Earnings Call: Q3 2018

Nov 1, 2018

Good day, ladies and gentlemen, and welcome to the Third 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 be given at that time. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Leah Brady. Please go ahead, ma'am. Good morning. I'd like to thank everyone for joining us today for Federal Realty's Q3 2018 earnings conference call. Joining me on the call are Don Wood, Dan Gee, Jeff Burkus, Wendy Seher, Dawn Becker and Melissa Solis. They'll be available to take your questions at the conclusion of our prepared remarks. I'd like to remind everyone 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 that expectations reflected in such forward looking statements are based on reasonable assumptions, Federal Realty's future operations and its performance may differ materially from the information in our forward looking statements, and we can give no assurance that these expectations can be attained. The earnings release and supplemental reporting package that we issued yesterday, our annual report filed on Form 10 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. Given the number of participants on today's 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 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 Q3 results. Don? Thank you, Leah. Good morning, everyone. At $1.58 a share in the 3rd quarter, we generated more funds from operations in a 90 day period than we ever have in our 56 year history. On an absolute basis, this was simply the best quarter we've ever had. More than 5% ahead of last year's quarter and in excess of both the streets and our internal expectations, contributions came from all parts of our business and on both coasts. Overall rental income grew 5.5% quarter over quarter. Earnings growth at comparable properties was particularly strong at 3.5%. The comparable portfolio remains 95% leased and 94% occupied and operating expenses including G and A, but not including real estate taxes actually fell slightly quarter over quarter despite $12,000,000 more in revenue. Real estate taxes it seems never goes down. The only metric that was underwhelming for us on the surface was comparable retail lease rollover growth at 6%. 90 day 90 comparable deals for 448,000 square feet at an average rent $38.31 per foot, 6% above the $36.22 that the previous tenant was paying in the last year of the lease. It's not bad, but it's not what you're used to seeing. So let's take a deeper look. In breaking down the overall results, space leased to new tenants grew at 13% with the previous tenant, while renewals of existing tenants grew at only 2%. That's the combined 6% rollover. The detail supporting the 2% renewal rollover rates reveals that more than half of the renewal rent came from just 2 deals, both of whom renewed flat to the last year of their previous lease and therefore depressed the reported percentage increase. A strong credit anchor at East Bay Bridge in Emeryville, California and the Best Buy Building at Santana Row. Now many of you who are familiar with our portfolio know both of those properties well. So let me spend a minute on the transactions behind the summarized metrics to hopefully help interpret what they mean. So consider this, rent in the East Bay Bridge anchor lease has been increasing annually at 3% since its inception in 1995 through 2,009 and 3.5% annually since 2,009. I don't know of any big anchor deals that have those kind of embedded annual bumps in them. Most are flat for 5 or 10 years and then bump 10% or so. Run the math. Those are very different economics. So we decided to renew it flat to the growing prior year's rent and from here it will continue to grow at 3.5% annually for the option period. And by the way, no tenant improvement dollars from us. Given more typical anchor lease terms, this new rent would equate to a huge bump over the old rent and our rollover statistics would have reflected double digit growth, yet we'd be far off economic far worse off economically. The strength in location, the lease terms and the very strong productivity of the store allowed us to get paid 1,000,000 more in rent along the way. Deal terms matter. Next, rent paid by the anchor at the hard corner of Stevens Creek and Winchester Boulevard at Santana Row more than paid for construction of the building they occupied by the time the initial term of the lease expired in 2014. And with the exercise of their first option back then has paid for the building more than twice over. The exercise of their 2nd 5 year option came in this quarter at the same rent despite significant supply coming on line at Valleyfair across the street. And again, no TI dollars paid by us. The real estate economics here are incredibly compelling despite negatively impacting the rollover metric. I go through those 2 leases in particular because digging behind any and all of the reported metrics is increasingly important as all of our businesses get more complicated and harder to compare. But at the end of the day, it comes down to FFO per share growth. We're particularly proud of the consistency and sustainability of that earnings growth year in and year out, no excuses. It's why we've worked as hard as we have to diversify our revenue streams and why we're using our existing real estate platforms to create and enhance real estate value through redevelopment and intensification on both coasts. The focal point is exploitation of our superior locations and cash flow stream through the lens of a broad real estate perspective. And this isn't just about our big mixed use projects because it applies to our core shopping centers too. For example, you'll see that we've added to our 8 ks redevelopment schedule this quarter a $23,000,000 87 Unit Residential Project at Bala Cynwyd Shopping Center on City Line Avenue just outside Philadelphia. This will be our 7th residential project developed internally by our team to intensify one of our core shopping centers. The others being 2 at Congressional Plaza, Wynwood Shopping Center, Chelsea Commons and Linden Square with more on the horizon. In terms of Ballack Pinwood, we would expect this residential project to be just the first step of what will hopefully be an ambitious redevelopment there. It's a great example of how we continue to find ways to extract real estate value in so much of our portfolio. Now let me update you on our largest initiatives. With the 675 Unit Residential Neighborhood at Pike and Rose fully 95% occupied and stabilized In the 375,000 square feet of restaurant and retail space nearly fully leased, though not yet fully open and rent paying until later in 2019, we are ready to move forward with the next phase. A 212,000 Square Foot Class A spec office building with about 4,000 feet of retail on the ground floor along with a 600 space parking garage that will be used by both office and retail users. The 11 storey glass curtain wall building addressed as 909 Rose will sit on the hard corner of Rockville Pike and Rose Avenue, literally Pike and Rose and is expected to begin occupancy in 2021. Our investment will approximate $130,000,000 with an expected stabilized yield between 6 and 7. Separately, we're assessing the viability of relocating Federal's