeing many of you next week. Given the number of participants on the call, we kindly ask you to limit your questions to one or two per person during the Q&A portion. If you have any additional questions, please feel free to jump back in the queue. And with that, I'll turn the call over to Don Wood to begin the discussion of our first quarter results. Don?

Thanks, Leah. Good morning, everybody. Some noise in this quarter supported earnings as the adoption of ASC 842, the new accounting standard on leases, produced FFO per share by $0.02 in the 2019 first quarter to $1.56. More on those impacts in Dan's comments, but let's talk about results before the implementation of ASC 842. FFO per share was $1.58, excluding the accounting change, compared favorably with $1.52 recorded in last year's quarter, up 4%, and comparable same-store income grew 3.5%. Leasing volume was a little light, as it usually is in the first three months of the year, particularly after our record fourth quarter last year. With 72 comparable deals done, for over 247,000 square feet of space, at an average rent of $45.07 per foot, a solid 10% higher than the $41.03 being paid by the previous tenant. As you might expect, we have the most success meaningfully increasing rents of those shopping centers that have been or are well on their way to being redeveloped and repositioned to sustain their market-leading position. Properties like Brick Plaza, where Trader Joe's just signed to backfill an old Ethan Allen furniture store, are nearly finishing up the complete merchandising of this dominant shopping center. Or EastGate Crossing in Chapel Hill, North Carolina, where an A1 location, along with a recent renovation, creates strong demand and higher rents. Or Bethesda Row, where four new deals signed during the quarter saw strong rent increases even with prior rents on those deals ranging from $59 to now $110 per foot. We had other examples where we rolled back rates but nearly always for the solidification of the merchandising base to create long-term value. Our eyes are on 2025 and relevance at that time. Those few examples serve as a pretty good microcosm of the shopping center leasing environment for us today. The bar has been raised on the product and place being offered. And the importance of a strong location has never been more critical to a retailer's decision. We hear that from retailer after retailer. In our experience, it's not about retailers choosing inferior locations with lower rents to grow their businesses, but rather consolidating around the shopping centers that give them the best chance of making money. We're certainly well positioned on that front. In the oversupplied overall market condition, it means using all the tools in our toolbox to consistently and sustainably grow earnings; after all, it is about growth. Having lots of tools to generate earnings and value is a true competitive advantage. Now one such tool is a fairly negotiated lease with a strong landlord as often as possible. Those strong contracts are an invaluable tool of value creation, particularly when a tenant fails, or are integral to our business. Economically profitable lease termination fees are a direct result of that. Let's talk about one of those this quarter. In the second half of last year, Lowe's announced that it was shutting down its 99 Orchard Supply Hardware stores, including our very productive unit in San Ramon, California and Crow Canyon Commons. When we first put in Orchard Supply, we successfully negotiated a full guarantee from parent company Lowe's, unusual at that time, and no sales kick or other way out of the lease given the strength of our real estate. Accordingly, we are in an extremely strong position to negotiate a termination fee of nearly 3.5 years of rent or $3.8 million, which was paid this quarter and is included in income. We fully expect to have that space re-leased at comparable or better per square foot rent within one year, clearly a strong economic outcome even when considering the capital that will need to be invested. To make a specific point about this fee, because of its size and to reiterate the strength of our leases as an integral part of our business plan, other lease termination fees totaled $1.6 million in the 2019 quarter compared with $1.9 million in last year's quarter. Now, lease termination fees over the past few months have certainly impacted portfolio occupancy as the overall quarter and lease rate fell to 94% from 94.6% at year-end and 94.8% a year ago. Three closures accounted for that decline, including the aforementioned Orchard Supply termination at Crow Canyon, the closing of Brightwood Career Institute at Lawrence Park Shopping Center, along with the post-holiday closing of Bed Bath & Beyond at Huntington Shopping Center. With the restrictions that both Brightwood and Bed Bath had at