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Edited Transcript of FRT earnings conference call or presentation 3-May-19 2:00pm GMT

Q1 2019 Federal Realty Investment Trust Earnings Call

Rockville May 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Federal Realty Investment Trust earnings conference call or presentation Friday, May 3, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Daniel Guglielmone

Federal Realty Investment Trust - Executive VP, CFO & Treasurer

* Donald C. Wood

Federal Realty Investment Trust - President, CEO & Director

* Jeffrey S. Berkes

Federal Realty Investment Trust - EVP & President of Western Region

* Leah Andress Brady

Federal Realty Investment Trust - IR Manager

* Wendy Seher

Federal Realty Investment Trust - Executive VP & Eastern Region President

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Conference Call Participants

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* Alexander David Goldfarb

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst

* Christine Mary McElroy Tulloch

Citigroup Inc, Research Division - Director

* Craig Richard Schmidt

BofA Merrill Lynch, Research Division - Director

* Derek Charles Johnston

Deutsche Bank AG, Research Division - Research Analyst

* Jeffrey John Donnelly

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Ki Bin Kim

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Michael William Mueller

JP Morgan Chase & Co, Research Division - Senior Analyst

* Nicholas Philip Yulico

Scotiabank Global Banking and Markets, Research Division - Analyst

* Robert Jeremy Metz

BMO Capital Markets Equity Research - Director & Analyst

* Samir Upadhyay Khanal

Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Federal Realty Investment Trust First Quarter 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Ms. Leah Brady. You may begin.

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Leah Andress Brady, Federal Realty Investment Trust - IR Manager [2]

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Good morning. Thank you for joining us today for Federal Realty's First Quarter 2019 Earnings Conference Call. Joining me on the call are Don Wood; Dan G.; Jeff Berkes; Wendy Seher; Dawn Becker; and Melissa Solis. They will be available to take your questions at the conclusion of our prepared remarks.

I like to remind everybody that certain matters discussed on this call may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any annualized or projected information as well as statements referring to expected or anticipated events or results. Although Federal Realty believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, Federal Realty's future operations and its actual performance may differ materially from the information in our forward-looking statements, and we can give no assurance that these expectations can be attained. The earnings release and supplemental reporting package that we issued yesterday, our annual report filed on Form 10-K and our other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial condition and results of operation. These documents are available on our website.

Lastly, we'd like to remind everybody that we're hosting an Investor Day on May 9, which is Thursday, at Assembly Row in Boston. The deadline to register is today. So please reach out with any questions, and we look forward to seeing many of you next week.

(Operator Instructions)

And with that, I'll turn the call over to Don Wood to begin the discussion of our first quarter results. Don?

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Donald C. Wood, Federal Realty Investment Trust - President, CEO & Director [3]

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Thanks, Leah. Good morning, everybody. Some noise in this quarter supported earnings as the adoption of ASC 842, the new accounting standard on leases, reduced FFO per share by $0.02 in the 2019 first quarter to $1.56. More on those impacts in Dan's comments, but let's talk about results before implementation of ASC 842.

FFO per share $1.58, excluding the accounting change, compared favorably with $1.52 reported in last year's quarter, up 4%, and comparable same-store income grew 3.5%. Leasing volume was a little light, as it usually is in the first 3 months of the year, particularly after our record fourth quarter last year. With 72 comparable deals done for over 247,000 square feet of space, at an average rent of $45.07 per foot, a solid 10% higher than the $41.03 being paid by the previous tenant. As you might expect, we have the most success meaningfully increasing rents at those shopping centers that have been or are well [long] in being redeveloped and repositioned for sustaining their market-leading position.

Properties like Brick Plaza, where Trader Joe's just signed to backfill an old Ethan Allen furniture store to nearly finish up a complete remerchandising of this dominant shopping center. Or Eastgate Crossing in Chapel Hill, North Carolina, were in A1 location plus a recent renovation creates strong demand and higher rents. Or Bethesda Row, where 4 more -- 4 new deals signed during the quarter saw a strong rent increases even with prior rents on those deals that range from $59 to more than $110 per foot. We got other examples where we will roll back rates, but nearly always for the solidification of the merchandising base to create long-term value. Our eyes are on 2025, and relevance at that point in time. Those few examples serve as a pretty good microcosm of the shopping center leasing environment for us today. The bar has been raised on the product and place being offered. And the importance of a strong location has never been more critical to a retailer's decision. We hear that from retailer after retailer. In our experience, it's not about retailers choosing inferior locations with lower rents to grow their businesses but rather consolidating around the shopping centers that give them the best chance of making money.

We're certainly well positioned on that front. In the oversupplied overall market condition, means using all the tools in our toolbox to consistently and sustainable grow earnings, after all, it is about growth. Having lots of tools to generate earnings and value is a true competitive advantage. Now one such tool is a fairly negotiated lease, with a strong landlord dais wherever possible. Those strong contracts are an invaluable tool of value creation, particularly when a tenant fails or an integral -- and are an integral part of our business. Economically profitable lease termination fees are a direct result of that. Let's talk about one of those this quarter.