headquarters into 2 of the 11 stories, about 40,000 square feet of the building. Doing so would validate our belief in the advantages of these mixed use neighborhoods in general and certainly North Bethesda specifically. At Assembly Row, we're now 95% leased at the 4 47 Unit Montage, significant can lead ahead of schedule and at net effective rents of nearly $3.40 a foot. And like our residential experience here, the Row Hotel, of which we own a 50 percent equity stake, opened in August at Assembly and seems to be following a similar track. Rate and occupancy are strong right out of the gate, a trend that we hope will continue through the Q4 and into 2019. So the market's exuberant acceptance of all things Assembly Row has us accelerating our plans for future development of additional residential and office product at 2 of the 5 remaining developable parcels there. We're hopeful that we'll be able to announce the next large phase of development at Assembly in a quarter, possibly 2. Out west, the Q3 saw a software giant Splunk sign and announce a lease for the full 300,000 feet of office space at 700 Santana Row with occupancy expected about a year from now. Get a chance to be anywhere near San Jose, be sure to visit Santana Row and feel how the end of the street has been transformed with the construction, this gorgeous building and energized plaza area below it. We expect to complete this phase of development on or slightly better than budget from a cost perspective and ahead from an income and timing perspective. The enduring strength of Silicon Valley in general and Santana Row specifically, not unlike Boston and Assembly Row, has us nearing a decision to potentially move forward with additional office development at Santana West, the 12 acre parcel on Winchester Boulevard across from Santana Road that we have controlled for the past several years. Tenant interest in this site due to its proximity to amenity rich Santana has been very high leading us to accelerate our master planning of that site. Stay tuned. And in Miami, demolition at CocoWalk is largely complete and construction begins in earnest this quarter. You'll notice slight increase in expected cost of the project reflected in the 8 ks, the result of a bit of increased scope and a bit of cost creep, but not expected to impact projected yields noticeably. Both our retail and office leasing teams are finding strong interest and we expect to start reporting signed deals beginning next quarter. A few miles away at Sunset Place, we received good news in the quarter as voters approved the ballot measure amending the city's charter, so therefore out of 5 vote of the commission rather than a unanimous one would be sufficient to relax the land use code in the district that includes Sunset Place. We're working through the entitlement process now to increase the density on the site. Many obstacles remain in the way of our moving forward with a viable project there, but we'll see. That's about it from my prepared remarks for the quarter. It was a really good one and we hope to follow with another and another. Let me now turn it over to Dan for some additional color and then open the line to your questions. Thank you, Don, and hello, everyone. Our $1.58 per share of FFO for the quarter was $0.07 above our expectations and $0.03 above consensus. This outperformance was driven by higher POI through more rent than forecast and continued expense controls at the property level, higher term fees than we had forecast as well as lower G and A, but was again offset from the drag of early ramp up at our 2 new hotels at Pike and Rose and Assembly, the latter of which just opened mid grade through the quarter. Our comparable POI metric was 3.5%, which bested our forecast as a result of the items I just mentioned. If you remember from our last call, we had expected this quarter to be the weakest of the year. Our continued proactive releasing activity this year provided a drag of 110 basis points, although this was partially offset from the benefit of our 2017 proactive releasing efforts. Our better than expected termination fees enhanced the result by roughly 1%. As a reference, our former metric same store with re dev came in at 3.4%. Discussed in detail our lease rollover number for the quarter of 6%, but please note that on a trailing 4 quarter basis, our rollover stands at a solid 12%, in double digits and in line with 2016 2017 levels. And to reemphasize, let's remember, this is real estate where true value creation should be measured over a 3 to 5 to 10 year horizon and let's not get overly focused on any one quarter's or even any one year's metrics. With respect to occupancy, after a strong momentum in the second quarter, our overall leased and occupied figures were 90 $4,800,000 $93,700,000 respectively, essentially flat to down slightly, but consistent with previous comparable quarters. New leases of note include Innisfree on Third Street in Santa Monica, Fogo de Chao at Pike and Rose in North Bethesda. New openings of note include Uniqlo with its Montgomery County flagship location at Pike and Rose, LA Fitness at Del Mar and Boca and TJ Maxx at Westgate in San Jose. With departures from our 1 Toys R Us box, which is already released but not open and our one Bon Ton box weighing on the metrics. Also when you're next in DC, please check out the new Anthropologie flagship location at Bethesda Row that opened earlier this month. It's truly impressive. With this stronger than expected quarter, we are again in a position to raise our FFO guidance, increasing and tightening the range from $6.13 to $6.23 to a range of $6.18 to $6.24 per share. That represents a $0.03 increase at the midpoint from 6.18 to 6.21. At 6.21, this implies growth for 2018 just above 5%, a testament to the continued consistency federal has demonstrated over its long history, even through challenging retail and economic environments. With respect to our comparable POI metric, we are also revising our outlook higher from about 3% to the mid-three percent range, driven by another strong quarter of 3.5% to go along with the 3.8% and 3.6% we had in the 1st 2 quarters of the year. Now, on to some preliminary goalposts for 2019. We are still in the midst of our 2019 budgeting process, so I'm going to keep this very directional in nature. We expect to grow in 2019 in line with the past couple of years despite continued industry headwinds due to both a changing consumer and a general oversupply of retail space in the U. S. We will also face some company specific headwinds next year. First, our G and A will grow in 2019. More detail on that on our next call. And second, we will have some drag FFO as we refinance our $275,000,000 term loan, which had been locked at 2.62% since its 2011 origination. And lastly, the negative impact from the new lease accounting standard $0.07 to $0.10 which I mentioned on our last call, which is reflected in these preliminary 2019 numbers. Despite these headwinds, we expect to have a solid base of growth of roughly $0.15 a share, which should get us into the mid-630s at the lower end of the range. It is still too early in our forecast process to predict how much higher we can push the upper end of the guidance