Lawrence Park and Huntington Shopping Center now gone, redevelopment plans, not just re-leasing plans are underway for significant value-add and redevelopment at both of those shopping centers, and we have strong tenant interest. It's a real benefit to control real estate in markets where economic redevelopment is a viable strategy, and we couldn't feel better about the long-term value creation at those three assets. So let's talk a bit about our future growth generators, and let's start with CocoWalk in Miami. It's going to be a great project. Construction is on schedule and on budget with delivery about a year from now. Two-thirds of the new office space is now leased, as is nearly 75% of the entire project. Uses like a fully renovated Cinepolis Theater, well-known local restaurants and fitness, health and beauty along with apparel round out the merchandising, which are the perfect amenities for the new Class A office. The desirability of Coconut Grove is becoming increasingly attractive for the year-round Miami professionals to live, work, and play. We see it in the local schools, in the hotel, in the housing development, and certainly in the traffic counts. You might remember that we've invested in half a dozen individual retail buildings in Coconut Grove that were also re-leasing at a barometer for demand in rents. When complete, we expect to have roughly $200 million invested throughout Coconut Grove, including CocoWalk, generating over $12 million annually with strong growth prospects of about $70 million of value creation. Next, you'll notice that we've added through our 8-K disclosure a new Santana Row office project across the street at Santana West. You can see the renderings on federalrealty.com or santanarow.com. The 360,000 square foot 8-story office building is hopefully the first of two or even three on this 12-acre site, with a total of one million square feet that will be built spec, with construction to start later this year, and deliveries to tenants beginning in 2021 and continuing into late 2022. The decision to move forward spec was not made lightly, but it's pretty clear that the floor of the fully amenitized Santana Row community was instrumental in our previous success attracting office users here and that the unmet demand for big 50,000 square foot floor plates in environments like this continues unabated, with very little new supply coming on during our delivery period. Basically, we believe this site's adjacency to Santana Row is a huge risk mitigator, as is our balance sheet and resulting in a lower cost of capital. The initial investment on this site will approximate $300 million, though roughly $50 million of that will support parking and infrastructure for future development. Construction costs are up significantly since we started 700 Santana Row, so our underwriting - underwritten stabilized yield is in the 6% to 7% range. We hope to be at the higher end of that range, we'll see, but in any event creating $75 million to $100 million in value. Phase three construction projects at both Assembly Row and Pike & Rose continue on schedule and on budget and both communities continue to mature and cement themselves as important staples in their respective communities. Leasing on the office components of Phase 3s is generating lots of interest at both locations. You will remember that we announced Puma as the anchor tenant at Assembly and that we, Federal Realty, will be the anchor tenant at Pike & Rose as we consolidate our headquarters there. And we continue to get closer to other deals. We look forward to having many of you join us for our Investor Day next week on May 9 in Somerville, Mass., where you can see for yourselves the progress being made at Assembly. And finally, you may have heard that last week, our team, working in close conjunction with city officials in South Miami, Florida, was successful in securing entitlements at Sunset Place that allow for a significant increase in activity density on our site there, with a unanimous vote in our favor by the city. Those entitlements, which contemplate a hotel, residential and commercial GLA with a total of roughly 900,000 square feet, are just the first step, but an important one in evaluating the viability of a meaningful change to the obsolete retail center that stands there today. There are also subject to an immediate 30-day appeal period, but clearly the land under Sunset Place becomes a lot more valuable with those developments. At Federal, and with our partners Grass River and the Comras Company, we are extremely grateful to the community leaders who worked tirelessly with our team to advance their city with this very important first step. Stay tuned. And that's about it for my prepared remarks for the quarter. Let me now turn it over to Dan for some additional color and then open the line to your questions.

