Federal Realty Investment Trust (FRT) Q1 2013 Earnings Report, Transcript and Summary

Welcome to the Quarter 1 2013 Federal Realty Investment Trust Earnings Conference Call. My name is Yolanda, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn the call over to Ms. Kristina Lennox. Ms. Lennox, you may begin.

Thank you. Good morning. I'd like to thank everyone for joining us today for Federal Realty's First Quarter 2013 Earnings Conference Call. Joining me on the call are Don Wood, Dawn Becker, Jim Taylor, Jeff Berkes, Chris Weilminster and Melissa Solis. These and other members of our management team are available to take your questions at the conclusion of our prepared remarks. Our first quarter 2013 supplemental disclosure package provides a significant amount of valuable information with respect to the trust's operating and financial performance. This document is currently available on our website. 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 and 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 contained in our forward-looking statements, and we can give no assurance that these expectations will be attained. Risks inherent in these assumptions include, but are not limited to, future economic conditions, including interest rates, real estate conditions and the risks and costs of construction. The earnings release and supplemental reporting package that we issued yesterday, our annual report filed on Form 10-K and other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial condition and results of operations. And with that, I'd like to turn the call over to Don to begin our discussion of our first quarter 2013 results. Don?

Thanks, Kristina. Good morning, everybody. The strength and momentum that we felt throughout 2012 continued into 2013 first quarter. Quarterly results really speak for themselves. Top line revenue growth of nearly 8%, first quarter FFO per share growth, 9.6%, same-store operating income growth of 4.4%, our quarter-end portfolio leased at 95.1%, 254,000 feet of comparable new and regular leases of 12% higher rent, new raw materials for our midterm redevelopment pipeline in form of a great new shopping center acquisition in Darien, Connecticut, and a ratings upgrade from Standard & Poor's to A-, Stable that puts us in some pretty rarefied company. It was a pretty darn good quarter, so let me start out by talking about leasing and a couple of deals that really shaped the quarter. We completed 75 comparable deals in the quarter for 254,000 feet, about an average level volume for a 3-month period at Federal at a rent of $35.78, 12% higher than the $31.89 in place rent under the last year's -- the former lease. Renewals rose 4% and new deals created 24% more rent. Bethesda Row, just outside of Washington, DC, was particularly strong this quarter with 5 deals done, 3 renewals and 2 new tenants, with new contractual rents 24% higher than the former lease. Similarly, lots of leasing activities during the quarter at Barracks Road in Charlottesville, Virginia, where we signed 6 new deals, 3 renewals, 3 new tenants and significantly higher rents as we update and redevelop significant portions of that very important shopping center. Of the 75 leases that were negotiated at this center -- in this quarter, rather, 63 of them, that's 84%, were for the same or more rent, while only 12 of them rolled down. And most of those cases, the roll-downs were for property-related strategic…

Thanks, Don, and good morning, everyone. As Don outlined in his remarks, our strong performance in 2012 continued during the first quarter of this year. I'm going to walk through some of the key underlying drivers of this out performance, review some balance sheet items and liquidity, and finally, provide some details on our increased guidance for 2013. Overall, property operating income for the first quarter increased 6.2% to $110.6 million compared to the prior year. Consistent with prior periods, most of the increase is attributable to increases in same-center POI, which as Don mentioned, increased 4.4% including redevelopment and 3.2% excluding redevelopment. These increases in same-center POI were achieved despite lower termination fees year-over-year and net cam [ph] leakage from higher snow removal cost in '13 versus '12. The balance of the increase in overall POI was driven primarily by the acquisition of East Bay Bridge, which was acquired and successfully integrated into our portfolio last quarter. Our POI margin remained stable on a sequential basis at 70%. It was down slightly from the prior year quarter due to lower term fees and higher snow removal cost I just mentioned. Bad debt remained at historically low levels at only 10 basis points as our tenants have shown increased financial strength and we have recovered previously written-off amount. Our EBITDA margin improved on a sequential basis as we maintain strict control over G&A cost, keeping them essentially flat despite the continued growth in our operating portfolio and revenues. As I've mentioned on prior calls, I remain deeply impressed by this team's commitment and focus on costs. Interest expense, on an overall basis, decreased $1.4 million in the first quarter versus 2012. Most of this decrease was attributable to the lower rate, our weighted average rate declined from 5.9% to 5.5%.…

[Operator Instructions] Our first question comes from Jeffrey Donnelly.

