Federal Realty Investment Trust. (FRT) — Q4 2019 Transcript

Good morning, everyone. Thank you for joining us today for Federal Realty’s fourth quarter 2019 earnings conference call. Joining me on the call are Don Wood, Dan Guglielmone, Jeff Berkes, Wendy Seher, Dawn Becker, and Melissa Solis. They’ll be available to take your questions at the conclusion of our prepared remarks. A reminder that certain matters discussed on this call may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any annualized or projected information, as well as statements referring to expected or anticipated events or results. Although Federal Realty believes that expectations reflected in such forward-looking statements are based on reasonable assumptions, Federal Realty’s future operations and its actual performance may differ materially from 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 are in a report filed on our Form 10-K and other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial condition and results of operations. These documents are available on our website. Given the number of participants on the call, we kindly ask that you limit your questions to one or two per person during the Q&A portion of the call. If you have additional questions, please feel free to jump back in the queue. And with that, I will turn the call over to Don Wood to begin the discussion of our fourth quarter results. Don?

Thank you, Leah, and good morning, everyone. For the 10th consecutive year, FFO per share has exceeded the previous year's performance, excluding last quarter’s Kmart real estate acquisition charge. If all goes according to plan, 2020 will mark our 11th consecutive year of growth, as Dan will elaborate on shortly. It’s important to recognize that we have consistently increased our bottom line earnings over the past decade and expect to continue this trend next year. While growth has slowed as the industry evolves, we still see growth, which is a claim no other publicly traded strip can make. Among nearly 200 US equity REITs, less than 5% have managed to grow FFO per share annually. Those companies average a multiple of nearly 21 times. A decade ago, when growth slowed after the 2008 recession, we leveraged our balance sheet strength and diverse skills to advance initiatives that would benefit us in the long term, even if they didn't provide immediate earnings. We proactively developed master plans for locations like Pike & Rose and Assembly Row, allowing us to stay ahead despite challenging market conditions. Today, we're facing oversupply and evolving consumer preferences, but we are similarly focused on future-oriented actions. This includes expanding successful mixed-use communities with less risky, mostly non-retail phases and pursuing new midsized projects like CocoWalk in Miami and Darien Shopping Center in Connecticut, while listening to stakeholders about their needs. Our year-end balance sheet shows $760 million in construction in progress, the highest in our history. We are enhancing our core portfolio by evaluating the strengths and weaknesses among retailers and shopping centers. We are investing in well-located high-quality centers, improving tenancy, introducing alternative uses, and employing sustainable design. We are divesting around $300 million in assets with limited growth potential, including Plaza Pacoima, Free State Shopping Center, a retail office building in Hermosa Beach, California, and the Kohls portion of San Antonio Center. The proceeds are being reinvested in more promising opportunities in Hoboken, New Jersey; Brooklyn, New York; and Fairfax, Virginia. In a cyclical business, our focus remains on growing long-term FFO per share regardless of the current market environment. Now, let's discuss the transactions that took place in the fourth quarter to illustrate this point. We achieved our goals by securing $155 million in December from the Los Altos, California School District for a 12-acre section of San Antonio Center via condemnation, a matter we have discussed for several months. This increased cash position is reflected in our year-end balance sheet. While we need to allocate part of these proceeds to existing tenants on the site, the timing and amounts are currently uncertain, though the net gain for us is significant. In addition, we completed an anchored plaza acquisition in Los Angeles for $51 million. Coupling these fourth-quarter disposals with earlier sales of Hermosa, Free State, and smaller parcels, we raised $300 million at a mid-4 cap rate based on anticipated 2020 cash flows. We are recycling this capital into Hoboken, New Jersey, where we purchased 37 of the 39 buildings in our new partnership last quarter, while the remaining two closed this month. Additionally, we acquired Georgetowne Shopping Center in Brooklyn and the retail strip next to our existing holdings in Fairfax, Virginia in January. Essentially, we invested $300 million in properties that yield better returns than those sold, with an internal rate of return 200 basis points higher. The fourth quarter was active in terms of transactions and operations. By the end of 2019, we signed 457 retail and office leases covering nearly 1.9 million square feet at average rents of $41 per foot, and over 2,300 residential leases at average rents of $2.82 per foot. The combined retail and office leases generated $77 million in annual contractual rent obligations for the next seven-plus years. Our rental income derives from a diverse base of retail, office, and residential tenants. On the development front, we are very active with the completion of 700 Santana Row, which was handed over to Splunk last week and is on budget at $210 million, yielding 7.5%. This property is noteworthy and a must-see on your next trip to Northern California. Construction at Santana West is progressing well, with about $100 million in planned expenditures for 2020, and $150 million in 2021, with no income anticipated until 2022. There's strong interest in this early stage of construction. Full-scale development at Assembly, both residential and office, continues as planned with spending of about $200 million in 2020, $100 million in 2021, with significant income contributions expected later. This is a major development that will significantly enhance Assembly Row, especially with PUMA’s North American headquarters serving as the office anchor. Construction of 909 Rose, our flagship office building at Pike & Rose and the future home of Federal’s headquarters, is on track and budgeted, with an estimated $50 million expenditure in 2020. We are negotiating leases for more than 40,000 square feet in line with our expectations. CocoWalk is progressing well, with 87% of retail space and 57% of office space under leases or fully executed letters of intent. Another $30 million is allocated there for 2020, and we expect to start generating income later this year. Finally, demolition and construction are underway at Darien, where we will transform the grocery-anchored shopping center by adding 75,000 square feet of new lifestyle-oriented retail space, complemented by 122 apartments and 720 parking spaces near the Noroton train station. This project is estimated to cost $120 million, projecting an incremental 6% yield with $25 million to be spent in 2020 and more in following years. There will be no additional income this year or next, but I want to emphasize our large development projects. Our year-end balance sheet shows $760 million of construction in progress. While the Splunk building will be delivered this year and decrease that figure, we anticipate adding around $400 million worth of projects in 2020 and $300 million in 2021 before these sites begin generating rental income. Overall, we are heavily investing in leading-edge real estate ventures as we prepare for a bright yet evolving future in response to shifting consumer demands and retailer strategies. We aim to lead this transformation while continuing to grow FFO per share, albeit at a slower pace in the near term. That's it for my prepared remarks. While it's understandable to focus on short-term occupancy and current earnings, we believe that the company's clear growth strategy and the long-term relevance of its real estate—long after current vacancies are filled—are far more crucial. Now, I'll turn it over to Dan before we address any questions.