Thank you, Don, and good morning. Let's start with a quick review of the numbers for the quarter. The $1.56 of reported FFO per share was a couple of pennies above our model and in line with consensus. The numbers in the first quarter were driven primarily due to lower property level expenses and a strong quarter for term fees, most of which were already reflected in our guidance. Offset by noise around the new lease accounting standard and more drag from our redevelopment and re-merchandising initiatives at properties both in the comparable and non-comparable pools. Adjusting for lease accounting on an apples-to-apples basis, FFO grew 4% for the quarter. Our comparable POI metric came in at 3.5% for the first quarter, ahead of our expectations heading in. Term fees, positive gains from our proactive re-leasing activity and expense savings all contributed to the strong metric. While term fees drove the metric by over 200 basis points, keep in mind the result was accomplished in the face of almost 100 basis points of drag from repositioning programs at some of our larger assets in the comparable pool, like Plaza El Segundo in L.A. and Huntington in Long Island. Now to the new lease accounting standard ASC 842. Don highlighted in his remarks the new lease accounting standard, which was implemented effective January 1, impacted our results by $0.02 per share. ASC 842 had several aspects which will impact our earnings moving forward, as well as require modest changes to the presentation of our financials. Let me walk through some of those components which will impact the numbers. The first is the treatment of leasing costs, which we have talked about over the last few quarters where previously we were able to capitalize certain leasing costs, which will now have to be expensed. The second is revenue recognition, including our straight-line accounting policy. Federal has always taken a conservative approach to assessing the collectibility of straight-line rents, and we will continue to do so moving forward. However, this new standard no longer allows partial reserves and requires revenue to be recognized on a cash basis in certain circumstances. This change resulted in a modest hit to Q1 earnings. And lastly, on our balance sheet with respect to leaseholds, where Federal is the lessee, operating leases will now reside on the balance sheet as operating lease right-of-use assets and liabilities, effectively increasing the balance sheet by $75 million. Capital leases have been reclassified as finance lease liabilities. Neither of these lease liability changes will have any impact on our income statement. ASC 842 also impacts the presentation of our income statement. Those impacts are detailed on Page 11 of our 8-K supplement, as well as in our 10-Q. Speaking of our 8-K financial supplement, you may have noticed a slight increase in the cost of our development project at 700 Santana on our development schedule. The project scope was expanded to include a complete renovation of the Plaza in front of the new building at the end of Santana Row for a total of $5 million. We will receive more rent from the tenants on the Plaza so there is no impact or projected return. We also pushed out the timing of when we will begin to recognize straight-line rent from response at 700 Santana from Q4 of 2019 to Q1 of 2020. However, there will be no delay to the build and completion or to the commencement of CAF rent later in 2020. Now on to the Capital Markets. We closed on 10 additional condos of Pike & Rose during the quarter and have an additional eight condos under contract bringing our total to 88 of 99 units sold or under contract. Almost done, and still ahead of our underwriting. On the non-core disposition front, we are in contracts to sell one of our Maryland assets for $72 million, a low-to-mid six cap rate, and we expect to close later this quarter. We also had conversations ongoing for an additional $150 million to $200 million of potential asset sales. Initial indications show pricing including the aforementioned Maryland sale at a blended mid-5s cap rate. While we don't expect all of these conversations to yield transactions, these active discussions provide further evidence of strength in investor demand for our noncore assets. On the acquisition side, in late February, we closed on a small acquisition in Fairfax County for $23 million. Fairfax Junction, an oldie and CBS-anchored asset, which we viewed simply as an attractive risk-adjusted capital deployment with redevelopment potential down the road. This transaction is a direct result of us opening a regional office in Northern Virginia and adding boots on the ground in the market, which is a great start to that initiative with more to come. We continue to target additional opportunities in Northern Virginia, as well as in our other core markets and hope to have more to report in the coming quarters. Now onto the balance sheet. Our net debt-to-EBITDA stands at 5.4 times. Our fixed charge coverage ratio remains at 4.2 times and our weighted average debt maturity remains near the top of the sector at just over 10 years. During the quarter, we raised $69 million of common equity for our ATM program at an average price of $135 per share. Even with our $1 billion plus in process development pipeline, our A-rated balance sheet equipped with the diversity of low-cost funding sources leaves us extremely well positioned to execute our multi-faceted business plan and continue to drive sector-leading FFO growth over the next few years and beyond. Next is guidance. We are leaving the range where it is at $6.30 to $6.46 per share. We're also leaving our annual comparable POI growth estimate at about 2%, despite the good start this quarter, as we still have a lot of 2019 left to go. Please be reminded that on an apples-to-apples basis, adjusting for the lease accounting standard, this guidance range reflects FFO growth of 2.5% to 5% versus 2018. And with that, we look forward to seeing many of you in Boston next Thursday for our Investor Day at Assembly Row, where you will have an opportunity to take a deep dive into the components of our diversified business plan, as well as see first-hand the breadth of our management team, including the next generation of talented Federal Realty. Today's is the last day to register, so please contact Leah if you haven't signed up and would like to attend. With that, operator, you can open up the line for questions.