range, however. Given the diversity of our cash flow streams and the number of different avenues that we can grow through, I would expect that an appropriate target for 2019 is to achieve growth consistent with what we have realized in 2017 2018, which implies high 640s as an upper end of the range. As I just mentioned, this takes into consideration the negative impact from the new lease accounting standard of $0.07 to $0.10 drag of roughly 1% to 1.5% and that's an estimate that we continue to refine. And note that on an apples to apples basis where 2018 FFO is preliminary and as we did last year, we will be providing formal guidance on our Q4 call in February, where we will refine these targets and provide detailed assumptions behind them. Now on to the balance sheet, which continues to improve and is very well positioned from a capital perspective as we head into the next phases of new development in the coming years. We continue to make progress on the condos, while already 107 market rate units at Assembly Row, at Pike and Rose, we are roughly 70% complete on a closed and under contract basis on those 99 units, with only roughly $20,000,000 left to go. During the quarter, we closed on the sale of a small non core asset and are under contract and close to closing on another before year end. For a total of $42,000,000 in gross proceeds, These two sales were executed at a blended mid-5s cap rate. We also closed on a 50% joint venture interest with our JV operating partner for the New Row Hotel at Assembly, generating $38,000,000 of proceeds to us. As a result, our credit metrics continue to improve. Our net debt to EBITDA ratio moving lower to 5.4 times for the Q3, down from 5.9 at the start of 'eighteen. Our fixed charge coverage ratio edging higher to 4.3x versus 3.9x at the start of the year. The weighted average maturity of our debt remains above 10 years and we are on pace to generate roughly $80,000,000 of free cash flow after dividends and maintenance capital. We expect these credit metrics to continue to trend in a positive direction through the balance of 'eighteen and into 2019, as we raise additional capital cost effectively through opportunistic asset sales. We currently have roughly another $125,000,000 of non core tax efficient sale prospects in the market, which we target to close over the coming quarters. With that, operator, you can open up the line for questions. Thank Our first question is from Nick Yulico with Scotiabank. Your line is open. Thank you. Good morning. Dan, Dan, just going back to the goalpost for 2019, when you're talking about growth in line with the past several years, are you was that referring to FFO growth or is that also same store comparable NOI growth? Yes. Generally, it's FFO is what the reference was there. We were not providing any same store guidance at this point and probably won't until our February call, similar to what we did last year. Okay. And second question is just on the re leasing spreads and Don, you gave a lot of info there. I guess question is, whether you have more of those types of leases, which escalations sound pretty attractive, that's sort of one part. And then separately, maybe we can get a preview of how you expect the releasing spreads to look in the next year. I know they've been volatile. You highlighted that they would could come down. Any numbers you could share there? Let me frame it for you Nick this way. First of all, those two leases, I mean normally I wouldn't break out a couple of leases and give you those kind of specifics on it. But that is just so economically compelling that I felt the need to do that. Now are there a lot of big anchor boxes that have those kind of boxes? No. Those kind of bumps, I don't know of any other, to tell you the truth. I mean they are that's really unusual. But the only reason that happens is because of the productivity of the store and the strength of the market and the strength of the locations that they're in. So what I'm the reason I do stuff like that or talk about stuff like that is you probably get sick of me saying, those contracts were business of contracts and that those contracts are just critical in terms of what they say to determine the value of the real estate that's underlying it. And when you have deals like that, I'm sure there are other people on this call saying, wow, because they don't have deals like that of that kind of significance. Now generally, so every quarter there is something that as you know, I like to highlight or talk about that kind of builds the case for the value of the real estate. There's no doubt that overall pushing rents, pushing rents is an issue industry wide because supply exceeds demand in terms of retail rents. It's a key reason that we look hard at office and at residential as a big part of our business plan. Once you create the overall environment on the ground floor, it's awfully nice to be able to capture real estate value by being able to do the right merchandising downstairs because you're going to get paid for it upstairs in the form of higher residential or higher office rents up there and you know how much we believe in that. Alternatively or in addition to that it really does come down to the leverage at each of the individual shopping centers that we have and we own good ones. So do I expect there the next year or 2 to be years of 2020 22% and 24% rent rollover bumps? No, I don't. Do I expect us still to be able to do double digit ramp ups? Yes. I don't see why not. That doesn't mean any particular 90 days. But certainly, when we look at our loss to lease overall in this portfolio, and I love the slide that we do in our deck that shows what leases have been done at versus what the in place is. It shows you compared to almost anybody else to look at that there's a whole lot of upside left there. But that doesn't mean across the board and everywhere, that gets tougher. I hope that helps. Our next question is from Alexander Goldfarb with Sandler O'Neill. So two questions. First, Dan, you mentioned the 125,000,000 dollars of dispositions that are in the pipeline. So I'm not sure if that sort of guidance for full year dispositions for 2019 or not. But can you just sort of give a breakout how much of that are sort of I'll call free assets like condos things like that that have no NOI impact versus how much of that will there be an NOI impact from? I mean, I think the 125 is just what we have and probably represents what's the first half of what we're targeting in the first half of the year for 2019. They are kind of income producing assets, kind of we view them as not non core that we don't have to own long term, and we think we should be able to achieve pricing kind of in the mid-5s on those, as well. So that's the color on those 2. Okay. And then the second question is, having toward Pike and Rose recently, 1, the asset is definitely coming down more. But 2, just sort of curious, you announced the 2nd office there. Don, how do you think about the mix of residential and office as far as driving like restaurants and the other elements of the projects in general? Do you view each item on its own merit, meaning which maximizes NOI for that particular land parcel? Or is there a view of