Thank you, Don, and good morning, everyone. Another record year of FFO per share as we posted $1.58 for the fourth quarter with the full year for 2019 at $6.33, as adjusted for the acquisition of the Kmart Assembly. An uptick in FFO versus the same period in 2018, and remember, in 2019, we faced an increase in G&A of roughly $0.02 per quarter from the new lease accounting standard. The numbers in the fourth quarter were driven primarily due to higher term fees and higher rental income than last year offset by a shift in timing on property level expenses, both from real estate taxes and a meaningful forecasted tax refund that was pushed into 2020, and non-recoverable property level expenses which were pulled forward from 2020. Both of these are primarily timing issues that should come back to us positively in 2020 but represented roughly $0.02 of drag in the quarter versus forecast. While this quarterly FFO result may seem muted, this was driven primarily by timing, and we had a really successful quarter in terms of all the positive activity Don highlighted in his comments. Our comparable POI metric came in at 2.4% for the fourth quarter and 2.9% for the year, basically in line with our previously increased annual guidance. With respect to retail space rollover, the 99% comparable retail leases during the fourth quarter were 462,000 square feet were written at an average rent of $37.87 per foot, 7% higher than the prior rent. Those results closely track the 379 full-year 2019 comparable deals which were written at $40.48 on average or 8% higher than the deals they replaced. Our portfolio remains well leased at 94.2%, though we do expect that to move lower in the first half of 2020. While we don’t typically provide guidance on our occupancy metrics, given the aggressive level of proactively leasing and some of the recent retailer fallout, we expect our occupancy metrics will trough in the first half of 2020 to the mid-93% level for leased and the mid-91% range for occupied. However, we should see a steady rebound back up to historic levels over the latter half of 2020 and into 2021 given our strong pipeline of leasing activity. A few additional comments I'd like to highlight in our disclosure this quarter that further demonstrate the strength in our business that is not directly reflected in the quarter numbers. On our development schedules in the Form 8-K, please note on page 17, we closed out another $50 million in projects and four of them on time and on budget. And on page 18, we raised our projected yield on $0.01 NOS to 7%, reflecting continued strength in rental growth that adds to sub-market for the amenitized office product we offer there. Now, why do I mention this? It’s because the redevelopment and mixed-use development we do is challenging, and it's really difficult to execute effectively through Federal’s experience and 20-year track record, we have meaningfully de-risked these parts of our business model. Now, we'll turn to 2020 guidance. We have formally provided a range of $6.40 to $6.58 per share. This formal guidance takes into consideration some of the projected tenant failures that have occurred since late October 3Q call; A.C. Moore, Pier 1, and Fairway the most prominent. We felt it prudent to take a more conservative posture as these restructurings play out. This range represents 2.5% growth in 2020 FFO at the midpoint. While this guidance range reflects some discrete headwinds facing us in 2020, which I will get to shortly, our diversified platform is executing on all cylinders, as evidenced by delivering 700 Santana Row to Splunk last week that returned in the mid-70s. The stabilization of the phase 2s at Assembly and Pike & Rose, delivery of smaller projects over the course of 2020 including the Primestor JVs Freedom Plaza, aka Jordan Downs, beginning delivery to start this year. Bala Cynwyd Residential opening in Q2 and a newly renovated CocoWalk expected to start delivering to tenants in the second half of the year. While none of these smaller projects will meaningfully add to 2020, they will be additive in 2021. We also have the stabilization of the $50 million of redevelopment at a blended incremental yield averaging 9%, and we also have a core