Hey good morning down there. So two questions. First, can you just talk a little bit more about the office at Santana West? Your thoughts on going spec versus getting an anchor lease and then what you're thinking about as far as the demand mix for type of tenant? Are you looking for one user? Are you looking for maybe just two large-scale users or small users just some sort of thoughts on how the project is envisioned?

Sure, Alex. This is Jeff. Thanks a lot for the questions. First off, we're very excited about getting going on Santana West. It's going to be a great building. As Don said, it's an eight-story concrete structure with 13-foot floor heights, nice big floor plates, great outdoor space, good parking, and you can walk right across to Santana Row. So, it's going to be a really cool building, very efficient, and we're excited to get going on it. As you know, the office space at Santana Row has been hugely successful. We leased up 500 and 700 quickly once we started construction. All the rest of the space we have there stays virtually 100% leased. Whenever we lose a tenant, we backfill the space very quickly. So, we're really bullish on the office space in and around Santana. The market is in an interesting place right now. There's still significant job growth in Silicon Valley. The bulk of that job growth, as you know, is from tech tenants, and those most tech tenants are office-using jobs. So, there's a lot of demand. And right now, quite frankly, there isn’t a lot of supply. I think the development pipeline under construction right now is six million feet or so in Silicon Valley and 80% of that is pre-leased. And there is not a lot in the pipeline. This will be one of the few buildings that gets delivered in this window and one of the only buildings that has Santana Row-type amenities to go along with it. And that has really become a requirement for getting office space leased today in the valley. So, I think our timing is very good. Our desire, of course, is to have a single building user. It's more efficient. Usually, you end up with quicker lease start rent start. So, that's our goal. Once we get the building underway, we'll see how things are going in the market. And if we're not able to achieve that, we'll start to break the building later in the construction process. So, I think that covers both parts of your question, but let me know if it doesn't. Thanks again.

Jeff, that was incredibly thorough. And then the second question is just going to the lease term fees north of 200 basis points in the quarter, obviously, was a lot, but maybe I didn't pick up any nervousness in your tone about more credit watch list tenants or more trepidation in the future. So, maybe you could just talk a little bit about, because it sounds like generically across retail land first quarter was a cleanup but most of the companies feel like they are looking at better prospects heading forward in the year. So, maybe just a sense of what you guys are expecting? Or if there's maybe still some residual concern on the part of landlords that maybe things look fine now, but maybe as we progress in the year, there's another batch of tenants that are going to experience difficulty later in the year?

Yes, Alex, look it's a new time. And I think this is frankly the new normal in terms of the next few years. And so you don't have nervousness from my perspective in terms of lease termination fees, as you know. What this – the entire mindset here is to get this portfolio and make sure that this portfolio is relevant and consolidating, if you will. Being the most important retail sites, we think we got the best real estate in 2025. I am not particularly worried for every 90 days I can't be. Because then I'd be nervous and worried about this guy or that guy. But the real estate is really good. And to the extent we've got in any quarter a lease termination fee that are a big number or a small number, here again we're laughing. We'll go out on a limb for you. The first quarter of 2020 will probably be weak in terms of comparable same-store growth. How about that, right? Because it works both ways. This is part of the business. I would expect this to continue not necessarily in the size of the number. It depends on what we've got. We're certainly trying to get the most when we’ve got a tenant trying to leave, and I think the continuation of this should be what you should expect. To me, the point is economically getting a bunch of money from a tenant because of a strong lease that can't be replaced for incremental cash over that period of time. It should be something that's applauded, and that's what we're trying to do.

Yeah, let me just take onto that a bit, Alex. Wendy and I and our leasing teams are aggressive about getting lease term fees, right? I mean, we could have let Lowe sit in the space of Crow Canyon pay the rent. They were good for the rent. But I want to control that space and I want to put somebody in that I want in the center. We're confident that we can replace the rent, so why not go after a big lease term fee. And that plays itself out daily when we're talking to leasing people. It's part of our business plan. And we're aggressive about it. So, yeah, expect to see more.

Thanks. Good morning. I just want to go back to the comparable NOI growth guidance of 2%. I mean, if you exceeded that in the first quarter and lease term fees helped that, I guess it implies that you could be below 2% for the rest of the year. And so maybe just talk about how we should think about the quarterly moves in comparable NOI growth? And kind of what's driving some of the rest of the year's slowing?

Yeah. I think we still have three quarters left to go, so there's a lot of 2019 to kind of come across. In terms of where we see trajectory of quarter-by-quarter, we'll be below trend in both the second and third quarter is what our expectation is and we'll probably be in the kind of the 1% range for second quarter, 1% range for third quarter, and we'll be above trend in the fourth quarter. And it's just too so even with a good start to the year for us to be changing our expectations for the annual metric.

