Federal Realty Investment Trust. (FRT) — Q3 2019 Transcript

Thank you. Good morning, and thank you for joining us today for Federal Realty's third 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 after our prepared remarks. Please note that some of the matters discussed on this call may be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. These statements can include any projected information and references to expected or anticipated events or results. While Federal Realty believes that the expectations in these forward-looking statements are based on reasonable assumptions, our future operations and actual performance may differ significantly from what is expressed, and we cannot guarantee that these expectations will be met. The earnings release and supplemental reporting package we issued last week, along with our annual report filed on Form 10-K and other financial documents, provide a more comprehensive discussion of the risk factors that could impact our financial condition and operational results. These documents are available on our website. Due to the number of participants on the call, we ask that you limit your questions to one or two per person during the Q&A session. If you have more questions, please feel free to rejoin the queue. Now, I will pass the call to Don Wood to begin discussing our third quarter results. Don?

Thank you, Leah, and good morning, everybody. Well, we are able to accomplish something this quarter that we tried to do unsuccessfully for the better part of the last decade, and that is to acquire the wildly under-market Kmart leased at Assembly Square marketplace for $14.5 million or about $2.4 million an acre. This very important six-acre parcel will allow us to unlock over time the significant value creation made possible by the success of Assembly Row over the years and allow us to both densify and unify the power center with the mixed-use community. This is a real estate acquisition through and through, a GAAP requirement that the expense currently in the income statement. Accordingly, reported FFO per share is $1.43, but $1.59 excluding that charge compared with the $1.58 reported in last year's third quarter. Also remember that this year's number reflects the 2019 accounting change requiring the expensing of previously capitalizable direct leasing costs of about $0.02 a share per quarter. The Kmart lease acquisition is representative of the focus and prioritization of our efforts these days. At this point in the cycle and given the oversupply of retail nationally, the dependence on significantly higher rents, significant increases in portfolio occupancy and landlord-friendly lease terms as the only means for growth is difficult. It's tempting in a retail environment like this to keep that cash flow growing by making inferior short-term decisions with regard to tenant selection, lease terms, and redevelopment opportunities. We won't do that. Our focus is on the next bunch of years, not the next bunch of months. Because while the current environment is resulting in slower short-term cash flow growth earlier in the cycle, it's also creating more opportunities for medium and long-term value creation in great locations that up until now were not possible. As I said, we've been back and forth with Kmart at Assembly for a decade, with no economic deal close. In 2019, an economically viable agreement was reached, and even though we'll lose $1 million of rent in 2020, the significant value creation potential is obvious. Similar story in Darien, Connecticut, where previously fruitless negotiations with Stop & Shop took a productive turn in 2019 with an economic deal agreed to resulting in the beginning of our planned development next quarter after many years. We bought Darien in 2013. We've been negotiating with Stop & Shop since 2013. Six years later, we have a deal and we'll start construction. Of course, we'll lose $1 million of rent in 2020, but again, the value creation of a redeveloped Darien property will dwarf that. Similar story on Third Street Promenade in Santa Monica, where finally we'll be free to redevelop an entire 45,000 square-foot building on the hard corner of Wilshire and Third Street currently occupied by an oversized Banana Republic that was built for another time and another consumer. We'll lose $2 million of rent in 2020, but because of where it is, we will improve the value of that corner and the value of other buildings we own nearby significantly. You get the idea. I'm not trying to bore you with a dozen stories like that, but suffice to say that we're willing to sacrifice roughly $6 million or $0.08 a share annually in order to create compelling retail and mixed-use neighborhoods that will be worth far more than they are today. The retail real estate environment is more conducive to opportunities like these than at any point since the bottom of the last cycle in 2009 and 2010. The fact that we can do all that and yet still grow overall cash flow, albeit more slowly from year to year, that's the power of great real estate and a deep and diversified skill set. Okay, back to the quarter. We did a lot of leasing, 95 comparable deals and 8 more non-comparable deals, which is new space, for nearly 0.5 million square feet, more than in the last year's quarter. The comparable deals were done at first-year cash rent of $38.93 per foot compared with $36.31 per foot in the last year, a 7% increase. Higher rent was achieved overall across the board on anchors, on small shop deals, on both new and renewal leases. Comparable property operating income was 2.1% higher this quarter than last year's third quarter, and lease termination fees had a minimal impact on that metric, as they approximated $2.8 million this quarter versus $2.6 million last year. The overall portfolio remains well-leased at 94.2%. We would expect that to be marginally lower in 2020 largely due to repositioning opportunities