Actually, this is a general question for you, Jim, first on the sources of capital. What's your interest at this point given that people are talking about the difficulty in locating Class A assets and maybe exploring like a joint venture arrangement with institutional capital to monetize some portion of your assets, maintaining control, or even just raising equity that you might not have not identified use immediately?

Jeff, I'm not sure I followed your question. I mean, I think as it relates to thinking about joint ventures for acquisitions, that's never really been part of our business plan, if you will.

I mean, for existing assets.

No. I think our general bias is, is that tends to complicate the balance sheet. If we choose to dispose of an asset, we'll dispose of it outright. And we do evaluate that pretty actively. The nice thing about an acquisition like Darien is that it sets us up for a reverse 1031. Should we proceed with the sale of an asset, we can do it on a very tax efficient basis. It is a very competitive environment right now for asset pricing. And again, we just remain very disciplined in acquisitions like East Bay Bridge or Darien and focused on the growth potential of those assets going forward. So for the right real estate in this capital environment, we think we can create a long-term value accretion through acquisitions. We just have to be disciplined on quality.

Can you talk about when you're looking at acquisitions, how you're thinking about the exit cap rate relative to your entry? Given that it's so competitive and cap rates are low, I'm just a bit curious how you're thinking about that?

Yes. We talk a lot about that. And we don't get ourselves through compressing our reversionary cap rate. We look at cap rates based on asset quality with a view towards what the long-term cap rate for that asset might be. So while today, we're in an environment of historically low cap rates supported by historically low interest rates. As we think about centers like Darien or East Bay and we look out at our reversion cap rates, we think about it more in terms of long-term averages for those assets. And typically, given where cap rates are today, that can be an expansion in cap rate by over 100 bps over where our pricing is now.

And just a question on your assets on. Pike & Rose, several apartment companies have just talked about supply concerns in future years moving out towards Rockville, and some of that will probably be Pike & Rose. So I guess, what concern do you guys have? Maybe you'll see some pressure on rents and multifamily in that market is could impact your initial yields? Is that sort of in your thinking,or?

Sure, Jeff. And it's something we always worry about and you have to consider in a long-term development project. It's pretty clear that whatever environment you go into, in development [ph] will be different -- there will be a different environment, either better or worse when you're delivering. But that's where they have enough room now and there's number of things to think about. First of all, if I look -- and I was just talking to our board about this yesterday. If you look at all the projects that were going to be done in that White Flint card or in surrounds 2 years ago, it was much a bigger list than it is today in terms of people who are actually moving forward. And I think that's always the case. There's always -- the question is when do developers turn off that supply's spigot. So today, all of that supply you've been hearing about is largely on the comp. We're absolutely out of the ground, we'll be the first ones to gain. So that's a very, very powerful piece of the economic equation. To the extent there is a cycle where there is too much supply and that depresses rents for a period of time, that's just part of the cycle. That will be what it will be. Everything we're doing with respect to this is for the long term. So I guess, I'm trying to hedge, if you will, in 2 different ways there. One, we'll be the first one out. Two, I don't think there'll be as much supply as you think. And actually, three, even if there is, the long-term value and nature of where this project is within the district is, I believe, will be superior.

And last question. I know it's small potatoes, but I thought I had read somewhere that you guys were looking at a residential use. I think the Crest building in San Antonio, is that just part of the process of trying to exit your presence down there?

