Earnings Call: Q4 2018

Feb 14, 2019

Good day, ladies and gentlemen, and welcome to the 4th Quarter 2018 Federal Realty Investment Trust Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, this conference call is being recorded. I'd now like to introduce your host for today's conference, Ms. Leah Brady. Ma'am, you may begin. Thank you. Good morning. Thank you for joining us today for Federal Realty's 4th quarter 2018 earnings conference call. Joining me on the call are Don Wood, Dan Gee, Jeff Berkes, Wendy Seher, Dawn Becker and Melissa Solis. They will be available to take your questions at the conclusion of our prepared remarks. A reminder that certain matters discussed on this call may be deemed to be forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements include any annualized or projected information as well as statements referring to expected or anticipated events or results. Although Federal Realty believes reflected in such forward looking statements are based on reasonable assumptions, Federal Realty's future operations and its actual performance may differ materially from the information in our forward looking statements, and we can give no assurance that these expectations can be attained. The earnings release and the supplemental reporting package that we issued yesterday, our annual report filed on Form 10 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, we'll be hosting an Investor Day on May 9 at Assembly Row in Boston. You should have received a save the date. If not, please let me know. Keep your eyes off for an invitation with additional details and a registration link in the next few weeks. We look forward to seeing you all there. Given the number of participants on the call, we kindly ask that you limit your questions to 1 or 2 per person during the Q and A portion of our call. If you have any additional questions, please feel free to jump back in the queue. And with that, I will turn the call over to Don Wood to begin our discussion of our Q4 results. Don? Thanks, Leah. Good morning, everyone. We finished our 2018 particularly strong with reported FFO per share in the Q4 of 1 $0.57 dollars better than we had expected, resulting in a full year 2018 results of $6.23 a share, 6.8% better than last year for the quarter, 5.4% better for the year. Just have to point out right upfront, this is the 9th year in a row that we have reported FFO increases over the prior year, the only shopping centers REIT to do so. And it's the 15th year of the past 16 that we've done so. We also expect to grow in 2019. Please let that sink in in light of today's environment. A lot went right this quarter and subsequently through today that both benefited the 4th quarter operating results and more importantly cash flow in the future. Everything from record leasing activity in the quarter to stabilized residential occupancy in our big developments to powerful office pre leasing at both Assembly Row and CocoWalk. All that is contributing to a business plan that more and more seems right for today's demanding and changing consumer. So let me get to some specifics. Revenues grew 5.1% quarter over quarter and 6.8% year over year. Earnings growth at comparable properties was 2% for the quarter, 3.1% for the year. The comparable portfolio remains 95% leased and 94% occupied and our operating expenses including G and A, but not including real estate taxes grew at less than 1% for the quarter and less than 3% for the year. That's a pretty complete formula for largely organic growth. In terms of leasing, we did 107 comparable deals for 574,000 square feet at an average rent of 32 $0.16 a foot, 15% above the $2,796 that the previous tenant was paying in the last year of their lease. We've never done deals for that much square footage in the quarter before, a record by nearly 10%. For the year, we did 374 comparable deals 402 total deals for almost 2,000,000 square feet, again, an all time annual record for us at 12% more rent. So despite the dislocation in the retail real estate business, there is plenty of strong retail leasing going on in the dominant quality properties that we own. A few more words on leasing because I don't want to portray it as all rosy. The big difference we see in today's results compared with a few years back is the increased volatility when you look at a large sample size of leases. Big rent bumps at redeveloped and modernized retail destination are as strong or even stronger than they've ever been. But there's also a number of roll downs on anchor or junior anchor boxes where there are legitimately acceptable alternatives in the market. Now, while that basic supply and demand dynamic has certainly been around forever, it feels more pronounced today. So that the spread between good deals and not so good deals seems to me to be wider. We've talked about for quite some time now the importance of a well diversified income stream to sustainable growing cash flow and I couldn't be more proud of the progress we've made in this regard. Our core shopping center portfolio is second to none and we're looking at harder than ever for densification opportunities in terms of broader real estate uses, retail, resi and office. Following the successes we've had or are having at places like The Point in El Segundo, Tower Shops in Davie, Florida, Congressional Plaza in Rockville and many more, you know the list. We broke ground this quarter on our initial development phase at Bella Kenwood Shopping Center, which includes 87 luxury apartments and expanded planning for the development of the balance of the east end of the site. In the next few months, we're hopeful we'll get investment committee approval to move forward with redevelopment of the entire western portion of Graham Park Plaza, our longtime owned 19 acre shopping center that sits inside the Beltway on Route 50 in Fairfax County, Virginia. That plan includes the addition of about 200 apartments and placemaking incorporated into a reinvigorated retail shopping destination. And we're getting closer in Darien, Connecticut with negotiation and feasibility of a residential over retail mixed use community right at the train station in this New York City suburb. But for a building permit, we now have all local and state entitlements to develop 75,000 square feet of new retail space and 122 rental apartments, diversify and intensify wherever feasible. The big development news over the past few months involves Assembly Row, Pike and Rose and CocoWalk. After achieving stabilization in 2018 as the big residential component of our 2nd phase of assembly row at higher rents and at a quicker pace than we had expected, we were anxious to capitalize on that success with the start of our next phase. In addition, the maturation of Assembly as a first class office location solidified by Partners Healthcare and the active T stop emboldened us to add more office product there too. So we're underway and we're driving piles. 