I discussed earlier as well as tenant failures like Dress Barn and others. In terms of our roughly $350 million-plus in annual development spend this year and next, primarily comprised of office development at Santana Row, Assembly Row, and Pike & Rose, along with retail development at CocoWalk and Darien, we remain on schedule and on budget. You'll notice in our 8-K an increase in scope at CocoWalk, as we were successful in getting the two-floor GAP space back early on the west side of the project, thereby allowing us to redevelop that side currently in conjunction with the bigger project. Yields remain unchanged. Our balance sheet at quarter-end shows nearly $700 million of construction in progress. We have a lot going on at this point in time that will undoubtedly create significant new income streams in the future, but obviously not helpful to the P&L this year or much of next. While an uncertain environment like the one we're in has created opportunities for us among our existing tenant base, it's also opened up opportunities among potential sellers, some truly interesting real estate. To that end, we currently have nearly $300 million in acquisitions tied up under contract with expected closings of most of it in the fourth quarter, subject to our completion of due diligence. $30 million in that did close in the third quarter. But even so, I want to take you through those deals at a high level, each one very different from the other and with a very clear value-creation common denominator. The first and largest is our agreement to form a 90-10 joint venture with a local real estate operator for an initial investment of 40-plus individual street retail properties in Hoboken, New Jersey. Our share of the investment approximates $185 million, the properties mostly apartments, over-street retail, prime real estate sites on either Washington Street or 14th Street, two of Hoboken's main commercial thoroughfares. We're very bullish on Hoboken and its access to the increasingly important west side of Manhattan, including the $20 billion Hudson Yards development. That access is easier than in many areas of Manhattan through the path, ferry, and bus, given the immediately adjacent links of tunnels, one or more transportation choices of which are walkable from the buildings we're buying. While we love the potential rent upside in both retail and residential income streams as Hoboken continues to mature and find favor among city commuters, maybe the most important part of this venture is that it creates a far more productive business development arm for us in Hudson, New Jersey. We expect this initial set of assets to be just the beginning. The other two are smaller and very different from the first, a more conventional grocery-anchored center in densely populated urban neighborhoods with under-market rents, surface parking and potential pad development opportunities, demographics that are both incredibly dense with strong incomes. A surface park site this large in the middle of an urban residential neighborhood like this is unusual. And finally, we have an income-producing retail site in Fairfax, Virginia, under contract that is immediately adjacent to our first quarter 2019 acquisition of Fairfax Junction. Separately, each center is relatively small for us with limited future potential. Early in the year, you may have wondered why we bought the first. But together, the combined 11-acre site at the prominent intersection of Lee Highway and Main Street Fairfax is powerful. Along the way, it will serve as a solid current income producer, but in the future, it's wonderful raw material for densification and inclusion of all uses. I go through this combined $300 million investment before they're closed for two reasons. First, think of the breadth of the type of property we look at. Everything from urban street retail with the rent and development upside, while effectively acquiring a regional growth partner, to an urban grocery-anchored shopping center with rent and pad site, to an effective land assemblage with the current yield income stream in an affluent Washington DC suburb serving as raw material for the future. The common thread through all this is compelling long-term retail-based real estate, relevant real estate both for today and in the future with an obvious path to income and value growth. Now how do we pay for it? The sales of Plaza Pacoima and a single building in Hermosa Beach, California, two assets where we could not see a path to growth, got us started, as did the sale of 12 acres under the threat of condemnation at San Antonio Center, which we expect to close in the fourth quarter by the way, along with some pretty attractive assumed debt on the acquisitions to make up the rest. So here's the overall math. These assets, assuming we close on all of them, will provide nearly a nickel of initial annual FFO accretion, net of the lost FFO of the sold assets. But that's just a byproduct of the capital allocation rationale. The reality is that we're investing in assets with great mid- and long-term futures and a 10-year IRR in excess of 6.5% and funding that investment with asset sales and assumed debt of properties with few long-term growth prospects and a 10-year cost of 4.5%. More than 2% improvement in the IRR of nearly $300 million of recycled capital. It's an investment approach like this which balances short-term accretion with long-term value-add that gives us such great confidence in Federal Realty's future through inevitable cycles. All the focus on short-term occupancy, current earnings, and lease-up expectations at this uncertain time is understandable, and it's certainly important. However, a company's clear path to growth and mid-and long-term relevancy of its retail real estate long after the current vacancies have been leased up is, in our view, far more important. Let me turn it over to Dan for addressing your questions.

