Earnings Call: Q1 2018

May 3, 2018

Good day, ladies and gentlemen, and welcome to the First 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 is being recorded. I would now like to introduce your host for today's conference, Leah Brady. You may begin. Good morning. I'd like to thank everyone for joining us today for Federal Realty's Q1 2018 earnings conference call. Joining me on the call are John Wood, Dan Gee, Dawn Becker, Jeff Burkus, Chris Wellnesser and Melissa Solis. They will be available to take your questions at conclusion of our prepared remarks. I'd like to remind you that certain matters discussed on this call may be deemed to be forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward looking statements include any annualized or projected information as well as statements referring to expected or anticipated events or results. Although Federal Realty believes that expectations reflected in such forward looking statements are based on reasonable assumptions, Federal Realty's future operations and its actual performance may differ materially from the information in our forward looking statements, and we can give no assurance that these expectations can be attained. The earnings release and supplemental reporting package that we issued yesterday, our annual report filed on Form 10 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 operation. 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 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 Q1 results. Don? Thanks, Mrs. Brady, and good morning, everyone. Really good quarter for us with all metrics from FFO to lease rollover growth to comparable property income growth and others exceeding our expectations. Strength was across the board and while I always caution about reading too much into any 90 day period, our performance here was encouraging. FFO per share of 1 point $5.2 be consensus estimates by a couple of cents and was nearly 5% better than the 2017 Q1. That growth came despite a 60 basis point hit to occupancy caused by a couple of big vacates like BSW in Hollywood, Walmart at Los Ardenas and Stein Mart at Grant Park. Those vacancies were all anticipated and either have been or are nearly released or are part of a broader redevelopment plan as is the case at Grand Park. In any event, those rents will be more than replaced with Vaxim. Rental income was up nearly 8% in the quarter, reflecting both the PrimeStore acquisition midway through last year and the fruits of strong leasing over the past few quarters in both the core and mixed use divisions. When those things are combined with lower operating expenses and G and A in many areas, the overall result was powerful. So let's get to some of the results and let me start with leasing. 78 deals for over 400,000 square feet at an average rent of $31.51 a Foot, 22% above the 25.91 that the previous tenant was paying in the last year of their lease. By the way, TIs this quarter were a lot lower than last year. It's not a trend, it's just a fact this quarter. Examples of strong rollover deals were evident in both small shop and anchors and on both coasts. Floor and decor replacing 1 of our 2 Kmarts in the portfolio, a deal we've been working on for quite some time at Saugus Shopping Center in suburban Boston was a big one. So with Bob's Discount Furniture that has taken the old Walmart space in one of the prime store assets in Greater Los Angeles. Better restaurant offerings at places like The Avenue at White Marsh and Linden Square in Wellesley, Massachusetts also contributed. Quarter after quarter, the evidence suggests that tenants will pay higher rents when they're confident that they'll do the business to support it. Plenty of good deals are getting done. Earnings growth at comparable properties was strong at 3.8% quarter over quarter and lease termination fees at those properties contributed 90 points of that result. As you know, we feel very strongly that lease termination fees are often the result of landlord leverage and a strongly negotiated lease and therefore belong in a comparable number. Sometimes it helps the comparison, sometimes it hurts, but it's always an integral part of how we run our business. It was a particularly strong quarter in our core shopping center business. I mentioned a minute ago that big store openings like Burlington at the Assembly Square Power Center, Michaels at Brick Plaza and Uncle Giuseppe's at Melville, for example, the result of strong leasing in past quarters really made their impact felt in this Q1. Tender cost controls and renegotiated vendor contracts also helped us drive the numbers to the bottom line. These results were posted despite the dilutive impact of new residential lease up at the Henry and Pike and Rose and the Montage at Assembly Row. But based on the current pace of lease up, those two buildings will be accretive to earnings by the latter part of this year. And at current residential cap rates, we've already created about $100,000,000 of value in those buildings. So let's talk about our residential portfolio for a minute. And I'll start with an update on that residential leasing at our 2 buildings currently under lease up. A 272 Unit Henry is now 82% leased, 76% occupied at net effective rates rents of $2.35 a foot, ahead of budget on lease up pace and meeting budget on rate. When you factor in the other 2 stabilized residential buildings at Pike and Rose that are already open, which by the way were not significantly impacted by the new supply coming on, the combined residential lease percentage is now over 90% at that project. Add in the condos that are more than halfway sold out at about $600 a foot, which is above pro form a, and there are nearly 800 families now living at this former strip shopping site. Pike and Row is quickly establishing itself as the region's residential destination of choice. At Assembly Row, the 4 47 Unit Montauk High Rise is now over 69% leased and 40% occupied at net effective rents of $3.37 a foot, well above budget. As far as the condos are concerned there, all 107 market rate units are sold out at $8.50 per foot and as of last week, 96 of them have been closed on and delivered. As far as we know, AvalonBay's product at Assembly continues to perform very well and now combined with ours makes Assembly Row the residential destination of choice in the surrounding area. Area. At Pike and Rose and Assembly Row, not to mention Santana Row, Bethesda Row and Congressional Plaza, we think we've indisputably made the case for the strong demand for quality residential product at various price points in well planned mixed use communities. In its first 15 years of existence at Santana Row, the compound annual growth rate of the overall residential offerings there approaches 4%. We like this business. By the end of the year, the end of this year, federal own and operate nearly 2,700 