Earnings Call: Q1 2019

May 3, 2019

Good day, ladies and gentlemen, and welcome to the Federal Realty Investment Trust First Quarter 2019 Earnings Conference Call. As a reminder, this conference call is being recorded. I now like to introduce your host for today's conference, Ms. Leah Brady. You may begin. Good morning. Thank you for joining us today for Federal Realty's 1st quarter 2019 earnings conference call. Joining me on the call are Don Wood, Dan Chee, Jeff Berkes, Wendy Seher, Don Becker and Melissa Solis. Will be available to take your questions at the conclusion of our prepared remarks. I'd 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 and supplemental reporting package that we issued yesterday, our annual report filed on Form 10 ks and our other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial condition and results of operations. These documents are available on our website. Lastly, I'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. Given the number of participants on the call, we kindly ask that you limit questions to 1 or 2 per person during the Q and A portion. If you have additional questions, please feel free to jump back in the queue. And with that, I will turn the call over to John Wood to begin the discussion of our Q1 results. John? Thanks, Leah. Good morning, everybody. Some noise in this quarter has reported earnings as the adoption of ASC 842, the new accounting standard on leases, reduced FFO per share by $0.02 in the 2019 Q1 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 of $1.58 excluding the accounting change compared favorably with 1 point $5.2 recorded 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 Q4 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 $4,103 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 along 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, where an A1 location plus a recent renovation creates strong demand and higher rents or Bethesda Row, where 4 new deals signed during the quarter saw strong rent increases even with prior rents on those deals that range from $59 to more than $110 per foot. We've got other examples where we'll 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 and 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 thoroughly negotiated lease with a strong landlord bias wherever possible. Those strong contracts are an invaluable tool of value creation, particularly when a tenant fails or 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 lows unusual at the time and no sales kick or other way out of the lease given the strength of our real estate. Accordingly, we are in an extremely strong position to negotiate a termination fee of nearly 3.5 years of rent or $3,800,000 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 $1,600,000 in the 2019 quarter compared with $1,900,000 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 post holiday closing of Bed Bath and Beyond at Huntington Shopping Center. With the restrictions that both Brightwood and Bed Bath had at Lawrence Park Huntington Shopping Centers now gone. Redevelopment plans, not just releasing 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 three assets. So let's talk a bit about our future growth generators and let's start with CocoWalk in Miami. This is going to be a great project. Construction is on schedule and on budget with delivery about a year from now. 2 thirds of the new office space is now leased as is nearly 75% of the entire project. Uses like a fully renovated Cinepolis Theater, great well known local restaurants 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 round 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 releasing in a barometer as a barometer for demand and rents. When complete, we expect to have roughly $200,000,000 invested throughout Coconut Grove, obviously including CoCo Op, generating over $12,000,000 annually with strong growth prospects, about $70,000,000 of value creation. Next, you'll notice that we've added to our 8 ks disclosure a new Santana Row office project across the street at Santana West. You can see the renderings on federalrealty.comor@santanarow.com. The 360,000 square foot 8 storey office building, hopefully the first of 2 or even 3 on this 12 acre site in total for a 1,000,000 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 lure 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 floor plates in environments like this continues unabated with very little new supply coming on during our delivery period. Basically, we believe this site's adjacency to Santana Row is a huge risk mitigator as is our balance sheet and result in lower cost of capital. The initial investment on this site will approximate $300,000,000 though roughly $50,000,000 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 $75,000,000 to $100,000,000 in value. Phase 3 construction projects at both Assembly Row and Pike and Rose continue on schedule and on budget and both communities continue to mature and cement themselves as important staples in their respective communities. Leasing on the office components of Phase 3s are generating lots of interest at both locations. You'll remember that we announced Puma as the anchor tenant assembly and that We Federal Realty will be the anchor tenant at Pike and Rose as we consolidate our headquarters there. And we continue to get closer to other deals. Are looking forward to having many of you join us for our Investor Day next week on May 9 in Somerville, Mass, 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 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 became a lot more valuable with those entitlements. At Federal and at our partners Grass River and The Commerce Company, we are extremely grateful to the community's leaders who worked tirelessly with our team to advance their city with this very important first step. 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. 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 of pennies above our model and in line with consensus. The numbers in the Q1 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 non comparable 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 Q1, ahead of our expectations heading in. Term fees, positive gains from our proactive releasing 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 LA 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 costs, 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 collectability 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 $75,000,000 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 ks supplement as well as in our 10 Q. Speaking of our 8 ks 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 $5,000,000 We will receive more rent from the tenants on Plaza, so there is no impact to our projected return. We also pushed out the timing of when we will begin to recognize straight line rent from Swanfit 700 Santana from 4Q of 2019 to 1Q of 2020. 