Okay. Thanks, Dan. Just second question is on Bed Bath. Are there any other closings contemplated in the portfolio besides Huntington? And if you just talk about your exposure to expirations over the next few years there? Thoughts on how much of that space Bed Bath might give back? And the type of tenant that you think is looking to backfill that size space?

Let's look at this in a couple of ways. First, don't anticipate any additional closings from them this year or next. The company has hired a firm to negotiate real estate deals, which complicates the existing team's business plan, and I'm not in favor of that. On a positive note, our leases in Huntington are solid. The shopping center is conveniently located next to one of the top-performing malls on the island that has recently undergone excellent renovations, which is beneficial for us. There are a few other locations we'd like to reclaim due to the demand for that space, but I won't go into details as we are in advanced discussions with someone there. However, having a significant piece of land next to the mall alleviates any long-term concerns about creating value at that shopping center. Regarding our other locations like Bed Bath or Gap, it boils down to real estate considerations. Losing a tenant of that size does impact us in the short term, as seen this quarter, but it also opens up real estate opportunities moving forward, giving us more options than before.

So, it wasn't like you had to give rent release to five other boxes?

No.

Thanks. I want to discuss the new office building in Santana Row and the parking ratios. So you have about 1,750 parking spaces. That kind of implies, if you use it in one in play for parking space, 205 square feet per employee. I know it's not perfect like that. But just how do you think about how much parking to put there? And would that have been different if you built this thing five years ago?

Good question, Ki Bin. It's Jeff. The 1,750 parking spaces includes a big garage at the back of the site that will support not only one Santana West but two Santana West. So we're building a little bit more parking upfront than we need, because we have to the way the construction works for the second building. The parking ratio in Silicon Valley is driven by the market and the market is three per thousand. So, when we have both one and two Santana West up, we'll be part of three per thousand.

And is there something different about how you build parking garages today? Just getting ready for a world where there is less kind of own or used cars? And is that change at all how you build those parking structures to give you optionality?

We prefer flat floors over ramped parking. This is generally our approach. The two buildings will have one parking space for every thousand square feet below them, allowing executives to park directly under the building, take one elevator, and reach their space. This is similar to our setup at 700 Santana Row. The remaining two spaces per thousand will be in a parking structure located at the back of the site. Looking ahead, in 20 to 30 years, if there’s no longer a need for more than one space per thousand, the parking garage could be removed, allowing us to develop something revenue-generating at the back of the site. We consider flexibility like this when planning our projects.

Yeah. That's an important point, Ki Bin. I mean, it costs more obviously to go onto that building a little bit. It costs more to build a structure not per se but it could the way we're laying it out with flat floors to be able to have that flexibility. But the notion of being able to park it solely on the footprint of the building would be a huge advantage. Because if we are able to ultimately take down that garage behind or convert that garage into a moneymaking office building or other use area, it would be hugely beneficial. So, it's smart thinking relative to today with tomorrow in mind.

Okay. Going back to the Bed Bath & Beyond question, I noticed that you lost one store, but the rents from Bed Bath & Beyond fell by 9%. Similarly, with Ascena, you lost one store, but the rents you’re collecting have decreased by 8.5%. Is there something else affecting the situation?

Well, the Bed Bath & Beyond store that we lost was relative to our other stores a higher rent payer.

And that was certainly the case with Ascena.

With Ascena, the location that we lost was actually one that we didn't really lose. We negotiated to replace it with Lane Bryant, and in Huntington, we split a space and leased it to two strong tenants, Chipotle and America's Best, from a merchandising standpoint.

With the disproportionate rent can you say?

That was driven by the northeast where we conducted a short-term search to fill in space. We have already leased that area to another tenant at a similar rent with improved merchandising. So that was the main factor, and it occurred at one of our centers in Philadelphia.

So, it wasn't like you had to give rent release to five other boxes?

No.

Hey, guys. Good morning. Don, in your opening remarks, you talked about retailers' desire to focus on the best centers. If I look at your leasing stats, your leasing cost in particular, they are basically double what they were for almost all of 2018. I know it's only one quarter and this stuff can be lumpy, but can you just talk about the added cost here to defend and invest in your assets in the current environment we're in? And therefore, should we expect to see a higher level of cost in the near term similar to what we're seeing here?