residential units in major coastal markets. Those apartments are expected to generate about $55,000,000 in operating income by calendar 2020, roughly a $1,200,000,000 residential portfolio. As far as other components of our development program, the 177 Room Canopy Hotel by Hilton opened at Pike and Rose at the end of the first quarter and we're thrilled with the product. The grand opening party saw nearly 1,000 guests, dignitaries, even Christmas at a Hilton CEO. We now strongly encourage investors and analysts and anyone else for that matter to experience this hotel anytime you come to Montgomery County, Maryland. As you may remember, we own 80% of the equity in the hotel in a joint venture with local developer, VPG Group. We continue to make progress on completing the Phase 2 retail lease up at both Pike and Rose and Assembly Row as they are 91% 80% leased respectively. Both of these projects are creating very significant real estate value. Construction at 700 Santana Row, our 300,000 Square foot, dollars 210,000,000 office building being built to anchor the end of the street remains on budget and on time for a late 2019 delivery. Leasing efforts are ongoing with lots of interest and buzz in the community for this heavily amenitized office environment. In Greater Miami, we're now under construction at Koko Walk, the roughly $75,000,000 redevelopment of this well located multi story retail center into a mixed use project that will serve the office needs of the Coconut Grove community with the addition of 80,000 square feet of prime office space on 5 floors. We're currently pretty far along in the lease negotiation with a national tenant for roughly half of that space in line with our pro form a rents without anything but drawings to show them. It's a great start to this transformation. Nothing more to say on Sunset Place given the town's rejection of additional heightened uses at this Floyd Shopping Center and so we'll continue to operate it as it is for the time being. And that's about it for my prepared remarks for the quarter. It was a really good one that we hope to follow with another and another. Let me now turn it over to Dan for some additional color and then open the line to your questions. Thank you, Talan and Leah, and hello everyone. Another solid quarter to start the year for federal with FFO of $1.52 per share, almost 5% above the Q1 of 2017. This result was a few pennies ahead of our expectations and $0.02 above consensus. The outperformance was driven by higher NOI, primarily due to less impact from failing tenants, higher other property revenues, lower property operating expenses with a slight offset from higher real estate taxes. On the same store front, our comparable POI metric of 3.8% was driven higher by term fees, which boosted the result by 92 basis points, but was offset by additional proactive re leasing activity, which produced a drag of 42 basis points. With respect to our former same store metrics, which we will provide for a couple of quarters for comparability, Same store with re dev was 3.6% for the quarter and same store without re dev was 3.5%, very solid figures which highlight strength across the core portfolio. Now to put in context Don's earlier comment regarding lease termination fees being an integral part of Federal's business strategy, over the past 10 years, Federal has averaged roughly 5.5 $1,000,000 of term fees annually. Since 2000, term fees have averaged roughly $4,250,000 annually. While it does vary somewhat from year to year and quarter to quarter, it is a consistent and recurring part of our business. We had a strong lease rollover number for the quarter, 22% on over 400,000 square feet of leasing with modest tenant capital of just $18 per square foot, roughly half of what we spent in 2017 on a per square foot basis. With prior rents of around $26 that represents $5.60 of positive rollover per square foot or $2,300,000 of incremental rent when those leases start. However, as Don mentioned, let's not caught up get caught up in 1 quarter's results. We expect lease rollover for the year to be consistent with the past 2 years activity in the low to mid teens and capital should also normalize. But we expect to see consistency in our ability to push rents across our best in class portfolio. On the occupancy front, our overall leased and occupied figures were 94.8% 93.3% respectively, both metrics growing by 20 basis points relative to Q1 of 2017. While there was roughly 50 basis points of decline relative to year end levels that can be attributed to our proactive re leasing activity, de leasing at our Sunset Place and Graham Park assets, as well as some seasonal impact following the holidays and our remerchandising activity at Bethesda Road. On the proactive releasing front, where we initiate vacancy, downtime and downtime with the objective of creating long term value and an enhanced merchandising mix across the portfolio. In addition to the large leases we have already disclosed such as the Anthropologie flagship at Bethesda Road, Bob's Discount at Los Sardinas in Los Angeles, Target at Sam's Park and Shop in Washington DC and a couple of deals on Third Street Promenade in Santa Monica, we have added a T. J. Maxx deal replacing 2 non credit tenants at Westgate in Silicon Valley and the Floor and Decor deal in the Kmart box at Saugus in Greater Boston. To the list of value enhancing leases, which will produce downtime and drag in our 2018 metrics and FFO per share and that's roughly $0.03 to $0.04 of drag on 2018 FFO, but will drive the long term value of our company by $50,000,000 to $60,000,000 net of capital. With respect to full year 2018 guidance, we're maintaining a range of $6.08 to $6.24 per share. There are no changes in our assumptions. Although with respect to our comparable POI metric, we should end up in the upper half of our 2% to 3% range given this quarter's outperformance. Now on to the balance sheet. We entered 2018 extremely well positioned from a capital perspective and as a result there was not a significant amount of activity in the quarter. As Don mentioned, we began closing on the condos under contract at Pike and Rose and Assembly Row in March and this has continued throughout April and into May. We raised $51,000,000 by quarter end and roughly $100,000,000 in total year to date. As a result, at quarter end, our net debt to EBITDA ratio improved from 5.9 times at year end to 5.7 times currently. This positive trend from a leverage perspective should continue throughout the year as condos close and EBITDA ramps up at Assembly Row and Pike and Rose. With respect to other credit metrics, our fixed charge coverage ratio improved from 3.9 times during the 4th quarter to 4.1 times for this Q1. Our weighted average debt maturity remains a sector leading 11 years. And our weighted average interest rate stands at 3.8% with