Federal Realty Investment Trust (FRT) Q1 2017 Earnings Report, Transcript and Summary

Welcome to the Federal Realty Investment Trust's First Quarter 2017 Earnings Conference Call. [Operator Instructions]. As a reminder, to this conference is being recorded. I'd now like to introduce your host for today's conference, Leah Andress. Ma'am, please go ahead.

Thank you. Good morning. I'd like to thank everyone for joining us today for Federal Realty's first quarter 2017 earnings conference call. Joining me on the call are Don Wood, Dan G., Dawn Becker, Jeff Berkes, Chris Weilminster and Melissa Solis. They will be available to take your questions at the conclusion of our prepared remarks. 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 earnings or anticipated events or results. Although Federal Realty believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, Federal Realty's future operations and its actual performance may differ materially from the information in our forward-looking statements, and we can give no assurance that these expectations can be attained. The earnings release and the supplemental reporting package that we issued yesterday, our annual report filed on Form 10-K and our other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial condition and results of operations. These documents are available on our website at www.federalrealty.com. (Operator Instructions) And now, I'd like to turn the call over to Don Wood to begin our discussion of our first quarter results. Don?

Thanks, Leah, and good morning, everyone. Another real solid quarter for us, with FFO per share of $1.45, 5% higher than last year's strong quarter. So this is a tough comp for and above our internal expectations also. Due somewhat due to the timing of quarterly expenses, particularly demolition of properties to be redeveloped, those will hit later in the year. But also due to less vacancy than expected and low snow removal in Philly and the Mid-Atlantic regions. Now there has been so much talk about the state of retail real estate in the past few months and I'll leave it up to the experts to who determine whether evaluations has overcorrected. Clearly, as of today, the short-sellers are winning. But I do want to make some observations about the environment that we're operating in. First of all, there's plenty of leasing that's getting done, we're doing a ton. In the latest quarter, we did 102 deals for more than 1.5 million feet of space, more in terms of both the number of deals and square footage leased since second quarter of 2014, 10 quarters ago. I've personally never been more convinced that the benefit of the highest quality real estate locations and products particularly in difficult times than I am today. But all the space that's either on the market today are believed to be coming to market, it clearly moves leasing leverage the tenant from the landlord in many situations in many situations. That shift manifest itself in negotiations that hurts in three ways, more tenant capital, more favorable deal terms for the tenant, and more timing to get the deals done. Not the end of the world by any stretch of the imagination, they certainly make the economic sense to do, but helpful nonetheless. The combination of strength of location and strength of balance sheet together make for a huge, that's right, huge, advantage in an environment like this. So let's talk about the quarter from that. Same-store property operating income rose 4.3%, including redevelopment in the quarter, which is the way we run our business as redevelopment of existing properties is such an integral part, an important part and a big important part of what we do. Rent start from splunk certainly helps as their strong growth at Melville Mall, Power Shops and Congressional Plaza. The overall portfolio was 94.6% leased versus 94.4% at year-end, and 94.1% last year's first quarter, to gain of 20 and 50 basis points, respectively. Note that we ended the quarter at 94.6% leased, though only 93.1% occupied, indicative of the signed deals for which rents is yet to start but that's good for later in the year and for 2018. Also, we continue to work through the excess anchor vacancies that we spoke about over the last 2 quarters. Of the 730,000 square feet of total anchor vacancy that we first talk about in November of last year, we're now over 50% leased of that pool, with the income from many of those deals scheduled to start later in '17 and 2018. Rent from new tenants exceeds rent from former tenants by 36% on those deals. Our team is working diligently on our anchor vacancy lease-up initiative to bring us back to a more normalized level, around 98%, and we're almost there with the anchor portfolio now at -- the anchor portfolio is now 97% leased. We'll have the updated detailed anchor vacancy schedule, including the timing of rent start, available at NAREIT in June. In addition, we expect to have last 2 Sports Authority boxes released as part of the redevelopment of both Brook Plaza and Assembly Square, the marketplace portion soon. In our development pipeline, continued construction progress is at the stage where all Phase 2 buildings at both Assembly and Pike & Roses are topped off, with the majority of work going on in the interiors. A higher construction cost estimate at Assembly is largely indicative of how higher leasing capital required there that's more than paid for with commensurate rental income. Preleasing preparation and marketing for the late summer residential movements is underway in earnest in both Assembly and Pike & Rose, and condo sales have picked up at both properties also. The occupancy there will begin in 2018. Please remember how dilutive the residential lease-up period would be at both properties beginning next quarter, but certainly works the value that's being created. 