In the second half of last year, Lowe’s announced that it was shutting down its 99 Orchard Supply Hardware stores, including our very productive unit in San Ramon, California, at Crow Canyon Commons. When we first put in Orchard Supply, we successfully negotiated a full guarantee from parent company Lowe's unusual at the time, and no sales kick or other way out of the lease given the strength of our real estate. Accordingly, we're in an extremely strong position to negotiate a termination fee of nearly 3.5 years of rent or $3.8 million, which was paid this quarter and is included in income. We fully expect to have that space re-leased at comparable or better per square foot rent within 1 year, clearly, a strong economic outcome even when considering the capital that will need to be invested.

To make a specific point about this fee because of its size and to reiterate the strength of our leases as an integral part of our business plan. Other lease termination fees totaled $1.6 million in the 2019 quarter compared with $1.9 million in last year's quarter. Now lease termination fees over the past few months have certainly impacted portfolio occupancy as the overall quarter and lease rate fell to 94% from 94.6% at year-end and 94.8% a year ago. Three closures accounted for that decline, including the aforementioned Orchard Supply termination at Crow Canyon, the closing of Brightwood Career Institute at Lawrence Park Shopping Center, along with the postholiday closing of Bed Bath & Beyond at Huntington Shopping Center. With the restriction that both Brightwood and Bed Bath had at Lawrence Park and Huntington shopping centers now have gone, redevelopment plans, not just re-leasing plans, are underway for significant value-added redevelopment at both of those shopping centers and we have strong tenant interest. It's a real benefit to control real estate in markets where economic redevelopment is a viable strategy. Couldn't feel better about the long-term value creation at those 3 assets.

So let's talk a bit about our future growth generators, and let's start with CocoWalk in Miami. It's going to be a great project. Construction is on schedule and on budget with delivery about a year from now. 2/3 of the new office space is now leased, as is nearly 75% of the entire project. Uses like a fully renovated Cinépolis Theater, great well-known local restaurants, and restaurant operators and fitness, health and beauty along with apparel round out the merchandising and are the perfect amenity for the new Class A office. Desirability of Coconut Grove as a really attractive place for the year-around Miami professional to live, work and play, continues to get better and better. We see it in the local schools, in the hotel, in the housing development and certainly in the traffic counts. You might remember that we've invested in a half a dozen individual retail buildings in Coconut Grove that we're also re-leasing at a barometer -- as a barometer for demand in rents. When complete, we expect to have roughly $200 million invested throughout Coconut Grove, and obviously, including CocoWalk, generating over $12 million annually with strong growth prospects, about $70 million of value creation.

Next, you'll notice that we've added through our 8-K disclosure a new Santana Row office project across the street at Santana West. You can see the renderings on federalrealty.com or santanarow.com. The 360,000 square foot, 8-story office building, hopefully, the first of 2 or even 3 on this 12-acre site, in total for 1 million square feet, will be built spec with construction to start later this year and deliveries to tenants beginning in 2021 and continuing into late 2022. The decision to move forward spec was not made likely, but it's pretty clear that the allure of the fully amenitized Santana Row community was instrumental in our previous success, attracting office users here and that the unmet demand for big 50,000 square foot floorplates in environments like this continues unabated with very little new supply coming on during our delivery period. Basically, we believe this sites adjacency to Santana Row is a huge-risk mitigator as is our balance sheet and resulting in a lower cost of capital.

The initial investments on this site will approximate $300 million, though roughly $50 million of that will support parking and infrastructure for future development. Construction costs are up a bunch since we started 700 Santana Row, so our underwriting -- underwritten stabilized yield is in the 6% to 7% range. We hope to be at the higher end of that range, we'll see, but in any event, creating $75 million to a $100 million in value. Phase 3 construction projects at both Assembly Row and Pike & Rose continue on schedule and on budget, and both communities continue to mature and cement themselves as importance staples in their respective communities.

Leasing on the office components of Phase 3s are generating lots of interest at both locations. You will remember that we announced PUMA as the anchor tenant at Assembly, and that we, Federal Realty, will be the anchor tenant at Pike & Rose as we consolidate our headquarters there. And we continue to get closer to other deals. We're looking forward to having many of you join us for our Investor Day next week on May 9, in Somerville, Massachusetts, where you can see for yourselves the progress being made at Assembly.

And finally, you may have heard that last week, our team working in close conjunction with city officials in South Miami, Florida, was successful in securing entitlements at Sunset Place that allow for a significant increased activity -- density on our site there, a unanimous vote in our favor by the city. Those entitlements, which contemplate a hotel, residential and commercial GLA, would total roughly 900,000 square feet. The new entitlements are just the first step, but an important one in evaluating viability of a meaningful change to the obsolete retail center that stands there today. They're also subject to an immediate 30-day appeal period, but clearly, the land under Sunset Place become a lot more valuable with those developments. At Federal and at our partners Grass River and the Comras company, we are extremely grateful to the communities' leaders, who worked tirelessly with our team to advance their city with this very important first steps. Stay tuned.