Thank you, Don, and good morning. Our reported FFO per share of $1.43 translates to $1.59 per share on adjusting for the one-time charge relating to the purchase of the Kmart leased at Assembly. The $1.59 figure is the appropriate comparison for consensus and year-over-year purposes this quarter. While the solid results were driven primarily by continued benefit from our proactive leasing activity as well as lower property-level expenses, it was offset by the weight of opportunistic capital transactions during the quarter, including both debt and equity issuance as well as asset sales, slightly higher G&A than we had originally forecasted, and continued drag from our redevelopment and re-merchandising initiatives of properties in both the comparable and non-comparable pools. Our comparable POI metric came in at 2.1% for the quarter, ahead of our expectations, bringing this metric through the first nine months this year to 3%. In the third quarter, net benefit from proactive re-leasing activity boosted the result by 175 basis points versus third quarter 2018. While we had another strong quarter from term fees, we received very little boost from them in comparable POI with just 17 basis points of tailwind versus last year. We again faced 70 basis points of drag from repositioning programs at some of our larger assets like Plaza El Segundo, Congressional, and Huntington. As a result of the better than expected quarter, we are increasing our forecast for comparable POI in 2019 from a range of 2% to 3% to about 3%. While Don emphasized our focus on positioning our portfolio for the long term and the potential short-term impact of these repositioning and re-merchandising initiatives, the quality of our real estate is driving a broad upgrade in our tenant base, as evidenced by new leasing activity. A few to note include a new 40,000 square foot urban Target as part of our Hollywood Boulevard redevelopment in LA; a new 38,000 square foot Home Depot design opening at Montrose Crossing, a great addition to that center in our home market. We finalized the deal to relocate Walgreens at the Darien redevelopment and significant uptick in rent from the old lease. We have also been proactive in reducing exposure to struggling retailers. One example is changing out two of our three remaining Cost Plus locations to bring in uses which enhance the merchandising at Escondido and Pentagon Row. Combined with the recent opening of Nordstrom Rack at Plaza El Segundo, in the last 12 months, we've reduced our exposure to Cost Plus from four locations down to just one remaining. While our lease percentage ticked up to 94.2% during the quarter, we expect our occupied percentage to begin to see some impact over the next few quarters, as we get after some of these repositioning opportunities that Don previously highlighted. As Kmart at Assembly, Stop & Shop at Darien, and Banana Republic at Third Street are turned over from a relevant tenancy and the full impact of Dress Barn's closure mute our occupancy as well as our FFO to start the year. With respect to new developments, you may have noticed some updates and new additions for the redevelopment schedule on Page 16 of our 8-K supplement. As Don discussed, we expanded the scope of our redevelopment project at CocoWalk with the early recapture of the GAP space on the west side of the project. It resulted in a modest increase in the budget. However, we are maintaining our targeted development yield on that incremental capital. At Hollywood Boulevard, where we are combining and redeveloping spaces to bring in previously mentioned new urban Target and a collection of QSRs while doing a complete refresh on the west side of that project, of roughly $20 million incremental spend at a targeted 9% incremental return. At Lawrence Park in Philadelphia, we locked in a long-term major medical use in less attractive, lower-level space and created more attractive retail square footage at the front of the property. You will see a complete refresh of that property as well, with $10 million of incremental capital at an incremental 8% yield. Now let's discuss some of the capital activity during the quarter. Given the big rally in the treasury market during the third quarter, we were able to be opportunistic by reopening our 10-year notes due 2009 for an additional 100-plus million dollars of proceeds at 2.7%, at the time of issuance, the lowest 10-year bond ever issued by a REIT. We also took advantage of the strength in the equity market by accessing our ATM program for an additional $75 million of proceeds. Lastly, we closed on the remaining $70 million of asset sales we have been working on at the time of our last earnings call, although one closed after the quarter end. We sold two non-core assets on the West Coast for a blended mid-5s cap rate, bringing our total asset sales for the year to just shy of $150 million at a blended upper-5s yield. More importantly, a blended sub-6% unlevered IRR. This activity positions us with higher than normal levels of liquidity with above-average cash on hand at $163 million and nothing drawn on our newly expanded $1 billion credit facility. While this enhanced financial flexibility will weigh on results by a few pennies for the second half of 2019, we couldn't be better-positioned to execute on our business plan on both the development and the acquisition fronts. Our credit and liquidity metrics continue to be at extremely comfortable levels for an A- rating at quarter end. Our net debt to EBITDA stood at 5.3 times. Our fixed charge coverage ratio was steady at 4.3 times, and our weighted average debt maturity remains at 11 years. With respect to FFO guidance for the balance of 2019, we're adjusting and tightening our range from $6.30 to $6.46 per share to a new range of $6.32 to $6.38 as adjusted for the acquisition of Kmart. On a NAREIT-defined basis, which includes the Kmart charge, this range stands at $6.16 to $6.22. The primary driver of this revision is the capital markets activity I just highlighted. Being positioned with more cash on hand, plus running the impact of our asset sale activity through our model impacts results and the midpoint by $0.01 this quarter and a forecasted $0.02 next quarter. With increasing macro headwinds of slowing economic growth, trade wars, and both global and domestic political uncertainty, running the balance sheet with more conservatism, even though slightly dilutive to current year's earnings, seems prudent at this time. Now on to some preliminary thoughts on 2020. We are still in the midst of our 2025 budgeting process. I'll keep this very directional in nature. There's still more wood to chop in finalizing our forecast. We've alluded to the greater intensity with which we are going after repositioning and re-merchandising opportunities in our portfolio for medium- and long-term value creation at the expense of near-term growth over the next several quarters. Roughly $6 million of net drag from this activity driven by the recapture of some larger anchored spaces that we've benchmarked at Assembly, Stop & Shop at Darien, Banana Republic at Third Street, as well as a handful of smaller deals, roughly in that $0.5 million per year rent range at places like Santana Row and the former Cost Plus deals at Escondido and Pentagon Row. We may also get after some more of the re-merchandising opportunities given that we see an environment that is right for upgrading our tenancy. We also have the impact of losing 10 Dress Barn locations, which have a $2.5 million run rate of annual rent that is projected to impact all of 2020. While we are active in discussions to backfill six of the 10 that we've lost, that rent won't begin to come back online until 2021. Despite these headwinds, we still estimate that we have a baseline of net growth of roughly $0.11 to $0.12, which should get us into the mid $6.40s as a low-end of the range. Like with last year's preliminary guidance, it is still too early in our forecast process to predict how much higher we can push the upper end of the guidance range. However, given the diversity of growth drivers we have in our arsenal, particularly growth outside the comparable pool, 700 Santana coming online, continued maturation of Assembly and Pike & Rose, redevelopments such as CocoWalk, Jordan Downs, and Bala Cynwyd Residential starting to contribute in 2020, plus the acquisitions we expect to close this quarter, offset by the aforementioned aggressive proactive re-leasing initiatives and expected tenant departures we've just highlighted, as well as a tough term fee comparable given a strong 2019 on that front, our preliminary target for the upper end of the range could push up into the low $6.60s. We'll have more for you on this topic in our next call, and we look forward to seeing many of you at NAREIT in Los Angeles in a couple of weeks. And with that, operator, you can open up the line for questions.