nearly all of it fixed. As continued volatility in the capital markets and a rising interest rate landscape prevail, our A- rated fortress balance sheet continues to position Federal to outperform in a challenging environment ahead. And with that operator, you can open the line for questions. And our first question is from Nick Yulizo from UBS. Your line is now open. Hey, good morning. This is Greg McGinniss on with Nick. Just thinking about the development pipeline between Assembly and Pike and Rose, you're quickly winding down on over $600,000,000 in development. Are future phases at those sites or other large development projects likely to be announced soon? Or are you expecting to take your foot off the gas bit this year? It's a great question, man. The cool thing about both of those projects is that there's sufficient critical mass there in terms of a place that's been developed to let us be opportunistic. And so certainly construction costs are up. Certainly our use of capital in this kind of environment is one that we are more stringent on effectively than we've been before. And having said that, we've got deals in terms of the ability to build the next phase at Pike and Rose, the ability to push out incremental office or residential product in particular add assembly that we're working through. So if you think about what's going on as cyclical to some extent, to a large extent in my point of view. The last time this happened, 2,008, 2009, we did not take off our foot off the gas in terms of the planning and being ready to go at all in terms of future phases or in that case the initial phases. We're doing the same thing now. So we are developing our plans. We're working through drawings. We're working with contracts, etcetera, so that we are ready pull the trigger when we feel like we've got a project that works in terms of our cost of capital. So you can expect that all of that lead up work, which is significant, as you can imagine, for those type of buildings, that is still ongoing depending upon where we are later on in the year with construction costs and GMP and that kind of stuff as well as the rest of the condo proceeds and some asset sales that Dan will talk about, we may very well be we'll announce the next phase of those projects. Okay, great. And then is there any update on Shasta of Sunset? Is there another vote in the works by any chance? I we're not spending a lot of time there. I'm this is me speaking for a second. I'm kind of done with those people from now. And the rest of our team is operating it. Chris Wildmancer is spending more time down there specifically for CocoWalk. But right now at sunset, those guys don't want anything more. It's we're a big company. We've got plenty of other things to do. So is that asset make If that sounds a little bitter, I guess it is. Okay, fair. And does that asset make sense to own if there's no redevelopment underway? I'm not sure. It certainly carries itself and will continue to carry itself for the time being. But in terms of what we do long term, if there's not a bigger play, I'm not really excited about it. So we'll have to we'll evaluate that, but it's not a 2018 decision. All right. Thanks, Don. Appreciate it. Yes, Ben. Thank you. Our next question is from Craig Schmidt from Bank of America. Your line is now open. Yes, thank you. Don, I was wondering if we could give an update on PrimeStore? Sure. In fact, I'm looking at Jeff Berges. Jeff Berges, why don't you give an update on PrimeStore at this point? Sure. Hey, Craig. How are PrimeStore, I would say, is going as expected. We've been closed now for 7, 8 months and the operating teams have come together and everybody's functioning efficiently and knows their priorities and pulling on the same ore, pulling oars in the same direction, however that saying goes. We're actively looking to make some new investments. Nothing really to talk about on that front yet, but we're getting close and hopefully in the next quarter or 2 we'll be able to tell you something. So I think it's as expected and going well. Portfolio very well leased. And as Don mentioned in his prepared remarks, we had a real nice deal backfilling the former Walmart neighborhood market space at Los Jardines. So happy with how everything is progressing with Bryan's store. The thing I would add to that, you know I have to because I can't help myself, Craig, is that with respect to the development that we've mentioned in the past and as Jeff said, we hopefully will be there in the next quarter or 2, but it has made its way it's made its way through our investment committee and been approved at our investment committee level. So obviously, we're ready to go to the extent they are the Pine any zoning or municipality approvals that you need for that project? Completely. Good. Thank you. Thanks, Craig. Thank you. Our next question is from Christy McElroy from Citi. Your line is now open. Hey, good morning everyone. Just following up on the hotel opening at Tyknro's, you had a note in the Q about an associated loss in equity and income. Just wondering from a cash flow perspective, given your 80% equity interest, how we should be thinking about the impact of this investment kind of coming online in March as we head through the rest of the year? Yes. Those that impact in the in our financials was really just the pre opening costs and the marketing costs. We had 28 days of operation in the quarter. So clearly that was expected. We would expect some ramp up in the hotel over the course of the year, clearly, but it's a new hotel. We don't expect a lot of contribution until later in the year with regards to our investment in the Canopy. But we're really pleased with the product and we're pleased with the opening thus far. Okay. And then just related, Don, in your shareholder letter, you highlighted 17% of federal's minimum rent comes from residential and office tenants, not retail. You also highlighted the mixed use and diversification of the income stream. I'm just wondering as you think of sort of where federal could be 5 10 years from now and in the context of your views on retail per capita shrinking in the U. S, how we should expect your mix and diversification to continue to change? So where could that 17% go? Yes. And you also highlighted in your remarks how the resi portfolio is growing. So with everything coming online, presumably it goes up. Just wondering how much the acceleration? Yes. No, that's fair, Christy. First of all, it will accelerate or be a larger percentage, not a much larger percentage. And let me kind of get to why that all is. Obviously, the point I'm making in there, which I think is frankly the most important thing to think about, is the diversity of any income stream. And the more diverse that income stream is, the more the lower the lows, if you will, during an uncertain time. We are and