Federal Realty Investment Trust (FRT) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to First Quarter 2018 Federal Realty Investment Trust's Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to introduce your host for today's conference Leah Brady. You may begin.

Good morning. I'd like to thank everyone for joining us today for Federal Realty's first quarter 2018 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. I would like to remind you that certain matters discussed on this call may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any annualized or projected information as well as statements referring to expected or anticipated events or results. Although Federal Realty believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, Federal Realty's future operations and its actual performance may differ materially from the information in our forward-looking statements, and we can give no assurance that these expectations can be attained. The earnings release and supplemental reporting package that we issued yesterday, our annual report filed on Form 10-K and our other financial disclosure documents provide a more in-depth discussion of risk factors that may be affect our financial condition and results of operations. These documents are available on our website. Given the number of participants on today's call, we kindly ask that you limit your questions to one or two per person during the Q&A portion of our 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 our discussion of our first quarter results. Don?

Thanks Ms. Brady and good morning everyone. Really good quarter for us with all metrics from FFO to lease rollover growth to comparable property income growth, and others exceeding our expectations. Strengthened with across the board and while I always caution about reading too much into any 90 day period, our performance here was encouraging. FFO per share of a $1.52 beat consensus estimates by a couple of cents and was nearly 5% better than 2017 first quarter. That growth came despite the 60 basis point hit to occupancy caused by a couple of big vacates like DSW and Hollywood, Walmart and LA Sardines and [Mart] at Grand Park. Those vacancies were all anticipated and either have been or nearly released or part of a broader redevelopment plan as is the case Grand Park. In any event those rents will be more than replaced when backup. Rental income was up nearly 8% in the quarter reflecting both the Primestor acquisition mid way through last year and the fruits of strong leasing over the past few quarters in both the core and mixed use divisions. When those things are combined with lower operating expenses in G&A in many areas the overall result is powerful. So let’s get some of the results and let me start with leasing. 78 deals for over 400,000 square feet at an average rent of 31.4 to 51 a foot 22% above the $25.91 that the previous tent was paying in the last year of their lease. By the way, TIs this quarter were lot lower than last year it’s not a trend just the fact this quarter. Example of strong rollover deals were evident in both small shop and anchors and on both coasts. Floor and decor replacing one of our two Kmarts in the portfolio, a deal we’ve been working on for quite some time and so with shopping center and suburban Boston was a big one. So with Bob's Discount Furniture that has taken the old Walmart space and one of the Primestor assets in greater Los Angeles that our restaurant offerings at places like the avenue at White Marsh and Linden Square at Wellesley, Massachusetts also contributed. Quarter-after-quarter the evidence suggests that tenants will pay higher rents when they’re confident that they’ll do the business to support it playing a good deals are getting done. Earnings growth at comparable property were stronger at 3.8% quarter-over-quarter and lease termination fees of those properties contributed 90 points of that result. As you know, we feel very strong with the lease termination fees are often the result of landlord leverage and a stronger negotiated lease and therefore belong in a comparable number. Sometimes it helps the comparison, sometimes it hurts but it's always an integral part how we run our business. It was a particularly strong quarter and our core shopping center business. I mentioned a minute ago that big store openings like Burlington at the Assembly Square Power Center, Michael's Brick Plaza and Melville for example resulted in strong leasing in past quarters really made their impact felt in this first quarter. Tighter cost controls and renegotiated vendor contracts also helped us drive the number to the bottom line. These results were posted despite the dilutive impact of new residential lease up at the Henri and Pike & Rose and the Montaje Assembly Row but based on the current pace of lease up those two buildings will be accretive to earnings by the latter part of this year and at current residential cap rates we’ve already created about $100 million of value in those buildings. So let’s talk about our residential portfolio for a minute and I’ll start with an update on that residential leasing at our two buildings currently under lease up. The 272 unit Henri is now 82% leased, 76% occupied at net effective rate rents of $2.35 a foot ahead of budget on lease up pace and meeting budget on rate. When you factor in the other two stabilize residential buildings Pike & Rose they’re already open which by the way we’re not significantly impacted by the new supply coming on the combined residential lease percentage is now over 90% at that project. Adding the condos there are more than half way sold out at about $600 a foot which is above pro forma and there are nearly 800 families now living at this former strip shopping center beside. Pike & Rose quickly establishing itself as the regions residential destination choice. At Assembly Row the 447 unit Montaje High-Rise is now over 69% leased and 40% occupied and net effective rents of $3.37 a foot well above budget. As far as the condos are concerned there, all 107 market-rate units are sold out at $850 per foot and as of last week 96 of them have been closed on and delivered. As far as we know Avlon base product at Assembly continues to perform very well and now combined with our makes Assembly Row the residential destination of choice in the surrounding area. At Pike & Rose and Assembly Row, not to mention Santana Row, Bethesda Row and Congressional Plaza we think we just beautifully made the case for the strong demand for quality residential product at various price points and well planned Massachusetts communities. In its first 15 years of existence at Santana Row, the compound annual growth rate of the overall residential offering there approaches 4% I like this business. By the end of the year – the end of this year federal own and operate nearly 2700 residential units in major coastal markets. Those apartments are expected to generate about $55 million in operating income by calendar 2020 roughly a $1.2 billion residential portfolio. As far as other components of our development program, the 177 room Canopy Hotel by Hilton opened at Pike & Rose at the end of the first quarter was real with the product. The Grand opening parties saw a nearly a thousand guests, dignitaries, even Christmas [indiscernible]. We now strongly encourage investors and analysts and anyone else for that matter to experience this hotel anytime you come to Montgomery County, Maryland. As you may remember, we own 80% of equity in the hotel and a joint venture with local developer BPG group. We continue to make progress on completing the phase 2 retail lease up at those Pike & Rose and Assembly Row as they are 91% and 80% leased respectively. Both of these projects are creating very significant real estate value. Construction at 700 Santana Row our 300,000 square foot $210 million office building being built to anchor the end of the street remains on budget and on time for a late 2019 delivery. Leasing efforts are ongoing with lot of interest in both and the community for this heavily amenitized office environment. In Greater Miami, we’re now under construction at CocoWalk to roughly $75 million redevelopment of this well located multistory retail center into a mixed-use project that would certainly offer seats to the Coconut Grove community with the addition of 80,000 square feet of prime office space on five floors. We’re currently pretty far along in the lease negotiation with our national tenant but roughly half of that space in line with our pro forma rents without any but drawings to show them, it’s a great start this transformation. Nothing more to say on Sunset Place given the challenge rejection of additional height and uses at this world shopping center and so we’ll continue to operate it as it is for the time being. And that's about it from my prepared remarks for the quarter with a really good one that we hope to follow with another and another. Let me now turn it over to Dan for some additional color and then open the line to your questions.