Hey, good morning. This is Greg on with Nick. I was just hoping to get a few more details on Kmart and Assembly Square marketplace. Curious when they start paying rent and then the expectations on backfilling in terms of timing and rent again. And then what else needs to happen at that asset for you to really start considering redeveloping the Atlantis.

Sure, Greg. Let's talk about a few things about it. So I assume you're pretty familiar with where it is on the site and how it connects effectively the power center with the mixed-use property. Assuming you know that, think about that. First of all, the rent will continue through the end of the year, I think, or just about through the end of the year, then early out. We have entitlement to do on that site. That will take a couple of years for us to be able to start construction and to be able to put stuff together. We don't expect adjusted on that property for those couple of years. We expect to lease up. There's a couple of ways to do it. It may not even be retail in terms of how it gets leased up because at the end of the day it's a giant 100,000 square foot box ground floor right next to transportation, and there is pretty significant temporary tenant activity right now. Nothing done, but something that would be really cool and actually accretive to 2020 to the extent we can get it done. Just not done yet. When we do get that thing re-entitled, which we hope to be able to do in a couple of years, the mapping on that site should be in the hundreds of millions of dollars of spend. So it's a big deal, certainly worth waiting for to the extent we get it done.

And just to clarify on that one. So the entitlements that you have at Assembly Square don't transfer over to that area?

They're fine for retail for the use that is today, but we have some other ideas for residential and/or office on that site in addition.

Okay, thanks. And then just for a second follow-up here. So based on your earlier comments regarding Banana Republic, are you exclusively looking at redevelopment opportunities there? What might that look like? Or are you still considering traditional retail backfill?

Yeah. Hey, Greg. We've got a number of alternatives we're working through right now. When we say redevelopment, we're not really talking about changing the building envelope but reworking the interior of the building and reworking some of the uses that could go into the building. Traditional retail is a potential for a portion of the backfill but not all of it. But we're still working through three or four alternatives we have for the building. Right now the response to our leasing and marketing effort there has been great. Hopefully in a quarter or two, we'll be able to give a little bit more definitive idea on forward heading.

You should expect more rent than what we're receiving today. Often, people look back and think of the $2 million coming from that building as a significant amount, and wonder how to increase that rent. When tenants are paying high rents in such locations, it gives us confidence that we can achieve that, and the necessary capital will help us create a valuable project there.

Yes, like Don said in his prepared remarks, regardless of which direction we go, the uses to go into the building are going to be additive relative to the current tenant to that end of the street and support our other assets on the Promenade.

Alright. Thank you very much.

Hey, good morning, guys. I just wanted to follow up on Hoboken. Did you say what the timing was of the closure of the remaining deals? And currently, is all that space owned by a single partner? And sort of what's the benefit of clustering and possibly aggregating more space in that market?