2 high rise buildings, 1 directly at the foot of the T stop with 500 rental apartments above ground floor retail and the second, a 300,000 square foot Class A office building, half of which is pre leased to German Shoe and apparel maker Puma for their North American headquarters. I hope you saw the separate announcement on Puma several weeks back. Together, a $475,000,000 Phase 3 expansion at one of the country's most successful mixed use developments that we're conservatively underwriting at the combined 6% yield with full land and infrastructure allocation and near 7% on an incremental cash basis. With the commitment of West Elm to take the final 12,000 square feet adjacent to pinstripes at Pike and Rose, our retail space has all been leased, leased once. As West Elm and the remaining tenants open throughout 2019 and the residential units remain 95% occupied, the first two phases of Pike and Rose will be fully stabilized. Construction on the 212,000 square foot spec office building and the 600 parking the space parking garage in Phase 3 is now fully under construction for tenant occupancy in 2021. At CocoWalk in Miami, we made very strong progress on both construction and leasing on this 256,000 square foot mixed use of redevelopment over the past several months with the signing of the 43,000 square foot office lease executed with Regis for their spaces concept at the project along with an additional 21,000 square feet of new deals both restaurants and retailers, which when combined with existing tenants gets us to well more than 50% pre leased on this important redevelopment. The office demand here in particular is validating our thesis of consumers wanting to be in a monetized environments close to home. This property is going to be very special when it's completed. No significant developments at Sunset Place over the last few months as we continue to work toward entitlements that would allow greater density. Tenants will continue to leave the property as it sits in its existing condition and so Sunset will be a significant year over year earnings drag in 2019. West Coast construction continues on schedule and on budget as we prepare to deliver 700 Santana Road to Splunk later this year. Next step should be the first of 2, 350,000 square foot office buildings at Santana West, the 12 acre site that we control across Winchester Boulevard from Santana Row. We expect the investment committee consideration of that project in a couple of months with construction start later this year if we can get comfortable with the numbers. Stay tuned. Also, Jordan Downs, our 113,000 square foot grocery anchored development in Los Angeles with joint venture partner Prime Store is well under construction with its full anchor program under lease. 30,000 square feet of signed leases in the 4th quarter alone with Nike and Blink Fitness, joining grocer Smart and Final and value retailer Ross to round out the offerings resulting in more than 75% of the GLA leased at this point. Tien tsin now turns to the small shelf space. And finally, a quick shout out to Wendy Seer, to Jan Sweetnam and the other 11 Federal Realty Executives that were promoted last week coming out of our Board meeting, including investor favorite James Meisel. There was a separate press release that lays out the details. There's very little about running this company that is more satisfying to me than being able to develop and grow human capital from within. It's not always possible, but we strive to be able to do so. To me, it's indicative of the depth of our team and pays off in spades in terms of the continuity of our business plan and our ability to not miss a beat. And yes, as Dan G will note, G and A will go up a bunch next year. And that's about it for my prepared remarks for the quarter and for the full year of 2018. It was a really good one. Let me now turn it over to Dan for some additional color and then open the line to ask your questions. Thank you, Don and Leah. Hello, everyone. We are really pleased with our results for the Q4 and the full year 2018 with FFO per share growth of 6.8% and 5.4% respectively versus 4Q and full year 2017. We beat consensus for both the quarter and for the year by a penny. The numbers in the 4th quarter were driven primarily due to lower net real estate taxes offset by greater net impact from failing tenants than was forecast heading into the Q4 as well as higher demo and higher G and A. Our comparable POI metric came in at 2% for the Q4 as a result of these drivers. The average comparable POI growth per quarter for the year was 3.2%, a solid result in light of the challenging environment. With respect to our former same store metrics, the quarterly average for the same store with re dev was 3.1% and same store without re dev at 2.7%. We are officially retiring these metrics having provided them over the course of 2018 during our transition to a more relevant comparable POI figure. With respect to asset sale and other activity during 2018, we raised over $200,000,000 of proceeds in the aggregate as we closed on over 85 percent of the market rate condos at Assembly Row and Pike and Rose raising roughly $130,000,000 in proceeds, sold Chelsea Commons Residential and Atlantic Plaza Shopping Center in our Boston region at a blended mid-5s cap rate raising $42,000,000 and closed on our fifty-fifty JV at The Row Hotel at Assembly, bringing in $38,000,000 of gross proceeds. On the acquisition side, our discipline was once again evident in 2018 as we aggressively scoured the market for opportunities, but to continue to find better risk adjusted capital allocation alternatives in our own portfolio from a redevelopment and development perspective. However, we do have a pipeline of attractive acquisition targets and are optimistic we can bring a couple of them over the finish line in 2019. Now on to the balance sheet. 