78 of the 107 market rent rate condos are under binding contract at the Assembly, and 27 of the 99 are under binding contract at Pike & Rose. CocoWalk came to investment committee and the Board just yesterday, and we're going to go forward with its redevelopment subject to finalizing the GNP contract shortly. We expect to add to the redevelopment schedule next quarter, but expect the $73 million to $78 million project. Darien shopping center's redevelopment is up next later in the year, we'll be talking about that. We're still working through the Sunset Place entitlements, 700 Santana Row construction continues. Core belief in all of this stuff throughout our company is that investment and great real estate is increasingly necessary to position it for relevance in the next decade and we have a lot to do. In terms of restocking our shelves with raw material for development in the coming years, the first quarter was productive with the February closing of Hastings Ranch in Pasadena, California, we've discussed it on our February call; and the March closing of Riverpoint Center in Chicago. We signed a press release a couple of weeks ago about that acquisition on 17 acres on the western edge of Lincoln Park. And except for the fact that it's the first acquisition we've made in Chicago over 20 years, it's right down the middle of the plate for the type of stuff we look for. It's very infill, it's very unattractive as it currently sits, other anchor markets with limited term and a big piece of land that's subdividable. Chicago [indiscernible] as opposed to Chicagoland suburbs has been a magnet for the continued trend for the organization and most major cities in the U.S. are experiencing. Nowhere in the country had the trends that's more pronounced than Chicago where [indiscernible] companies have moved headquarters since 2008, ConAgra, Google, Kraft Heinz, Motorola, even McDonald's is moving in. Those 17 acres on the Chicago River and Lincoln Park can only get more valuable in our view. And it looks like we may not be done with the acquisition this year. I can't fill in all the details yet because deals aren't fully negotiated. But the reasons I'm bringing it up on this call is twofold. First, with all the handwringing and remind [indiscernible] concern for the fast-changing consumer shopping and behavioral patterns that we're witnessing, we are firmly demonstrating our commitment to the future of great quality real estate. Over the past 20 years that I've been at Federal, there has simply never been a time, never, not 2007, not 2009, not today, where our poor quality real estate outperformed our better assets. Never. For us, great quality has simply defined as locations and the product on them where retailers, residents, office workers and shoppers want to be and will pay up to be there. In short, where demand exceeds supply. In our view, the future locations like that look better than ever. Secondly, because uncertain times like these sometimes provide that final push to convince sellers to part with long-held properties. The property is well located, desirable and has redevelopment possibilities, cap rates remained extremely low as they always do at times like this, but the mere availability is a huge opportunity. The strength of our balance sheet left us to selectively exploit those opportunities. Now [indiscernible] and a personal note, we'll be losing Jeff Mooallem as our Senior Vice President, running the core portfolio as he takes on the CE role -- of the CEO role of a new venture with long-time veteran [indiscernible]. Just a good man who's done a terrific job of setting up our decentralized core over the past couple of years, and I wish him all of the best in the top job he's taken. As most of you know, our bench is deep and I'm thrilled to replace Jeff with 15-year Federal Realty veteran and Senior Vice President, Wendy Cyr. Wendy previously ran leasing for the core with Jeff, is widely respected both inside our company and most assuredly, outside by peeries, brokers and tenants nationwide. Asset management, core leasing and tenant coordination were for important to her. Many of you already know Wendy, but she will be more visible to you in the quarters and years ahead. That's it for my prepared remarks, we've got a lot going on around here and a huge investment in our future. Over $600 million of construction in progress on the balance sheet, in the right type of products for a future with some of the best piece of the real estate and some of the best markets in the country. We're surely will never take for granted the balance sheet that's been set up over the last few years that provides exactly the flexibility and cushion when things don't go exactly as planned. Let me turn it over now to Dan before opening up the lines to your questions.