And that's about it for my prepared remarks for the quarter. Let me now turn it over to Dan for some additional color and then open the line to your questions.

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Daniel Guglielmone, Federal Realty Investment Trust - Executive VP, CFO & Treasurer [4]

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Thank you, Don, and good morning. Let's start with a quick review of the numbers for the quarter. The $1.56 of reported FFO per share was a couple pennies above our model and in line with consensus.

The numbers in the first quarter were driven primarily due to lower property level expenses and a strong quarter for term fees, most of which were already reflected in our guidance. Offset by noise around the new lease accounting standard and more drag from our redevelopment and remerchandising initiatives at properties both in the comparable and noncomparable pools.

Adjusting for lease accounting on an apples-to-apples basis, FFO grew 4% for the quarter. Our comparable POI metric came in at 3.5% for the first quarter, ahead of our expectations heading in. Term fees, positive gains from our proactive re-leasing activity and expense savings all contributed to the strong metric. While term fees drove the metric by over 200 basis points, keep in mind the result was accomplished in the face of almost 100 basis points of drag from repositioning programs at some of our larger assets in the comparable pool, like Plaza El Segundo in L.A. and Huntington on Long Island.

Now to the new lease accounting standard, ASC 842. As Don highlighted in his remarks, the new lease accounting standard, which was implemented effective January 1, impacted our results by $0.02 per share. ASC 842 had several aspects, which will impact our earnings moving forward as well as require modest changes to the presentation of our financials. Let me walk through some of those components, which will impact the numbers.

The first is the treatment of leasing cost, which we have talked about over the last few quarters where previously we were able to capitalize certain leasing costs, which will now have to be expensed. The second is revenue recognition, including our straight-line accounting policy. Federal has always taken a conservative approach to assessing collectibility of straight-line rents, and we will continue to do so moving forward. However, this new standard no longer allows partial reserves and requires revenue to be recognized on a cash basis in certain circumstances. This change resulted in a modest hit to Q1 earnings. And lastly, on our balance sheet, with respect to leaseholds, where Federal is the lessee, operating leases will now reside on the balance sheet as operating lease right-of-use assets and liabilities, effectively increasing the balance sheet by $75 million.

Capital leases have been reclassified as finance lease liabilities. Neither of these lease liability changes will have any impact on our income statement. ASC 842 also impacts presentation of our income statement. Those impacts are detailed on Page 11 of our 8-K supplement as well as in our 10-Q. Speaking of our 8-K financial supplement, you may have noticed a slight increase in the cost of our development project at 700 Santana on our development schedule. The project scope was expanded to include a complete renovation of the plaza in front of the new building at the end of Santana Row for a total of $5 million. We will receive more rent from the tenants on the Plaza, so there is no impact or projected return. We also pushed out the timing of when we will begin to recognize straight-line rent from 700 Santana from 4Q of '19 to 1Q of '20. However, there will be no delay to building completion or to the commencement of cash rent later in 2020.

Now on to the Capital Markets. We closed on 10 additional condos of Pike & Rose during the quarter, and have an additional 8 condos under contract, bringing our total to 88 of 99 units sold are under contract. Almost done and still ahead of our underwriting. On the noncore disposition front, we are in contract to sell one of our Maryland assets for $72 million, a low-to-mid 6 cap rate, and we expect to close later this quarter. We also have conversations ongoing for an additional $150 million to $200 million of potential assets sales. Initial indications show pricing, including the aforementioned Maryland sale at a blended mid-5s cap rate. While we don't expect all of these conversations to open the lid result on our transaction, these active discussions provide further evidence of strength and investor demand for our noncore assets.

On the acquisition side, in late February, we closed on a small acquisition in Fairfax County for $23 million. Fairfax Junction, an [oldie] and CBS-anchored asset, which we knew simply as an attractive risk-adjusted capital deployment with redevelopment potential down the road. This transaction is a direct result of us opening a regional office in Northern Virginia and adding boots on the ground in the market, a great start to the initiative with more to come. We continue to target additional opportunities in Northern Virginia as well as in our other core markets and hope to have more report in the coming quarters.

Now onto the balance sheet. Our net debt-to-EBITDA stands at 5.4x. Our fixed charge coverage ratio remains at 4.2x, and our weighted average debt maturity remains near the top of the sector at just over 10 years. During the quarter, we raised $69 million of common equity through our ATM program at an average price of $135 per share. Even with our $1 billion plus in process development pipeline, our A-rated balance sheet, equipped with a diversity of low-cost funding sources, leaves us extremely well positioned to execute our multi-faceted business plan and continue to drive sector-leading FFO growth over the next few years and beyond.

Next is guidance. We are leaving the range where it is at $6.30 to $6.46 per share. We're also leaving our annual comparable POI growth estimate at about 2%, despite the good start this quarter as we still have a lot of 2019 left to go. Please be reminded that on a apples-to-apples basis, adjusting for the lease accounting standard, this guidance range reflects FFO growth of 2.5% to 5% versus 2018.