should always be considered, as long as I'm here a retail company. And if you think about it, the reason residential and office are an important part of our income stream and yes, 17% is a real important part of our income stream. It's because we've created that environment with retail on the ground floor. And it's a really, really, really important thing to remember. And so what we think are the thing we do the best is figure out how to take a piece of land or location and get lots of people to it on a regular basis. Then in places that can handle densification and intensification, the way to make money is up. And so up we go. And so the notion of that mixed use piece of the business, which is 25 percent of our total business and that 25% includes the retail and everything else. That's about where that will be. It could go a little bit higher, but about like that. But just like last year, when we made a $350,000,000 investment in Primestore, which is all retail and boxes in large measure, that would bring that 17% down or did bring that percentage down. So it's balanced. We're growing and trying to use all the arrows in our quiver, all the tool, the toolbox, the whole 5 tool thing that you hated before is what we do. So you should think about, I think, the notion that this is a retail company through and through, even in 2018 or 2020 and 2022, but that we know how to create place. And with place comes the ability to maximize real estate value. And maximizing real estate value means residential on that property, means office on those properties. And as I said from the beginning and believe thoroughly through and through, those properties work on an integrated basis. And so the idea of the value of Santana Row or Pike and Rose or Assembly Row is very, very much tied to the way those uses work together. I hope that's helpful. That's helpful. Thanks, Dan. Thank you. Our next question is from Jeremy Metz from BMO Capital Markets. Your line is now open. Hey, guys. You had a strong start to the year with the 3.8 percent comp NOI. You mentioned the benefit from the term fees, but you held on to that 2% to 3% range. It sounds like you're pointing towards the high end now. But how much of not formally changing the range at this point is just added caution given the current retail environment there's maybe more known items that could drag you back down in that 2% arena when it's all said and done? And then maybe as a follow on, can you comment on the demand you're seeing, maybe break down the demand side a little bit in terms of traditional open air retailers? How much is maybe typically more mall retailers looking to enjoy some fresh air and maybe appetite from e tailers to test out brick and mortar? Yes, you bet, Jeremy. Look, it's May 3. It's May 3 in a company that does have a lot of parts of our business, as Christy was just talking about. So we are bringing in new product being developed. We do have an uncertain environment with respect to some extent bankruptcies. So but the biggest thing is we're not a commodity company. So there is a bunch going on during the year, lots of things that do affect capitalized interest when you bring property when you bring up the big construction process into service and that creates some uncertainty. So on May 3, we're going to keep the guidance right where it is. It's not any particular known thing that's going to go the other way, which is specifically what you're asking, I think, in the latter part of the year. It is caution, but the caution is not sandbagging. The caution is complicated business with a lot of stuff happening at this point in time. With respect to the second part of your question, I think there's nothing more interesting than looking at Uniglo choosing Klink and Rose in terms of what retailers are trying to do and figure out in terms of their future. I mean, every one of these retailers is grappling with how many stores, what size the store should be and most importantly where they are where they should be. And every one of those retailers has a different business plan. And what we are absolutely finding is that there is more certainty in 2018 versus 2017 in terms of what direction those retailers are choosing. What we don't know is, are they right? And whether those plans will make sense in 2020 or 2022 or 2024. But as a landlord, all we can do and we think the most important thing to do is to create a place, create that environment that they can do the best business in. It starts with location, it includes place making, it certainly includes the other merchandising that's happening within the center. And that's where I think we have a big competitive advantage. Appreciate that color. And just one follow on here on toys. I think you only have the one box From what I know, I think it's almost backfilled, but maybe you can talk about that existing store release. And then I think you had some adjacent unknown toys at various assets. So any color you can share there in terms of the process? Are you bidding on those? And do you think you can shake some more free that could create potentially larger opportunities? Yes. We own we did get control of the one that we do own in Escondido, which is great news. It's way under market. We've got demand. That will be a good story when that's backfilled. That's the one that we own. The real interesting one to me is the box that we did not own, but as you say was adjacent to East Bay Bridge, which is a traditional power center. And I mean if you listen to the common dialogue, well, it's a power center, there was a Toys R Us adjacent to it, how can that be a good thing? But that particular piece of land and the performance of that particular power center meant that the auction process that happened on that Toys R Us box for which we did go through investment committee and approve a big number in terms of our ability to control that box. And by the way, that big number meant that we could have either backfilled it with another retail box retailer or it's a really good residential site, given what's happening there. We bid aggressively. We and 14 others for that site. And at the end of the day, we lost it, but did not get it to a number that we couldn't make sense with. So supply and demand matters and location really matters. And those are the 2 toys boxes that were in play. There is a third one in the prime store portfolio that has not kind of worked its way through the system yet and we're hanging around the hoop to see how that plays out. Thanks for the time, Doug. Thank you. Our next question is from Jeff Donnelly from Wells Fargo. Your line is now open. Good morning, guys. Some of your competitors have reported, I guess, it's a weakening pricing in lower cap rate markets. Do you believe that to be the case? And do you think maybe the 7 to 8 cap rate dispositions that are coming into the market are