portfolio excluding headwinds caused by term fees, repositioning, and recent tenant failures which otherwise would deliver comparable growth in the 2.5% to 3% range. Also note that we executed on roughly $300 million of new investments and over $300 million of non-core asset dispositions during 2019 which will be a couple of cents accretive in 2020 but provide more meaningful value creation and growth over the longer-term. Whether another retail REIT can tell an asset recycling program that's accretive to FFO in year one. These items together would drive FFO per share growth into the 6% to 7% range if not for some discrete but somewhat disproportionate headwinds. Let me give some additional color. First, term fees, we had a record year in 2019, earning over $14 million in gross fees. Whether it provides headwinds or tailwinds, we include term fees in our metrics because it is part of our business and the overall strength of our lease contracts provide us with a competitive advantage we can leverage over time. While we expect a strong year again in 2020, we do not forecast getting back to 2019’s levels and therefore forecast a meaningful drag here. A second headwind. Late last year, we identified several attractive, proactive re-merchandising and repositioning opportunities across our portfolio and continue to evaluate additional opportunities, which will drive significant longer-term value creation but at the expense of 2020 FFO. Changing out struggling retailers, we have limited runway in terms of long-term relevancy and replacing them with tenants who we project to be thriving in 2030 and beyond will be another source of 2020 drag. Add in the forecast that impacts the more recently announced retail failures on top of those previously identified such as Dress Barn. Collectively these items get us to a range of 1% to 4% FFO growth in 2020. Regarding other assumptions behind our guidance, comparable POI growth is expected to be at 0% to 2%, which reflects the headwinds we just highlighted. The first and second quarters of 2020 will be the weakest and may even be negative due to term fee drag. We assume roughly 100 basis points of credit reserve comprised of bad debt expense, unexpected vacancy, and rent relief. This is roughly in line with past years’ projected reserves and actuals. Please note that projected lost revenues from the recently announced tenant failures previously mentioned have been incorporated into our guidance and are not part of this reserve. As for G&A, we forecast roughly $11 million per quarter, up modestly from 2019’s run rate. On the capital side, we project spending on development and redevelopment of roughly $450 million to $500 million. As is our custom, this guidance assumes no acquisitions or dispositions over the course of the year. We will adjust guidance for those as we go. Finally, we project roughly $60 million to $80 million of free cash flow generation after dividends and maintenance capital. Now, onto the balance sheet, as has become a Federal Realty custom, we have positioned our capital structure exceptionally well to handle the current wave of value-creating development or redevelopment activity at the company. We finished the year with over $100 million of excess cash and nothing outstanding on our newly expanded and extended $1 billion credit facility. As a result, our net debt to EBITDA now runs at 5.5 times, our fixed charge coverage ratio holds steady at 4.2 times, our weighted average debt maturity remains near the top of the sector at 10-plus years, and the weighted average interest rate on our debt stands at 3.8%, with all of it effectively fixed. Our A-rated balance sheet equipped with a diversity of low-cost funding sources allows us to execute our diversified business plan with a meaningful – meaningfully lower cost of capital than anyone in the sector which is another way we derisk the development activities we have underway. Our game plan for 2020 has all the components in place to position Federal for sustainable outperformance in both FFO and NAV growth over the next decade. That's all I have for my prepared remarks, and we look forward to seeing many of you in Florida in a few weeks. Operator, please open the line for questions.