Thank you, Don and Leah, and hello, everyone. Another solid quarter to start the year for Federal with FFO of 1.52 per share almost 5% above the first quarter of 2017. This result was a few pennies ahead of our expectations and $0.02 above consensus. Year performance was driven by higher NOI primarily due to less impact from failing tenants, higher other property revenues, lower property operating expenses with a slight offset from higher real estate taxes. On the same-store front, our comparable POI metric of 3.8% is driven higher by term fees which boosted the result by 92 basis points but was offset by additional proactive releasing activity which produced a drag of 42 basis points. With respect to our former same-store metrics which we will provide for a couple of quarters for comparability, same-store with redev was 3.6% for the quarter and same-store without redev was 3.5%, very solid figures which highlights strength across the core portfolio. Now to put in context Don’s earlier comments regarding lease termination fees, the integral part of Federal's business strategy. Over the past 10 years Federal has averaged roughly $5.5 million of term fees annually. Since 2000 term fees have average roughly 4.25 million annually while it does vary somewhat from year-to-year and quarter-to-quarter it is a consistent and recurring part of our business. We had a strong lease rollover number for the quarter 22% on over 400,000 square feet of leasing but not extended capital of just $18 per square foot roughly half of what we spent in 2017 on a per square foot basis. With prior rents of around $26 that represents $5.60 of positive rollover per square foot or $2.3 million of incremental rent windows leases start. Whoever as Don mentioned let’s not get caught up in one quarter’s results. We expect lease rollover for the year to be consistent with the past two years activity in the low to mid teams and capitals have also normalized, but we expect to see consistency in our ability to push funds across our best-in-class portfolio. On the occupancy fronts, our overall leased and occupied figures were 94.8% and 93.3% respectively both metrics growing by 20 basis points relative to first quarter of 2017. While there was roughly 50 basis points of decline relative to year-end levels, that can be attributed to our proactive releasing activity, deleasing at our Sunset place and Grand Park assets, as well as some seasonal impact following the holidays and our remerchandising activity at the [indiscernible]. On a proactive releasing front, where we initiate vacancy downtime and downtime with the objective of creating long term value and an enhanced merchandizing mix across the portfolio. In addition to the large leases we have already disclosed such as the Anthropologie flagship [indiscernible], Bob's Discount at Les Sardines and Los Angeles, Target at Sam's Park & Shop in Washington DC and a couple of deals on Third Street Promenade in Santa Monica, we have added a TJ Maxx deal replacing two non-credit tenants at West Gate and Silicon Valley and [foreign to Cordele deal] in the Kmart bar in Greater Boston. So the list of value enhancing leases were produced down time and drag in our 2018 metrics and FFO per share and that’s roughly $0.03 to $0.04 of drag on 2018 FFO but we will drive the long term value of our company by $50 million to $60 million net of capital. With respect to full year 2018 guidance, we are maintaining our range of $6.08 to $6.24 per share. There are no changes on our assumptions. Although with respect to our comparable POI metric, we should end up in the upper half of our 2% to 3% range given this quarter's outperformance. Now, onto the balance sheet. We entered 2018 extremely well positioned from a capital prospective and as a result there was not a significant amount of activity in the quarter. As John mentioned, we began closing on the condos under contract of Pike & Rose and Assembly Row in March and this has continued throughout April and into that. We raised $51 million by quarter end and roughly $100,000 in total year-to-date. As a result, at quarter end our net debt to EBITDA ratio improved from 5.9 times a year end to 5.7 times currently. This positive trend from leverage perspective should continue throughout the year as condos close and EBITDA ramps at Assembly Row, Pike & Rose. With respect to other credit metrics, our fixed charge coverage ratio improved from 3.9 times during the fourth quarter to 4.1 times for this first quarter. Our weighted average debt maturity remains in sector leading 11 years and our weighted average interest rate stands at 3.8% with nearly all of it fixed. As continued volatility in capital markets and arising interest rate land keep prevail, our A minus rated fortress balance sheet continues to position Federal to outperform in a challenging environment ahead. And with that operator, you can open the line for questions.