which what's the right mix of office, residential, etcetera that drives the overall NOI of the center? Just trying to figure that out. Yes. It's a combination of both. I mean look at the end of the day when you're doing these set of projects what the real trick is, is the path to maturation. All of these projects, mixed use projects take time, take years to mature. Now do they mature in 2 or 3 or do they mature in 6 or 7 or somewhere in between or differently. One of the key ingredients to get that maturation is daytime traffic, which you're trying to get to is a busy place as often in 7 days and 24 hours a day as possible. Office is a key user for there. So that daytime traffic coupled with the incredible efficiency that comes from parking that you build for office that's necessary for office, but is also used by the retail and other uses in the evenings is a critical part of the efficiency of how a mixed use project works. So every one of these and you know Pike and Rose well because of the time that you've spent there. And when you look at Pike and Rose and you think of what's coming on from a retail perspective and you see how it does on nights and weekends from the residential base that's there and the retail base that's there, you can see, well, yes, there needs to be some daytime traffic and that office is a critical component to that and part of the reason that we continue to invest that way. Okay. Thank you. Thank you. Our next question is from Christy McElroy with Citi. Your line is open. Hi, good morning. Dan, I just wanted to follow-up on the $275,000,000 term loan. You talked about refiing that next year. I think the 2 swaps on that expired today and now that's floating. Do you plan to keep that floating through the maturity next November? And when do you plan to sort of refi that or when can you and what are your plans for that? Yes, it will float at LIBOR plus 90, and I think we'll look to be opportunistic in terms of refinancing that term loan. I think by extending it into 2019, it avails us to get into a little bit of the sweet spot of the market in the bank market to potentially refinance it as another term loan or it gives us the optionality to look at it in the bond market. So, I think that we'll be opportunistic in terms of refinancing that. It'll be pretty open for repayment And so we can there won't be any excess cost if we look to be opportunistic ahead of the November 2019 maturity. But likely 'nineteen, Christy, not 'eighteen. Right, right. So keep it floating for a year and then refi it to something fixed next November? Or before that. But what I'm saying is it won't be a refi in the Q4 of 2018. It will be 2018, 2019 opportunistically. Got it, got it. Okay. And then just with regard to the term fees recognizing that this is a recurring part of your business, but they did seem a little higher in Q3 than you had originally thought. What were those related to? And is this space that you were proactively trying to get back or did this unexpectedly come back to you? A little of both. This is a good recurring part of our business because it's I mean this is a recurring part of our business because it's I mean this is a business of contracts and we are like we want to use those contracts to our best advantage as a tool in various numbers of ways, including the ability to proactively get tenants out, but also recognizing and this is a big part. There is a change in consumer. We don't want the same retailers over and over again as you look over out over the next 5, 7, 9 years. We're probably less than others about simply trying to backfill an existing box with another tenant than we are about having an opportunity to redevelop a shopping center. So one of the tools that we use for this stuff is a strong lease. And it's just so critical to what it is that we do. When you look at this quarter, they were higher. And it's a combination of everything that you said. We lost some tenants that didn't think we were when we gave a forecast for termination fees, but we also went hard after a couple of them to be able to make sure that we were able to redevelop and keep that pipeline growing. So you see it in both places. I don't expect term fees to be low over the next year or 2. I mean, if you think about the business, there is a changing of the business and a changing of retailers. I don't know if you've seen the list of retailers that we actively go after who are digital digitally based retailers who have figured out, you know what, we need bricks and mortar presence. But that's a long list of other That's a list of tenancy that particularly for street retail oriented mixed use type of projects. That's a tenant base that we'd love to be able to access. Things like Parachute Home and others that you haven't heard necessarily a lot about, but are part of the future. So having a contract in place that's strong with an existing tenant gives us the opportunity to be able to have some leverage to be able to create places for the future. And that much more than any other comparison with any other company, that's what drives us in terms of what we report and what our business plan is. I know it's long winded, but it really is it's important to us to talk like that. And also, I just wanted to add that. Go ahead. Yes, Christy, I just wanted to add that of the tenants that terminated in the 3rd quarter, over 2 thirds of that income has already been replaced with executed leases of tenants who are coming in. So not only did we get those term fees, those outsized term fees, we've already been nimble enough to actually backfill over 2 thirds of that space before we even reporting the quarter. So I think that's a testament to kind of how proactive we are in terms of managing the process and limiting kind of cash flow downside. Great. Yes, that was exactly what I was looking for. Thank you. Thank you. Our next question is from Jeremy Metz with BMO Capital Markets. Your line is open. Hey, good morning. Going back to the 2019 guidance or at least the rough goalpost you laid out there, can you walk through some of the bigger pieces that could really swing you from one end to the other? I know you mentioned the term loan and the G and A, but any of the bigger pieces there? And then maybe how you're thinking about bad debt and tenant fallout relative to this year? It sounds like from your comments to Christy's question that you're more or less expecting a similar level of headwind on that front? Yes, I think it's a whole host of things. As I said, this is preliminary. I think how quickly the hotels continue to ramp up at Assembly and Pike and Rose can move things around a little bit. I think kind of where our where we see our watch list performing over the case of over the course of 2019 can swing things. Just going back to the 2 items, I mean, I think even now at LIBOR plus 90, 100 basis points of drag if we keep it floating. And if based upon where kind of 6th 12 month LIBOR is projected to be, there will be some drag over the course and that's looks to be roughly $0.03 to $0.04 in the ballpark. And G and A will grow. I'm not going to get too far into the detail there, but G and A will be higher in 2019, but we'll provide more color on that in our