Thank you, Don and Leah, and hello, everyone. As Don, we'd another strong quarter despite the increasing headwinds facing the retail sector overall due largely to a very active quarter on the leasing front, with 592,000 square feet of total leases signed and 524,000 square feet signed on a comparable basis. For comparable results, we drove an average increase of 11% on a cash basis and 23% on a GAAP basis. The 11% on the cash basis and that's 11.49% to be precise is in line with our expectations. The breakdown for the quarter was 17% on new leases and 5% on renewals. Our same-store NOI grew 4.3% despite a drag of roughly 70 basis points from lower term fees, with only $300,000 of same-store term fees during the quarter versus $1.1 million in the first quarter of 2016. This 4.3% is also impressive given the impact of our proactive releasing efforts. If you recall on last quarter's call, I highlighted a few examples of our proactively leasing activity, which would negatively impact near-term operating metrics. On Third Street Promenade in Santa Monica, where Adidas will replace Express, switching out A.C. Moore for Trader Joe's at Assembly Square up in Boston; and at Santana Row where we traded Bay Club Fitness for Broad Soft. All 3 deals were at meaningfully -- meaningful increases to previous rents, add to that the recently publicized deal at Santana Row to bring in Amazon Books, in place Brooks Brothers. Those 4 leased deals alone represent over 50 basis points of negative impact on our first quarter same-store growth metrics, as well as 30 basis points in occupancy drag, both represent $18 million to $20 million of value creation where you consider the increased rents, impact on real estate value after deducting capital. That's $18 million to $20 million value creation through 4 leases. Clearly a trade-off we would make every time from short-term dilution versus long-term value creation perspective. Plus, the benefits of significantly upgrading our tenant mix further solidifies these properties for the future. Also creating drag in our same-store pool are the activities of our 2 South Florida properties, CocoWalk and Sunset Place, which we intend to significantly redevelop in the coming years. For example, during the first quarter, Sunset Place produced a drag of 30 basis points on our same-store growth, drag we fully expected and underwrote when we acquired the asset in 2015. As we prepare to execute on these extensive redevelopments over the coming years, occupancy and NOI are forecasted to decrease meaningfully as we care down and rebuild significant portions of the existing structures. As a result, as we get to a late 2017, early 2018, we will begin to provide occupancy and other operating metrics with and without CocoWalk and Sunset to better isolate the performance of our portfolio. Now on to Assembly and Pike & Rose. As we highlighted last quarter, Assembly Rows Phase 1 is fully stabilized. Pike & Rose Phase 1 continues to make progress with Dallas and PerSei being 96% and 97% leased, respectively, and the office being 100% leased at quarter end. The property overall continues to be on track to deliver 75% of projected stabilized POI in 2017, in line with our guidance. On a tax co redevelopment side, we continue to find the opportunities to redevelop our core portfolio, creating value and positioning our centers to outperform in their respective markets. Two new projects have been added to our redevelopment schedule in the 8-K. At [indiscernible] and Richmond, where we are demolishing small shop and anchor space and relocating another anchor to accommodate Dick Sporting Goods at the property in a new free cut 9,000 square foot store; and at [indiscernible] Mall outside of Princeton, where we acquired an office building adjacent to the center and are redeveloping the property for retail use. With respect to AFFO for the quarter, it increased 8.4% over 2016. FFO per share was $1.45, which represent the 5.1% increase over the first quarter in 2016 and is $0.02 above both our internal projections and consensus. As Don mentioned, this was largely due to the timing of demolition expense between the first and second quarters, which roughly was $0.01 as well as forecasting higher tenant bankruptcy that actually occurred during the quarter, with our portfolio so far having minimal exposure to many of the troubled retail names declaring bankruptcy so far in 2017. This, coupled with lower removal expense, represented another $0.01. On this point, let me highlight them. We have no Eastern Mountain, no Gander Mountain or no Gordon, no Family Christian, Route 21, Limited or Gas, no American Apparel, Wetseal or Crocs, we have only one [indiscernible] and the rent is well below market. So it's unclear if we can even get that back. Only 2 BCBG's, one of which we presently expect than to keep open and another we have already backfilled. Just 1 BBN and 2 RadioShack and only one of our 6 Payless is currently on their closure list. Plus, our total exposure to Payless is just 0.11% of total revenues, although we do have 3 [indiscernible] locations, which closed the last week. Of what we know today in terms of closures from those tenants, it represents just 0.1% -- 0.16% of total revenues and our total exposure to those tenants is just 0.44% of total revenues. While we forecast to give back part of this outperformance over the balance of the year as the delayed demo commences this quarter and the challenging retail environment continues, we are revising upwards our 2017 FFO guidance to $5.85 and $5.93, increasing the bottom end of our guidance range by $0.02 to $5.85. This is being driven largely by our recent acquisition activity with the combination of our acquisitions of Hastings Ranch in Pasadena, and Riverpoint Center in Chicago, getting about $0.015 of gear with Hastings Ranch providing an NOI yield in the low 6s and Riverpoint in the mid- to upper-4s. Please note, we left the upper end of the range unchanged at $5.93 given the uncertainty still facing the retail sector and remain cautious on our forecasting for the remainder of the year. Despite the strong first quarter, we still expect same-store growth with redevelopment for 2017 to be around 3%. Second quarter is not expected to be as strong given the difficult comparable relative to 2016. Now with an update on the balance sheet. We had $217 million outstanding on our $800 million credit at quarter end, driven in part by our acquisition of Riverpoint on the last day of the quarter. Our the credit facility is the only floating rate exposure we have. Our weighted average maturity remains an industry-leading 10-plus years and our weighted average interest rate is now at 3.9%. Our debt-to-EBITDA is at 5.6 and our interest coverage ratio remains very healthy at 4.5x. Before we turn the call over for your questions, I would like to share with you another discovery we've made at Federal since joining late last summer. During our Board meeting earlier in the week, we took a look back over 15 years to review how Federal has performed during some of the previous difficult cycles in retail, and again came away extremely impressed by the resiliency of Federal's portfolio as well as the performance of the company as a whole. We compiled numbers for report publicly every quarter under 1 sheet showing FFO, FFO per share and same-store growth quarterly over the 15-year period. And the performance is remarkable, particularly when you consider that the great recession occurred in the middle. Remind me to show it to you next time we are together. For many of you that will be at NAREIT next month, Leah tells me there are a few slots still available given we have 3 schedules running as Jeff Berkes will join me and Don at the Hilton in New York. And with that, operator, you can open up the lines for questions.