Good questions, Christy. Thanks for asking them. First, regarding the timing, we closed on the first building in September. Most of the remaining transactions will be completed in the fourth quarter, with some possibly extending into the first quarter. We're working with different partnerships and structures, involving multiple buildings. One challenge we've faced in street retail has been achieving sufficient critical mass to effectively compete and influence merchandising and economic conditions on the street. We successfully accomplished this on Third Street Promenade years ago and have attempted it on Newbury Street in Boston, where we purchased a couple of buildings but didn't acquire as much as we hoped, leading us to sell those when a larger deal fell through. This latest effort involves acquiring 40 buildings both downtown and uptown in Hoboken, which gives us leverage—though I realize this is likely the worst-kept secret in the REIT sector. We have undertaken significant research concerning the demand for these buildings and the associated rent expectations, which has yielded very positive results. Therefore, we are optimistic about the opportunities here. The concept of clustering more retail storefronts clearly gives us greater leverage with tenants looking to enter the market.

Thanks. And then just looking at 2020, thank you for all the detail on the kind of the preliminary range but also a lot of moving parts in terms of space recapture and what's known at this point. As you kind of look into your budgeting and you think about what's unknown for credit loss and tenant fallout, how are you thinking about next year? Are you looking at it more conservatively than you did in 2019, or is it about the same in terms of the tenant credit environment right now?

Yes. At this early stage of the process, I think we're kind of sitting in a similar type of position as last year. I think we would expect kind of that credit loss whether it would be bad debt expense, unexpected vacancy rent relief, kind of in total all of those different components, to be consistent with how we looked at it over the last year and even the year before. I don't think at this point we're getting more conservative or more aggressive. I think where we sit today, kind of keeping it in line with the past history is where we feel most comfortable.

Okay, thank you.

Hey, guys, good morning. Dan, appreciate the direction outlook for 2020. Sticking with that in the revised expectations here in 2019, but also some of the drags you noted, how should we think about the comp POI trajectory from here relative to the 3% you're now expecting in 2019? And then if you have it, how much will be coming into the pool next year in terms of the residential and commercial as those should be pretty additive?

Yes, it's still early in our process. We engage in a thorough budgeting process from the ground up. With only 100 properties, we can examine each asset and its respective business plan closely. However, we haven't reached a stage where we have a clear understanding of the comparable figures. This is more of a top-down approach right now, and I can't provide guidance on the trajectory of the comp POI at this time. There are many factors at play, and plenty of work ahead. From both a residential and office perspective, a significant portion of our residential assets falls outside the comparable pool, though there are some in it, especially on the West Coast. This could be a positive addition and beneficial for the comparable numbers, but it is still too early for us to offer any guidance for next year.

Alright. And then, Don, you got a lot in the pipeline here on the acquisition front. You mentioned the pickup in interesting opportunities out there, that conducive environment to go out and capitalize on these. You obviously have the balance sheet to do so. Beyond the $300 million here, how active is the pipeline beyond that? Is there more in the works that we could be hearing about here in short order?

There is. Jeremy. We were asked a lot to smooth out the notion of acquisitions, how much we would do. We were asked how much proactive releasing. The reality is it's kind of where you start, and you're spot on. It's about taking advantage of opportunities when they avail themselves, and that's not smooth. I think about some of the stuff we're doing on both the acquisition side and the proactive side, and a lot of this stuff, including acquisitions, we have been trying to get done for a long time. But the market wasn't ready. The economics weren't ready. It's a very good time. I'm very optimistic about our future on where we're going and why we're doing it because we're able to do some deals that we're high-fiving ourselves about around here. That hasn't happened in a while, even though it's your turn dilutive. So, yeah, you may very well be hearing about more.

Great, thank you. Don, when you introduced the Hoboken acquisition, you said that it could create business opportunities and development arm in New Jersey. It sounds like that would obviously be beyond Hoboken. But could you describe what you could see happening there?

I could, but I'd prefer not to. We're dating. This is an initial partnership with a local company that has done an amazing job of accumulating everything that's there. They also have pretty large long tentacles into other properties and other development opportunities there. The idea of us of saying what we got and being able to do more with them, including potential opportunities in and around Hoboken. So I'm not talking about Morris County or anything far away from this center of gravity, which is where we're going to concentrate.

Dan, sticking to the comparable point of interest, I want to clarify for Darien. When you lose that Stop & Shop and the $1 million rent goes away, does that come out of the pool next year?

Darien will come out of the comparable pool basically at the start of the year. So that will not have drag on FFO, but it will not have drag on next year's comparable POI metric because...

It's not comparable.