February call. Yes, Jeremy, let me just ask or add 2 things to that. First of all, welcome to BMO, Matt. Good to have you back. And secondly, it is the developments that are the single biggest mover. I mean, we're going to deliver to Splunk at some point around a year from now, a month one way or the other, 2 months one way or the other is important to how that works through. And secondly, I do want to add one thing to you to the G and A piece. With Wildminster and Briggs leaving, it's an awesome opportunity for the next generation here. And so we're going to be doing a bunch of promotions. And that's why G and A is going up. It's good stuff. It's a reason to be able to bet on that Federal Realty 2.0, if you will, with respect to the next level of management. So we will talk more about that in February, but it's a critical part to us setting us up for the next 10 years. Yes. And then you talked about the ramping dispositions a bit as a source of capital. Dan, you mentioned $125,000,000 in the first half of next year. Beyond that, will you look at dispositions as being more opportunistic or if markets accommodate and equity is attractive, you may be pull back from selling? And following on that, I mean, are you baking some equity into the plan at this point? I mean as I said, it's preliminary. I think that we'll be opportunistic on the equity side as well. I think that it's a very limited small amount is kind of what's figured in to our 2019 kind of calculus for providing those goalposts, we'll have a greater refinement on kind of what that detailed assumption is in February. And let me add one thing to that, if you don't mind. In my prepared comments, I think I led you to a discussion of the next phases of development at assembly, the next phases of development at Santana. You saw what we're doing at Ballo with respect to the residential project there, a very strong redevelopment pipeline in the core. So as that stuff comes to fruition, this company looks at funding it, including potential dispositions, but it's different than other companies in that we don't have a bunch of shopping centers that we don't want to own. So it's a smaller pool effectively to look at. No, we don't have equity in the numbers in any significant way at this preliminary point. But we might, again, very modestly or modestly as a part of the balance sheet program. But a lot of it is dependent upon whether we go forward, and I expect we will on building out some of these big de risked development projects de risked because the places are already there and successful. Yes. And from a capital perspective, we have multiple arrows in the quiver in terms of you know, I mentioned you know $80,000,000 of free cash flow in 2018. We should expect similar levels in 2019 from where we sit today. I think also the balance sheet capacity as we're down positively trending from a debt to EBITDA perspective. I think that as cash flow continues to grow, as we continue to ramp up at Assembly and Pike and Rose in 2019 and as they further stabilize, that will add greater debt capacity, just very, very naturally on a leverage neutral basis. And so we've got a number of different ways that we can kind of fund the development pipeline and feel really, really good about how well positioned we are heading into the final quarter of 2018. Okay. Thanks. Thank you. Our next question is from Samir Khanal with Evercore. Your line is open. Hey, guys. Good morning. Don, can I ask you to take a step back and maybe talk about sort of your watch list today and compare that to last year? I mean, I look at your as I kind of go through the top 20, it certainly feels like there's less exposure to the tenants that will go bankrupt or liquidate, which tells me kind of that 2% to 3% of same store probably still is applicable for next year. But then you look at Bed Bath or you look at Kroger's that continue to risk that your releasing spreads could kind of start to decelerate a little bit here going into maybe the next 12 to 24 months? Yes, Sameer. It's a good question. Look, the and I love the way you started it because that's effectively how I look at it. I start out with that list, that watch list, etcetera, and try to predict as best we can what would effectively happen. I mean, do I worry about Bed Bath Beyond long term? Sure. I absolutely do. And do I worry about Bevavian not honoring their commitments and paying rent? No, not at all. And somewhere in that's a great example of an operation where I don't know how they will change their business plan. I don't think anybody does at this point, whether how successful they'll be, what that new prototype will be as they move forward in the coming years. But certainly, I want to make sure we have tenants that are tenants of the future that we believe in that are there to the extent we're not part of their plans going forward. So certainly with any tenant that's not performing as well as they were, the rent pressure ramps up. It's an obvious statement, but it's certainly the case throughout a lot of these box tenants. The key with us is the balance. And we'll I want to start to show you a little bit more of how our residential performs. We're going to show you how our office performs. We're going to try to get this community to understand our company in its broadest from a broad real estate perspective because there are pressures coming in terms of retail lease rollover. Certainly, there are pressures. Do I see them as, oh my God, all single digit lease rollovers or rollbacks? No, I don't. So consider this within the context of the whole company in terms of how we're moving. And I think you ought to feel really good about an investment that is very likely to continue to grow in for years simply based on what we have in pipeline today. And I don't know if there's anybody else that can say that or very many else that can say that. Okay, thanks. And as we think about next year, I mean, what are sort of the drags we need to think about, especially from a same store perspective? I mean, there's one is certainly toys, right? But I don't think you had a lot of exposure to those. And then are there any other tenants that will the company be kind of moving on to a level where you'll be proactively maybe taking back space like you did a couple of years ago? Is that something to think about for 2019? Very much so. Very much so. I mean, when you go down the list and you look at what we've got, you've got to feel really good about this income stream. Toys might be the best example at all. One, one that was completely released period of time. That's done. And so where what happens with respect to Mattress Firm, we've got 14 of them. When I look at the 14 of them, you know where most of them are? They're on outparcels or endcaps in great locations. That's not something I particularly worry about. Doesn't mean there's not going to be some dislocation depending on what happens with the resolution of the company, but we deal with that all the time, always have been. Don't see any amount of those type of income stoppages, if you will, in a significant way any different than we've managed through in years past certainly and certainly better than 2016. So yes, you ought to think about