[Operator Instructions]. Our first question comes from the line of Jeff Donnelly with Wells Fargo.

Dan, I guess, if I could just stick with you on sort of the source of the newses. Can you just walk us through how you're seeing that for the remainder of this year? Just I was thinking between development spending and debt obligations on the horizon that it might command a lot of your cash flow this year and I'm wondering whether it intensified any of these asset sales or equity issuance or due to some cash at refinancing?

Well, from where we stand right now, I think we have about $206 million of -- or $217 million of mortgages, which we'll refinance at the property level. So that's any of the near-term debt maturities that we have. With respect to our development spend for the remainder of the year, it stands at around $300 million roughly. We will utilize our free cash flow, which is projected to be in the $70 million to $75 million range for the year, as well as we do have some assets under consideration for sale currently. And I think we'll look to be opportunistic with regards to issuance of equity as necessary. But I think that, that is generally how the rest of the year lays out.

And maybe just a follow-up, I recognize you guys aren't here to give us guidance on 2018. But current consensus estimates for this year about 4% FFO growth and next year, it accelerates a little bit about 6.5%. I recognize you have some major developments opening, with also some capitalize costs coming into the mix. I'm just wondering how you're thinking about given this current retail environment, is there sort of a chance? Or how we should be thinking about maybe a slow down or a slow wing of stabilization on some of those new development assets? And just how that can kind of flow through your FFO grow into '18?

That's a good question, Jeff. When I sit back, we think of it in 2 kind of buckets. The same-store portfolio and when I say same-store I certainly mean, redevelopment I mean, the stuff that we do day in and day out. And then the hedge is to create a value and not only is that obviously that Pike & Rose and Assembly and also CocoWalk, [indiscernible], there's a whole bunch of other smaller initiatives that fit in there. I'd like to break those things out going forward, and Dan and Melissa and I are talking about that to be able to show kind of the base case the wheel of the company and then what those other initiatives are doing. And the reality is as we've been saying for a couple of quarters, you've got dilution in the period of time that we're talking about, the end of '17 and into '18 from building those things and doing those. Frankly, more confident than ever before, even given the current environment, Jeff, that what's happening with the type of product that we're building, that we're doing is being accepted. So this bifurcation if you will between the have and have nots, be it quality real estate, it gives [indiscernible] becoming more pronounced to tell you the truth. And so as long as we do a good job disclosing and showing the difference between kind of the base portfolio and the other initiatives, I think you'll like what you'll see. And the reason I'd say that is, I don't know whether because of that some level of unpredictability, if you will, is how Henry leads us up, Montage leases up, et cetera, being as precise as we'd like to be for 2018 is not possible. But when you bifurcate it between the stuff that's more predictable and the stuff that's longer-term value creative, it will give you the tools to decide what you think about the value is being value creative and that's the most important thing that we want to do to improve our disclosure that way. So I'm not just -- I'm not being pinned down, if you will, to a specific number, which is really hard to do at this point in time. But the value creation part of it is, frankly, easier to see than it's ever been before.

Our next question comes from Nick Yulico with UBS.

Could you just's talk about, you put the new, I apologize I joined a little late, you put the new details in the credit quality of the tenants, the credit ratings of the tenants, which was helpful. Do you have any historical perspective you'd be able to provide on how you think that's been trending over the last 5, 10 years?