2018 was a year where we positioned our capital structure exceptionally well to handle the next wave of value creating development and redevelopment activity for the company. We finished the year with roughly $50,000,000 of excess cash and nothing outstanding on our credit facility. We reduced our overall net debt level by over $100,000,000 We generated upwards of $90,000,000 of recurring free cash flow after dividends and maintenance capital in 2018. As a result, our net debt to EBITDA at year end is 5.3x, down from 5.9x@yearend 2017. Our fixed charge coverage ratio stands at 4.3 times currently versus 3.9 at 4Q 2017. Our weighted average debt maturity remains at the top of the sector at 10 plus years and the weighted average interest rate on our stands at 3.88 percent with over 90% of it fixed. As we push forward with the next wave of development and redevelopment at federal over the coming years, development which has been significantly derisked through solid pre leasing, spun with 100% of the office leased and 97% of the total building at Santana Row, delivery set at the end of the year. Puma with 55% of the office base leased and multiple tenants competing for the balance of the office space at Block 5B and Assembly Row, delivery slated for late 2021 and Regis' IWG Spaces concept having pre leased 50% of the new office space at CocoWalk, delivery scheduled for late 2020. Our A rated balance sheet equipped with a diversity of low cost funding sources leaves us extremely well positioned to execute our multifaceted business plan and drive sector leading growth through 2019 and into 2020, 2021 and beyond. Now I will turn to 2019 FFO guidance. We are formally providing a range of 6 $0.30 to $6.46 per share. This guidance takes into account the impact of the new lease accounting standard, which we estimate at $0.07 to $0.09 where among other items, we will be expensing internal leasing and legal costs that were previously capitalized. Please note that on an apples to apples basis, adjusting for the new accounting standard, our FFO growth forecast for 2019 would be roughly 2.5% to 5%. Behind this growth are the underpinnings of a very solid 2019. Occupancy and rental rate gains in our comparable property portfolio will be meaningful. Proactive re leasing activity in 2018 will drive growth in 2019 as major tenants like Anthropologie in Bethesda, 49er Fit and TJ Maxx at Westgate in San Jose, Bob's Furniture at both Los Jardines and Escondido in Southern California, Target at Sam's Park and Shop in BC among others all contribute more fully over the year. And continued stabilization our signature mixed use projects Assembly and Rose and Santana Row will all drive meaningful growth to the bottom line in 2019. These items together would drive FFO per share growth into the 6% to 8% range, if not for some discrete, but somewhat disproportionate headwinds. De leasing impacts at our non comparable properties, CocoWalk, Graham Park and Sunset Place will lay on this year's results. Proactive redevelopment and remerchandising activity at some of our dominant regional assets in order to further consolidate their market leading positions will also have an impact, assets which include Plaza El Segundo in Los Angeles, Huntington Shopping Center on Long Island and Congressional here in Metro DC. In addition, our recent initiative to establish the next generation of leaders of federal will meaningfully increase our G and A in 2019 beyond the lease accounting changes. As a result, our guidance underscores a very constructive 2019 for federal. Now to the detailed assumptions behind our guidance. Comparable POI growth of about 2% and total POI growth of 4%. The credit reserve, which includes bad debt expense, unexpected vacancy and rent relief of roughly 100 basis points, non comparable redevelopments, I. E. CocoWalk, Graham Park and Sunset will create about $0.06 of drag relative to 2018 as we work through the continued de leasing impact of these assets. With respect to G and A, we forecast roughly $10,000,000 to $11,000,000 per quarter. This reflects $0.07 to $0.09 impact from the new lease accounting standard taking effect this year and about $0.05 to $0.06 in higher G and A primarily relating to the promotions and new additions we mentioned. On the capital side, we project spending on development and redevelopment of $350,000,000 to $400,000,000 As is our custom, this guidance assumes no acquisitions or dispositions. And finally, we are projecting another $70,000,000 to $90,000,000 of free cash flow generation after dividends and maintenance capital. As I close out my comments on guidance, I would like to highlight that Federal's diversified business model continues to consistently churn out sector leading FFO growth by a wide margin. When you assess the projected apples to apples FFO growth for 2019, let me have you pause and think about the following statistics. Federal consistently produces outsized bottom line FFO growth relative to our peers, not as adjusted, but SEC endorsed, may redefined FFO growth. Over 3 year, 5 year, 10 year and 15 year horizons, Federal's FFO growth has outperformed its Bloomberg shopping center peer average by a margin of roughly 8%, 6%, 8% and 7% respectively. That's per annum and that's compounded. With that, we look forward to seeing many of you in Florida in a few weeks and please be on the lookout for the invitation store Investor Day, which will be held on Thursday, May 9 at Assembly Row in Boston. Operator, you can open up the line for questions. Thank Our first question comes from the line of Jeff Donnelly of Wells Fargo. Your line is now open. Good morning, guys. And Dan, thanks for the color around guidance. Question is, the guidance range that you provided seems slightly more conservative than earlier commentary you gave in late 2018. Is that small delta the result of a specific change in your outlook you can talk about or is that really just kind of a non specific, I guess, I'd say desire to be cautious looking out at 2019? Yes. I think it's a little bit of both. I think that when we put things out there, we had a placeholder with regards to the G and A and the incremental G and A outside of the lease accounting. And so that ended up being a little bit higher. And I think just as we work through, we it was a preliminary guidepost guidance back in November. And as we work through a budgeting process, which hadn't really yet started until mid November in through the end of the year and wasn't finalized until January. I think, look, it's 60 basis points, dollars 0.04 revision on a $6.40 basis. So it's tweaking around the edges. Could you view it as a little bit more conservatism? Yes. And maybe just a second part on the guidance. Can you talk about what your assumptions are around cash spreads on renewals for 2019? Just because in 2017, they were up 9%, in 20 18, they were up 4%. I guess I'm wondering if there's a trend there, if you guys kind of