[Operator Instructions] And our first question is from Nick Yulico from UBS. Your line is now open.

This is [indiscernible] with Nick. Just thinking about the development pipeline between Assembly and Pike & Rose you are quickly winding down on over $600 million in development. Are future phases of those sites or other large development projects likely to be announced soon or are you expecting to your foot of the gas this year.

The cool thing about both of those projects is that there is sufficient critical mass there in terms of a place that’s been developed. So let us be opportunistic and so certainly construction costs are up, certainly our use of capital and this time environment is one that we are more spending on effectively than what we had done before. And having said that, we got deals in terms of the ability to build the next phase of Pike & Rose, the ability to push out incremental profits or residential product in particular at Assembly that we are working through. So, if you can think about what’s going on as cyclical to some extent, to a larger extent my point of view, the last time this happened 2008 and 2009 we did not take off the foot of the gas in terms of planning and being ready to go at all in terms of future phases or in that case the initial phases. We are doing the same thing now. So, we are developing our plans. We are working through drawings. We are working with contracts et cetera. So that we are already to pull the trigger when we feel like we got a project that works in terms of our cost of capital. So you can expect that all of that lead up work which is significant as you can imagine for those that type of building that is still ongoing depending upon where we are later on the year with, construction cost and G&P and that kind of stuff, as well as the rest of condo proceeds and some asset sales that Dan will talk about we may very well be - will announce the next phase of those projects.

And is there any update on fund side is there another vote in the work expansion?

You know we’re not spending a lot of time there. Yes, this is me speaking Chris, I’ve kind of done those things for now. And you know the rest of our team is operating it, Chris Weilminster spending more time down there specifically for CocoWalk, but right now at Sunset, those guys doesn’t want anything more, we’re big company we have plenty of other things to do. That sounds a little bit right yes it is.

Does that asset make sense to own if there is no redevelopment underway?

I am not sure. It certainly carries itself and we will continue to carry itself for the time being. But in terms of what we do long-term if there is not a bigger play, I am not really excited about. So we’ll have to - we’ll evaluate that but it's not a 2018 decision.

Our next question is from Craig Schmidt from Bank of America. Your line is now open.

Don I was wondering if you give an update on Primestor?

Sure. In fact, I am looking for Jeff Berkes. Jeff Berkes want you an update on Primestor at this point.

Primestor I would say is going as expected. We've been closed now for seven to eight months and the operating team have come together and replace functioning efficiently and those are priorities and pulling on the same order, pulling already to the same direction, however that saying goes. We’re actively looking to make some new investments, definitely to talk about on that front yet. But we’re getting close and hopefully in the next quarter or two, we will be able to tell you something. So I think it as expected and going well. Portfolio is very well leased and as Don mentioned in his prepared remarks, we had a room I feel back - the former Walmart able to market space that will certainly and so happy how things are progressing with Primestor.

The other thing I would add to that, I have because I cannot help myself Craig is that with respect to the development that we mentioned in the past when I just said we hopefully will be there in the next quarter or two. But it has made its made its way through our investment committee and that improves at our investment committee level. So we’re ready to go to the extent there they are [indiscernible] with respect to the other specifics with the city.

And then just a question on CocoWalk, are you essentially done with any zoning or municipality approvals that you need for that project?

Completely.

Our next question is from Christy McElroy from Citi. Your line is now open.

Just a following up on hotel opening taken room, you had a - I know in the Q about an associated loss in equity and income. Just wondering from a cash flow perspective, given your 80% equity interest, how should we thinking about the impact of this investment kind of coming online in March, since we had the rest of the year?

That impact in our financials was really just a preopening cost and the marketing cost where a 28 days of operation in the quarter. So clearly that was expected. Yes, we would expect some ramp-up in the hotel over the course of the year, clearly, but if the new hotel we don’t expect a lot of contribution until later in the year with regards to our investment in the Canopy. But we are really pleased with the products and we're pleased with the opening thus far.