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 at Pike and Rose during the quarter and have an additional 8 condos under contract bringing our total to 88 of 99 units sold or under contract. Almost done and still ahead of our underwriting. On the non core disposition front, we are in contract to sell one of our Maryland assets for $72,000,000 a low to mid-six cap rate and we expect to close later this quarter. We also have conversations ongoing for an additional $150,000,000 to $200,000,000 of potential asset 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 ultimately result in a transaction, these active discussions provide further evidence of strength and investor demand for our non core assets. On the acquisition side, in late February, we closed on a small acquisition in Fairfax County for $23,000,000 Fairfax Junction, an ALDI and CBS anchored assets, which we use 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 having 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 to report in the coming quarters. Now on to the balance sheet. Our net debt to EBITDA stands at 5.4 times. Our fixed charge coverage ratio remains at 4.2 times and our weighted average debt maturity remains near the top of the sector at just over 10 years. During the quarter, we raised $69,000,000 of common equity through our ATM program at an average price of $135 per share. Even with our $1,000,000,000 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 are 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 an 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 have an opportunity to take a deep dive into the components of our diversified business plan, as well as see firsthand the breadth of our management team, including the next generation of talent at Federal Realty. Today 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. Thank you. And our first question comes from the line of Alexander Goldfarb with Sandler O'Neill. Your line is now open. Hey, good morning down there. So two 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 dynamics for type of tenant? Are you looking for one user? Are you looking for maybe just 2 large scale users or smaller users? Just some sort of thoughts on how the project you're envisioning in? 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 Don said, 8 stories, all concrete, which is unique in the valley, 13 foot floor heights, nice big floor plates, great outdoor space, good parking and you can walk across Olin or Olson 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 50 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 a lot of supply. I think the development pipeline under construction right now is 6,000,000 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 with a quicker lease start, rent starts. 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. Jeff, that was incredibly thorough. And then the second question is just going to the lease term fees, north of 200 basis points in the quarter, obviously, it 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 I mean, because it sounds like generically across retail land, Q1 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's 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's another batch of tenants that are going to experience difficulty later in the year? 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've got the best real estate in 2025. I'm 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 is 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 were laughing. We'll go out on a limb for you. The Q1 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 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. Yes. Let me just tag on to that a bit, Alex. Wendy and I and our leasing teams are aggressive about getting lease term fees, right? I mean, we could Lowe's sit in the space at Crow Canyon and pay their 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. It's really important. And we're aggressive about it. So yes, expect to see more. Okay. Thank you. Thank you. And our next question comes from the line of Nick Yulico with Scotiabank. Your line is now open. Thanks. Good morning. I just wanted to go back to the comparable NOI growth guidance of 2%. I mean, if you exceeded that in the Q1 and lease term fees helped that, I guess, implies that you're going to 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 rest of the year's slowing? Yes. I think we still have 3 quarters left to go. So there's still a lot of 2019 to kind of come across. In terms of where we see trajectory 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 2nd quarter, 1% range for Q3 and it will be above trend in the Q4. 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. Okay. Thanks, Dan. 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? Yes. And let's do this a couple of ways. First of all, I 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. I'd just like to be running real estate when somebody comes in and 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 in Walt Whitman that Simon just did a beautiful job renovating, that opens up a site for us. There's 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 because we are somewhere relatively advanced with somebody and 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's trying to figure out how they're 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? I'm sorry, go ahead. No, no, thanks. 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? You see nothing more in 2019, nothing in 2020, 4 coming up in 2021. 21, yes. And then a few each year from there. Okay. Thank you. Appreciate it. You betcha. Thank you. And our next question comes from the line of Ki Bin Kim with SunTrust. Your line is now open. Thanks. I want to discuss the new office building in Santana Row and the parking ratios. So you have about 1750 1750 parking spaces kind of implies if you use 1 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 built this thing 5 years ago? Good question Ki Bin. It's Jeff. Hey, the 17.50 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 is 3 per 1,000. So when we have both 1 and 2 Santana West up, we'll be parked at 3 per 1,000. And is there something different about how you build garages today, just getting ready for a world where there's less kind of owner used cars? And is that change at all how you build those parking structures to give you optionality? Yes. We're more in favor of flat floors than ramped parking on ramps. And that's generally what we execute. And these two buildings just to dive a little bit further into the weeds, they will have 1 per 1,000 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 1,000 