Well, it's plenty of asset because I do think that Dan was referring to in his prepared remarks with respect to the 15-year history, we've got some pretty good stuff behind that. That kind of shows, historically, what has happened as tenants go out, how they are, what's happening after releasing of that. And I've been talking to Dawn Decker, who's been here in the middle of that for the longest period of time. And we are putting together some analysis probably I have on the phone for you today. But Dan's comment, coupled with mine about over that period of time, 10 years, 5 years, 15 years, it's really clear how better quality properties perform in terms of being released and turning over rather than poor quality properties. And we're breaking that up and kind of looking that internally at ourselves a lot, and that's why I said what I said that. Maybe by the time we get to NAREIT, we'll be share some of that. But you will see a bifurcation between great assets and the not-so-great.

Our next question comes from Christine McElroy with Citi.

This is Katie McAnon [ph] for Christy. Can you provide a little more color on what you're seeing on the demand side to the backhaul space today? And how much of a crossover are you seeing as far as more traditional mall-based tenants looking for space in open air centers today and vice versa?

Yes. Well, let me start, Chris, you're going to do the second part of this. The first part with respect to backfilling and the demand is, I think pretty well represented by this anchor sheet that you have all seen before, and we'll see again in terms of that 730,000 feet of anchor vacancy that we had. Do I wish it were back in the day when there were 3 and 4 tenants competing for every space? You bet I do, that is no longer the case in my conversation about the leverage that has moved 2 tenants from landlord is spatial. Having said that, as you can see if you own the great -- if you own well-positioned, great quality assets, demand is strong. And I think we're demonstrating that clearly with the empirical data with the announcement of leasing that we're doing. Deals are not as good and that -- I hate that. And that's what happens cyclically throughout our business, but demand remains strong.

I agree with everything Don said. What I would add is I think that's a great example of a tenant we've secured 2 deals with, one has opened at Santana Row and the other one we've announced for Pike & Rose and that's Sephora, which is traditionally been a pure mall-related retailer, they see that there's a core customer that is not shopping at the malls. And as they open up Santana Row, it had no impact at all on what was going on, on the Daly Mall. So I do think that, that test will turn into a more opportunity for well-located real estate that matches up with the attributes that our portfolio has. And so we look forward to having more of those conversations and we would at other mall-related retailers as they look for growth opportunities.

I think the thing that Chris is saying that it's an important point that retailers are less discerning as to the format that they're going into, whether it's a mall or whether it's opening or we're something in between. It's about where they think, they are more open-minded because they have more leverage too. They're more open-minded about where they will go to and that's why we're having success in the locations that we are in pooling malls tenants, but also pooling other types of the dwindling number of boxed tenants, et cetera, that come fill our properties.

Our next question comes from Paul Morgan with Canaccord.

I think you said that the spread on the released anchor space, was it 36% for the GOC, Don, which is I think around kind of where you had, in your prior presentations, what that had been. Any color on kind of whether there's been movement since kind of the past disclosure? You talked about roll over on the remaining square feet being more in the 15% to 20% level. Does this happen been a lot of new deals since that time? Or those that you have done have been a little bit better than what you were looking at?

Yes, it's interesting, Paul. There hasn't been change at all in terms of what it is that we had told you and what we're expecting, although it depends on which deals, obviously. And you have to remember the big schedule that showed kind of what they are, we added this quarter a couple of deals that we're on, which included A.C. Moore. It included a fitness company that got took out Hancock Fabrics space of Westlake. We previously talked about Total Wine that was this year, but it was announced last time. Those deals were in line with what we thought it would be and they tie down into that 36%. As I look at all the remaining anchor space, I think I told you one time the implied role of the remainder was about 19%. The schedule I'll show you today shows that at 21%. Now these are small, little differences when you're talking about this amount of space. But it does all -- much of this is happening, the stuff that's taking the time particularly is happening in products, which are under redevelopment. And that's a real positive thing from a standpoint of retailer looking to what's going to invest -- where it's going to invest his capital today.

Great. I know there's lots of kind of puts and takes going on in same-store number. It sounds like Q2 will be lighter than Q1 based on what you know now. Do you have any color on kind of how you expect the cadence to look as you head into the back half of the year? Obviously, I think the comps are going to start to get easier, but any other stuff you know in terms of openings coming in and how that will impact the number.

Yes. No, I think that with the demo expense lighting from first quarter into second quarter and with a tough comp in the second quarter from a lease termination fee perspective, we're expecting second quarter to be lower than our first quarter same-store. I think that our proactive leasing activity is going to continue to put some pressure on our occupancy levels. And I think that we're making good progress leasing rates are increasing. However, occupancy is going to tread water for probably at current levels through the middle 2 quarters and probably look to tick up towards the end of the year. So but that's why we're keeping our same-store number kind of when you look and see and are proceeding with caution from a forecasting perspective, we're maintaining our 3% same-store growth forecast for the balance of the year.