And then just related Don. In your shareholder letter, you highlighted that 17% was Federal, minimum range comes from residential and office tenants, not retail. You also highlighted the mixed use and the diversification of the income stream. I'm just wondering if you think of sort of where Federal could be five and ten years from now. And in context of your views on retail per capita shrinking in the U.S., how we should expect your mix and diversification to continue to change? So where could that 17% go? And you also highlight in your remark how the resi portfolio is growing. So everything coming online, presumably it goes up. Just wondering how much is acceleration?

First of all, it will accelerate or be a larger percentage - not a much larger percentage. And let me kind of get to why that all is. Obviously the point on making in there which I think is frankly the most important thing to think about is the diversity of any income stream. And the more diverse that income stream is, lower the lows if you will during an uncertain time. We are and should always be considered, as long as I'm here, a retail company. And if you think about it, the reason residential and office are an important part of our income stream yes, 17% is a real important part of our income stream. It's because we've created that environment with retails on the ground floor. And it's a really, really, really important thing to remember. And so, what we think are or the thing we do the best is figure out how to take a piece of land or a location and get lots of people to it on a regular basis. Then in places that can handle densification and intensification, the way to make money is up. And so up we go, and so the notion of that mixed use piece of the business which is 25% of our total business - and that 25% includes the retail and nothing else. That's about where that will be. It could go a little bit higher, but about like that. But just like last year, when we made a $350 million investment in Primestor which is all-retail and boxes in large measure that would bring that 17% down or did bring that percentage down. So it's balanced. We're growing and trying to use all of the arrows in our quiver, all the tool boxes, [indiscernible] is what we do. So you should think about I think the notion that this is a retail company through and through. Even in 2018 or 2020 or 2022, put that we know how to create place. And with place, comes the ability to maximize real estate value and maximizing real estate value means residential, on that property, means office on those properties. And as I said at the beginning, we believe thoroughly through and through those properties work on an immigrated basis. And so the idea, the value of Santana Row or Pike & Rose or Assembly Row is very, very much tied to the way those pieces work together. I hope that's helpful.

Our next question is from Jeremy Metz from BMO Capital Market. Your line is now open.

You had a strong start to the year with a 3.8% comp NOI. You mentioned the benefit from the term fees, but you hold onto that 2% to 3% range. It sounds like you're pointing towards the high end now. How much of not formally changing the range at this point is just adding caution given the current retail environment. There's maybe more known items that could drag you back down in that 2% arena when it's all set and done. And then maybe as a follow on, can you comment on the demand you're seeing, and maybe break down the demand side a little bit in terms of traditional open a retailer, how much is maybe typically more and more retailers looking to enjoy some fresh air and maybe appetite from e-tailers to brick and mortar.

Look, it's May 3. It's May 3rd, and in a company, that does have a lot of parts of our business as Christy was just talking about. So we are bringing in - new product being developed. We do have an uncertain environment with respect to some extent, bankruptcies. But the biggest thing is we're not a commodity company. So there is a bunch going on. During the year, lots of thing that do affect capitalized interest. When you bring properties - when you bring up the big construction of profits into service, and that creates some uncertainty. So on May 3rd, we're going to keep the guns right where it is. It's not any particular known thing that's going to the other way which is specifically what you're asking I think. In the latter part of the year, it is a caution, but the caution is not sandbagging, the caution is a complicated business but a lot of stuff happened at this point. With respect to the second part of your question, I think there's nothing more interesting than looking at UNIQLO choosing Pike & Rose in terms of what retailers are trying to do and figure out, in terms of their future. Every one of these retailers is grappling with how many stores, what size the store should be, and most importantly, where they should be. And everyone of those retailers has a different business plan and what we are absolutely finding is that there is more certainty in 2018 versus 2017 in terms of what direction those retailers are choosing. What we don't know is, are they right and whether those plans will make sense in 2020 or 2022 or 2024. That has a landlord. All we can do or what we think is the most important thing to do is to create a place, create that environment that they could do the best business in. It starts with location, it includes place making, it sort of includes the other merchandising that's happening within the center. And that's where I think we have a big competitive advantage.

I just have one follow on here on toys. I think you only have the one box, I know I think it's almost back filled or maybe you can talk about that, that existing store release. And then I think you had some adjacent unknown toys at various assets. So any color you can share there in terms of the process or - are you bidding on those and do you think you can shake some more fleet that could create potentially larger opportunities?

We did get control of the one that we do own in [indiscernible] which is great news. It's way under market, we've got demands, that'll be a good story when that's back on. That's the one that we own. The real interesting one to me is the box that we did not own, but as you said, was adjacent to East Bay Bridge which is a traditional power center. I mean, if you listen to the common dialog, it's a power center, there was Toys R' Us adjacent to it, how can that be a good thing. But that particular piece of land and the performance of that particular power center meant that the auction process that happened on toys are unboxed for which we did go through investor committee and approve a big number in terms of our ability to control that box. And by the way, that big number meant that we could have either backfilled it with another box retailer or it's a really good residential site. Given what's happening there, we bid aggressively. We and 14 others for that site, and at the end of the day, we lost it. We did not get it to a number that we could make sense with. So, supply and demand matters, and also issue really matters. And those are the two toy boxes that were in play. There is a third one in the Primestor portfolio that has not worked its way through the system yet and we're hanging around the hoop just to see how that plays out.