Thanks. Just first question on the guidance. If you look at the FFO range you put out versus the goalposts you talk about on the last call, you mentioned that you see more Fairway and some others, I think, affected things. Was there also a decision to start more redevelopment? Is that also causing any additional drag versus what you expected last quarter?

No, I think good morning. The additional redevelopment really didn't factor into it; it was more about adopting a more conservative approach given the news that has emerged since late October, three and a half months ago. That was the primary driver.

Okay. That's helpful, Dan. And then I guess just the second question is as we think about this year and you talked about the earnings growth being affected by a few significant move-outs that are unrelated to tenant bankruptcies. You’ve always been ahead of the curve in terms of remerchandising boxes, but this year is clearly a more impacted year than most. So, what I'm wondering is, is this a function of the retail environment and is it going to be a new theme in the federal portfolio? How should we think about our risk of there being a similar type of downturn – downtime vacancy impact in 2021?

Yeah, Nick. Well, let me start on that. We've taken a very holistic approach to all of our centers and really trying to take a look at where we believe these things will be more powerful in 2025 and 2026. That means the notion of place and placemaking is a much – it's always been an important part of what we do but it's a – it's a more important – it's a bigger focus in terms of what we're creating including the type of co-tenancy that is happening there. Clearly, less clothing if you will, more experiential type of stuff including health and beauty; including food and different food sources. So, we look at this holistically as a major change in how retail and centers, including mixed-use Centers serve their communities over the next 10 years. Our staff is not in the middle of the country; generally, it's sitting in the coast and in populated areas with lots of money and lots of people around. And so, we are forward-thinking, if you will, in terms of that. And it's not just about backfill and space. So, does this continue? Yeah, I do think it continues because I think this is a major change in how people are going about their lives when it comes to interacting with retail. But we do it on a balanced basis, and there's nothing more important than that to us to know that as a public company we can't tell you, well, our earnings are going down but it's going to be great in the future. We need to balance both of those things, current earnings along with the sustainability of great real estate. And that's the needle that we thread.

All right, Don, that makes sense. Just last question is on the re-leasing progress on the spaces that are a drag on 2020, NOI, for example, Kmart, Assembly, Stop & Shop, Darien, and Banana Republic at Third Street in Santa Monica.

Yeah. Let me go through those because those are big ones. The Kmart at Assembly we may temporarily lease up the space. But the purpose of that was that’s an acquisition to be developed, and that will be a continuation of Assembly Row. Now, we've got entitlements to do. That takes a couple of years. The timing and the planning is necessary so we'll certainly look for some kind of mitigation, if you will, of the lost Kmart rent. But it's not the driver. The driver is the value that will be created on that 6 acres, which is why I still don't understand the accounting that has to go through the P&L, frankly. That is an acquisition all day long. Come up to Darien; we are now under construction. That Stop & Shop is not going away, and so as a result that will be a completely different use on that parcel. You won't see income contributed there. We're not trying to backfill the Stop & Shop. We'll knock it down. The whole notion there is how to create a whole bunch of value on a piece of land that was obsolete. That shopping center wasn't needed as another grocery and acreage shopping center with that train station. So, look forward to that in the coming years. In terms of Banana, Jeff, I don't know how much you want to say at this point, but we're making some real progress on backfilling that at an incremental rate.

Yeah. Thanks, Don. And, Nick, we can tell you more hopefully next quarter. We're down the road but not to the point where we can really give a lot of detail on the leasing part of us there because we're in negotiations. More to come on that one, but trending in the right direction.

Okay. Thanks, everyone.

Hey. Good morning, guys, and thanks for the call out on our conference for promoting it. In terms of – Don, you talked about $400 million of additional spend in 2020, $300 million in 2021. I know you have many options for capital raising to fund that, but just sort of generally how should we think about the mix? Dan, you said free cash flow this year is $60 million to $80 million; you've also got equity issuance as an option, but how should we think about the potential for additional dispositions as well?

You know that will always be part of our plan, Christy. So, first of all, let's start with the balance sheet that you're looking at, which adds over $120 million of cash on it. Starting out with a balance sheet that, as you know, is about as strong as can be, including a completely unutilized billion-dollar credit line. So, that’s not a bad start. On top of that, there's no doubt we will continue to recycle the portfolio that you should still assume, and I can’t – I'd love to say $150 million or $200 million of dispositions, but the reality is that's very opportunistic and it depends. We just did $300 million last year. We did much less than that the year before. I don't know exactly where that will be in 2020, but it's part of the program; it's part of the capitalization if you will of the company, and we're comfortable in doing that because of the uses of capital that we have to reinvest. So, between the existing balance sheet capability along with asset sales, along with cash flow generated by the business, we're more than covered I think as kind of we've shown you in the past 10 years.

Okay. And then Dan, thanks for all the color on the drivers behind the comp POI range. I'm wondering if there are any properties that are entering the pool in 2020 that have an impact there. And then regarding the term fees, it sounds like they'll be relatively backend loaded through the year. I'm wondering if you could say how the 2020 absolute amount is supposed to come out in FFO relative to the $14 million in 2019.

Okay. Well, maybe I'll start with the term fee question. $14 million is significantly in excess of our 20-year average which typically is about $5 million per year, per annum, and over the last 10 years, it's been about $6 million per annum. Maybe a better way to look at it because we've grown over time is it's roughly 80, 90 basis points of total revenues. This creates a bookend of maybe $5 million to $8 million of term fees, which is kind of what we have currently in that range. We don't expect to get back to the $14 million level. I wouldn't say necessarily it's backend weighted. We'll probably have a little bit of a tougher headwind in the first quarter from term fees because we had such a big one in the first quarter of 2019 with the lowest term fee at supply. And then with regard to your first question, could you just repeat it?

Yes, sir. Just what’s entering the pool in 2020 that might have an impact there?

There will be some things moving around. I mean, I think – but there won't be materially moving things. We are going to move the residential assembly at Assembly Row into the pool. We're going to be moving phase one of Pike & Rose roads as well as the residential and phase two into the comparable pool, and we'll probably also be moving Towson Residential. But all of those have stabilized. So, there won't be a material boost that you'll see from those entering the pool. They've stabilized in kind of one year seasoning we do as part of that methodology for comparable. But you won't see a big boost there.