It depends on the quarter, Jeremy. Don't extrapolate this considerably into the future. We achieved 247,000 feet this quarter and over double that in the fourth quarter. You're primarily discussing a couple of specific deals, which are aimed at reinvesting and repositioning for the future. Not all of these deals are included in the redevelopment schedule, as some merchandising may not fit into that plan. The focus is on letting go of tenants that we believe will not be viable, and on bringing in tenants that we feel will thrive from 2023 to 2025. This time, we're dealing with smaller volumes, so even a few deals have a bigger impact. Just be cautious with the calculations.

Okay. And then, just going back to the last question here that was asked. It was asked on a couple of specific tenants, but just generally can you talk about any sort of activity on the modifications from what you're looking at here, as you just looked to reposition to your point on looking further down the road? How active are you on taking some further modifications just to tee those up for bigger repositioning in the next couple of years?

Very active. That reflects our overall view of the environment. The last business I want to be in is one where I compete by offering the lowest rents or trying to get even cheaper rents. That's not a sustainable model for us. Instead, we focus on consolidating the best properties available in the market. Competing solely on rent is not our goal; we aim to provide a better experience for tenants that allows them to be profitable. We evaluate each property carefully to determine if we can achieve that, and this is part of the list Dan shared regarding disposals. Fortunately, this is not a significant part of our operations, but there are some instances, and we're addressing them. In any location where we have a proactive strategy to strengthen the shopping center for the next five years, we're actively pursuing that. Such opportunities arise as tenants encounter challenges, which is the current market situation. This is why you should anticipate lease termination fees. It's essential to assess whether you believe the real estate will appreciate or depreciate in value over the next five years. We're investing capital wisely to ensure that the properties retain or increase their worth in five years, which is a critical distinction between our business model and others.

Hey, Don. I was wondering if you could just maybe talk a little bit about the kind of the overall leasing environment. Obviously, you had some impact from closures like everybody else in the industry, but sort of as you think about the pipeline and the activity level, how would you maybe stack up the pipeline today versus a year ago? And kind of the mix of those tenants?

Well, you know, Samir, it's funny. I'm always accused of being the most glass-half-empty guy in the room, and I can't help that. It is about making sure that protecting that downside and setting yourself up for the future. There is no doubt in my mind. And I'm looking over at Wendy if I finish this because I want her to jump in out here that there isn't a property that we are spending capital on in the markets that we're in where we don't have significant demand from tenants. Now the clear notion of just trying to backfill a big box with another big box user is not something we really want to do. We don't really see that as the future. And so that's a generalized comment. It doesn't pertain to any particular tenant, but there will be times. We are clearly trying to create boxes or spaces that work for five and seven years and out. That does mean smaller in a lot of markets that we're doing. It does mean capital in terms of splitting or reconfiguring the space that is there. The way we look at that, Samir, is to the extent we believe that that will create a growing stream of income. Again, with the cost of our capital in their figures in all the way through for the next five years, we're going to do it. So it is a disruptive time. I don't know anybody that I talk to on either the retailer side or on the private developer side that doesn't recognize that this retail leasing environment is one that is harder than it has been in prior cycles or prior times. A lot of what I see has leverage on the side of those retailers who certainly will try to renegotiate everything, kind of the Bed Bath example is a good one that we talked about before. But what do you have on the landlord side to battle that? And I don't know anything that's more important than the location and the ability for that tenant to create value and profit in that space. I will take that all day long over my rent being the cheapest as the way to get somebody in. So that's kind of what we see.

I just wanted to add that from a global perspective, as we are in the trenches and kind of having these discussions with retailers, it is disruptive, but we're seeing that it provides us opportunities to strengthen the merchandising which again goes hand-in-hand with that number one criteria of location. It seems to be most important. And as I look at it globally, I'm also looking and listening to deal volume activity, conversation, and that is still strong within our properties. So I feel comfortable that we are able to get after these. It might take a little bit more time than we would want to, especially when we are looking at it on an every 90-day basis. But in order to create the merchandising we want, we are getting the activity and the categories I think are still strong.

The way we use ICSC, Samir, is really to showcase our large developments where we have those big opportunities effectively to do stuff. We will be talking a little bit about Sunset. We will be talking about CocoWalk, for example down there in a big way. We will be talking about those shopping centers that we're trying to reposition. So we always kind of see it with those big opportunities. And then we have our entire team there, and that is all about the blocking and tackling of getting deals done. That's our focus. That's always our focus underneath the highlighted ones that we like to show, and that's where we will be this year. I don't expect that to be different.