Our next question is from Jeff Donnelly from Wells Fargo. Your line is now open.

I guess your competitors reported, I guess that they're weakening pricing in lower cap rate markets. Do you believe that to be the case and do you think maybe the 7 to 8 cap rate dispositions that are coming into market are providing a source of competition for retail capital?

So kind of two thoughts on that question. First, for the high quality product, we really haven't seen pricing change. There hasn't been a tremendous number of trades but the trades that have happened have been priced very, very aggressively and we don't think cap rates are backed up at all from the high quality stuff. What has changed I think is how people define high quality. It used to be that if a shopping center has a grocery store and within a major metro area in the United States, it was considered high quality. And I think people are a little bit more discerning and a little bit wiser now and even want to see true brochure of quality asset or what we like to buy which is in still properties with a lot of people and income round of those assets and some definable go forward and line growth. So the definition of the quality has changed a little bit but what people are paying for quality hasn’t changed at all. Second you get outside out that and it’s anybody guess. What the cap rate is going to be on an asset or whether the asset even going to trade, could be a six could be seven could be an eight, we are seeing a lot of deals just not happen right now because the buyers aren’t showing up. And my own personal view on that is the market whether its equity market or debt market to buy those centers is nervous that the values have bottomed yet and they are not defined. So interesting time, I think that answers your question but if not let me know.

Yes, it does and maybe just as follow-up to that, what is thinking you mentioned through grocer, I think that’s for many, many years there was having a traditional grocer if you will ever since stop and shop however depending on the region of the country really defines that. I means what’s been the reaction to sort of Walmart or Target with food or Trader Joe's and all the you mean are lenders or buyers viewing those as grocery anchor right now or is there still sort of chasm between traditional and maybe there sort of emerging types of food we get?

Lenders are looking at it and we don’t feel like secure debt so and I’ll spend a lot of time talking to the life insurance or securitized communities to figure out what they think of those types of alternative grocery anchors if you like on that. I mean again in my view and this has been our view for a long time et cetera what’s important is having the right grocer and the right trade area. So could that be and old deal leader or could that be Trader Joe's or small local chain or whole foods and non-traditional grocer absolutely. And yes as you look I am talking to Walmart and others putting more feed in the stores, absolutely that can take the place of the traditional grocer in certain trade areas. So I think it's very trade area specific but I do think the shine is off the traditional grocer drug anchored 125,000 square foot neighborhood somewhere.

You touched on this in a earlier question but just seems like last year there was just such a flood of daily announcements round sort of closures, this year if feels sort of like desert if you will by comparison. But there is still that overhang out by retailers. I am just curious as it relates to leasing have you guys see any change in the tenure of appetite releasing and specifically have you seen any sort of change in either resistance to sort of venture coding or seeking more TI or lease duration are going to like kick out, so I am just curious if that's most are evolved into different kind of lease negotiation may be then you had 12 months ago?

I would say no Jeff not for 12 months ago, I would say absolutely yes over the last five years. And I am making a distinction there, I think importantly I think the notion that tenants want to pay less rent and have more control of their space through other things being a new concept is not true. Those negotiations are - have gone for a long time there is no question that over the last five years pushing harder on tenant improvement dollars themselves, pushing harder for terms that whether the kick outs whether they use restriction other things in the leases are absolutely negotiated hard as our rent. So I mentioned only one thing but I see such difference in places where we got leverage and places where we don’t have leverage. And we have leverage its no difference you either want in or don’t want in and places where you’ve only got one choice one day yes, they are going to get a whole lot more in terms of those deals. And so over the last 12 months what I’d like about over last 12 months is I think as I said before tenants they picked a direction and not all of them but more of them certainly then a year ago have a picked a direction and here they go. This is what they are doing, this is what the plan is and that’s a very positive thing. Now depending on the location and depending what is it that they want, who else wants the space there is you’re going to have those negotiation points that you just mentioned, some would propel on somebody won't. But I don’t think it’s a last 12 months that’s changed - that changed that amount of leverage.

And may be just one last question Don, I think it was about a year ago you could talked about maybe the greater need for data as landlord in this business. Maybe the investments there or you kind of explored that further I am curious what you are thinking is?