But you know, Paul, this is my particular [indiscernible] in terms of these numbers what we are absolutely going to do is to enhance our disclosure. That shows, that gives you a very clear reason, very clear understanding of what's bringing same-store up and what bring same-store down. And we haven't worked that through, it's just in this quarter close, as I've said to Dan, he said to me, we've got to talk about this, we got to talk about that, but there should be a graphical way then we can do a better job communicating with you on that.

Our next question comes from the line of Samir Khanal with Evercore ISI.

When I look at your 3% guidance number, how much sort of extra bankruptcy or occupancy loss is baked in the guidance at this point? How much more cushion is there? You've obviously baked in [indiscernible], BCBG, Payless. Just trying to see what else, I mean, how much cushion is there at this time for occupancy lost?

Yes. I think that we do a pretty rigorous forecasting as we talked, Samir, before in terms of where we expect vacancy space by space, property by property over the course of the year. And I think -- our bad debt expense over the last 5 years has run 2% to 5%, 0.2% to 0.5% I think we're kind of forecasting that same amount. We're forecasting some unexpected vacancy on top of that. And I think we feel very good about the cushion or our forecasting for the balance of the year based on where we sit today and the fact that we're really not getting impacted by the bankruptcies and the store closures that occurred have today. But we remain cautious and we remain cautious through the balance of the year getting over our SKUs.

Let me point to that, Samir. I don't want Dan to be mad at me for showing how quickly things can change. As of 1.5 weeks ago, we had 3 operating [indiscernible] new stores. And overnight, the Canadian company decided to close down all of its U.S. stores. They're still obligated on the lease, we will see what happens, we've got some pretty good security. But that's all got to play itself out of yet. But overnight, there was a company that closed down its operations. And so that's the kind of environment we're working. That is why you're hearing the caution throughout our whole industry. That part of it is absolutely appropriate. It's [indiscernible], are we over-the-top in terms of that caution. It's a good example, stuff like that happens every single year. And we got cushions to effectively be able to handle that. Can we handle 3 and 4 and 5 and 7 of those? No, but we don't see that's the thing. That is the type of environment we're in and that's [indiscernible] cost with it.

But if you kind of take a step back and you think about sort of the pace of closings, I mean. What inning do think where Julian for the industry as a whole? I mean, look, there's headwinds are clearly impacting growth this year and in the 2019. But I just kind of getting a sense from you as to how you guys are thinking about this internally?

Well, I can tell you, Samir, I'm not sure I can do the baseball analogy part. But what I can do is it's really important that each guy in my position at all of these companies has done their best over the -- not today, forget about today, over the past 3, 5, and 7 longer years to set the company up to be able to take, if they get through, periods like this, which are inevitable. And so it is -- when I look at it, it does, it is why there is development product that's coming on. It is why we've diversified a bit to include residential, to include office some other uses on the real estate we have. It is why we tried really hard to not go after the particular tenant that's doing deals with everybody like HH Gregg was 5 years ago or 7 years ago whenever the heck it was. It's a myriad of a whole bunch of things because we are in a cyclical business, there's no doubt about it. It's why I want to show you how this portfolio has performed over 15 years. And you can compare that to anybody you want to compare it to. And you'll see, well, I'm not going to tell you it's the third or the fifth or the ninth because I don't know. I can tell you how we're prepared to continue to grow, that's a bit slower. But we're prepared to continue to grow through the depths of the situation like this.

Our next question comes from Alexander Goldfarb with Sandler O'Neill.

Just may be continuing that from a different angle. As you guys, obviously, experience the current environment, do you feel that your traditional credit underwriting model, your grid, is as effective as ever? Or you found that you have to tweak how you underwrite a retailer or tenants credit?

That's a good question, Alex. And understanding the way we view credit, the way we view our capital, the way we view our allocation of capital is similarity with a long-term focus in mind that left side of the balance sheet, the right side of the balance sheet needs to make sense together over that period of time. There's no doubt that parts of the cycle that we're in, that we toughen that up a bit. With respect to, and we have a totally different standard to the extent that there's significant capital going into a space versus a place that's got no capital or less capital going into the space, we'll be much more relaxed in the latter case. And going through this, I'll tell you through '08 and '09 and '10, I'm not saying it's the same thing. But at a time when there's trepidation on the retailer side from however you look at it, that we had some real good experience in terms of how we take it up our credit positions, on how we thought about our allocation to capital, that same thing is happening today absolutely. And by the same token, when there are tenants who have kind of figured it out how, I mean, TJX, carries more weight with us today. They've always been a huge important tenant, but they are not over another tenant. We're looking in a particular place where we got 2 tenants competing, one of them is CDS, the other is not. And the CDS leases is clearly being given more credit -- not the one you're thinking about, Dan is looking me, I'm sorry, ordinarily. And so you're right, once you have to take that subpiece and put that within the prism of the entire long-term view that we have of creating this, making these properties as good as they're going to be in 2025, even though it doesn't feel good today when you look at the stock price or figure out how it's going to impact in the short-term same-store income.