And with that, we look forward to seeing many of you in Boston next Thursday for our Investor Day at Assembly Row, where you will have an opportunity to take a deep dive into the components of our diversified business plan as well as see first-hand the breadth of our management team, including the next generation of talent at Federal Realty.

Today's is the last day to register, so please contact Leah if you haven't signed up and would like to attend. With that operator, you can open up the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

And our first question comes from the line of Alexander Goldfarb with Sandler O'Neill.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [2]

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So 2 questions. First, can you just talk a little bit more about the office at Santana West? Your thoughts on going spec versus getting an anchor lease and then what you're thinking about as far as the demand mix for type of tenant? Are you looking for 1 user? Are you looking for maybe just 2 large-scale users or smaller users, just some sort of thoughts on how the project your divisioning in?

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Jeffrey S. Berkes, Federal Realty Investment Trust - EVP & President of Western Region [3]

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Sure, Alex. It's Jeff. Thanks a lot for the questions. First off, we're very excited about getting going on 1 Santana West. It's going to be a great building. As John said, 8 stories, all concrete, which is unique in the valley, 13 foot floor heights, nice big floorplates, great outdoor space, good parking and you can walk across all under Olsen right to Santana Row. So it's going to be a really, really cool building, very efficient, and we're excited to get going on it. As you know, the office space at Santana Row has been hugely successful. We leased up 500 and 700 quickly once we started construction. All the rest of the space we have there stays virtually 100% leased. Whenever we lose a tenant, we backfill the space very quickly. So we're really bullish on the office space in and around Santana.

The market is in an interesting place right now. There's still significant job growth in Silicon Valley. The bulk of that job growth, as you know, is from tech tenants. And obviously, most tech tenants are office-using jobs. So there's a lot of demand. And right now, quite frankly, there isn't lot of supply. I think the development pipeline under construction right now is 6 million feet or so in Silicon Valley, and 80% of that is pre-leased. And there's not a lot in the pipeline. This will be one of the few buildings that gets delivered in this window and one of the only buildings that has Santana-Row-type amenities to go along with it. And that has really become a requirement for getting office space leased today in the valley. So I think our timing is very good. Our desire, of course, is to do a single building user. It's more efficient. Usually end up with a quicker lease start -- rent start. So that's our goal. Once we get the building underway, we'll see how things are going in the market. And if we're not able to achieve that, we'll start to break the building later in the construction process. So I think that covers both parts of your question, but let me know if it doesn't. Thanks, again.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [4]

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

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Donald C. Wood, Federal Realty Investment Trust - President, CEO & Director [5]

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

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Jeffrey S. Berkes, Federal Realty Investment Trust - EVP & President of Western Region [6]

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

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Operator [7]

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And our next question comes from the line of Nick Yulico with Scotiabank.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [8]

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

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Daniel Guglielmone, Federal Realty Investment Trust - Executive VP, CFO & Treasurer [9]

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Yes. I think we still have 3 quarters left to go. So there's still lot of 2019 to kind of come across. In terms of where we see trajectory of quarter-by-quarter, we'll be below trend in both the second and third quarter is what our expectation is, where we'll probably be in the kind of the 1% range for second quarter, 1% range for third quarter and then we'll above trend in fourth quarter. And it's just too soon even with a good start to the year for us to be kind of changing kind of our expectations for the annual metric.

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [10]

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

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Daniel Guglielmone, Federal Realty Investment Trust - Executive VP, CFO & Treasurer [11]

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Yes. Let's do this a couple of ways. First of all, don't expect any further closings from them this year and next year. But that company has brought in a firm to negotiate the real estate deals, which to me is always a -- it's just certainly rough on the business plan of the existing team. How'd you like to be running real estate when somebody comes in from the outside. So I don't like that. I don't think that's a good thing. Having said that, our leases are strong in the particular place in Huntington.

What it effectively does for us in Huntington is a really good thing. I mean that shopping center sits directly next to one of the highest performing malls, certainly on the island, and what -- Simon just did a beautiful job renovating. That opens up a site for us. There is 1 or 2 others. We'd like to effectively get back because the demand we've got for that space, and I don't really want to talk as we are somewhere relatively advanced with somebody there, I don't want to mention it right now. But you can imagine, if you've got that size of piece of land adjacent to Walt Whitman mall, that you're not particularly worried about creating value at that shopping center over the long term. In terms of some of the other places that we have Bed Baths or the Gap for that purpose or anybody else who is trying to figure out how they are going to play in the future. It comes down to the real estate. And for us, at least, losing a tenant of that size, while it hurts in a quarter as it certainly did in this quarter for us, don't forget how much it unrestricts the real estate going forward, which gives us more options than we would otherwise have. Wendy, I don't know if you want to add anything to that?