providing a source of competition for retail capital? Hey, Jeff. It's Jeff. So kind of two thoughts on that question. First, for the high quality product, we really haven't seen pricing change. There hasn't been a tremendous number of trades, but the trades that have happened have been priced very, very aggressively and we don't think cap rates have backed up at all for the high quality stuff. What has changed I think is how people define high quality. It used to be that if the shopping center had a grocery store at anchor and was in a major metro area in the United States, it was considered high quality. And I think people are a little bit more discerning and a little bit wiser now. And you either want to see a true brochure quality asset or what we like to buy which is infill properties with a lot of people on income around those assets and some definable go forward NOI growth. So the definition of quality has changed a little but what people are paying for quality hasn't changed at all. 2nd, you get outside of that and it's anybody's guess what the cap rate is going to be on an asset or whether the asset is even going to trade. Could be a 6, could be a 7, could be an 8. We're seeing a lot of deals just not happen right now because the buyers aren't showing up. And my own personal view on that is the market whether it's the equity market or the debt market to buy those centers is nervous that the values haven't bottomed yet and they're not defined. So interesting time. I think that answers your question, but if not, let me know. Yes, it does. And maybe just as a follow-up to that. What is the thinking? You mentioned True Grocer. I think that's for many, many years it was having a traditional grocer, if you will, in Albertsons Stop and Shop, whatever, depending on the region of the country, really define that. I mean, what's been the reaction to sort of a Walmart or Target with food or a Trader Joe's or an Aldi? I mean, are lenders or buyers viewing those as grocery anchored right now? Or is there still sort of a chasm between traditional and maybe those sort of emerging types of food retailers? Well, I can't really speak to how lenders are looking at it and we don't do a lot of secure debt. So and I don't spend a lot of time talking to the life insurance or securitized community to figure out what they think of those types of alternative grocery anchors, if you want to call them that. I mean, again, in my view, and this has been our view for a long time at Federal, what's important is having the right grocer in the right trade area. So could that be an Aldi or Aledo or could that be a Trader Joe's or a small local chain or Whole Foods and not a traditional grocer? Absolutely. And yes, as you look at Target, Walmart and others putting more food in their stores, absolutely, that could take the place of a traditional grocer in certain trade areas. So I think it's very trade area specific. But I do think the shine is off the traditional grocer drug anchored 125,000 square foot neighborhood center. It's helpful. You touched on this in an earlier question, but it just seems like last year there was such a flood of near daily announcements around store closures. This year it feels sort of like a desert, if you will, by comparison. But there's still that overhang out there about retailers. I'm just curious as it relates to leasing, have you guys sort of seen any change in their tenure of appetite for leasing? And specifically, have you seen any sort of change in there either resistance to certain rents you're quoting or seeking more TI or lease duration or even like kick outs. I'm just kind of curious if that's morphed or evolved into a different kind of lease negotiation maybe than you had 12 months ago? I would say no, Jeff, not for 12 months ago. I would say absolutely yes over the last 5 years. And I'm making a distinction there I think importantly. I think the notion that tenants want to pay less rent and have more control of their space through other things being a new concept is not true. Those negotiations are have gone for a long time. There is no question that over the last 5 years pushing harder on tenant improvement dollars themselves, pushing harder for terms that whether they're kick outs, whether they're use restrictions, other things in the leases are absolutely negotiated hard as our rents and rents are only one thing. But I see such a difference in places where we've got leverage and places where we don't have leverage. And where we have leverage, it's no different. You either want you want in or you don't want in. And places where you've only got one choice or one game, yes, they're going to get a whole lot more in terms of those deals. And so over the last 12 months, what I like about over the last 12 months is I think as I said before, tenants are they pick the direction and not all of them, but more of them certainly than a year ago have picked the direction and here they go. This is what they're doing. This is what the plan is. And that's a very positive thing. Now depending on the location and depending what it is that they want, who else wants the space, there is you're going to have those negotiation points that you just mentioned. Some we prevail on, some we won't, some we won't. But I don't think it's the 12 the last 12 months that's changed that amount of leverage. And maybe just one last question. Don, I think it was about a year ago, you talked about maybe the greater need for data as a landlord in this business. Have you guys made any investments there or have you kind of explored that further? I'm just curious what your thinking is. That's a great question, Jeff. And I do believe that. We have not made investments yet to this point. We're looking at some stuff hard. And I'm not sure that we're looking at it at this point from an investment perspective as it is really trying to get a good look as to what of it matters. I mean there are a lot of I'm going to call them fly by night, consulting firms and data firms effectively taking advantage or trying to take advantage just as you would or I would in a dislocated market and fearing with landlords who fear, oh my gosh, I have to have more data, I have to understand and they're making good money consulting. But what is that how much of that is actionable? And how much of that is irrelevant today, but not in 6 months because the technology is changing so quick? Those are real open questions. And so what we're doing here is then there's a task force here within our company that includes Jeff Fergus and some other folks. We are exploring and talking to companies to try to uncover really whether they have anything here that's valuable or not and how to effectively play along. So that's where we are in the whole genesis and life cycle of figuring out the best way to play in technology as opposed to jumping in water with