I don't think that's necessarily true. Our investment in San Antonio is performing fine. It's not great. It is what it is. We're always looking at different things to be able to the any of these buildings value creations throughout the portfolio. I don't believe there's anything that's imminent certainly on the Crest building in San Antonio.

Christy McElroy.

Regarding the Darien acquisition, it sounds like you plan to include Stop & Shop in the future plan. Can you talk about what kind of sales they're doing in that spot? And is a grocery-anchored center ultimately the best to use there given the pretty steep competition with Palmer's right next door and the new Whole Foods like a mile away? How many years is left on their lease?

Great, great questions, Christy. That's why I try to address it proactively in my comments. So Stop & Shop has 10 years -- 10.5 years, something like that, left on the lease in total. No further options. Nothing. At that point in time. At this point in time, it's not a great Stop & Shop. You don't go, you certainly -- it certainly wouldn't be a Stop & Shop necessarily that would be #1 in the market or #2 in the market. So the question as to whether they are a part of the future there is largely in their hands during the term of their lease because they have restrictions, as you would have imagine. So the question is, one of 2 -- do they want to cut a new deal which is more in line of, I believe where your thinking and I'm just implying that based on what your comments were, or do we hang-out and clip coupons and wait and then have the door open to all kinds of things 10 years from now. So my hope is that there'll be a deal that we work out with Stop & Shop sometime in the much more recent near future than that, depending on how it takes, and exploit that Equinox, which is at the other end of the property and is an extremely successful. And you go in that Equinox, that is our customer. That is the customer we will be trying to serve with any redevelopment there.

Okay. And just doing the math on the term fees, Don, based on your comments, does that mean that the Q1 lease term fees were about $900,000? And can you quantify in basis points the impact on same-store NOI growth of the lower term fees. I just didn't know how many -- how much of it was attributed to the same-store pool.

We haven't...

It's over. It's over 100 basis points. I don't know if you have the total numbers.

It's about 130 to 140 basis points of impact, Christy, and your math is pretty close to right on.

Okay, great. And then just lastly. Are you able to break out your re-leasing spreads in the quarter by small shops versus anchor space. And just generally looking at 2013, would you expect there to be a meaningful difference between the 2? I'm just trying to get a sense for what kind of pricing power you have in the 2 categories?

We look at that at year end and we'll probably revisit it in terms of discussion at year-end. But I think what we're seeing on a quarterly basis is good performance, both in the small shop and the anchors. It's difficult in any 1 quarter to pull a trend because they can be swung by just a few individual leases. But overall, with the 12% rollover, we saw strength in both the small shop and the anchors.

Our next question comes from Craig Schmidt.

Don, earlier, you said you haven't seen metrics like this since 2005. I think one main difference, however, is in 2005, we really have that active development. How much of the lack of development is making these metrics stronger? And if construction comes back, does it come back quickly or is it a bit gradual?

Craig, first of all, I can only speak for us. And I think that developments that were underway now is depressing our results. Not having a lack of development increase, you know what I mean? I mean, we are spending marketing dollars. We are knocking down an existing shopping center and therefore, losing the rent from the existing tenants that are netting down our results. That will effectively accelerate throughout the balance of '13 and into 2014, yet we're still putting up metrics like this. Now the difference between '05 and today, I suspect, Craig, and this is just gut feel, that we were doing more redevelopment on more smaller projects in 2005. And today, it's more of the larger projects. But net-net, I see those metrics as being pretty darn comparable.

I think, Craig, from an overall perspective, I know a lot of people have been talking about the lack of new development in various markets allowing occupancies to improve and expectations of forward performance to continue. Again, I think where our assets are located, we're less impacted by development just because of the barriers to entry. So a little bit harder for us to generalize on that point.

Well, I think what I just said for Federal is exactly right. When you take that and extrapolate that and look at the -- all of our competitors and everything else, there's no doubt that there is less construction and less development happening in the country in most markets. And so in some respect, you've got -- you may have that void set of metrics throughout the industry. But as I say, we're doing plenty of it and it's negatively impacting earnings but certainly long-term accretive.