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Nicholas Philip Yulico, Scotiabank Global Banking and Markets, Research Division - Analyst [12]

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No, no. That's helpful. I guess just to be clear. I mean how should we think about the expirations that are coming from Bed Bath in your portfolio over the next couple of years? How many expiring leases are going to pop up?

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Donald C. Wood, Federal Realty Investment Trust - President, CEO & Director [13]

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You see nothing more in '19, nothing in '20, 4 coming up in '21, and then a few each year from there.

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Operator [14]

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And our next question comes from the line of Ki Bin Kim with SunTrust.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [15]

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I want to discuss the new office building in Santana Row and the parking ratios. So you have lot 1,750 parking spaces kind of implies if you use it, you know one employee per parking space, 205 square feet per employee. I know it's not perfect like that. But just how do you think about how much parking to put there? And would that have been different if you'd built this thing 5 years ago?

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Jeffrey S. Berkes, Federal Realty Investment Trust - EVP & President of Western Region [16]

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Good question, Ki Bin. It's Jeff. The 1,750 parking spaces includes a big garage at the back of the site that will support not only 1 Santana West, but 2 Santana West. So we're building a little bit more parking upfront than we need because we have to the way the construction works for the second building. The parking ratio in Silicon Valley is driven by the market. And the market's 3 per thousand. So when we have both 1 and 2 Santana West up, we'll be parked at 3 per thousand.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [17]

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

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Jeffrey S. Berkes, Federal Realty Investment Trust - EVP & President of Western Region [18]

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Yes. We're more in favor of flat floors than ramped -- parking on ramps. That's generally what we executed. And these 2 buildings just to dive a little bit further into the weeds. They will have 1 per thousand parking below the buildings. So if you're an Executive and higher up in the company, you can pull right under the building, get on one elevator and go directly to your space. That's how we parked 700 Santana Row as well. And then the other 2 per thousand are in a structure in the back of the site. So down the road, I don't know, 20, 30 years from now, 40 years from now, whatever it is, if you don't need more than 1 per 1000, the parking garage could come down, and we could put something on the back of the site that's revenue generating. So we think about things like that and flexibility when we're laying out projects, but...

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Daniel Guglielmone, Federal Realty Investment Trust - Executive VP, CFO & Treasurer [19]

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

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [20]

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Okay. And just going back to that Bed Bath & Beyond question. I noticed that -- obviously you lost one store, but the rents you're collecting from Bed Bath & Beyond dropped 9%. And similar for Ascena you lost one store, but the rents you're collecting seems to have dropped 8.5%. So is there something else going on in the mix?

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Donald C. Wood, Federal Realty Investment Trust - President, CEO & Director [21]

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

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Daniel Guglielmone, Federal Realty Investment Trust - Executive VP, CFO & Treasurer [22]

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And that was certainly the case there with Ascena.

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Wendy Seher, Federal Realty Investment Trust - Executive VP & Eastern Region President [23]

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With Ascena, the location that we lost was -- that we really didn't lose. We negotiated to replace with Lane Bryant in Huntington is a situation when we took a space, we split it and then we leased it to, from a merchandising standpoint, 2 strong tenants between Chipotle and America's Best.

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Donald C. Wood, Federal Realty Investment Trust - President, CEO & Director [24]

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But the disproportionate rent you can say.

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Daniel Guglielmone, Federal Realty Investment Trust - Executive VP, CFO & Treasurer [25]

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That was driven by northeast where basically we did a short-term hunt to kind of fill -- we've already released that space to another tenant at about the same rent, a better merchandising play. So that was the bigger -- the biggest mover, and that's at one of our centers in Philadelphia.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [26]

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So it wasn't like you had to give rent release to 5 other boxes.

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Donald C. Wood, Federal Realty Investment Trust - President, CEO & Director [27]

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No.

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Operator [28]

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And our next question comes from the line of Jeremy Metz with BMO Capital Markets.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [29]

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Don, in your opening remarks, you talked about retailers' desire to focus on the best centers here. If I look at your leasing stats, your leasing cost in particular, they are basically double what they were for -- what they were almost in all of '18. I know it's only one quarter and this stuff can be lumpy, but can you just talk about the added cost here to defend and invest in your assets in the current environment we're in. And therefore, should we expect to see a higher level of cost in the near term similar to what we're seeing here?

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Donald C. Wood, Federal Realty Investment Trust - President, CEO & Director [30]

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It depends on the quarter, Jeremy. You're looking at -- don't extrapolate this over the future in a big way. We did 247,000 feet this quarter and more than double that in the fourth quarter. So first of all, you're talking about a couple of specific deals. And on the couple of specific deals that we did, they are all in the case of reinvesting and repositioning them for the future. So it would be part of -- not all of them are in the redevelopment schedule because remerchandising is not necessarily on our redevelopment schedule, but it's all about getting rid of tenants that we don't think will be around and tenants that -- and placing them with tenants that we think will be really strong in the '23, '24, '25 time frame. So that's what you're doing there. Again, smaller volumes, so bigger impact of just a couple of deals this time. Don't read further into it than that.