I think we're all trying not to look at stock prices these days. Second question is, on the investments side, you said though there's more of the acquisition [indiscernible]. Just curious, just given how the stocks are performing and the trepidation over the retail environment, in times like you guys are comfortable buying in the market even if cap rates are influx or maybe cap rates are influx, it's just the headlines. But if you could just help us understand how you guys lock in a deal knowing that it's not going to close for a period of time. And in this environment, there's a chance that cap rates do move the wrong way versus where you underwrote.

First of all, it's a very, very good question and the first answer to that always is balance, right? It's why we're not a giant acquisition shop, never were, never will be. But having said that, we did learn some pretty good lessons in 2009, '10 and '11. And the first thing that we learned during that period of time was this giant bunch of additional great property that was going to be available to us was not. And the reason it's not is because great quality real estate is not often available, and the cap rate on it often doesn't change at all in some crazy locations because it's such a rare commodity. It actually gets more [indiscernible]. So from our perspective in the type of stuff that we want, we need to maintain a business focus and a balance that includes all 5 tools, I'm not going back to the -- based on analogy the past year's because you will make fun when I do, but we do need to make sure that our toes in the water with every single tool development, as well as acquisition as leasing. So making sure that stuff that we've been working on for a long time, that could really work out well for the long-term part, piece of the company even if it seems expensive, if you will, today because of the uncertainty and what's going to happen to those cap rates, doesn't to us to the extent we know that we'll never get a chance to own it again.

Our next question comes from Ki Bin Kim with SunTrust.

Don, you mentioned tenant negotiating leverage. And I think importantly, you mentioned about TI's possibly going up. Could you guide us a little deeper into to that? Because to me, it really feels like that is the variable that doesn't get a lot of attention that needs to.

All right. I completely agree with you. The notion of capital to get deals done, from our perspective, frankly, has always been an important part of our business. Because often, I don't mean going back in the redevelopments, but when we have the ability to get the right tenant in the space that's going to really help us solidify shopping center, with our cost of capital, we are willing to use it with respect to that tenant. Those tenants are demanding more today, there's no doubt about that, it's an important part. What has never happened is the understanding throughout our industry of the cost of the capital, no understanding for our industry whether it is likely that after a fix leave term and option is exercised so as to which how you lay out that capital, how you get a payback, how you determine in the contract what the capital is specifically used for, it's a big deal. It ain't an open check. It can't be an open check. So just like all other parts of our business, there are differences to between how capital is employed, what the terms are, and the period to how it gets effectively paid back. We are -- we treat TIs just like we treat request for redevelopment money, just like we treat request for acquisition money, or G&A for that matter. It's allocation of capital. There's no doubt that those trends are going negative from the standpoint of landlord that we are putting more capital out. We're also saying no a lot more, too. We're saying no where we're not comfortable as that capital is going to create a return based on the life of that tenant, based on the terms that they're demanding, in terms of the use of that money. It's part of the reason these things take longer for us to get deals that. We're not going to just build it to get a deal in there. And so I don't know how you look into it deeper, but I welcome it because I think that discipline for tenant capital is every bit as important as any other use of capital. Let me do my [indiscernible]. So thanks.

And [indiscernible] percentage is way too tough to do it now. But what's the magnitude of that change you think?

I didn't understand the question.

How much more capital is it -- are tenants asking for? Where is this trending?

Yes. I don't know that I can do that. Listen, if you take a look at our schedules and pull it together from long period of time and you look at all new leases, it's hard because there's a lot of in our redevelopment capital also, but over the years, I mean, there is a clear trend to additional capital. It's not crazy. I mean, it's nothing like you're saying, oh my God, these deals don't make sense anymore. But -- and I'm afraid you have to lay out a percentage because it's not any particular 90 days or even any year. But if you look back and you can look at it over 5 years or so or even more than that, you can get the idea that there's a slow increase in the demand, the movement of risk, if you will, to reach from landlords because they perceive our cost of capital being lower in some cases and because they can. In other cases, you have to have a point to say no on deals that don't make sense.

And do you any quick update on the occupancy cost ratios for the tenants that you track? And how that's trended lately?

I really don't. It so hard for us. I think it's the least reliable metric that we have. Something less than 1/3 of all of our tenants report occupancy. The other thing about that is, I don't have a good number for you. I know that when we pull it together in some kind of a regular thing, that the last time we tried to make some big exercise to see kind of where that was, we're around 9%. And I still feel like that's about where we would be.