proactive leasing too. We do constantly. It's not a switch that we turn on and off. It is a dial that we turn up when we see opportunities and turn down when we don't. And yes, you could see that turned up a little bit again. Okay. Thanks so much. You bet. Thank you. Our next question is from Craig Schmidt with Bank of America. Your line is open. Thank you. Don, I was wondering if you could give us some description or background on rev up, the 3rd party platform that Mike Kelleher is setting up? Very good. Very good for picking that up, Greg. That's cool. Not a big deal at this point at all. What that's about is, when you look at this industry and you think about temporary tenant income, ancillary income, sponsorships, all of the kind of non traditional leasing revenue generation. I'm really proud of what we've built as a company over the last decade or decade and a half. And yes, Mike Kelleher has been a big part of that to be able to grow it. We think we have capacity there. And we think we figured out how to do that maybe better than some other folks have. So we'd like to in the markets where we do significant business already, we'd like to pick up some third party work and spread that platform across a bigger base. It's just something that we're rolling out. We probably won't do that service for some of our direct public competitors, but there's an awful lot of regional real estate companies that really could benefit and we can share the income with them. So that's what we're messing with. I think it's cool. I don't know if it turns into anything or not. If Keller were on the phone right now, I'd be telling you it's the greatest thing you've ever heard of and we're going to do really well with it. We'll see. But it's I think more importantly, Craig, it's indicative of the creativity and the way we look at trying to add value in various different ways, big and small throughout the company. Great. And then, the lower G and A, I'm sure was helped in some part by Dan and Chris' exit, but it looks to be more significant than that. Can you tell me what you're doing there in terms of maybe getting some more cost savings? Yes. Look, it's a big part. One of the things that I always wonder about and I think you can appreciate this is, as a company with our longevity, right, we've been around a long time and we're relatively powerful in the few markets that we're in. And I think vendors and others get comfortable with that in terms of dealing with federal. And I don't think we use our leverage as much as potentially we could have to be able to renegotiate some of those deals and effectively reexamine scopes, reexamine financial terms with some of our partners. And when I say partner, I mean vendor, I mean, people necessary to create great shopping centers. We pushed hard on that in 2018 and we pushed hard on that with some very favorable results. That's what you're seeing coming through and I don't think those are one time favorable results. I think those are our benefits that are all about relooking and leveraging the power of Federal Realty and again the 5 or 6 critical markets that we do business. And part of it is on a year over year basis. I mean we did the Prime Store acquisition in the Q3 last year. So there were transactional costs that added to G and A, which we just didn't have in 2017 that we just didn't have in the Q3 of this year. So, that's another kind of driver. Okay, thanks. Thanks a lot. Thank you. Our next question is from Jeff Donnelly with Wells Fargo. Your line is open. Don, I think you might have touched on this in the call, but I had heard that concerning Santana West that that was a site that even Apple might have been looking at perhaps through one of their projects. That may be market chatter, but I guess my question is, do you think that's an office opportunity that needs to be a single tenant development opportunity like you had with Splunk? Or is it possible that could have something that's a little more ground floor retail or residential or office on it? Yes. And then Jeff will add to this after I just make a comment or 2 on it. No, this is an office project. It's an office site. It's entitled for office. Any retail that we do would be relatively insignificant. And this is real simple, man. This is a 12 acre piece of land directly across from one of the most iconic, if you will, at this point, mixed use destinations in the country. It happens to be in the middle of Silicon Valley. It's really valuable. And so whoever the tenant or tenants are, it doesn't have to be one tenant. It could be it can certainly be several. What we know is we've got a piece of real estate there that is getting an awful lot of interest from some, I will say, typical or users that you would think of and some that just certainly wouldn't. And it just shows the broad value of the real estate because of what was created across the street. So all this has to be teased out a little bit more, but there's no denying the value of the real estate that's there. Thanks for that, Jeff. I don't really have anything to add other than if you look at all of Silicon Valley right now, there is precious little available office space or office space coming anytime soon that's amenitized. We've got at Santana West, probably one of only a handful or less than a handful of opportunities for that over the next 2 or 3 years, just given the entitlement cycle and what's going on in some of the other submarkets around here. So we're, like Don said, super bullish on it and there's a lot of interest in the site right now. Jeff, just I guess sticking with that. I mean, are you seeing some of the bigger employers in that market effectively trying to tie up office space even though they might not have an immediate need for the space today just because of that dark space there sort of tying it up in anticipation of future growth? Yes and no. But remember growth is occurring very quickly out here and you have a lead time on development even something that's entitled and ready to go is still a couple of years to build a building. So a lot of firms are growing into the requirements by the time the space actually delivers. And then it's clearly the case with Apple at their new headquarters building. From what we understand, that's full. And when we look at market activity, we don't see them giving back any of their other space. So if you look at the big users out here, I think that's true. They have to look out a couple of years and by the time the space is ready, they've filled it. And maybe Don, just stepping back more broadly on external growth. I mean your perspective on retail seems to have shifted somewhat sharply over the last few years and what the prospects of it hold. Do you think as a company you're more open to mixed use or a mix of uses than you ever been before? And do you think the market focus or just the geographic focus of the company maybe has changed with that? Are there some markets that you're more open to going into? Maybe one last aspect of it is, would you ever do standalone office or residential development away from retail? No to the last question. I'm going to book in here for a minute now because that was a lot. No, we won't just standalone or non retail