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Robert Jeremy Metz, BMO Capital Markets Equity Research - Director & Analyst [31]

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

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Donald C. Wood, Federal Realty Investment Trust - President, CEO & Director [32]

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Very active. It's our overall perspective of the environment. I mean this -- the last business I ever want to be in is, "Hey, look at me. My rents are the cheapest, and I can get another 10% or cheap rent." I don't want to be in that business. We can't be in that business. We're in the business of consolidating the best properties in the marketplace. And that means, I mean, the last way I want to compete is solely on rent. I want to be able to compete on a better place of that tenant to be able to make money. So we go through property by property by property, places we can't figure out how to get that done. It's part of the list that Dan gave you in terms of dispositions. Before, luckily, it's not a big part of our company, but there are certainly some, and we're working through on that.

Any other place Jeremy, that we've got an active way to proactively go in and solidify the shopping center for the next 5 years, we're doing. Those opportunities avail themselves along the way as tenants do fail. That's the environment we're in today. That's why you should expect lease termination fees. That's where we are. Take a look at the real estate and figure out whether you believe that real estate is going to be worth more in 5 years or less in 5 years. No capital that we're spending that we believe is being flushed down so that the property will be worth less in 5 years. And that's a fundamental important distinction between this business plans and others.

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Operator [33]

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And our next question comes from the line of Samir Khanal with Evercore.

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Samir Upadhyay Khanal, Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst [34]

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

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Donald C. Wood, Federal Realty Investment Trust - President, CEO & Director [35]

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Well, you know, Samir, this is -- it's funny. I'm always accused of being the most glass half empty guy in the room, and I can't help that. It is about making sure that protecting that downside and setting yourself up for the future. There is no doubt in my mind. And I'm looking over at Wendy as I finish this because I want her to jump in out here that, that there isn't a property that we are spending capital on in the markets that we're in where we don't have significant demand from tenants. Now the clear notion of just trying to backfill a big box with another big box user is not something we really want to do. We don't really see that as the future. And so that's a generalized comment. It doesn't pertain to any particular tenant, but there will be times.

We are clearly trying to create boxes or spaces that work for 5 and 7 years and out. That does mean smaller in a lot of markets that we're doing. It does mean capital in terms of splitting or reconfiguring space that there. The way we look at that, Samir, is to the extent we believe that, that'll create a growing stream of income. Again, with the cost of our capital in there figured in all the way through for the next 5 years, we're going to do it. So it is a disruptive time. I don't know anybody that I talked to on either the retailer side or on the private developer side that doesn't recognize that this retail leasing environment is one that is harder than it's been in prior cycles or prior times. A lot of what I see kind of is -- has leverage on the side of those retailers who certainly will try to renegotiate everything, kind of the Bed Bath example's a good one that we talked about before. But what do you have on the landlord side to battle that. And I don't know anything that's more important than the location and the ability for that tenant to create value, to create profit in that space. I will take that all day long over, "My rent's the cheapest," as the way to get somebody in. So that's kind of what we see.

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Wendy Seher, Federal Realty Investment Trust - Executive VP & Eastern Region President [36]

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I just wanted to add that from a global perspective, as we are in the trenches and kind of having these discussions with retailers, it is disruptive, but we're seeing that it provides us opportunities to strengthen the merchandising, which, again, goes hand-in-hand with that #1 criteria of location. It seems to be most important. And as I look at it globally, I also am looking and listening to deal volume, activity, conversations, and that is still strong within our properties. So I feel comfortable that we are able to get after these. It might take a little bit more time than we would want to on a -- especially when we are looking at it on a every 90-day basis, but in order to create the merchandising we want, we're getting the activity, and the categories I think are still strong.

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Samir Upadhyay Khanal, Evercore ISI Institutional Equities, Research Division - MD & Equity Research Analyst [37]

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Okay. And then, Don, I guess, just sticking to the subject, I mean we know we've got ICSC a month away and -- I mean, kind of, what are you thinking about sort of accomplishing there? And is there any kind of initial thoughts and maybe any sort of themes that could emerge this time around?

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Donald C. Wood, Federal Realty Investment Trust - President, CEO & Director [38]

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

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Operator [39]

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And our next question comes from the line of Christine McElroy with Citi.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [40]

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

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Donald C. Wood, Federal Realty Investment Trust - President, CEO & Director [41]

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Yes. I think most of the term fees are in the comparable pool. There was maybe one kind of small that wasn't, maybe $100,000 of it was in the noncomparable pool. And in terms of kind of big picture -- look, this year is expected to be another year of -- we had $7.7 million in term fees last year. I think we expect this year to have a -- probably a comparable number of term fees. Maybe we'll do more or less. But what's interesting is as a percentage of the size of the company, while this is -- these seem large on a relative basis, if you look at it in terms of the size of the company, it's kind of in line with our kind of 10-year and 20-year history, in terms of where term fees have been over the last 20 years. The average has been in around $4.5 million, over the last 10 years kind of in the $5.5 million to $6 million. It's not unusual. We are growing, we're almost $1 billion revenue company. And the term fees represent, even with a strong year like we had last year and we expect this year, it's still less than 70 to 80 basis points of our revenue base.