think you sort of bottom here or maybe that's not so much a trend other than just a mix of lease maturities that you faced? Can you repeat the question? I got you, Jeff. I got you, Jeff. It is I don't have much to add to that. It is a mix. It depends on what deals are coming up, how it kind of rolls, how it plays through. There's no doubt there are pressure on rents. And I tried to make that point in the prepared remarks. There at least we see more volatility. Great deals are great, not so great deals are not so great. And that mix between top and bottom is more. When it comes down to renewals, I mean, if I looked and just looked even at the Q4, I can give you a couple of pretty interesting specifics. So there is a CDS deal at a great property that we have in Northern Virginia, that's a big time renewal increase. At the same time, we sit there with an Ulta deal at Congressional Plaza where they had somewhere else to go and we wound up agreeing to reduce rent on that, something that wouldn't have happened a few years back. So it really is a bit more volatile. I don't know what more to tell you in terms of the notion of how those renewals will play out. But I can tell you that overall, you should certainly expect to see continued growing rents from us. I just can't give you the mix as precisely as maybe you'd like it. And maybe if I can just add one more sorry. I think you'll see more volatility. I think you saw that this year with regards to some of the rollover, the range of office leasing decisions. At Assembly, you obviously cut the deal with Puma, a retail brand, instead of looking outside of retailing. I'm just curious because for your retail properties, you guys have always talked about putting thought behind, not just economics, but how the tenant contributed to the overall merchandising and other factors. For office, is it strictly economics? Is it credit risk? Is it what it does to the daytime population? How do you guys kind of think about that? Yes, that's a great question, Jeff. It really is. There is on the weighting of merchandising versus economics, certainly on the retail side, as you know, we put a lot of there's a higher weight on the merchandising side. On the office side, it is less. It is more economic, but not completely. So at the end of the day, again, when we do our when we're doing office, we're only doing office at our places where we've created that environment on the street. So to the extent the company has a workforce that aligns better with the merchandising that we've done on the retail side on the street, that is clearly beneficial or they get a checkup in that type of environment. Credit is certainly the most important thing as we look at it on the office side. But that merchandising component is clearly a component in who we put there. Our next question comes from the line of Christy McElroy of Citi. Your line is now open. Good morning. This is Katie McConnell on for Christy. So, maybe if you can talk generally a little bit more about the yields you're able to achieve on larger mixed use development projects and how you're underwriting future phases as well and how you think about it in the context of ultimate value creation and what these assets can be worth upon stabilization? Yes, Katy, I'd love to deal I'd love to take that one. Look, there is no question, I don't think I'm saying anything that everybody doesn't know that construction costs are clearly high and probably will go higher as we go forward and you need premium rents to do that. I can tell you the best thing that we have done in the last decade was to not stop our mixed use development program throughout the last recession. That put us, as you know, in the place of having the places themselves, the street level places created during that period of 2013, 2014, 2015. And so the incremental mixed use development stuff that we do at those places, Pike and Rose, Assembly Row, Santana Row are risk mitigated in large measure. I very much believe that mixed use properties are at least the good ones are completely integrated in terms of those uses and have to be viewed as integrated in terms of their cap rates, what they would be sold for, what those income streams are valued at. And so when we have the chance to jump on take assembly, the next big piece for residential and office at a combined 6 on a fully loaded basis and closer to a 7 on a cash on cash basis, there's no doubt in my mind we're creating significant value. And that's in a market where construction costs are about as high as any place that we've seen them given what's happening in and around us with the casino and other things that are taking that construction workforce and employing them. So if you just step back then and say, all right, do you view these mixed use properties that we're doing as sub-five capital assets in total? Absolutely, we do. We absolutely look at those things as being 1 plus 1 plus 1 equals 4 in terms of office and resi and retail. And accordingly, to the extent we can put our capital to work 6% or better certainly at assets like that, we think we're getting a sufficient premium to our cost of capital plus as has been demonstrated at Santana and in Bethesda, as these things are open and yes, they take a long time to get open, yes, they take a long time to mature, but they are the gift that keeps on giving. So the growth rate of those assets we've experienced to be higher than other stuff. So the IRRs are effectively higher than other stuff. So I hope that answers it. I hope that puts in context for you. That's great. Thanks for the color. Thank you. Our next question comes from the line of Steve Sakwa of Evercore ISI. Your line is now open. Thanks. Two questions. I guess, Don, the follow-up on that. As you think about places like Santana Row in the next phase and office, I mean, are you sort of raising the bar at all? Are you getting a bit more cautious as we're getting later in the cycle, particularly on the office side as it relates to pre leasing or sort of the wiggle room you want on rents? I realize that the apartment side is a little bit easier to sort of weather a downturn, but sort of how do you think about the office component this late in the cycle? Yes, it's a very fair question, Stephen. And look, we absolutely look at this market by market, property by property as we make those decisions. And I'll give you a great example. When we look across the street at Santana Row and you look at those 13 acres, we had a tenant that we could have signed for the entire 350,000 square feet of space to effectively pre lease that one of