Hey. Good morning, guys. I guess just shifting subjects a little bit here on the acquisition front. You guys were pretty active in 2019, kind of wondering what's in the pipeline at this time.

Samir, you don't want me to give you the LOIs that we’ve got, right? I mean, at the end of the day, our pipeline for acquisitions does change all the time. There is no question that we were heavily focused on the New York Metropolitan Area in 2019, and that will stay. We will continue to try to increase our holdings in those markets where we've just entered. But that doesn't mean that that – and by the way, the same thing for the Northern Virginia market. That doesn't mean something else won't pop up. One of the things that we are noticing right now are clearly more sellers who are looking to get out for all the reasons you would assume. The trick for us is making sure that we're picking up assets that we believe in the long term for. That could even be a box center in the appropriate place – in a place or two, but it really depends on the metrics. So there isn't anything that is imminent at this point, but you should see us active throughout 2020, particularly in the areas that we targeted for future growth.

And what about on the disposition side? I know you guys have kind of had the strategy to sort of dispose some non-core assets. Yeah. You were a little bit active last year. I mean, how should we be thinking about that sort of disposition volume possibly in 2020 from a modeling perspective?

Yeah. I don't know how to say too much more than I did on the first question, Nick. Weather – I don't know the number is $150 million or $200 million or what it should be. I will tell you we've identified assets that we would like to dispose of because we have things to spend that capital on. In the preparation for those packages and figuring out what the market – what makes sense in the marketplace, we do that very opportunistically. And so there is not a budgeted number, if you will, that you can just put in the model of how much dispositions we would have. You should assume that anywhere from 0 to $200 million or $250 million is what we have historically done and will approach it the same way in 2020 as we have over that period of time.

Hi. Good morning, everyone. So, we're going urban. So, Hoboken and now Brooklyn. Can you go through the near-term opportunity at Georgetowne Shopping Center? Mark-to-market opportunities, merchandising improvements, your planning. They have a Fairway, they had a Dress Barn and a GameStop, to be fair, some stronger retailers, Starbucks, Carter's, Five Below, Chipotle. So, the question is, what's the near-term plan? Where are you actually going with this longer-term? It's a 9-acre parcel, and there are 575 parking spaces.

So, Derek, let me just start something and then I’ll ask Wendy to jump in there after that. But, we’re going urban; I mean we build around the density and the population centers. So, I don't think there’s any change in Brooklyn, New York than there is of – or Bethesda, Maryland or Santa Monica, California or Fairfax County, Virginia. That is what we are; we’re those close-in suburbs, if you will, of major CBDs. I think frankly, a grocery-anchored shopping center with the density that Brooklyn has at the price that we got at that was hard to pass up, to tell you the truth. And, obviously, we underwrote the weakness in Fairway as part of that underwriting process; we didn't know and still don't know, the timing, in particular, of what we can do there. But we know that demand for grocery is ridiculously strong. So, you should assume that that will be a grocery-anchored shopping center in the middle of a densely populated area, with rate upside based on how it was previously managed and run compared with how we will prospectively run that shopping center. You shouldn’t expect it to be torn down and something else happening there. You should expect that they are really in my view, hopefully better run, higher rent, better acre park, open parking lot in the middle of Brooklyn.

Okay. And then San Antonio Center. Certainly, you've seems to have worked out fine. I think you guys paid around $62 million in 2015. So, it was sold under a combination for the $155 million. When will you have to pay out the tenant award portion from the proceeds? Can you share how that's determined and how that works?

Jeff, you want to take that carefully?

Yeah. It's going to play out over the next couple of years. We've been able to work things out with most of the tenants, but not all the tenants, so still on that. The process is relatively straightforward and mechanical but is not going to start for a couple of years. So, Don, I don’t know if there's much more than that that we would want to add.

Well, the only thing I would point you to – maybe point you to is financial statements where there is a recorded gain and obviously, inherent in that gain is an estimation of the expenses that are to be paid out, so I hope that’s helpful. You should know that that is by design very conservative.

Thank you, everyone.

Thank you. On page 17, you break out the delivered projects which are recurring at 9% and then the active redevelopment projects which are delivering at 6%. I wonder if the 6% is the new norm or is this just a temporary mix issue.

Yeah. Well, a little bit of both, Craig. I think it's a great question. The result is – the reality is the construction costs are high, and they are significantly higher than they were a couple of years ago as we started these other projects. So there are steps that certainly part of it. Call it, I don't know whether it's half of the difference or whatever else. The other half is certainly the mix. You can see that Darien has a disproportionate piece in that. That's a complete redevelopment of a shopping center. One of the reasons we're willing to do at Darien or something like that at an incremental 6% is because of the nature of the project and where we believe the future in that asset goes. This is the same as putting a pad out in front of a shopping center where the new income is the new income, and that’s where it will be for 10 years. At something like Darien with a big residential component, too, you should say, Darien too, and we’ll do Darien at 6% because of the incremental rent increases we expect to get, not on the residential side but in terms of the lifestyle part of the center as it gains traction. So you’ve got a big mix component in that but also, as I’ve said, construction costs are up.