Our next question comes from [indiscernible] with JPMorgan.

One quick question on Freight Farm venture. Just want to get a little bit of sense of why you made the venture? What are you trying to get out of it? What's the thought process behind it? And then on a separate note, maybe if you could just talk about what are the potential negative surprises at this point? It seems like businesses doing well and the same-store don't find that. What would be a potential negative surprise at this point?

Well, that by the way, those 2 questions are very different. Let me start with the last one. I mean, the negative surprises are the things that are the macro surprises. They are the [indiscernible] that decide to close all their stores over a night. We have no more visibility that way. As I said before, we do have bad cushions in our assessment, that's part of our regular forecasting process that hits that. But there are negative surprise. And depending on who they are and what happens that, that is certainly a risk. Our construction cost absolutely remaining high. I'm actually really proud of how we do manage construction costs. It's -- we certainly have our overruns at times, but usually very small or manageable. Things come up, especially redevelopments that were not anticipated, but that's always a possibility. The issues on the negative surprises are very much macro issues today. In terms of Freight Farms, I appreciate you asking the question because it's deeper than Freight Farms, and I don't want to be on a high horse here at all. But I do want to say, we always look for ways to increase the value of our real estate. And it's kind of through and through, all of our ways of thinking. And the notion of -- I mean, sustainability throughout this company is kind of the way we think. We are an urban company. And so we don't have a lot of stuff in any stuff in rural areas, we don't have a lot of stuff in suburb areas. So there's an urban thought process throughout this company. It's why there's more solar income at this company per amount of GLA than I think anybody else. I know companies like Kimco may have more solar income, but they're a whole lot more real estate, too, despite the number. So what's really an important part of the way we think. The back of a shopping center that has -- that is not the most attractive place in the world, that has great restaurants outfront. The notion of being able to use a part of the unused part of the back to put containers that are able to grow vegetables with the right light, with the right water that the restaurants outfront can use, I call it farms to table, I guess it's container to table, effectively there is a really powerful thing. It's not a powerful in terms of the income generation that Federal gets from it. It's small, it's rounding. But what it does do is create a sense of community that we tend to believe in. And so that restaurant or that investor, et, cetera look favorably to things like that, and we get an outsized benefit for doing things like that as evidenced by the call -- your question on this call. But it's more about a mindset of how we look at our real estate and our responsibility environmentally.

Can I say one thing on that? I think it's also really important internally that the employees done really has driven this culture internally at Federal and it's something we're all very proud of. So as Don talks externally, I also wanted to make a point, it's really important internally to us, too.

And our next question comes from Chris Lucas with Capital One Securities.

As you guys look to refinance the mortgages that the [indiscernible] got going and to grow very different products. Just curious as to sort of in the conversations that you're having with lenders, whether or not the conversations are different than you expected, whether or not there's a perspective that they're bringing that is different than you might have expected 6 months ago.

I would say that we are already kind of locked in on our refinancing of the Plaza El Segundo mortgage. It comes due in August, we have an open prepayment in June. We'll be refinancing it, I think, we got excellent execution. I think it will be sub-4%, 3.83% for $125 million, got to right size the mortgage. We had a lot of interest from both the insurance company and the lending market and CMB assets as well as balance sheet lenders. The lending market is still very, very strong even for retail properties. I think we're about to launch a refinancing of the October maturity for the growth. And we'll let you know when we get in different feedback as we enter that process. But we fully expect to get a very, very attractive pricing on that and kind of in the 3 handle on it with significantly improving from a cash interest expense and also from a GAAP interest expense, the financing costs will come down significantly on both of those.

So you got, what, about a $50 million GAAP in the refi between what the balance is on Plaza El Segundo and what the new mortgage will be, how are you planning on funding that?

With cash. Effectively, you get free cash flow, we've got asset sales that we've executed and that are in the pipeline. So it's a combination of those. When we acquired Plaza El Segundo, one of the variances we had was we were able to a very highly levered asset. We were able given kind of our balance sheet to be able to take that on and not face some of the issues that a lot of other buyers would have to deal with regards to absorbing that high leverage mortgage and satisfy the lender's requirements. So, yes, this is just the right size of it. And we fully have the cash on hand to kind of fill the gap there.

I'm showing no further questions in queue. At this time, I'd like to turn the call back over to Ms. Andress for any closing remarks.

Thanks, everyone, for joining us this morning. As Dan mentioned, we do have couple of slots up at NAREIT. Please let me know if you're interested in meeting with the team. Have a great day. Goodbye.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great afternoon.