those buildings. We decided not to do it. We decided not to do it because of the credit of the tenant, because of the viability of the business plan, even though the rents were strong. So it's important, I think, that you know that as we're allocating capital and we're allocating the underwriting if you will, the quality of the tenants that we're getting that while they are completely while they're very much derisked because of the environment we created, they're not totally derisked. And so we look really close at the credit. We look really close at diversity of the tenant base. We look very close as to the prospects of their impact on the rest of the shopping centers, Jeff Donnelly asked early on. In total, we feel real strongly about Silicon Valley in terms of those opportunities over the next 2 or 3 or 4 years. Beyond that, we'll have to see. It is not as vibrant at all in Montgomery County, Maryland. And that's why we're doing one building relatively small size. We know we want office as part of the overall mix of the mixed use project. Those will probably be smaller tenants and more diversified in terms of the business. So the market the marketplace will dictate it to some extent, but we have no problem saying no to a tenant that doesn't meet the underwriting standards that are necessary to make the whole thing work. Okay. And then I guess one for Dan Gee. Just on the guidance, I guess I understand you've got a lot of balance sheet flexibility, but is it fair to assume that you've got some equity raised in the model to fund the $350,000,000 to $400,000,000 on the development spend in 2019? Yes, not a lot. I think that we've positioned the balance sheet with call it, dollars 80,000,000 to $90,000,000 of free cash flow after dividends and maintenance capital. We've positioned the balance sheet to be able to raise leverage neutral incremental debt of $125,000,000 to 150,000,000 dollars We have some dispositions in the market now. We'll see how we'll look to kind of bring those over the finish line. But also we've got capacity on our line of credit and we'll be opportunistic with regards to use of our ATM program to the extent that it's opportunistic. Yes. The only thing I'd add to that Steve is, I mean truly look at our history and in terms of how we judiciously issue equity. It's we all love doing big deals. And you don't love it, nobody loves it. And so everything balanced and the ATM program has been a good program in terms of matching up with development spend pretty nicely. We're at a position as I think you know where we don't have to do that though. And so when you sit back and you look at all the alternatives, I think, Dan said we had some properties in the market. I think we got $125 or so 1,000,000 worth of dispositions that are in the market now that hopefully get done. We expect them to get done, see how that plays out. So it is all about having more arrows in the quiver and being able to pick and choose them opportunistically, carefully and in no way in a big in any one of those arrows being over too big a deal. For me. Thank you. Our next question comes from the line of Alexander Goldfarb of Sandler O'Neill. Your line is now open. Hey, good morning. Just two questions here. First, Don, just going to the office side, you guys have obviously now done some pretty big deals with Puma and Partners Health and Splunk. Are you guys thinking that maybe as you look at your pipeline going forward that maybe you want to have more office? Or do you feel that you guys are still leading with retail and offices is I don't want to say an also brand, but offices that second component? Just trying to understand because obviously you've had some pretty big wins here. It's a very good question, Alex. And please understand we are a retail company that if you just the way you build out a large mixed use project and we have 3 between Santana Assembly and Pike and Rose in particular, you have to create a place first. It's you create that place and we lead as we have in all three with residential over that because there's no question having a population that lives there associated with the environment you've created is a real positive. Now as those things mature and if you're lucky enough as we have been to have big pieces of land where there are incremental ways to create value, the logical next place to go is with daytime population. The thing that we're seeing in the marketplace to me that is just really frankly amazing is it's become almost not optional for a progressive company to have who hires younger people or the workforce that it needs to not be in a place with all of the amenities. And so we're sitting with this advantage, if you will, of many, many year head start, if you will, of creating places. And so now you will see office that daytime population that fills in and makes it to ground out the communities and makes them so strong. I mean, I don't know whether Puma would be there without the partners deal. And remember, Partners Healthcare, we don't own the building. We didn't take the risk. We ground leased it. So we are a conservative company in terms of the way we view value creation at these at our assets. We could probably grow faster if we did absolutely everything ourselves and move forward in that way. We're careful about it. And we only do it ourselves in places where we've really already established and know what the environment is. So think about our office as an integrated part of a decade or 2 decade long placemaking environment community, if you will, that has to have all components of lifestyle, including the office environment. Okay. That's helpful. And then second question is and maybe my with old age, maybe I'm forgetting things, but I thought previously you guys had spoken about just with the experience of the 2nd phases of Pike and Rose and Assembly that the next wave of projects would be sort of smaller in scale. But the capital spend for Phase 3 at assembly is significantly bigger than either of the other 2 on an individual asset basis. So just sort of curious how you're thinking about it as far as the stabilization period, the impact it has to earnings. I know you guys are all about growing regardless. So just want to understand how this bigger capital spend factors into that and if you expect a longer stabilization period or because it's a lot of office maybe that's not really as much of a factor because they move in sort of quickly? Yes. Let's look at it. First of all, you had nothing to worry about with your age. You're remembering well. Everything seems totally perfect. You're