Hi. Good morning. Just a follow-up on the lease term fees just some clarification question. So the $5.4 million this year versus the $1.9 million last year is all of that associated with the same-store pool? And then if I think about the 200 basis point or so additive to the Q1 growth rate if that is all associated what's the full-year impact expected to be versus the 2% same-store guidance? Because I know that you're also facing some tough comps in Q3 given that you had a lot of lease term last year.

Yes, I believe most of the term fees fall within the comparable pool, with perhaps one small portion of around $100,000 being in the non-comparable pool. From a broader perspective, this year is anticipated to mirror last year's $7.7 million in term fees. We expect a similar amount, potentially a bit more or less. However, it’s noteworthy that while these figures may appear significant on a relative scale, when considered as a percentage of the company’s size, they align well with our 10-year and 20-year averages. Over the past two decades, the average has been about $4.5 million over the last decade and roughly between $5.5 million and $6 million. This isn't unusual for a company approaching $1 billion in revenue. Even during a strong year like last year, and with expectations for this year, term fees still account for less than 70 to 80 basis points of our revenue.

Absolutely, Christy. When you open a new hotel, there is a ramp-up period, and in both instances, both hotels are performing well relative to expectations, but they are not generating significant cash flow at this stage. We anticipate that both hotels will start contributing meaningful cash flows as they mature. On Thursday, we will discuss this extensively, focusing less on the hotels themselves since they're small, and more on the maturation process of these larger projects. We plan to share some valuable insights into the progress over time that should reassure you about continued growth.

Hey, good morning. Thank you. You guys have had a good run year-to-date and trading pretty close to NAV. So how do you think about funding development, redevelopment via increased ATM action or even equity issuance, given the attractive cost of equity versus further non-sale of non-core assets?

We have multiple low-cost funding sources available to us. Our A-minus rating provides the lowest capital cost from a debt perspective. As we continue to grow, both FFO and EBITDA are increasing, which creates leverage-neutral debt capacity and serves as our primary source of additional capital. We're generating around $75 million to $100 million in free cash flow after dividends and maintenance capital, considering the size of our company. We effectively balance accessing the ATM when our stock is performing well, as it did this quarter, with tax-efficient asset sales that allow us to reinvest in our business, including development and redevelopment projects. This balanced approach to funding will remain a core strategy. Over the next three years, we can sustain our funding needs without requiring additional capital, relying instead on free cash flow, leverage-neutral debt capacity, and a pipeline of over $1 billion in tax-efficient asset sales.

Okay. Great. And any further color on Sunset in regards to the entitlement win? And definitely congrats, it's a big deal. Given the increased construction cost and delayed timing, has your thinking or vision for this site changed as well as development yield expectations?

Well, yeah. Certainly over the three years or three-plus years that we've owned the property, I mean everybody knows what's happened in the retail world. Everybody knows what's happened with structural cost associated with it. So it does make it tougher. On the other hand, my goodness this is a good piece of land. It's actually a great piece of land, and getting these entitlements through to really — it's hard to see that if you're not there and don't kind of see it. I don't know how familiar you are with the site; to imagine how transformational this will be to an entire local region effectively between Coral Gables and South Miami and even parts of Miami like Coconut Grove. It truly — I mean what is designed is really pretty cool. We are tweaking it. There is no doubt that we are tweaking it, because we're not looking at the same type of retail mix. We clearly are changing the mix a little bit in terms of what we see between residential and the hotel and the retail. And maybe even a little bit office as we look at it. So, all of that’s in play. But as of last week, it's not just a theoretical exercise anymore. It is something, and so therefore we are down and dirty into trying to figure out how we can really change the environment for those South Miami residents and everybody around it. There is a possibility we can get something good down there.

Hi. Good morning. You mentioned asset sales of potentially $160 million to $260 million or so. Is there anything reflecting or contemplating that you could take in the back half of the year for acquisitions?

Well, we don't factor in kind of acquisitions or dispositions as we know with regards to our guidance from that perspective. We did acquire an asset during the quarter, a small one. We are planning to close kind of towards the end of this quarter with a $72 million disposition. I think we're going to continue to be opportunistic, trying to get some of that $150 million to $200 million of conversations over the finish line, at attractive pricing. And we look to be opportunistic on the acquisition side as well. We'll see what comes down.