And then also whatever, as Don alluded to, we're going through the process now. Whatever other re-merchandising we can get after. I mean, we've been proactive in the Cost Pluses. There are other opportunities that, as Don said, when you can get after stuff, when there is demand to bring in new tenancy and remerchandised, you get after it. So I think that's something we're working through in our budgeting process right now. So that's right.

Hey, good morning, Don. I appreciate your comparison of the Hoboken versus your efforts on Newbury Street number of years ago. I'm just curious how you viewed street retail in Hoboken versus obviously what's going on here in New York or Miami, where street retail has become sort of a bad word. What gave you comfort that in Hoboken it didn't experience the same situation that we're seeing in other areas?

Yes, it's so funny, Alex. You know me. I am a Jersey kid through and through. It's a whole lot different than Manhattan. The people that go to Hoboken, even that moved to Hoboken, are generally from Jersey who go there. They're not coming from Long Island. They're not coming from Westchester, etc. So it is a completely different market. The in-place rents, Alex, are below $50. We're not talking about $200 street retail. We're not talking about numbers that are scary that way. The in-place residential rents are $2.65. We're not talking about things that have run to the extent of anywhere near the markets that you just made. What has changed? I'll tell you what has changed is its acceptability and its access to the more important parts of Manhattan now, because Manhattan is changing. When you think about getting to that West side from a lot of places in Manhattan, it is not easy. We're hopeful that Hoboken will see part of the momentum from all of that investment. The early deals that we're talking about are validating that thesis.

Hey, good morning. Not to beat a dead horse, but the acquisitions, certainly a sense and excitement in your voice that I haven't heard at acquisitions in a long time. I'm curious what you're getting from the seller side. Are they more willing to be engaged? Are the pricing expectations changing? Is your cost of capital making some of these deals a bit more easy to underwrite? Just curious on what's driving some of that enthusiasm.

A lot of human things. I think there is absolutely the overall notion that the economy isn't going to stay strong forever. There is a recession coming someday. Whenever that's going to be, right now, today, is such where the assets are especially when we're talking about really good assets. We're not talking about sellers who are looking at dumping properties and having their cap rates go up and be able to get paid because there is the only time they can get paid. We're talking about sellers who know when they have a good thing generally and this is just my gut-worried about the future in terms of the economy and know they can get paid pretty well today. That wasn't obvious a couple of years ago. So that's on the acquisition side. On the proactive re-leasing side, I think there has been a major shift in not only retailers but in most businesses in the country of it's better to rip the band-aid off rather than work through problems long-term. I think we see that in a number of situations. There were restaurant companies not doing well in the DC area but well in other places. I think in the old days, they would have not wanted to close their stores. They would have tried to work through it. Today, they're more willing to rip it off and move forward. That psyche is out there today both on the sellers of property side and the businesses in retail today. I believe fundamentally different than it was a few years back. Does it impact pricing? Not significantly. Some of these deals we’re really happy with what we’re doing, how we’re getting them, but they're still really expensive because they're great real estate. Hope that helps.

That does. And I guess I'm curious on the thinking here and the willingness to take that some of the incremental dilution and drag. Clearly, the market is reacting to bit negatively. I think there are higher expectations for growth. So fully appreciating your big thing. You have a great portfolio and you're building for the long term. Just curious how you factored all that into a thinking, why now. I understand some of that may be entitlement related.

No, no. It's an important question. I thought what I covered in my earlier comments, but let me make you crystal clear now. You do it when you can, and it's not always available, and it goes to your previous question on the psyche. If companies are willing to make change to deal economically, not have silly expectations for which there is no economic deal, a lot of people - it's always for sale, it's practically speaking it's not. Today, there is no way we wouldn't do the Kmart deal to save $1 billion next year. There is no way we wouldn't do the Darien deal to save that $1 million next year. If there is four more of those? No, we'll do those too because they're available today. We've been working on this stuff for years. There is a fundamental difference in the psyche of people in our business willing to be reasonable with respect to economics today, I believe.

Hi, everybody. Thank you. Just back to Kmart and Assembly briefly. Are you concerned about the entitlement process for residential there coupled with low development yields and the probable inclusion of a percentage of affordable housing? Would an office mixed-use make more sense, given that Puma will be fully moved in?

I'm concerned about everything all the time on development and the processes and how we get through. But none of that changes the real estate fact that when there is an opportunity, you jump on it. Any decent real estate guy can sit back, grab a cup of coffee, sit on that site and look at the traffic and look at how things go between the two things and say there is an economically viable way to create significant value here. Exactly what that might be? Who knows at this point. I know we know isn't something you can put in the model and factor in to 2020 or 2021 for that matter. But the jump to can they do something better accretively in both income and value perspectives on that six-acre site, that's not a long leap I think most people can get there.