And I do believe that, we have not made investments yet to this point. We’re looking at some stuff hard and I’m not sure that we’re looking at this point from an investment perspective as it is really trying to get a good look as to what of it matters. I mean there are a lot of - I am going to calling fly by night consulting firms and data firms affectively taking advantage or trying to take advantage just as you would or I would in a dislocated market and fearing with landlords who fear oh my gosh I have to have more data, I have to understand and we’re making good money consulting. But how much of that is actionable and how much of that is relevant today but not in six months because the technology is changing so quick, those are really open questions. And so what we are doing here is there is a task force here with upper companies that exclusive Jeff Berkes and some other folks. We are exploring and talking to companies to try to uncover really whether they have anything here that valuable or not and how do affectively play along. So that’s where we are in the whole genesis and lifecycle of figuring out the best way to play in technology as opposed to jump in water with stuff that may not nearly be as valuable as being portrayed.

Our next question is from Ki Bin Kim from SunTrust. Your line is now open.

Don can you talk about the average occupancy cost in your portfolio and how that’s trended over time?

I can try Ki Bin, but one of the things about us is we don’t have a lot of reporting in terms of sales reporting. So what I am going to say take with in that context roughly 30% of our tenants report sales and therefore allow us that really figure out what occupancy is with the data that makes sense. We also have very active property management group that tries to get that data so that we can accumulate that database and try to figure it out. And when you look and you see it our best guess, is that somewhere around 9%, 8.5%, 9.5% something like that but again it based on a whole of lot of limited data that number has trended up as we would expect. Over the past three years but we’re also doing it awful lot in changing out ports and its renew tenants and that’s whole proactive leasing initiatives that we have been pushing like crazy over the past three years and so from that perspective, you’ll see it coming down a little bit but I am kind of working around the edges because they don’t have good clean data but in trying to answer your question that’s affectively what we believe overall in the portfolio.

I see and may be this is one even tougher then, so when you think about the leasing spreads on renewals that were out 20% in general are these retailer have been there for awhile and their sales have maybe increased over the life of lease. Have their occupancy cost dropped and when you renew it up 20%, you're bringing it back to like a portfolio average or is it more of a case where it goes above the portfolio average?

Look I get the point a 110%, think about this way first of all. This is not a commodity company, so if you were to look at the standard deviation around lease rolls up, lease rolls down things being flat it’s what. And so that's 22% don’t expect 22% as the Dan has said as a run rate for this company, that 22% was a couple of deals in particular I mentioned them that we were real hard in with respect to old space that Kmart space since August has been under market for years and as a result, we finally were able to get that back and put the market rate tenants. So boom, rent was up 400% in that case. That’s always been the case with Federal, that continues to be the case with Federal, the other thing associated with that as you kind of think of tenant sale is you do, you do have a mix of tenants that’s all over the place in terms of occupancy cost for restaurant versus occupancy cost for furniture store or growth, so we did, it’s very wide and going back to Christy’s question in terms of the diversity of our income stream that makes it even, even harder to kind of put us in the same place as others. Overall, we’re running individuals places and locations where we’re constantly trying to change out tenants to get best-in-class. And so as a result, if I had perfect information you would see occupancy cost ratios going up, going down, going up, going down that would be relatively volatile overall I don’t have that information but that’s how we’re running the business. So it’s certainly not direct answer but it’s directionally how it is that we’re doing.

Our next question is from Daniel Santos from Sandler O’Neil. Your line is now open.

I was wondering if you could talk a bit about acquisitions, as you’re looking at new deals, has your underwriting changed and what your focus unchanged over the years given the changing environment?

Daniel it’s good to talk to you, I can’t imagine Alex not being on the call, I’m very disappointed and you can tell him that.

It’s harder now to find a deal from underwriters deals appropriately certainly then were because we’re on the market real time, leasing space, operating centers and we’re in relatively few markets and understand the markets we’re in well. That diligence if you will is constantly evolving and to make sure we’ve made investments and we find assets where we can create value. So yes, there is nothing static if you will about the way we underwrite it or look at any of our investments. So I don’t know if that answers your question but something that is constantly evolving here.

And I just wondering on Pike & Rose and Assembly Row if you guys had a guess where you would be on the retail leasing front in the holiday season this year, what would you say?

Well, I think in both cases we will be nearly fully leased, we won’t be fully open and so that’s the difference, the build-out, so I was just looking at this morning as it related to couple of new deals that we did at Pike & Rose and there is a couple of concepts that we’re doing that are really cool but they won’t be open until the spring of 2019. So when you think about really Pike & Rose being a real fully opened experience in terms of the street, we’re talking of 15 months from now or 18 months from now something like that but the leases, the commitments if you will be certainly done by the end of the year.

Our next question is from Mike Mueller from JPMorgan. Your line is now open.

I was wondering when you look at the redevelopment pipeline and think about the mix of spend over the next five years or so coming from Assembly, Pike & Rose, Santana in that bucket versus the other catch all buckets, I mean do you anticipate the things similar to what it’s been or will that mix change?