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Christine Mary McElroy Tulloch, Citigroup Inc, Research Division - Director [42]

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Okay. And then, I guess, just for the unconsolidated hotel JVs that sort of loss from partnership line, at least from what I can tell the EBITDA component of that is pretty minimal currently. Just maybe bigger picture would you expect this to become more of a positive contributor over time?

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Daniel Guglielmone, Federal Realty Investment Trust - Executive VP, CFO & Treasurer [43]

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Absolutely, Christy. You open up new hotels, there's a ramp. And in both cases, both performing well relative to expectations, but not performing in any meaningful -- contributing any meaningful cash flow. We certainly expect both of those hotels to be contributing meaningful cash flows as we move forward as they mature. We're going to be talking a lot about that, not necessarily the hotel per se because it's small, but in terms of the maturation process of these big projects on Thursday. And I think we'll show you some pretty enlightening stuff of what happens over the periods of time that will give you some confidence that, that will continue to grow.

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Operator [44]

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And our next question comes from the line of Derek Johnston with Deutsche Bank.

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Derek Charles Johnston, Deutsche Bank AG, Research Division - Research Analyst [45]

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

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Daniel Guglielmone, Federal Realty Investment Trust - Executive VP, CFO & Treasurer [46]

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Look, we've got, as we like to say multiple arrows in our quiver of low cost funding sources. The A- rating that we have gives us the lowest cost to capital from a debt perspective. As we're continuing to grow, we grow FFO, we grow EBITDA, we're creating leverage-neutral debt capacity. So that's clearly the biggest source of incremental capital that we have. We're generating in the range of $75 million to $100 million given the size of our company, free cash flow after dividends and maintenance capital. And I think that the balance between accessing the ATM when our stock is trading at attractive levels like it was this quarter with rates down and balancing that with tax-efficient asset sales where we can redeploy that capital into our business, our development and redevelopment, is a powerful capability that we have.

And we'll continue to have that balanced approach to how we fund our business. But we can fund over the next 3 years without any need for additional capital, just through free cash flow, leverage-neutral debt capacity and our asset sale, tax-efficient asset sale pool, our $1 billion plus pipeline over the next 3 years.

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Derek Charles Johnston, Deutsche Bank AG, Research Division - Research Analyst [47]

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

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Donald C. Wood, Federal Realty Investment Trust - President, CEO & Director [48]

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Well, yes. Certainly over -- and I think I'd mentioned this in past calls, certainly over the 3 years or 3-plus years that we've owned the property, I mean everybody knows what's happened in the retail world. Everybody knows what's happened with structure cost associated with it. So that does make it tougher. On the other hand, my goodness, this is a good piece of land. It's a great piece of land, actually. And getting these entitlements through to really -- it's hard if you're not there and you don't kind of see it. I don't know how familiar you are with the site to imagine how transformational this will be to an entire local region effectively between Coral Gables and South Miami and even parts of Miami, like Coconut Grove.

It truly -- I mean, what is designed is really pretty cool. We are tweaking it. There is no doubt that we are tweaking it because we're not looking at the same type of retail mix. We clearly are changing the mix a little bit in terms of what we see between residential and the hotel and the retail, and maybe even a little bit of office as we look at it. So all of that's in play. But as of last week, it is not just a theoretical exercise anymore. It is something, and so therefore, we're down and dirty into trying to figure out how we can really change the environment for those South Miami residents and everybody around it. There is a possibility we can get something good done there.

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Operator [49]

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And our next question comes from the line of Mike Mueller with JPMorgan.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [50]

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

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Daniel Guglielmone, Federal Realty Investment Trust - Executive VP, CFO & Treasurer [51]

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

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Donald C. Wood, Federal Realty Investment Trust - President, CEO & Director [52]

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

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Operator [53]

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And our next question comes from the line of Jeff Donnelly with Wells Fargo.

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Jeffrey John Donnelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [54]

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Two questions. One, on the leasing front, I think it's about 40% of the leases that have been signed by Federal in the last 3 years or so or new leases compared to, I think, it's about just 15% for all your peers. What drives that gap? Is it just presentation? Do you guys exclude option exercises from your activity? Or is it more of a philosophical difference, it leads you to a preference for churning your tenants more?

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Donald C. Wood, Federal Realty Investment Trust - President, CEO & Director [55]

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No. There is no question. And I feel like I have been repeating myself a bunch today. So I'm going to work on my articulation a little bit, Jeff. But we are all about creating the right merchandising for the future. It's not just about renewing failed concepts or average concepts. If you got better real estate, you should be able to create -- to attract new tenants for a new economy, for a new consumer set of behavior. And so it's been actually a goal effectively of ours. And so it doesn't -- that's -- what you said is true and not surprising at all. In fact, I think it does show the differences in how we approach, creating value in real estate. I don't know if the option exercise answer is in terms of whether we include them or not to Jeff's point.