That's a great property and I completely understand. And just shifting gears. We haven't really had an update on the Primestor JV in the West Coast in quite a while. Just any thoughts on further projects with them? Or could we see this relationship develop or grow over the next few years? Are there any opportunities within the portfolio and other metros, such as Miami, to kind of replicate the success there?

Yes. We are operationally doing great right on top of what we underwrote a couple of years ago in terms of the capital that we've invested and the NOI or POI that we expected. Everything from that standpoint is going as planned. We would love to grow the footprint. We're doing that maybe a little bit slower than I would have liked, but we're doing that business. We have Jordan Downs under construction, delivering next year. We were able to acquire the Toys 'R' Us box adjacent to our Los Jardines property in Bell Gardens late last year. We have a couple of other things in the acquisition pipeline that we're working on as we speak. That said, you've heard this from us before. The acquisitions market is competitive and difficult particularly in LA, all of California quite frankly, and we're disciplined about how we go about that part of our business as is Primestor. So to the extent we can shake stuff loose where we think we can make money, we will and we won't do a deal just to do a deal, which is probably why we haven't seen us grow from an acquisition perspective significantly with that platform yet. But it's definitely something we want to do and it's definitely something we work hard on every day. Now, I’ll let you take the second half of the question on other metros.

Yes, conceptually there is something there. Even with respect to what we're doing in Hoboken and around Hoboken, and as we think that through, that's a potential other market that we can look into. We want to make sure we have the experts in those markets before we jump in. So stay tuned.

Yes, hi. I guess on the Hoboken transaction, what's the rough split between residential and retail in terms of NOI?

The split is approximately 70% commercial, including retail and a small portion of office, and about 30% residential.

Got it. Okay. And then, Dan, you mentioned some lease term income in the quarter. Can you just quantify what that was?

Yes, we had a strong quarter in 2018, $2.6 million, and $2.8 million this quarter. So a modest boost to the comparable, but it wasn't a big driver of our outperformance on the comparable basis.

Got it, okay. That was it. Thank you.

Hey, good morning. Could you elaborate on your plans at Third Street Promenade and also talk a little bit about the overall health of the retail area there? There are some vacancies on Third Street and Santa Monica Place, so just wondering how that is impacting the rents you're expecting at the Banana Republic redevelopment.

Again, Jeff.

Yes. There is some turnover on the Promenade right now. That's definitely true. If you go south on the street in the Santa Monica Place, you can see that. We're very pleasantly surprised at what we have going on in Banana Republic. We have 3, 4 alternatives that we're working through. There is competition toward the building for the space of the building. As Don said, the rent, whichever direction we choose to go, we're going to collect materially more rent than we're currently collecting. So because we are in kind of a leasing, marketing, negotiating mode right now, I can't say a lot more about it than that. But we've been pleasantly surprised and it's going to be an accretive deal for us.

The only thing I would add to that, Vince, just for everyone to think about, we evaluate for highest and best use of the real estate. The success of that street has brought demand from other users who pay good economic numbers to be there. We have the ability to look at it that way and therefore execute it that way, and I think that's an advantage.

Interesting, but the Third Street, the entitlements you have in place now are just retail or is there something you're exploring, potentially changing the use or adding additional height, which I know there are restrictions in Santa Monica?

Yeah, we won't be adding additional height. In my previous comment, we're going to be working within the existing building envelope, and depending on the use, there may be some work we need to do with the city, but we're confident that we would get through that.

Okay, great. Thank you.

Good morning. Thanks for taking my question. A follow-up question on the street retail. Your urban street retail you found on two deals, Primestor and the Hoboken transaction. As you think about that, first how much would you need to be able to invest to be able to consider an opportunity like that? And also how many other markets around the country do you think could meet your criteria?

It's a good question, but a difficult one. We don't go out and look for street retail. We don't go out and look for grocery-anchored shopping centers. We don't go out and look for land assemblages to put things together. Basically what we are doing is trying to find places for which demand exceeds supply. When you have a place like that, like Hoboken for example, the notion there is, can you get enough? I don't know what the number is, Floris, but if you look at our history, you get a pretty good idea. We spent like $40 million, $50 million or so, something like that on Newbury a few years ago. We're talking about a $200 million-plus deal that we were unable to get. When we're stuck in just $40 million or whatever the number was at that point, we said, no, we can't impact change. So we sold it. Similar, we just sold Hermosa, which was one building in a great area. If we could control Hermosa Beach, California, I'd love to own and continue to own in Hermosa Beach, California. We didn't. We look at it through the lens of one building and what we can do with that. When we talk to Arturo at Primestor about that rationale, he fully agrees and understands that with us. There's symbiosis with what we're trying to do there. I expect to have that same type of partnership in Hoboken.