Yeah. Mike, I’d add to that. I mean there are a couple of things we're looking at now. I mean, there are always a couple of things that we're looking at. But there's a couple that we're looking at, and actually have me interested at the moment. So whether we get over the finish line or actually get stuff done that way. Look when you're sitting, you look at all of the economics between acquisitions and development, redevelopment etc. Redevelopment is number one, development is number two, and acquisition is number three. It's how I would rate it today. But that's a global comment. And within that, there are places where that chronology changes a little bit. So, I wouldn't be surprised if you show us some acquisitions. I don't know whether it will be second half of this year or earlier into next year or whatever. But don’t think we're blind to it. We're not.

Good morning, folks. Two questions, one on the leasing front. I think it's about 40% of the leases that have been signed by Federal in the last three years or so are new leases compared to I think it's about just 15% for all your peers. What drives that gap? Is it just presentation? Do you guys exclude option exercises from your activity? Or is it more of a philosophical difference at least to do a preference for churning your tenants more?

No, there is no question. I feel like I have been repeating myself a lot today, so I will work on my articulation a bit, Jeff. Our focus is on creating the right merchandising for the future. It's not just about renewing unsuccessful or average concepts. If we have better real estate, we should be able to attract new tenants for a new economy and a new set of consumer behaviors. This has been one of our goals. What you mentioned is indeed true and not surprising at all. In fact, it highlights the differences in how we approach generating value in real estate. I’m not sure what the answer is regarding option exercises and whether we include them or not, Jeff.

We don't include them.

We do not include option exercises. So, I guess that factors in a little bit too but that's the big point, Jeff. Just about done. The Northern Virginia office we're in temporary space now. But we'll be in permanent space in the next couple of months. The other team has moved over there. So from the decentralization of Washington D.C. for example, just about all set up. In terms of New York and Boston completely set up. In terms of the West Coast as you know for a long time completely set up. Our next question will be what are we doing in Miami? And do we want a full-service office there? How do we want to look at that? So that will be one of the things that that piece of it is certainly not done. I was very anxious to see what happened down at Sunset. Very anxious in spending some more time in South Florida which we do view as a very attractive market, particularly with some of the tax law changes and the attractiveness of Florida that way as it relates to northeast, so interesting. That's the piece of it that's not done, the rest of it’s done and put in place basically.

Hi. This is Reuben on for Tayo. Just have two questions. What would be driving comparable POI growth to close to 1% in 2Q and 3Q before it rebounds in 4Q as was described earlier in the call?

I think it's just going to be kind of timing of anchor box kind of refill and kind of going through some of the churn and some of our anchors over the course of the year, and just tough comps particularly in the third quarter. I mean that will be kind of I think the two of the main drivers of the second and third quarters, but below trend metrics that we expect at this point.

Thank you. I'm returning to shops in the Sunset Place. I notice the occupancy went from 74% to 66%. Is this you preparing the site for the retailers? And maybe could you talk through a little bit about the NOI that may have to come offline as you get more serious about the project?

Yes. There is certainly no doubt that this period of stagnation and the uncertainty at Sunset over the past three years is not ideal for a retailer looking to renew. What I appreciate about Sunset is the anchor system. When you consider a well-performing AMC there, along with other entertainment options that offer games, and the fitness businesses that thrive, plus the valuable parking garage, these elements are beneficial not only for the tenants at Sunset Place but also for medical leases in the vicinity. We have a solid foundation, but the overall situation remains challenging. Craig, you have seen how this has impacted us over the last three years, and it hasn't performed well enough. It will continue to decline until we can effectively implement new deals and merchandising strategies as part of our plan. Therefore, anticipate ongoing deterioration in 2019 and likely extending into 2020 as well.

We performed well over the past few years in maintaining reasonable occupancy levels. We noticed a significant increase, especially in small shop leasing, where we added another 30,000 square feet. However, as Don mentioned, this has been a challenge since we acquired the asset regarding occupancy rates. If we exclude Sunset from our small shop occupancy and lease percentage metrics, it negatively impacts us by 150 basis points. This means we would have been 150 basis points higher on the lease side and 120 basis points higher on the occupancy side for small shops. Sunset has been a significant factor in dragging down those metrics.

Thanks for joining us today. We look forward to seeing you in Boston next week. Please reach out with any questions you have about registration for Investor Day. Thank you. Bye.