Great. And then in terms of re-leasing like A.C. Moore or Pier 1, can any of that occur before the end of 2020, or is that all a 2021 event?

There's nothing better than me looking at Wendy Seher right now because I love that you asked that question. Wendy?

Thank you, Craig. I do think that we will be able to do some other re-leasing and get those documents signed in 2020. In terms of them opening, I think you'll see that more in 2021, but we do have some strong activity in the pipeline right now which gives me encouragement that we will get a fair amount of it done in 2020.

Great. Thank you.

Hey. Good morning. Don, Dan, I just want to go back to the growth topic again. You guys mentioned growth this year, growth next year, and obviously appreciating you're in this for the long game, also specifically detailed a number of projects in your opening remarks which are clearly helpful. But sounds like income will be a little more phased and possibly backend loaded through 2021. So, just broadly thinking about a bridge, is it fair for us to be thinking we should have some temporary expectations at this point for any sort of big reacceleration or any reacceleration of growth next year? Obviously, recognizing those number of the moving pieces in the pipeline and the repositioning as you guys have talked about?

Yeah. Jeremy, you understand it well and you’ve kind of laid it out really well there. There's a lot – there's clearly uncertainty in our business. I’d love what we’re doing in terms of what we’re – what the capital that we’re putting to work, its contribution, as you said will be later in 2021. The big question and answer to your question is how many holds are there at the bottom of the bucket. That's what is for anybody in this retail space; the big unknown. It does make it harder to predict. It does make it harder to say, okay, growth will go back to this number on May 6, 2022 or something like that. But all we think we should be able to – should be doing is looking toward making sure this stuff, all of this portfolio is extremely relevant and as good as it's ever been and better as we go through the 2020s. Balancing it to keep that growth – to keep growth in place but not knowing when we're able to really accelerate to another level is just the facts today and I would tell you it’s the facts with everybody no matter what they tell you. The difference is we got $1 billion of incremental capital that will create that incremental growth going forward. But what’s the negative coming out of the bottom end of the bucket is definitely unknown.

Yeah, that’s fair. Dan, just a quick one. You mentioned that 100 basis points of credit reserve. You also mentioned the A.C. Moore. Just wondering are those baked into that 100 basis points that you're giving yourself or are those on top of the 100 basis points and that’s separate? Thanks.

Yeah. Our guidance reflects a projection of what lost revenue we should achieve or what we’ll be hit with in 2020. That’s reflected in our guidance. If we deviate and it gets more negative, then that’s covered in the reserve. But kind of an expectation of how things will play out with regards to those recently announced retail failures is reflected in the guidance and then a reserve on top of that if it’s worse than we project.

Hey. Good morning. Just got two questions from our end. First, Don, you’ve spoken before that you guys are a retail company. You do office, you do apartments, but at your core you're a retail company. That said, office has definitely been a bright spot this cycle. So, as you guys think about where you're going to spend on the development pipeline or the assets that you're looking at. Are you having your team focus more on assets or opportunities that could involve more office or your view is look we’re a retail company focused on retail? If it has office, if it has residential, great, but retail is our core.

We are fundamentally a real estate company, and our primary goal is to attract people to our properties through strong retail offerings. The core challenge is always how to bring visitors to our locations. Our strategy does incorporate various real estate uses, which we have demonstrated over the years. This evolution towards mixed-use properties enables us to create vibrant retail environments complemented by residential, office, hotel, or other uses that enhance the retail experience. This approach will continue to guide us. While we are open to pure retail developments—as seen in Brooklyn where we effectively maintain value through higher rents in a stable environment—we also recognize opportunities in areas like Hoboken, which features significant residential components, as well as projects like Friend Center, Darien, and CocoWalk. We adopt a comprehensive perspective on all our real estate holdings, and this philosophy has been a longstanding principle for us.

I realize that it's just – it's funny this cycle office seems to be the golden child. So, you have the positive yield revision at 1 Santana. So, I don't know if that was leading you to try and push your team more to office. But the second question is…

Let me say one thing to you there, Alex. It's important that we don't do this for cycles. We don't invest to time cycles. There will be a time when office is no good and retail is back better, and we are building long-term sustainable real estate destinations. And so, no, we don't move along with – you're not going to see us buying industrial properties because it's hot right now, for example. I just always want to make sure we are a long-term focused company and we act that way.

Okay. And then the second question is with all the retailer closings that are announced, some are obviously full liquidations, but some are retailers' parent stores. In general, as I’ve looked at your portfolio and troubled retailers, are you generally pretty good about calling which of your tenants is going to close, or do you feel like some of these retail closings are sort of haphazard or wouldn't necessarily follow productivity logic that you would otherwise could take meaning? Are you caught offside by some of these closing announcements, or all the ones that have happened pretty much apart from a full liquidation you're pretty much like, yeah, we had a feeling they were going to close this one or that one?