oriented resident office as part of our business plan. I'm going to go back to your last thing. I'm going to say one quick thing about your last question and that is please don't speculate about Apple. Don't speculate that. Don't write that down because that's probably not the case, okay. Let me be clear. Now let's get to what you just asked. It's not that here's the way I look at it. The more predictable the future is, the more narrow you can target your business plan. The less predictable the future is, the more you want to be able to have to be as flexible and it's the most important word in our business plan, as flexible as you possibly can. Flexibility with respect to what the future holds simply means to me, I'd like to be able to not rely on any one income stream. And if that's the rolling forward of rents in a basic shopping center, that's one thing. If it is, do I want to have the ability to create value upstairs on land in the markets that we're in that are densifying anyway? Of course, I do. It's not it really isn't about liking mixed use or not liking you let mixed use or liking a shopping center or not liking a shopping center. The reality is what our core competency is, is 1st ring suburbs creating great places for people to go to. That can be a grocery anchored shopping center, it can be a mixed use project, it can be whatever else it is. Once you have them there, that's not necessary in Manhattan at the corner of 57th and 5th that environment already exists. There you can do an independent any kind of building. The people are already there. That's not the case in the First Ring suburbs where we are doing most of our business. We know how to bring people there. Now once you have them, how do you make more money? And that's where you have to say whether it's buying adjacent parcels and growing on them, whether it's going up in office or retail. But if I look out at an unpredictable future, I want as many arrows in the quiver as I possibly can have. That's what I think we've done. So I don't see it as a sharp change in believing in retail or not believing in retail. I think it's an evolutionary change in the unpredictability of technology's impact on the consumer. And so when you sit and you think about it that way, what do you best do about that if you're a real estate company, not a retailer, but a real estate company, you make sure your real estate is valuable in any one of a number of different ways. And I think we've proven pretty well a core competency in the ability to look more broadly as real estate people rather than simply shopping center people. Yes. Thanks guys. Thank you. Our next question is from the line of Mike Mueller with JPMorgan. Your line is open. Yes. Hi. A couple of questions. First, Dan, when you were talking about 2019, you flagged G and A and then lease accounting separately. So is your lease accounting expense, is that going to be in operating expenses? No, no, no. They'll be a component of increase in our G and A in 2019. Part of it will be lease accounting related. The lease accounting change geographically will set up a G and A item, but we will also have a in our current level of G and A, there will also be an increase, which so there's 2 pieces to that. Got it. Okay. And then, I guess just thinking about tenant demand and everything. On the mall calls, you constantly hear about e tailers and demand and moving into the malls. I'm curious in terms of your portfolio, are you seeing that sort of interest as well from those types of tenants? Yes, Mike. This is I talked about it earlier in one of the questions. But think about this for a minute. Of all of these e tailers basically or let's start and say online retailers who have started online, these guys all of them, I didn't say all, most are struggling and have always struggled with the typical things you struggle in a business with, number 1 being customer acquisition costs. How do I get that customer and what's it cost me to get to them? And of course, then the delivery system. And those two things have led many of them to the conclusion that you know what, we need a physical presence. And I've got some interesting stuff I'll share outside of this maybe at NAREIT next week of some of the quotes and some of the plans that these guys have. Now when you say, okay, where are they going to go? The chances to me are look awfully good for the type of properties that we own. We're close to a lease for one of those tenants that we're talking about in Bethesda Row right now. We're close on 2 at Santana Row right now. The streets that we have presence on like Third Street Promenade, I mean, these are it's I don't know how important a component of the future it is, but it's certainly a component of the future. And going back to where I was before, we want to cast the broadest, widest funnel to be able to be attractive to the largest possible number of retailers. And where we are suggest to me that we'll have more than our fair share of those tenants who are finding the need for bricks and mortar stores. Thank you. Our next question is from Haendel St. Juste with Mizuho. Your line is open. Hey, good morning. Lots of call, lots of detail, much appreciated. A question for you, Don. I guess more big picture, we've seen a lot of M and A this year in the REITs, but nothing in the shopping centers. Curious why you think that is? And then is there anything you expect over the next year that federal could participate in? Haendel, this is a I mean, we've been talking about this question for 20 plus years and that's just what I remember. So I'm sure it goes back before that. Look, the idea of combining platforms has to have a business sense to it that makes all the sense in the world. Obviously, what you saw with Equity One and Regency was indicative of that. I think you can look at that and say, yes, that company is better off than the 2 companies separately would have been. But those things are few and far between. They're hard to do. I love to tell the story of I know if Ernest Rady would be mad at me for saying it or not, but we had a we have a very good relationship and back before they were public, we were trying very hard to put those companies together. It didn't work out, they went public, are doing great. So it comes down to the individual business plans. It comes down to the social issues that are part and parcel to it. And when you think about betting on the future, there's almost always just a dilution from the buyer side initially for a period of time. So you have to be comfortable with where that future is going and what it's going to provide. That's harder to do today than that's been in other periods. So a combination of other things. Does is federal involved in anything that's possible for us? You bet. We talk a lot. We talk to a lot of people a lot of the time. But we're not going to do something that doesn't improve the prospects versus our existing plan. And our existing plan is really good in terms of this real estate. Our real estate clearly will be worth more in the future than it is today. When I sit and I look at the prospects for growth, for domination in certain at certain properties that could the whole consolidation of properties etcetera. So