stuff that may not nearly be as valuable as is being portrayed. Okay. Thanks guys. Thank you. Our next question is from Ki Bin Kim from SunTrust. Your line is now open. Thanks. Good morning, everyone. Don, can you talk about the average occupancy cost in your portfolio and how that's trended over time? I can try, Ki Bin. But one of the things about us is we don't have a lot of reporting in terms of sales reporting. So what I'm going to say, take with in that context, roughly 30% of our tenants report sales and therefore allow us to really figure out what occupancy is with the data that makes sense. We also have a very active property management group that tries to get that data so that we can and we accumulate that database to try to figure it out. And when you look and you see it our best guess is that we're somewhere around 9%, 8.5%, 9.5%, something like that. Again, that's based on a whole lot of limited data. That number has trended up as you would expect over the past 3 years, but we're also doing an awful lot in changing out poor tenants for new tenants and that's the whole proactive leasing initiative that we've been pushing like crazy over the past 3 years. And so from that perspective, you'll see it coming down or a little bit. But I'm kind of working around the edges because I don't have good clean data. But in trying to answer your question, that's effectively what we believe overall in the portfolio. I see. And maybe this one is even tougher then. So when you think about the leasing spreads on renewals that were up 20%, in general, are these retailers that have been there for a while and their sales have maybe increased over the life of the lease, have their occupancy costs dropped and when you renew it up 20%, you're bringing it back to like a portfolio average? Or is it more the case where it goes above the portfolio average? Well, Keith Where the cost of the business gets tougher. Yes. No, listen, I get the point 100 and 10%. Think about it this way. First of all, this is not a commodity company. So if you were to look at the standard deviation around lease roll ups, lease roll downs, things being flat as it gets wide. And so if you look at 22%, that don't expect 22%, as Dan has said, as a run rate for this company. That 22% was a couple of deals in particular, I mentioned them that we worked real hard in with respect to old space that Kmart space in Saugus has been under market for a 1000000000 years. And as a result, we finally were able to get that back and put a market rate tenant in it. So boom, rent was up 400% in that case. That's always been the case with federal. That continues to be the case with federal. The other thing associated with that as you kind of think of tenant sales is you do have a mix of tenants that's all over the place in terms of occupancy costs for a restaurant versus occupancy costs for a furniture store or grocery store. And it's so it's very wide. And going back to Christy's question in in terms of the diversity of our income stream, that makes it even harder to kind of put us in the same place as others. Overall, we're running individual places and locations where we're constantly trying to change out tenants to get best in class. And so as a result, if I had perfect information, you would see occupancy cost ratios going up, going down, going up, going down. They would be relatively volatile overall. I don't have perfect information, but that's how we're running the business. So it's certainly not direct answer, but it's directionally what how it is that we do it. Our next question is from Daniel Santos from Sandler O'Neill. I was wondering if you could talk a bit about acquisitions. As you're looking at new deals, has your underwriting changed and what you're focused on changed over the years given the changing environment? I'll pick that up, Jeff. And by the way, Daniel, it's good to talk to you. I can't imagine Alex not being on the call. I'm very disappointed and you can tell him that. So Jeff, what do you got? I will let him know. Thanks, man. Yes, Daniel. Sure, it has. It's harder now to find good deals and underwrite those deals appropriately certainly and we're because we're in the market real time leasing space operating centers and we're in relatively few markets and understand the markets we're in well. That diligence, if you will, is constantly evolving to make sure we make good investments and we find assets where we can create and add value. So yes, there's nothing static, if you will, about the way we underwrite or look at any of our investments. So I don't know if that answers your question, but it's something that's constantly evolving here. Got it. That's helpful. I was just wondering on Pike and Rose and Assembly Row, if you guys had a guess where you'd be on the retail leasing front in the holiday season this year, what would you say? Well, I think in both cases, we'll be nearly fully leased. We won't be fully open. And so that's the difference. The build outs, I was just looking at this, this morning as it related to a couple of new deals that we did at Pipe and Rose. And there's a couple of concepts that we're doing that are really cool, but they won't be open until the spring of 2019. So when you think about really Pike and Rose being a real a fully open experience in terms of the street, we're talking about 15 months from now or 18 months from now something like that. But the leases, the commitments if you will, will be certainly done by the end of the year. Got it. That's helpful. Thank you. Thank you. Our next question is from Mike Mueller from JPMorgan. Your line is now open. Hi. I was wondering, when you look at the development, redevelopment pipeline and think about the mix of spend over the next 5 years or so coming from Assembly, Pike and Rose, Santana in that bucket versus the other catchall bucket. I mean, do you anticipate it being similar to what it's been or will that mix change? I do, Mike. And let me talk about that in a couple of ways. First of all, the redevelopment of our core shopping center is it's such an important part of that this business. The initial yields are usually better. The obviously the risk is lower. It's their established places that we're adding in. But it's very hard to put 100 of 1,000,000 of dollars in any period of time to work on that. That's just it doesn't work like that. There is there are smaller projects, but an important part. In terms of the bigger projects, there is I mean, I got a list of $1,000,000,000 of we just went through with the Board of capital that could be deployed over the next 3 years in primarily the big projects including Cocoa, including Santana, etcetera, as well as Pike and Rose at Assembly. But whether we deploy that or not goes back to the first question, Mike, that was asked and that is going to be. Can we understand our cost of capital? Can we get