Fair enough. Don, it might be early, but can you share any thoughts on return expectations? Will you be introducing the joint venture partner at a later time?

I will be at a latter point. Let us get through the rest of the same get it closed up, and I'll talk more about this.

Hi, thanks for taking my question. You already discussed Banana Republic. But for Stop & Shop in Kmart, would your replacement rents look like there? And then how are you thinking about the population of the 10 Dress Barns in the level of replacement rents or types of redevelopment opportunity?

You bet. Let me take the first two and then Danny take it from there. The Kmart site is more complex. Any short-term replacement rent, I would expect to more than cover the Kmart rent on a per-foot basis. I don't know whether we get the whole 100,000 or whatever it is done, but I think you'll be happy with that in the short term. In the longer term, it's obviously a much better thing from a great perspective, because it's much bigger. At Stop & Shop, you see it in the redevelopment schedule on the overall project of Darien and redeveloping Darien, which will include residential, which will include boutique retail, which will include, well, we'll see what else it includes as we go through. What certainly accretive to the brand we lost.

With regards to the Dress Barns, I think it's a case-by-case basis. One of the things with Dress Barn is they did pay market rent. We expect to see the upside with our Dress Barns by putting in merchandising in tenancy that enhances the broader center and enhances the long-term value of the real estate. You'll see some roll-ups and I think you'll see some staying flat and kind of a little bit of a mix, but there's not a whole ton of rent upside on Dress Barn.

Thanks.

Hey, it's Michael Bilerman with Christy. Don, a quick question for you. Back in May, at the Investor Day, we should have dropped in your opening comments, but thought about selling an interest in your asset base, in certain projects that would raise substantial sums. When I pushed you on it in the follow-up, you said there was nothing planned today. I guess now that your acquisition pipeline seems to be growing, the $200 million deal at Hoboken, it sounds like you got a lot of other irons in the fire. Would you give that more consideration today to bring in capital into some of your deals rather than issuing equity on your ATM?

Yes, that's a very valid question. While I wouldn't say every deal is reviewed, we do look closely at our balance sheet every six months, much more frequently than our annual budget process. We protect our balance sheet rigorously. We always ensure that discussions about the left side of the balance sheet are balanced with equal attention to the right side. Considering our current position, we believe that the prudent use of the ATM is the best option. I prefer to minimize conflicting goals with shareholder funds, as joint ventures and asset sales can complicate that. I have a tendency to avoid these complexities, as I mentioned in May, and that perspective remains the same. However, if there are compelling long-term opportunities for the company's value, we will refrain from large equity issuances. We aim to keep all options available to us. If larger opportunities arise, we would certainly consider them. It's all about finding the right balance. I know this is a complex answer, but if you were collaborating with me, you would see the need to reassess this every six months to ensure we understand all our ongoing projects and how to finance them. So far, I believe we've managed this well.

Alright. But at least an example of Primestor on this Hoboken deal, you have a partner that staying in from a capital and also providing some operating level. A joint venture with a capital partner seems less complex than taking...

It's all the least value add, it's also the least value-add.

Right. I mean, yes, it's more complex bringing in a partner, but we're getting something strategically to create real estate value for those things. That trumps just money, because at the end it's just money.

Right. Like money. I think you do too. So how big is this pipeline? I mean, how big could acquisitions get this next year? You're talking about a $1 billion? Are you talking $500 million?

I'm not, I'm not. If you look at what we've done over our history, the one thing I like about us is balancing moderation. You're probably not talking about $1 billion in acquisitions, you're probably not talking about $0.5 billion of acquisitions, but I would put that at the upper end of the upper limit.

Thanks. Just a bigger picture, Don. Has your view on the health of retail changed at all in the past year for your tenants, and I am not looking to answer for those, but what do you think is mispriced in this business? The simplest answer is no test the value per pound for different types of shopping centers versus maybe even certain retailers that are priced healthy that people are going to go achieve faster with more money.

Yes, that second part of that question, I'd love to have a beer with you and sit and talk it through. It's a lot more complex than a 30-second thing to answer. I'm going to give you a bigger picture point on the first question part of the question that you asked. Yes, I think there is a healthier, frankly, retailer mindset out. It's healthier. It's not always better for the landlord, right? There are tough negotiations, and there is, as I said before, the preponderance of the ability to rip the band-aid off and move forward. I view those things as healthy because it suggests there is a plan for them to move forward. I like that. I hate and we do see this in some grocery operators today where there is still at the real estate level that maybe we'll consider this, maybe we'll consider that, not really sure how that works all the way up to the boards and the CEO's office of those companies. I don't like that. More definitiveness, if you will, in business plans, well, not always good for us, is far better than uncertainty.

Thanks for joining us today, and we will see many of you at NAREIT in a couple of weeks.