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 1,000, 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 Yes, that's an important point Ki Bin. I mean the it costs more obviously to go under that building a little bit. It costs more to build the structure 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 were able to ultimately take down that garage behind or convert that garage into a money making office building or other use there, it would be hugely beneficial. So it's smart thinking relative to today with tomorrow in mind. Okay. And just going back to the Bed Bath and Beyond question, I noticed that obviously you lost one store, but the rents you're collecting from Bed Bath and 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? Well, the Bed Bath store that we lost was relative to our other stores a higher rent payer. So that was part of that was certainly the case there. With Ascena, what? With Ascena, the location that we lost with that we really didn't lose, we negotiated to replace with Lane Bryant and Huntington is a situation where 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. But the disproportionate rent piece, I That was driven by Northeast where basically we did a short term punt 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. So it wasn't like you had to give rent release to 5 other boxes? No. Okay. All right. Thank you. No. Thank you. And our next question comes from the line of Jeremy Metz with BMO Capital Markets. Your line is now open. Hey, guys. Good morning. Hey, 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 costs in particular, they're basically double what they were for what they were almost in all of 2018. I know it's only 1 quarter and this stuff can be lumpy, but can you just talk about the added costs 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? 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 Q4. So first of all, you're talking about a couple of specific deals. And on a couple of specific deals that we did, they're all in the case of reinvesting and repositioning them for the future. So it would be part of not all in the redevelopment schedule because the merchandising is not necessarily on a redevelopment schedule, but it's all about getting rid of tenants that we don't think will be around and tenants that we and placing them with tenants that we think will be really strong in the 'twenty three, 'twenty four, 'twenty five timeframe. So that's what you're doing there. Again, smaller volume, so bigger impact of just a couple of deals this time. Don't read further to it than that. 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 look 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? Very active. It is 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% over 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, it's the last way I want to compete is solely on rent. I want to be able to compete on a better place, a better 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. But 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 than 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 and some others. Thanks for the time. Thank you. And our next question comes from the line of Samir Khanal with Evercore. Your line is now open. Hey, 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? Well, 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 if I finish this because I want her to jump in, Javier, 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 so that's a generalized comment. It doesn't it doesn't contain any particular tenant. But there will be times we are clearly trying to create boxes or spaces that work for 5 7 years from now. 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's there. The way we look at that Samir is to the extent we believe that that will create a growing stream of income again with the cost of our capital and they're figured in all the way through for the next 5 years we're going to do it. So that it is a disruptive time. I don't know anybody that I talk 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 is 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 or create profit in that space. I will take that all day long over my rent the cheapest as the way to get somebody in. So that's kind of what we see. Thanks, Don. I'm sorry? So I just wanted from a global perspective as we are in the trenches and kind of having these discussions with retailers, it is hand with that number one 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're looking at it on an 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. Okay. Thanks for the color. And then Dawn, I guess just sticking to the subject, I mean, 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 on maybe any sort of kind of themes that could emerge this time around? 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 a 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 are trying to reposition. So we always kind of theme it with those big opportunities. And then we have our entire team there and that is all about the blocking and tackling of getting deals done. And that's our focus. That's always our focus as underneath the highlighted ones that we like to show and that's what it will be this year. I don't expect that to be different. Okay. Thanks, Dan. Thank you. And our next question comes from the line of Christy McElroy with Citi. Your line is now open. Hey, good morning. Just to follow-up on the lease term fees, just some clarification questions. So the $5,400,000 this year versus the $1,900,000 last year, is all of that associated with the same store pool? And then if I think about the 200 basis points or so additive to the Q1 growth rate, if that is all 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. Yes. I think most of the term fees are in the comparable pool. There was maybe one kind of small one that wasn't, maybe $100,000 of it was in the non comparable pool. And in terms of kind of big picture, look, this year is expected to be another year of we had $7,700,000 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 20 year history in terms of where term freeze have been over the last 20 years. The average has been in the around $4,500,000 over the last 10 years, kind of in the $5,500,000 to $6,000,000 It's not unusual. We are growing. We're almost $1,000,000,000 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 basis points to 80 basis points of our revenue base. 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? 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 flow 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 will show you some pretty enlightening stuff of what happens over the periods of time that will get you some confidence that that will continue to grow. All right. Thanks. I'll see you next week. Thank you. And our next question comes from the line of Derek Johnston with Deutsche Bank. Your line is now open. Hey, good morning. Thank you. 