construction costs in line? Can we get comfortable with the rents that we'll get and have projects that make some sense? Can we get the appropriate county assistance in the case of Pike and Rose? I don't know yet, but we're going to be ready to go to the extent the answers to that are yes and depending on asset sales and other ways to capitalize. Got it. Okay. And then switching gears for a second. On the PrimeStore portfolio, are there any notable differences that you're seeing in terms of lease spreads, NOI growth or mark to market versus your other comparable assets out on the coast? I want to just look while just thinking about them, we'll give you an answer. I've got a pretty strong view on this. And that is there is no question that while the Prime Store assets don't look or feel the same way as Third Street Promenade or even Escondido Shopping Center or Plantville Segundo, they act similarly. And the reason they act similarly is because demand exceeds supply. And so that's the game. That's what's necessary here. So I don't know, Jeff, if you can I don't see when we look at the numbers of the renewals, when we look at new leases, there's the occasional big bump that we just saw like from Bob's for Walmart, there's similar things that happen in our portfolio? And so a more high profile asset like Third Street Promenade has been delivering that way for 20 years, frankly for us, there and continues to keep giving. So we obviously don't have that level of history and understanding of the prime store assets over that longer term. But today, I don't see a remarkable difference personally. I don't know, Jeff, you want to add to that? No, I don't either. And I think it's a good question. Ask us in a year or 2. Again, we've only been in the portfolio for a few months and there has not been a tremendous amount of space that we've needed to lease. What we have done has generally been in line with what we underwrote, with the exception of the Los Sardinas deal, which was significantly excess of what we underwrote. So it's just there's just not enough history for me to give you a really good answer to that question, but I'd say it's generally in line with everything else in our portfolio in California. Okay. That was it. Thank you. Thank you. Our next question is from Floris Van Dijk from Boenning. Your line is now open. Great. Thanks for taking my question, guys. Don, you made a comment a little bit earlier. You alluded to some asset sales and then suggested that Dan was going to give some more detail. But I'm curious what you guys what you had meant by that? You know, Floris, it's funny. I do that a lot and then Dan doesn't give more detail. I don't know why. Let's see if we can. Hold on. Go ahead. So what was the question, Well, it's trying to get a sense of any planned asset sales, I guess, and if you guys can give some color on Look, we've got a and I've talked about this with folks before. We've got a pool from an asset sale perspective of high tax basis, tax efficient assets that we can sell and is roughly around $500,000,000 or more. And we feel as though we can be very opportunistic with regards to getting into the market and taking advantage of strength in the investment sales market where it's strong. But that's just one arrow in the quiver that we have from a capital perspective. And I would expect us to kind of fund our business going forward with, as Don likes to call, from a technical terms, a little bit of this and a little bit of from a capital perspective. We generate about $70,000,000 to $80,000,000 annually of free cash flow if your dividends and maintenance capital that we can redeploy into the business. We've got this pool of $500,000,000 plus of assets that we can sell on a tax a reasonably tax efficient basis. Look, we already closed on $100,000,000 of condos sitting here in the last 2 months, very, very tax efficiently and probably have another $50,000,000 more to sell over the balance of the year into 2019. We have an A- rated balance sheet that gives us the flexibility on a move forward basis. We will operate in our within the metrics of our A- rated balance sheet, but a balance sheet that has tremendous capacity. Plus, we're getting a lot of reverse inquiry from institutions who want to partner with us and we'll explore that. And if it makes sense, we'll go there. But I think we've got multiple areas where we can fund the business on a go forward basis. And I think that's what I talked about in terms of having a balance sheet that's positioned for us to continue our growth plans over the next 2 to 3 to 5 years without kind of over reliance upon common stock. Insurance. Maybe, Florence, the only thing I would add to that, and I do think I think the point on raising $100,000,000 so with condos can't be overlooked. It's really important, 35 more of that to go this year, the rest into next year. That's great tax efficient, fully usable in terms of proceeds money. And of the $500,000,000 or so that Dan talked about in terms of the overall set of assets that we could sell tax efficiently if we wanted to, we have identified about $75,000,000 of that that we would expect to have on the market by the end of June or early July, something along that. And therefore, theoretically, at least close that $75,000,000 by the end of the year. So when you look at that, that's $200,000,000 plus in 20 18 of proceeds through selling assets, very tax efficient. Great. One other question I have for you. Don, you had mentioned, I believe that, and refresh me on the fact, but that your Santana Row apartments NOI growth has averaged something like 4% over the last 15 years. I'm curious to see or how does that compare to your retail NOI growth there? And I'm curious to see if you think something obviously, you're thinking that you're going to that you're going to do something similar at Assembly and Pike and Rose, but is that achievable as we look forward? Florence, I love the question. It's really cool into the really I mean, we're one of the only ones that has some real history on what happens with mixed use projects. And it's fascinating. I don't know if you remember or not, I certainly do. Santana Row could not have started out slower. And even in terms of the apartments, in terms of the rent growth, in terms of that way. And when you look at what happens as that sense of place is established and it becomes the place to hang out, I mean, what we were doing by the end or not by the end, but even in the last phase of Santana Row is adding in residential product that we would have not thought of before because we had to figure out a way to add a product that got you in there under $2,000 a month. And that product was very small work live spaces than the back of the garage that we had that sold out. So it becomes that's where that 4% effectively has come from over that period of time. On the