Well, that's a good question, and I would – I'm putting a percentage on this not for exactness, but to be illustrative. I would say 75% or 80% of the deal; so we need kind of have a real good idea as to what's going on and why logically a tenant would close the store or renegotiate a store or do whatever obviously. But there is to your point here, 8 percentage, 20%, some percentage, if you will, of decisions being made today that are not as obvious as they used to be and some of that is because there are broader market decisions being made. What good performing stores can be closing too because they don't fit in a business plan of a company going forward. There are other reasons that that sure, they do take us by surprise occasionally. You see it certainly in some of the categories you know like restaurants for example where you can have a decent performing restaurant, but because of that ownership structure, we get surprised with a closed door. Overall, the point here is really to make sure whether surprised or not, we've got backfills, and we've got alternatives to fill that. I don't know how you better mitigate that risk more than with great real estate.

Thanks. to go back to the kind of bigger picture and the growth rate that we can expect from Federal. So, maybe you can – is there any way you can give some color on how much NOI you expect from redevelopment and development from the just from the known projects that you have on the ground today that we should expect in 2020 and how that looks like in 2021?

Well, I mean, let's do it – let's do it this way. When you go to page 17 and 18 of our 8-K that does a pretty good job, I think, of laying out capital and laying out the returns. You can get a pretty good idea of what ultimately those projects and new ones coming up are going to contribute. Now, on the timing, there's no doubt that much of the big numbers on those two pages will not be producing income until starting later in 2021 and then forward. They’re big projects. And by the way, that construction does have certainly in the case of Pike & Rose or Assembly; it does have an impact slight but it's got an impact on the rest of the project because there's more stuff happening with dump trucks and that kind of stuff. You should assume later in 2021 is when you're going to – is when the big stuff on pages 17 and 18 starts producing. As Dan went through, you'll get some of that in 2020 including, by the way, a big one in 700 Santana Row in Splunk, but there's a lot more coming. So, you'll have to back-weigh that. We're still growing, Ki Bin, we're still growing.

Yeah. I mean the reason I asked that is that we've had a couple of years of low growth and I know you're investing for the future and it's all the right decisions, but at least in the near or medium term, the market is trying to figure out when we get back to that 4% or 5% FFO growth on trajectory. That's why I asked those questions.

No. And as…

And just…

Go ahead.

And are you working on anything to perhaps try to decrease that downtime when you already have a leaf on hand and when you have a tenant moving out which I'm trying to know that gap of that downtime?

Absolutely yes. In fact, if you could read our goals and objectives for the company, it is the single biggest thing, not from the first leasing person’s discussion with a tenant to the first dollar of rent that gets recorded in the P&L all along that process, major initiative to reduce that time. It includes some things that you would assume, like a simpler lease; it assumes some things you might not assume, like how tenant coordination happens and who does the work and how it gets priced out and things like that. It assumes some changes in terms of the marketing materials that leasing agents use and how they use them. All the way through, it is a primary focus of this, and I would suspect most companies in this space in 2020.

All right. Thanks, Don.

Yeah. Hi. A few things. First, I was wondering, can you talk about the timing and the magnitude of the recently unanticipated bankruptcies that you've been talking about?

Yeah. I think we've taken a kind of an holistic view of – look, there’s uncertainty in these restructuring processes. We've taken an estimate of how we anticipate getting potential stores back, what stores will stay in place and so forth; we made that estimate. I don't think that there's a, like a kind of a good answer for you in terms of helping you with your – with kind of specificity like Pier 1. I mean I think we're in pretty good shape at Pier 1 where we're, basically, released on one of them. Another one is going to stay because it's one of their top performing stores in the region and the remaining two out of three were trading paper and should have them leased up probably by end of the year. But it's tough to, kind of, go through each one of them, and the bankruptcy process is unpredictable. We’ll see how it plays out.

Got it. And maybe a couple of other numbers questions here. What was the lease term income come in the fourth quarter?

Lease term income was gross fees of about $3.8 million in the quarter, and that was roughly in line with kind of what we had expected.

Got it.

Got it. Okay. Thanks. And last question, with no dispositions in the guidance and $450 – I think it was $400 million to $450 million of investment spend, what's the equity assumption baked into 2020 FFO guidance?

Yeah. Over the course of the year, what’s reflected in our guidance is about $125 million of incremental equity, consistent with what we have done over the years in that range, and it would be kind of played out over the year in terms of your models. We’ve got the balance sheet that we don’t have to use that. We’ve got other sources that will fill the gap whether it be incremental leverage, leverage neutral, leverage asset sales, cash on hand, free cash flow. We’ve got a lot of tools in the toolbox in addition to kind of the opportunistic equity insurance that we’ve been fortunate to be able to issue over the years.