doing just fine, pal. So let's get that out of the way. In terms of and so incremental adjustments and adds to existing properties are generally smaller than the original first phase that we do in the first two phases that we do. We saw an opportunity at assembly and I really hope you'll join us on May 9th for our Investor Day up there. This marketplace that marketplace is on fire. What we were able to do with that building the residential building, which was big, 477 units, The time it took to fill that up surprised even us. It was short and very different than almost every other market. It's that good. So the ability to jump on that and there were some reasons both from construction cost perspective, which continue to go up there as well as some things that we need to get done with the on the residential side in terms of units that are cheaper effectively to do. On balance, it made sense to do that right now. And jumping on that, it's a big building. It's at the base of the T. That residential building, we have very strong thoughts on how well that will do. And then when Puma was without us putting a shovel on the ground effectively had that deal done there, that convinced us to move forward there. So we decided to do 2 at the same time. While a residential building is not pre leased, effectively we view it as that way given the level of success that we've had over the last 18 months. So it's a bit of an anomaly, but it's only an anomaly based on the strength of the market and the success that we've had in the first two phases. Thank you, Don. Thank you. Our next question comes from the line of Ki Bin Kim of SunTrust. Your line is now open. Thanks, good morning everyone. So if I think about some of the troubled tenants out there, and I'm generalizing here, Obviously, you've talked about it, but we've seen some landlords work with these tenants to restructure their leases to keep them viable and occupancy cost rationalized and so forth. But it's been more a little bit more one off. But my question is, if I were working at the real estate department at TJ Maxx or the gyms that are expanding or Peloton, any of the kind of expanding very strong retailers and I see other tenants getting a 30% discount on the rent. I would think and come to you and say, you know what, we're the draw. We're bringing tenants and we're bringing customers into your center. There's a lot more value for us to be there. Why are we not getting a discount? Now I'm going to answer my own question, and I know it's different by property and quality and all of that, but do you see this as a risk and is that increasing? I'll keep in. I mean, there is no doubt. By the way, if you were hired at any retailer's real estate department and you did not try to take advantage of an oversupply situation in the country, you probably wouldn't be there that long. So there is no question that every retailer has adopted the position of getting the best deal. That's not different than it's ever been. There is no question that in a more oversupplied environment that they play that card higher. Answer out your own question. When there are no other opportunities, you can play it all out, but you don't win. On places where there is more opportunities, you do. And that goes back to my volatility point from earlier on. I see a bigger spread between good deals and not so good deals from that perspective. I think if you I think I don't think there's a company out there that can say that the retail real estate industry is not in a position of change, does not have a overall oversupplied phenomenon associated with it. So you have to look at 2 things. In your specific real estate, what leverage do you have to a deal and at what terms? And then secondly, outside of basic shopping center leasing, where else do you have to grow? What other ways do you have to grow? And if you can't answer those two questions, then you got a growth problem. We don't have that issue. And that's a big deal. So the last couple of questions have been about office. Think about this for a second. We have a 500,000 square feet of signed office deals that are going to create over $23,000,000 of NOI over the next couple of years. Just they're locked, they're just not that's a lot of pizza shops and TJ deals and dry cleaners and stuff. That's a pretty good down payment on future growth. And that's because of a vision of the overall importance of place that has been a 20 year or longer view for us. So what you say is, of course, it's a risk. It's a risk to the entire industry. And you have to look at what you have to negotiate against that. And I think we've done pretty well. All right. Thanks, Scott. Thank you. Our next question comes from the line of Jeff Spector of Bank of America. Your line is now open. Hi, guys. This is Justin on for Jeff this morning. First, just congrats on a good quarter and solid year. One for Dan, we saw portfolio occupancy tick down a little bit in Q4, both sequentially year over year. Can you just drill into what happened in the quarter? And then second, just from a guidance perspective, where you sit today, how should we expect occupancy to trend over the next 4 quarters? Yes, Sure, sure. I mean, look, occupancy as we reported is December 31, occupancy of 2017 versus December 31, 2018. Overall, occupancy was pretty stable over the course of the entire year from an economic perspective. And so while you saw some point in time to point in time diminution, I think that was part of it. I think in the Q4, we were hit with a little bit of some bankruptcies on a smaller level that let us down a little bit over the course of the quarter. But that's a bit of the color that we could kind of point to. I would say that with regards to some of our small shop, I mean, we I think, which trended down a little bit as well. A lot of that is driven by the de leasing activity we've got going on at Sunset and Coco. Without those two properties, our small shop would be about 150 basis points to 160 basis points higher. So, I think it's a little bit specific to kind of some of the redevelopment that we're doing within our portfolio with regards to some of those trends. But I would expect over the course of 2019, occupancy and lease rates will be fairly stable. Okay, great. Thanks. And then Don, sorry if I missed this, but any updates on the PrimeStore JV? I'm curious if these assets are meeting your internal expectations so far and if there's anything you've learned there from this venture that you might be able to integrate into the overall core portfolio? Very, very good question. And the short