And just out of curiosity, do you think the consumers are going to be stronger in the second half of the year, the same or weaker?

I got to tell you, I've been thinking a lot about that with what I see. I mean, I don't necessarily think the consumer will be stronger. I think the consumer will be about where they are right now. But frankly, it's pretty darn good. I mean, in a lot of respect, better than you would have thought it would have been at this point. But when you think of things like the payroll tax reversion back to these payroll tax numbers, sequestration throughout the country, the continued sluggish stuff, that is, to me, being offset to some extent by the home industry. And a recovery, if you will, at homes, which has more to do with psyche [ph] than anything else, and certainly, construction jobs in some extent. So on balance, I think there's negatives. I think there's positives. And consumers should be about where they are.

Paul Morgan.

On the rating upgrade, you've mentioned that -- you said it shouldn't reduce your flexibility. I mean I think in the past, with some REITs, it's been viewed a little bit as a mixed blessing because it has constrained strategy a bit, the desire to maintain the rating. And as you think about your ramp-up in development and the funding needs for that in the context of the A, could you just give a little more color on kind of why you think you won't be constrained?

I think our plan has always been about balance. And when you think about the level of activity that we're doing relative to the size of our balance sheet, it remains modest. And then you look at stress case scenarios which we've gone through with rating agencies in terms of development not performing as expected, and the resulting impacts on our coverages and overall leverage being relatively modest, and you think about our long-term capital plan, we're really not changing any of it as we pursue the development going forward. So yes, if our plan included levering up to do this type of activity significantly, then, yes, Paul, I would agree with you. But our status-quo plan, if you will, does have us executing this, does have executing future phases as it is appropriate for them to be executed. When you take a big step back and you think about this company and the fact that there's probably $2.5 billion to $3 billion of capital that we can put to work in assets that we own today. We have a lot of work to do over a long period of time. And we're going to get to it in appropriate size and at appropriate yields over that period of time. But we have -- and of course, we're very transparent with the agencies as we discuss this.

So at least in the near term then, it doesn't change kind of at all any of the kind of timing of the way you would invest your capital or kind of the scale of an ATM program or anything like that?

No. Again, because we've always struck balance.

Okay. And then same question on Santana. I mean, you've had a lot of kind of other aspects of the project in the works, the office components and sort of the retail at the end of the street. Maybe see if you have any updates there. Also, with the state of the housing market in the Bay Area, I mean you've always kind of considered one of the 2 new apartment projects as a condo conversion. I mean, could that happen sooner rather than later given how fast houses appreciated?

I'll get Jeff on the call. Let me start that, Paul, and Jeff, please feel free to add on to this. The one thing that is crystal clear is the value of that street to every other -- the value of the retail street to every other use there is -- has not peaked out yet. It is getting better and better in terms of the community. you can't believe the hotel results, if you saw the hotel results. In fact, we're talking to that same hotel operator about Pike & Rose, and -- which I think is a very positive thing, and obviously, they're very positive because of what happens at places like Santana if you do the street right. Well, that applies to the residential in a big way. I think you saw it with the what we call Building 60, which is Levare, the residential projects. Not the one that's under construction now, but the one that we did 1 year, 1.5 year ago. We went in. We felt we were going to do a 7.5 or 7.7 or something like that on the property, and we hit 9, and leased up in record time. This next one that we're building now in a city [ph], will it be as strong from an initial return perspective? No. And that's partly because of the slightly higher construction cost and the need to have some amenities in that bigger project that we didn't need to do to a smaller building, but still very, very healthy. The rental stream, in particular there, is one that we've spent a lot of time making sure that we have different levels of products for people to be able to move up and move through in the site. There's a lot of value there and I think that, that value will continue to grow. So taking the money off the table in a condo there, which as you know, we did very successfully in 2005. Well, those people made a lot of money because there was an awful lot of growth after that point. And so at this point, with this true stability of the property, we're very, very hopeful to be able to continue to build that out. The office building on the front, which the timing was tougher because we went into that '08, '09 period, still came out very value-added and it's completely leased up with a effectively waiting list. There is strong office demand for Santana Row itself. So when we look at the maturation in that property, frankly, Paul, there, we see the next decade as not only retail, but residential or maybe some more office that truly needs to exploit the streets that's getting stronger.