any kind of deal from a merger perspective or anything else has to be incrementally significantly better than that and I haven't found that. Helpful, Don. Thank you. And just a follow-up on the mid-five cap rate expectations for the assets under discussion for disposition here. Curious where you think those assets might have traded 12, 18 months ago? And then how large would you say your bucket of non core but tax efficient potential asset sales bucket is? I'm going to jump in before Dan here on a minute because I cringed when he said that, when he said mid times because it is listen, we'll see based on the marketplace what those assets will trade at and what they won't trade at. The answer to your question, how does that compare? I don't know. That's what I'd love to see as part of this. And it is a small bucket. And I kind of went into that before a little bit. It's a small bucket because we sit and we look at the future earnings prospects of the assets and the by far and away most of the assets at this company and again there's only 104 of them. Most of those assets have really bright futures. To the assets based on information that we have today in terms of looking at the future that would fall into that bucket. Thank you. Thank you. Our next question is from Derek Johnston with Deutsche Bank. Your line is open. Hi. This is Shivani Sood on for Derek Johnston. The office aspect of the portfolio has been a large focus of today's call. So would you mind just speaking to the leasing front there, how the process and potential CapEx operating metric perspective? Yes, sure. It's a good question. I'm not sure that well, I am sure that we don't have a view on office product in a national way or in standalone office product. What we do know is places where we have created an environment with retail on that ground floor that is amenity rich is more and more and more attractive to office users. And as a result, in places where we have the land, and again, our average shopping center is 20 acres large, which is big compared to most shopping centers, we have the opportunity at various places to be able to exploit that retail environment that we've created. In some cases, we've seen it at Pike and Rose with the first phase. We've certainly seen it at Santana Row. Even though there are other opportunities in the marketplace for office, the office user sees those other opportunities as irrelevant and obsolete. And so we think we have something that's particularly special that can drive a premium rent, that can drive premium bumps in those rental deals. And most importantly, it's so integral to the overall property that we're developing or building or community that we're building that it's really part and parcel of how the retail works, how the resi works, it provides the daytime traffic. As I said before, that's critical. It is immensely efficient in terms of the parking. And so office brokers bring the product to us. And so it's these are negotiated similar to any other office deal with the same criteria for capital, the same criteria for rent, etcetera. We just feel like we're in a stronger position to be able to be at the top of the range of those market conditions on all the economic aspects because of what we've invested down on the ground floor. So you won't see us doing separate office buildings across the country to broaden our what our basic core competency is, but we certainly will at the properties that we've created great places exploit that. And to me, that office product where we're building, whether it's Santana or Assembly or Pike and Rose, that office product is derisked to a huge degree because of the significant investment that has been made in the place previous to that. Great. Thanks so much for that color. And then just given the more diverse pool of assets that FRT owns and peers, for example, power centers, grocery anchored, mixed use, Can you just give us an update in terms of retailer demand for the different property types and if that's shifted at all over the past year or so? No. And I'll tell you why, because I know it's simpler to say power centers perform like this and grocery anchors perform like this and mixtures perform like that, etcetera. It's just not true. It totally depends on physically where that property is and the supply and demand characteristics at that particular piece of real estate. So I spent a bunch of time on that call talking about leases at a power center called East Bay Bridge in Emeryville, California. It's an incredibly powerful supply demand environment for us because there's no other supply of that. So, no. And I could make those same kind of comments for each one. You really got to get into the individual real estate. It's not a cop out. I know it sounds like one. But I really fight hard about the characterization of any particular type, even though I understand it's easier for you to categorize. Sorry. Thanks. That's it for us. Okay. Thank you. Our next question is from Ki Bin Kim with SunTrust. Your line is open. Thanks. So already a lot of good questions have been asked by my peers. So just one last one for me. If you could wave a magic wand and get any piece of technology to help your business, what would that be? I'll keep the last question and it's the most cerebral here for crying out loud, good for you. There's an interesting thing going on right now and it's obviously all about data and how much data is available and every 2 person consulting firm who's selling their idea of what data you need and what would really matter. The answer to that question in my mind and I don't think my peers agree with me necessarily on this, but the answer to that question has not is not clear. There is so much information out there. The one thing that I think we all have to be careful about is running out in pulling in a whole bunch of data that it turns out really isn't impactful to the lease negotiation or to the deal negotiation in the form of an acquisition, etcetera. The obvious pieces of data and information are clear. It's certainly sales per square foot, it's certainly profitability, it's certainly the supply effectively, it's certainly understanding where your customers are coming from. But when you say what one piece is there, it gets to myopic in my view. I don't think there is one piece. And so we're dealing with all that now. We're talking with a lot of vendors. We're talking with potential partners. We're talking with companies that are trying to marry retailers with landlords doing all the right things, but really trying to figure out where to invest in information that will make a difference, that's still great. Yes, I get what you're saying. I've seen a few pitches and I know what my problem is, my problem is that everything sounds So I get you. All right. Thank you. Absolutely. You bet. Thank you. And that does conclude our Q and A session for today. I'd like to turn the call back over to Leah Brady for any further remarks. Thanks for joining us today. We do have a couple of meeting slots left at NAREIT, so please reach out if you're interested in meeting with us and we look forward to seeing you many of you there. Have a good day. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a great