answer is, yes. I mean, it's been a really good experience all the way through. Jeff is on the phone. Jeff, can you take PrimeStory on this? Yes, Yes. We've been up and running for about 18 months now with the Primestore folks. And we're meeting our projections on what the produce and in the way of NOI and leasing velocity within the portfolio. And if you look at some of the we had a small bankruptcy out here at Gstage, we're able to backfill those spaces very quickly at better rents. So operationally, I think everything is going well with the JV. Jordan Downs, as Don mentioned, is our first new investment with them since formation. Everything there is on track. We're 75% leased with our boxes in place and focused on leasing our small shop space right now. So that's on track as expected. So I think everything is going well. In terms of are we learning anything that we can apply to our greater portfolio? I don't know, Don, you might want to chime in on that. I'd say probably not. But again, we haven't been in the JV that long. And there's a lot of heavy lifting upfront, of course, when you form a relationship like that. So I would expect there'll be some nuggets as the years go on that we're able to extract. But Don, what do you think? Yes, I think the word nugget is right. Remember, we did this deal with Arturo and Primestor because they did think like us, because they have I mean, if you go to a number of their properties, Azalea is the one that comes to mind most. You'll see a lot of importance on place, a lot of importance on the mix of tenants and that's kind of what got us together in the first place. We are aligned in the way we see things. There'll be nuggets that come out going forward that will go both ways, I'm sure, but not at this point. Okay, great. Thanks. Thank you. Our next question comes from the line of Vince Tibbult of Green Street Advisors. Your line is now open. Hey, good morning. I'd like to drill down a little further on the comparable property NOI growth guidance. I'm just trying to bridge the gap on how to get to the 2%. You mentioned occupancies expected to be roughly flat this year, and with where spreads and contractual rent bumps are, it seems like that would imply something greater than 2%. Just hoping you could provide a little clarity there? Sure, sure. I think that kind of our core portfolio overall, we'll see kind of decent growth in, call it, along with some of the kind of the proactive releasing activity that we had in 2018 kind of really reaping the benefits into 2019, kind of getting us north of 3%. So you're right from that perspective, but there are specific things in the portfolio that will weigh on some of those numbers. 1, some of the late year bankruptcies that we impacted the 4th quarter. We'll see that carry out through 2019. So that'll be about a 50 basis point to 60 basis point drag in our forecast for the year in terms of some of those kind of below the radar impact from bankruptcy. And then also I mentioned the redevelopments at Paz El Segundo, Huntington Congressional, where we're doing kind of some remerchandising that will create some drag as we turn tenants over. And at those large assets, they can have big impacts that will create about 80 to 90 basis points just on those kind of 3 or 4 assets of drag. So that kind of brings us down to that about 2% number. And so it's those two things. But they're value creative. Yes. And the key point there is that long term at Plaza El Segundo, what we're doing at Huntington, Congressional, great pieces of real estate with what we're doing and kind of that diminution in kind of cash flow over 2019 as we do that long term we're creating value and you'll see higher rents and higher property operating income over the long term there and value creating projects. So again, similar to our proactive re leasing activity, this is more of the same, but just on a larger scale. Thank you. That's really helpful color. One quick follow-up there. So just is the redevelopment contribution going to be negative then? Just looking so it looks like you only have a few smaller projects that stabilized in 2018 that would contribute to comparable property NOI and a few rolling in 2019 as well. So given that 80 basis point drag, is the overall contribution to next year's growth negative from re dev? Well, we look at kind of re dev and development kind of in the same thing. I think that you'll see some balance there. I think you'll see some small contributions from a readout perspective in terms of what's on Page 16 of our 8 ks. I think you'll see continued contributions from Phase 2 roll up of assembly from 2018 to 2019 as well as that He's asking about comparative. Comparative. Comparable. Comparable. Okay. So, yes, I think we'll be Yes. No, I think you'll see, yes, based upon that redevelopment, Yes, no, there will be drag from redevelopment during that on our comparable number. Yes. Our next question comes from the line of Nick Mieleco of Scotiabank. Thanks. Dan, just hoping to get maybe a few of the items, how we should think about for the AFFO adjustments there like recurring CapEx number, how that might trend this year versus last year? I think we expect when we look at kind of the going from FFO to AFFO, will be pretty consistent I think with 2018 numbers. After our free cash flow, which is really AFFO, less dividends, should be pretty consistent. We're consistent and get us into that, call it $80,000,000 plusminus range in terms of what we expect our AFFO payout ratio to be pretty consistent with what we have in 2018. Okay. That's helpful. And then Don, I just want to return to Santana Row and the future office development opportunity there. I mean all the stats on the market out there are showing strength, new supply, competitive new supply continues to get leased and there's less of it available. So I guess I'm just wondering, do you have like a does the company have an internal timeframe on sort of go or no go on the office there since and then whether we should think about the separate, right, you have this 320,000 office versus the 1,000,000 square feet across the street, whether there's like separate decision making on that or you could just launch everything at once if the market is you think the market is strong enough? Yes, let me it's a great question. I mean cycles, right? So as we sit and we look at Santana, we very much would like to make decision in the first half of twenty nineteen as to whether we're going forward with the first 350,000 square foot building across the street from Santana, that's Santana West. That is