I do Mike and let me talk about that in a couple of ways, first of all the redevelopment of our core shopping center is such an important part in this business. The initial yields are usually better, obviously the risk is lower, it’s the established places that we’re adding and but it’s very hard to put 100s of millions of dollars in any period of time to work on that, it doesn’t work like that, there is smaller projects but in an important part. In terms of the bigger projects, there is - I got a lid of $1 billion of just went through with the board of capital that could be deployed over the next three years in primary the big projects including Coco including Santana et cetera, as well as Pike & Rose and Assembly but whether we deploy that or not goes back to the first quarter Mike if that was asked and that its’ going to be, can we understand our cost to capital, can we get construction cost online to get comfortable with the rents that will get in that projects that makes some sense, can we get the appropriate counting assistance in the case of Pike & Rose, I don’t know yet. But we’re going to be ready to go to the extent the answers to that yes and depending on asset sales in other ways capitalizing.

And then switching gears for second on the Primestor portfolio, is there a any notable differences that you're seeing in terms of lease spreads, NOI growth or mark-to-market versus your other comparable assets that on the coast.

I want to just thinking about them will give you an answer. I got a pretty strong view on this and there is no question that while the Primestor assets, don't look or feel the same way as Third Street Promenade or even Escondido Shopping Center or Plaza El Segundo, they act similarly and the reason they act similarly is because demand exceeds supply and so that’s a gain that's what's necessary here, so I don't know Jeff if you can. I don't see when we look at the numbers of the renewals, when we look at new releases they just the case of big box that we just saw like from Bob's for Wal-Mart. They're similar things that happen in our portfolio and so a more high profile asset like Third Street Promenade has been deliver in that way for 20 years frankly for us. There and continues to keep giving, so we obviously don't have that level of history and understanding of the price of our assets over that longer term but today I don't see the remarkable difference personally I don't know Jeff you want to answer that?

No, I don't either and I think it's a good question and ask as in the year or two again we've only been in the portfolio for a few months there has not been a tremendous amount of space the reviews the ways. What we have done is generally been in line with what we underwrote with the exception of the Les Sardines deal which was significantly accessible we under wrote. So it's just not enough because three for me to give you really going to answer that question but its general in line with everything else in our portfolio in California?

Our next question is from Floris van Dijkum from Boenning. Your line is now open.

Don you made a comment a little bit earlier you alluded to some asset sales and then suggested that Dan was going to gets some more detail but I’m curious what you had meant by that?

Floris it's funny. I do that a lot and then Dan doesn’t give more detail I don't know let's see if you can hold on for good.

So what was the question for us?

Well, if I try to get a sense of any planned asset sales I guess and if you guys can get some color.

Look we got a and I've talked about this with folks before, we got a pool from an asset sale perspective of high tax basis, tax efficient assets that we can sell and is roughly around call the $0.5 billion or more. And we feel so we can be very opportunistic with regards to getting into the market and taking advantage of strength in the investment sales market where it’s strong. But that's just one arrow in the quiver that we have from a capital perspective and I would expect us to kind of fund our business going forward with, as Don like to call them from in technical terms of a little bit of this from a little bit of that from a capital perspective. We generate that $70 million to $80 million annually of free cash flow as the dividends and maintenance capital that we can redeploy into the business. We've got this pool of $0.5 billion plus of assets that we can sell on reasonable tax efficient basis. Look we already closed $100 million of condos sitting here in the last two months, very, very cash efficiently and probably have another $50 million more to sell over the balance of the year and into 2019. We have A minus rated balance sheet, that gives us the flexibility on a move forward basis, we will operate in our - within the metrics of A minus rated balance sheet but it’s a balance sheet that has tremendous capacity. Plus we’re getting a lot of reverse increase from institutions who want to partner with us and we will explore that and if it makes sense we will go there but I think we’ve got multiple areas where we can fund the business on a go forward basis and I think that’s what I talked about in terms of having a balance sheet that is positioned for us to continue our growth plans over the next two to three to five years without kind of over the lines on common stock.

Maybe Floris, the only thing I would add to that, I do pay I like the point on raising $100 million so far with condos can’t be overlook, it’s been really important, 35 more of that to go this year, the rest in the next year that’s great tax efficient fully usable in terms of proceeds money and $0.5 billion that Dan talked about in terms of the overall fed up assets that we could sell tax efficiently if we wanted to, we have identified about $75 million of that, so we would expect to have on the market by the end of June or early July something along that and therefore see readily a lease closed at $75 million by the end of the year. So when you look at that, that’s $200 million plus in 2018 of proceeds through selling assets, very tax efficient.

One other question I have for you guys, Don you mentioned I believe that refresh me on the fact but your Santana Row apartment NOI growth has averaged something like 4% over the last 15 years, I’m curious to see how does that compare to your retail NOI growth there and curious to see if you think something obviously you’re thinking that you’re going to do something similar, Assembly and Pike & Rose but is that achievable as we look forward?