Got it. Okay. That was it. Thank you.

Hi. Good morning. I'm just curious, when you lose a grocer such as Fairway, how does it impact the adjacent small shop tenants? Are there typically co-tenancy clauses that allow them to immediately pay lower rent once the grocer closes?

No, there are not, Vince, particularly in any strongly located place like that. It wouldn't be – certainly wouldn't be in our lease. While we didn't write that lease that was before that, there is no such impact there. So, just the grocery; just that box. But on the other side of that, can you imagine putting a better grocer in that box and what the impact that would have in terms of traffic to the balance of the space, something that we're counting on.

Let me clarify how surprised you were by the Fairway bankruptcy. Additionally, how concerned are you about the smaller regional grocers? Do you anticipate more bankruptcies in the grocery industry over the next five years as it continues to evolve?

Well, let me answer that question in two ways. One, not surprised at all with respect to Fairway bankruptcy. Frankly, it was one of the most – one of the most important parts of our due diligence on buying the asset, and if you knew what we did for due diligence, much of our time was spent figuring out how much demand there was for that space and at what rent they would pay. So no, no surprise there at all. In terms of the bigger question, I don't – new grocery is very different than any other category, and this kind of goes back to the two – the beginning part of what we were talking about here. We’re not just about filling boxes up. We really are about bringing these retail products to places, shopping centers, and mix of these properties to places that will be the best five years from now. To the extent more groceries go out, smaller grocers, less well-capitalized grocers, which if they don't have a particular niche, sure. They're under margin pressure all the way through. I completely agree with that. But again, so what to the extent you've got backfill opportunities that are more sustainable to what that shopping center should be in any particular neighborhood or community? Our stuff, as you know, is a lot bigger on average and a lot more regional on average than a traditional grocery-anchored shopping center in a lot of markets. It's more than doubled the size on average in GLA, for example, and land. So, it's all about from a landlord’s perspective, options, alternatives, and it's hard to imagine there isn't more disruption in the grocery business. Of course, there will be. Just as there will be in every other sector as we move forward. But I think we're well prepared to use that to create better retail destinations.

Hi. In terms of occupancy troughing to mid-93% leased and mid-91% occupied. But then getting stronger in the second half of 2020 and to 2021, where are you hoping to end the year in terms for occupancy or 2020?

I would say kind of back at kind of current levels. We expect kind of a dip over the course of the year and targeting getting back to kind of what our year-end levels were in 2019. But over the course of that, obviously, we'll work our way through kind of that trough and still grow bottom line.

Thanks. And then do reimbursements see more of an impact this year given lower occupancy?

Sure. I mean absolutely with – and we don't talk about that enough. With triple-net leases effectively losing any tenant in that space, somebody’s got to pay those bills. It hurts earnings, too. I think the point that's really important to understand here though is with reduced occupancy as expected, we are projecting FFO growth. That's pretty incredible actually. And that speaks to the balance of the project – the balance of the portfolio, I think.

Agree. And then do you have any Lucky's or Earth Fare to some topic of grocers?

No. We have neither.

Great. Thanks, guys. A quick question. The 1% credit reserve that you have baked in, how does that compare to your five-year historical realized credit losses?

It's actually very much in line with our five-year history and actually where we come out in terms of actual. There's not a material difference but 100 basis points has been pretty consistent at least since I've been here. The actual results are kind of in line roughly with those reserves.

Okay. And then maybe a quick question on the residential rents. What has your experience been on the rental increases after the first year’s rents on newly-developed departments? What kind of increases have you seen at Assembly or at Santana? And how should we think about Pike & Rose in terms of increases for residential? Or do you think that market is different than you think is going to be a little softer than Boston and San Jose?

Yeah. Floris, it's a great question. Obviously, our best population from which to get that information is Santana because we’ve been open as long as we have, and I can tell you that the annual CAGR for those residential rents has been about 3.8%, almost 4% over that period of time, not every year during it but strong. Now, come over to Assembly, Assembly is really interesting because it – if you remember, we started out with AvalonBay during the first phases of residential. We then added a big good 500-unit building. Now, we are adding more supply. Even with all that happening, we've seen rental growth that's – and again, it's only a couple of years in excess of 4%. So that's real strong. In terms of Montgomery County, it’s clearly been weaker. Montgomery County and therefore for Pike & Rose on the residential rents side over the past three or four of the first three to four years was essentially flat. We are now in the last 12 to 15 months seeing the first signs of real strength from that perspective. Not surprisingly, that is very much in line with the strength that we're seeing on traffic counts and sales on the retail piece. As these communities become more mature, there is no doubt that that ignores to the residential up top. So, I'm very hopeful to see sustainable, call it, 3% at these properties over the long term.

Great. Thanks, Dan.

You bet.

Thanks for joining us today. We look forward to seeing many of you in the next couple of weeks. Thank you.