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 non sale of non core assets? Yes. Look, we've got, as we like to say, multiple arrows in our quiver of low cost funding sources. The A minus rating that we have gives us the lowest cost of capital from a tech 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 the incremental capital that we have. We're generating in the range of $75,000,000 to $100,000,000 given the size of our company of 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 are $1,000,000,000 plus pipeline over the next 3 years. 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 costs and delayed timing, has your thinking or vision for the site changed as well as development yield expectations? Well, yes, certainly over and I think I've 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 construction costs associated with it. So it 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 to really it's hard if you're not there and you know 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's a possibility we can get something good done there. All right. Good stuff. Thanks, Ken. Thank you. And our next question comes from the line of Mike Mueller with JPMorgan. Your line is now open. Hi, good morning. So you mentioned asset sales are potentially, I think, $160,000,000 to $260,000,000 or so. Is there anything you're expecting or contemplating that you take in the back half of the year for acquisitions? 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 $72,000,000 disposition. I think we're going to continue to be opportunistic, try and get some of that $150,000,000 to $200,000,000 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. Yes, Mike, I'd add to that. I mean, there are a couple 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 sit and you look at all of the economics between acquisitions and development, redevelopment, etcetera, redevelopment is number 1, development is number 2 and acquisition is number 3, is how I would read them. 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 the second half of this year or into next year or whatever, but don't think we're blind to it. We're not. Got it. Okay. That was it. Thank you. No worries. Thank you. And our next question comes from the line of Jeff Donnelly with Wells Fargo. Your line is now open. Good morning, folks. Just two questions. 1, 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 were 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 that leads you to a preference for churning your tenants more? No, there is no question. And I feel like I've 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've 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 what the option exercise answer is in terms of whether we include them or not, just to just one. We don't include them. We do not include option exercise. So I guess that factors in a little bit too, but that's the big point, J. D. 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 putting in the place the structure and personnel to achieve, I guess that next stage that you were looking for? Just about done. Just about done. The Northern Virginia office, we're in temporary space now, but we'll be in permanent space in 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, it's been 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 at a 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. Okay, great. Thank you. Okay. Thank you. And our next question comes from the line of Tayo Okusanya with Jefferies. Your line is now open. Hi. This is Reuben on for Tayo. Just have two questions. What would be driving comparable POI growth to close to 1% in 2Q and 3Q before it rebounds in 4Q as was described earlier in the call? Yes, 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 on some of our anchors over the course of the year. And just tough comps particularly in the Q3. And that will be kind of I think the 2 of the main drivers of the second and third quarter below trend metrics that we expect at this point. Got you. And then I guess additionally, can you give an update on your tenant watch list? With regards to tenant watch list, I mean, look, we keep our eye on, I think a lot of the same names, a lot of our peers are. One of the things that is the peer ones and models of the world where the kind of the Q1 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 Tier 1s represent about 15 basis points of revenue. We've got 4 models. They represent about 13 basis points 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've got any others that are kind of bubbling up to the top of the list, but I think it's the same list that a lot of our peers have just generally. Okay. Thank you very much. Thank you. And our next question comes from the line of Craig Schmidt with Bank of America. Your line is now open. Thank you. I'm returning to Shoppes in Sunset Place. I noticed the occupancy went from 74% to 66%. Is this you preparing the site for the retails? And maybe could you talk to a little bit about the NOI that may have to come offline as you get more serious about the project? Yes. There's no question about it that obviously this period of stagnation, if you will, in terms of what was going to happen and 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 a couple of the entertainment uses, a company called Game Time for 1, when you look at LA Fitness and how well they do there and most importantly, the parking garage, which is incredibly valuable, as you can imagine, there not only for tenants at Sunset Place, but we actually leased out to medical users 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's no question about it. It will continue to deteriorate until we are able to effectively do the new deals, the new merchandising that would be part of a plan. So expect continued deterioration in 'nineteen and probably 'twenty over 'nineteen also. Yes. 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 the first the floodgates open a little bit in the Q1, 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 120 basis points higher on the occupied side on the small shop if Sunset would not be part of it. So a big, big drag to those metrics. Well, with the potential entitlements coming, that's going to totally change the trajectory, I guess, of the project. So good luck on that. Thanks, Craig. What it absolutely changes is the value of the piece of land itself, obviously, which has already happened. Thanks. Thank you. And ladies and gentlemen, this concludes today's Q and A session. I'd now like to turn the call back over to Leah for any closing remarks. Thanks for joining us today. We look forward to seeing you in Boston