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Wendy Seher, Federal Realty Investment Trust - Executive VP & Eastern Region President [56]

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We don't include them.

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Donald C. Wood, Federal Realty Investment Trust - President, CEO & Director [57]

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We do not include option exercises. So I guess that factors in a little bit too, but that's the big point, JD.

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Jeffrey John Donnelly, Wells Fargo Securities, LLC, Research Division - Senior Analyst [58]

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Okay. And just maybe a second question is for you, Don, is that, where are you with your, I think it was Decentralization 2.0 plan? I mean where are you at putting in the place the structure and personnel to achieve, I guess, that next stage that you are looking for?

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Donald C. Wood, Federal Realty Investment Trust - President, CEO & Director [59]

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

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Operator [60]

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And our next question comes from the line of Tayo Okusanya with Jefferies.

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Unidentified Analyst, [61]

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This is [Ruben] on for Tayo. Just have 2 questions. What would be driving comparable POI growth to close to 1% in 2Q and 3Q before a rebound in 4Q as was described earlier in the call?

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Donald C. Wood, Federal Realty Investment Trust - President, CEO & Director [62]

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I think it's just going to be kind of timing of anchor box kind of refill, and kind of going through some of the churn and some of our anchors over the course of the year. And just tough comps, versus -- particularly in the third quarter. I mean that will be kind of, I think, the 2 of the main drivers of the second and third quarter, but below trend metrics that we expect at this point.

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Unidentified Analyst, [63]

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Got you. And then I guess, additionally, can you give an update on your tenant watch list?

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Donald C. Wood, Federal Realty Investment Trust - President, CEO & Director [64]

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With regards to tenant, I mean -- look, we keep our eye on. I think a lot of the same name a lot of peers are. And one of the things that is -- the Pier 1' and Modell' of the world were the -- kind of the first quarter kind of new names to the list in terms of kind of being -- kind of at the forefront. We don't have a lot of exposure there. We have some. We've got 5 Pier 1', represent about 15 basis points of revenue. We've got 4 Modell'. They represent about a 13 to 14 basis points of revenue. So not a lot of exposure, but it is something we do keep an eye on. I don't know, Wendy, if you got any others that are kind of bubbling up to the top of the list, but -- as I think, it's the same list that a lot of our peers have, just generally.

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Operator [65]

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And our next question comes from the line of Craig Schmidt with Bank of America.

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Craig Richard Schmidt, BofA Merrill Lynch, Research Division - Director [66]

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

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Donald C. Wood, Federal Realty Investment Trust - President, CEO & Director [67]

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Yes. There is no question about it that obviously this period of stagnation, if you will, in terms of what was going to happen, certainly uncertainty at Sunset over the past 3 years is not exactly what a retailer wants to hear in terms of his or her ability to re-up. What I love about Sunset is the anchor system. So when you look at a really strong performing AMC there, when you look at couple of the other [entertainment] uses, a company called GameTime for one, when you look at L.A. Fitness and how well they do there, and most importantly, the parking garage, which is incredibly valuable as you can imagine. They are not only for tenants at Sunset Place, but we actually lease out to medical uses that are in the area. We've got a good basis, but the rest of it isn't very good. And so Craig, you've seen this weigh on us over the past 3 years, we're not -- it's not done weighing on us. There is no question about it. It will continue to deteriorate until we are able to effectively do the new deals and new merchandising that would be part of a plan. So expect continued deterioration in '19 and probably '20 over '19 also.

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Daniel Guglielmone, Federal Realty Investment Trust - Executive VP, CFO & Treasurer [68]

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We did a very good job over the last few years since we've owned it of maintaining reasonable, relative occupancy there. We saw kind of first the floodgates open a little bit in the first quarter, particularly on small shop, where we left another 30,000 square feet of small shop tenancy there. It has been, as Don said, weighing on us over there, since we bought the asset in terms of occupancy levels. If you back out Sunset from our small shop metrics on the occupancy side, on the lease percentage side, it weighs on us 150 basis points. So we'd be 150 basis points higher on the lease side and a 120 basis points higher on the occupied side on the small shop. It's Sunset, but not part of it. So a big, big drag to those metrics.

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Craig Richard Schmidt, BofA Merrill Lynch, Research Division - Director [69]

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Well, with potential entitlements coming, that's going to totally change the trajectory, I guess, of the project. So good luck on that.

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Donald C. Wood, Federal Realty Investment Trust - President, CEO & Director [70]

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Thanks, Craig. What it absolutely changes is the value of the piece of land itself, obviously, which has already happened.

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Operator [71]

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Thank you. And ladies and gentlemen, this concludes today's Q&A session. I would now like to turn the call back over to Leah for any closing remarks.

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Leah Andress Brady, Federal Realty Investment Trust - IR Manager [72]

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

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Operator [73]

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Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. And you may all disconnect. Everyone, have a wonderful day.