retail, the retail like retail everywhere does particularly well in strong economic periods of time. And today, our retail growth at Santana Row is slower than it's been before because it's retail today. Having the ability to exploit the place though up in terms of residential product like that is a real advantage. If it's only the retail, you're going to move up with up and down with the retail market. But having the incremental uses that exploit that at Santana Row is also close to 4%, 3.5% at Santana Row is also close to 4%, 3.5%, 3.7%, something like that, but a bit more volatile. Great, thanks. You bet. Thank you. Our next question is from Haendel St. Juste from Mizuho. Your line is now open. Hey, Don. Hey, Don. So, a question for you, a couple here quickly. Curious on your view on converting potentially converting some of your space to creative office space. It certainly seems to be something we're hearing more of these days. How relevant or perhaps how attractive of an opportunity do you view that for your portfolio? Yes, I love the question. The one thing the question is, is it being done defensively or offensively? And I make that distinction because it's really important. When you're saying, gosh, I have a place that doesn't have any more retail demand for whatever reasons they are. And so maybe let me convert it to some type of creative office space. And the results aren't great, but they're better than they would be at 0 for retail any longer. I mean that's a defensive move and that happens. Because it's not a bad thing, it's better than the alternative. What we're focused on is the offensive side of it. So when you take a CocoWalk, which is a multilevel retail property with an absence of dearth of office product, a office product in the marketplace. And the marketplace is one that's filled with well-to-do people that are sick and tired of driving in their car to Miami because of the traffic, now you have an offensive situation. And so converting that retail product from all retail basically to half retail and half office, I mean, we'll see. We don't have assigned deals yet, but the demand on that office side is powerful. And so I don't think you can like anything in real estate, I think it's I don't think it's a trend as much as it is a parse. You need to parse the opportunities between offensive and defense. We are in a couple of places, Cobalt being the most obvious, looking at it from that offensive stature. Got it. Thank you for that. And following up on an earlier question, it looks like just looking at your readout pipeline here in the next 3, 4 years, you need to fund $1,000,000,000 ish, dollars 1,000,000,000 plus. It sounds like asset sales are now part of the consideration and JV Capital. That was certainly the crux of my question. So I guess I'm curious as you look at the potential to sell JV interest, what type of cap rates do you think you could fetch should you decide to sell partial interest? Let me stop. Let me reset your premise, if you don't mind. The idea of how to fund development or redevelopment, I think or acquisitions, capital use is something that we're really proud of not having only one alternative. And so the reality is it will probably be if I were betting on this, you'll probably see a little bit of everything. So you'll probably see a bit more debt that gets issued. You'll see a bit more asset sales as we just went through. We will absolutely look at and understand the JV market for certain assets. I don't really want to. We've done I think a very good job of not doing joint ventures, not complicating this company for fundraising purposes. When we do a joint venture, it's for strategic purposes. It's because the prime store folks are bringing something strategically, the most important thing strategically to the deal. That won't change. I don't think you should look at JVs in this company as, oh, that's how we're going to raise the money to do something. I think you should look at it, it strategically does something important for us. And so that will be a component or could be a component. That's what we'll explore. So if you can think about this on a more balanced approach to that $1,000,000,000 again and then on the other side, is it a 1,000,000,000 or is it $500,000,000 Perhaps it depends. Some projects will make, some projects won't make that way. All of these things are happening together. And I think if you look at our path for how we try to execute that balance, you'll see that we don't go all in on any one thing. Okay, got it. Very helpful. And one last one, it's a question on PrimeStore. And maybe it's not a fair question to ask, but I'm going to try anyway. I'm wondering if the change and let's call it the political climate is impacting how you're thinking about your prime store JV and potential future investments. I was positively surprised to hear that there doesn't seem to have been any impact to sales and traffic given the demographics of the neighborhoods involved here. But curious how the political climate is playing a role in your thinking about the underwriting of future investments on that JV? Yes. And first of all, it's there's nothing wrong with that question. And it's certainly something that if you had a spy at ICSC last year, when we were in the final negotiations, you would have seen Dan Gugliamoni and myself outside of the Nathan's Hotdog place on the phone with Burkus and some other people saying what do you think the political climate is going to do to the demand on those assets over the long term and the folks and everything else. And so it's a real good question. And we without question after going through it all, after trying to understand the retailer's points of view, to understanding looking at the empirical facts in terms of the sales and what had happened over the previous couple of years that way and also very much, very much being completely supportive of the most diverse population that we can have. We think it's a positive thing in so many ways. Over the long term, the idea of being a major player in California and not participating in the Latino community seems like we are taking one hand and tying it behind our back with respect to expanding our business and seeing the opportunities we have. It's now a year later, we are and now I'm speaking for me and I'm looking at Jeff to see if he's going to agree with me or not. I am 110% committed in the same way that we were before. And over the long term, I just don't know how in the world you can ignore 50% of the population in Los Angeles County. Yes. No disagreement for me, Haendel. Great, guys. Thank you for the time. Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Leah Brady for closing remarks. Thanks everyone for joining us today. We look forward to seeing many of you at NAREIT in a couple of weeks. Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.