Floris, I love the question, it’s really cool into that really and we’re one of the only that has some real history on what happens with next years’ projects and it’s facet, I don’t know if you remember or not, I certainly do, the Santana Row could not have started out and even in terms of the apartments and terms of the rent growth that way. But when you look at what happens as that place is established and if I come the place to hang out, I mean we were doing by the end sorry not by the end but even in the last phase of Santana Row is was adding in residential products that we would not have thought of before because we haven’t figure out a way that add a product that got in there under $2000 a month and that product was very small work with spaces in the back of the garage that we had that sold out. So that is about 4% effectively has come from over that period of time. On the retail, the retail like retail everywhere does particularly well in strong economic periods of time and today our retail growth at Santana Row is slower than it’s been before because it’s retail today. Having the ability to exploit the place sold up in terms of residential product like that is a real advantage, it is only the retail you’re going to move up with up and down with the retail market but having the incremental uses that exploit that retail place is really special. Over the 15 years, the retail number on a compounded annual growth basis at Santana Row is also close to 4%, 3.5%, 3.7% something like that but a bit more volatile.

Your next question is from Haendel St. Juste from Mizuho. Your line is now open.

So question for you, a couple here quickly. Curious on your view on converting potentially converting some deal space to create of office space certainly seems to be I think we’re hearing more of these days how relevant perhaps how attracted of an opportunity, do you view that for your portfolio.

Yes, I love that question. The one thing that the question is it being done defensively or offensively and I make that distinction because it's really important. When you're saying gosh I have a place that doesn't have any more retail demand for whatever reasons they are and so maybe let me convert it to some type of trade office space and the results aren't great but they're better than they would be zero for retail any longer. I mean assets defend to move and that happens it's not a bad thing, it's better than the alternative what we're focused on is the offensive side of it, so when you take a CocoWalk which is a multi level retail property with an absent some but there of office products a office product in the marketplace and the marketplace is one that's filled with, it well to do people that are sick and tired of driving in their carts in Miami because of the traffic, now you have an office of situation and so converting that retail product from all retail basically to have retail and have office. I mean we'll see we don't have the sign deals yet but the demand on that office side is powerful and so I don't think like anything in real estate I think it's, I don't think it's a trend as much as it is a parse you need to parse the opportunities between offensive and defensive we are in a couple of places called one being the most obvious looking at it from that offensive expansion.

And sort of an earlier question looks like just looking at reading pipeline here the next three, four years you need to find a billion ish, billion plus. Sounds like asset sales are now part of the consideration and JV Capital that was certainly the crux of my question, so I guess I'm curious is if you look at the potential JV interest, what type of cap rates you think you could fetch should use partial interest?

Let me stop, let me reset your premise, if you don’t mind. The idea of how to fund development or redevelopment I think or acquisitions capital use is something that we're really proud of not having only one alternative and so the reality is it would probably be if I were betting on this you'll probably see a little bit of everything, so you'll probably see more debt that gets issued you'll see a bit more asset sales as we just went through. We will absolutely look at and understand the JV market for certain assets. I don't really want to we’ve done I think a very good job of not doing joint ventures, not complicating this company for fund raising purposes but we do a joint venture it's for strategic purposes. It's because the Primestor folks are bring something strategically, the most important thing strategically to the deal that won't change. I don't think you should look at JVs in this company as oh that's how we're going to raise the money to do something. I think you should look at it, it's strategically does something important for us. And so that will be a component there could be a components that’s - so if you can think about this on a more balanced approach to that $1 billion again and then on the other side is it a billion or is it $0.5 billion that some project to make, some projects won’t make that way. All of these things are happening together and I think if you look at our path for how we try to stop to execute that balance, you'll see that we don't go all in on any one time.

And one last one it’s the question on Primestor and maybe it's not a fair question asked but I'm going to try anyway. I'm wondering if the change in let's call it the political climate is impacting how you're thinking about your Primestor JV in potential future investments. I was probably surprised to hear that there doesn't seem to have been any impact to sales and traffic given the demographics of the neighborhoods involved here but curious how the political climate is playing a role in your thinking about, the underwriting of future investments on the JV.

Yes, and first of all nothing wrong with that question and it’s certainly something that if you had a spy and ICSE last year when we were in the final negotiations you would have seen Dan Guglielmone and myself outside of the nascent top-dog place on the phone with Berkes and some other people saying, what do you think political climate going to do to the demand on. So those assets over the long-term and the boats and everything else, and so it’s a real good question and we without question after going through at all after trying to understand that the retailers points of view of their understanding looking at the empirical fact in terms of the sales and what it happened over the previous couple of years that way and also very much being completely supportive of the most diverse population that we can have, we think it’s a positive thing in so many ways over the long-term the idea of being a major player in California and not participating in the Latino community seems like we are taking one hand and tying it behind our back with respect to it failing our business and seeing the opportunities we had. It’s now a year later we are, and I am now speaking for me and I am looking at Jeff see if he’s going to agree with me or not. I am 110% committed in the same way that we were before and over the long-term I just don’t know how in the world you can ignore 50% of the population in Los Angeles count.

Thank you. At this time I am showing no further questions. I would like to turn the call back over Leah Brady for closing remarks.

Thanks everyone for joining us today. We will look forward to seeing many of you at May REIT in a couple of weeks. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.