the that's the next thing up. We haven't even delivered Splunk yet and it won't be delivered till the end of the year and hopefully it's this year, it might even go into next year. We'll see how that plays out. But other than Splunk, we've got it'll be the gono go on the 350. You'll see that decision soon this year because the market is as strong as it is. It definitely weighs into our considerations. We know the queries we've been getting about office on that site. We know that they're strong. We know we've kind of proven it with Splunk 1, Splunk 2, AvalonBay chose to bring their offices there with us. Our first office building has been a complete 100% leased with great roll ups there. So we know we've got an office environment that we created there that will be successful. To the extent that market softens as it surely will at some point over the next 5 or 6 years, we don't want to be in that position then. So there is definitely a desire to get it done and get it going, at least part of it in 2019. Thanks, Don. Thank you. Our next question comes from the line of Derek Johnston of Deutsche Bank. Your line is now open. Hi, good morning. Thank you. Are you seeing an uptick in interest or signing leases or additional leases with online native retailers? And are there any examples? And are you seeing proof of concept regarding long term viability there? That's a great question. In terms of long term viability, too early to say, right? I can tell you that we've had some real good meetings and are doing some pretty good deals with digitally native brands coming over whether we're talking about Casper or Parachute Home or Allbirds or any of those guys. Now all that is good and it's demand and increasing demand in the type of properties that we have. That's clearly a positive. Now whether those brands are will be great brands for 10 or 20 or 30 years, time will tell. We'll have to see. It's why the diversity of the income stream is the most important thing in that decision making process. But clearly, many all would be too strong. Many of those digitally native brands who just 3, 4, 5 years ago said, I'll never have a brick and mortar place. I have gone have a reverse course that way. And yes, with the type of properties we own, we're a natural recipient of that demand. Okay, great. And just switching gears a bit. I know there are no dispose provided in guidance, but you guys are out there in the market. Any idea of how many assets are currently being marketed and the demand profile you're seeing in the private markets and how they're performing and basically are cap rates coming in at your expectations or what's the delta? Yes. We're in the market with, as Don mentioned, 2 assets. We expect kind of a hope to get into that $125,000,000 range in terms of proceeds and it's an ongoing process. I think we're I think that right now with regards to those processes, sales processes coming in at our expectations, We'll see whether or not we get them done. But, yes, no, I think for our assets, we're seeing relative stability of demand for them and no surprises so far. Thank you, guys. Thanks a lot. Thank you. Our next question comes from the line of Collin Mings of Raymond James. Your line is now open. Thanks. Good morning, everybody. Just in the prepared remarks, the tone seemed to be pretty upbeat about maybe getting some acquisition opportunities to the finish line this year. Anything else you can offer us or expand on those comments at all at this point? And maybe just generically, should we think about that those opportunities that you're pursuing maybe having a redevelopment component based on some of your prior activities? Is that a fair way at least to think about that? It is, Collyn. Let me jump on that for a minute because it's so funny when Dan and I were talking about what to do for on prepared remarks. He wanted to talk about acquisitions because we do have some things that are close. The bottom line is when we do acquisitions, we want to make sure that there's an opportunity to create value. We've never been a volume shop. As far as I'm concerned, we never will be a volume shop and it's harder to buy today and assume that rents are going up. It's not 2,006 anymore. So that kind of leads us to say what we do primarily will have some sort of a redevelopment component to it. It's what we do best. Doesn't mean we're not looking for under market rents. Of course, we're looking for under market rents, but it's harder to find that. So you'll see some acquisition activity from us this year. It'll probably be relatively minor, but you know and mostly because our best use of capital is in the places that we've already created and we have incremental things to do at them. That is the on a risk adjusted basis, clearly the best thing for us to be doing, which is why you see that development pipeline so full. But one of the things we never want to be is a one trick pony. And so on that on the acquisition side, you'll see the occasional acquisition. It will most likely be part of some strategic plan to either add an adjacency or do something to it to be able to create redevelopment value. All right. Really appreciate the color there, Don. And then just going back to Derek's question on disposition activity. Can you guys just touch on the Atlantic Plaza sale in 4Q? Sure, sure. We closed on a $27,000,000 grocery anchored center and pricing was kind of in the mid-6s, kind of taking that with a blended basis of our Chelsea Commons residential. We were in the mid-5s on a blended basis on those 2 kind of what we view as non core at the end of the day, just kind of and that's the color on that. I mean, I think that The demos are too light there for us. And it came as part of a package, I don't know, 10 years ago, maybe even more now, that includes a number of assets and that was one of the lighter that was one of the lighter demos. It was a good area. It is a good area with North Reading, but it is but they were light. And so when we looked at what we'd be able to do there in the future, we said nothing and have the ability to take shelter, which is what we did and that's why that got sold. All right. Really appreciate it. I'll turn it over. Thanks. Thank you. And I'm showing no further questions at this time. I would now like to turn the call over to Ms. Leah Brady for closing remarks. Thank you for joining us today. We look forward to seeing many of you over the next few weeks. Again, follow-up if you did not receive the Investor Day, save the date. Thank you. Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone have a great day.