Don, I would only add on the street, Paul, and you noticed because you live out there, we opened up a batch of new retailers last year. Kate Spade, Icebreaker, Drybar, VeggieGrill, all of which opened very strong and are doing very well. We opened a Madewell last week that just had a banner opening day on the first week. We took the mall wall down this morning on Splendid. We expanded Tesla early last month. And we got another round of new tenants coming in as we work through our 10-year-olds. So the momentum here on the street, as Don said, is just exceptional and definitely headed to the right direction. So -- and that applies to the residential as well. So we're not -- we're always thinking about the condo exit, but that's not in front of mind right now. And particularly because we -- while the housing market is strong here, as you know, we're not seeing the big gap between condo values and rental values that we saw back in '05, '06 when we executed the conversion and sold out for $150 million. On the office side, everybody that opens an office here and spends any time working here, they love it. Their employees love it. In the Bay Area, in particular, environment for the high-paid engineer that works in these offices is very, very important for recruiting and in employee retention. Those things are front of mind for the executives that run companies out here. And if you're not Yahoo!, eBay, Google and have the size and scope to have your own campus, we basically have a built-in campus for you here at Santana. So that's why we're proceeding with the planning on the office space here, and that's why, ultimately, we think we'll be successful. More to come on that over the next quarters and years as we move forward with that plan, but very positive. And like Don said, I think the next 10 years in Santana are going to be very, very exciting.

Our next question comes from Steve Sakwa.

Don, I wanted to go back to the comment that you made about the business conditions being as good as you've seen maybe in 5 or 6 years. And if I go back and look at some of your operating stats from kind of '04, '05, '06, '07, it'll be a little nostalgic, but you are consistently above 95% occupancy, a lot times breaching 96%, 97%. Your rent spreads are off in the high-teens and a lot of times in the 20s. And I'm just curious when you kind of contrast to the pricing power you've got today at '12, while all that's best-in-class in the shopping center space, how do you kind of look at the operating metrics again and compare that to, say, 5 years ago? Can we see those rents spreads and pricing power kind of get back to those '05, '06, '07 periods?

That's a great question, Steve, and it's one that, honestly, I kind of go through and try to understand where the real pops are and value throughout the portfolio. And when that whole conversation that Jeff just had about re-merchandising Santana Row with all those tenants he listed up, that was all about trying to get -- I mean, we have a specific target at Santana of getting tenant sales up until into the $700 a foot ranges to be able to price that. That's the key. And so there is a lot of focus on trying to be able to do that. Having said that, there is no doubt, that tenants today fight harder, and frankly, are smarter about their ability to leverage their deals for rents. And it is hard for me to see that on a consistent basis, that we would be up and show rent spreads up in that 18% and 20% range, portfolio-wide all the way through. Understanding that, though we're a larger company in terms of space, we are tight on expenses. We try to squeeze as much out of the margin as we can. And so as a result, to me, when you look at the our -- look at this -- look at the retail real estate business, this conversation about like same-store rents being up in the 4%s, in the 5%s, in the 6%s, as you know and I know, that long term, this business does not yield 4%, 5%, 6% same-store growth. A lot of that comes from higher occupancy. So this is still a 3% business for best-in-class and more like a 2% business for average stuff. And I thoroughly believe that. The long-winded way of saying, I think as we run the business over the next few years, particularly given the stuff that we're adding to it, I think we still have some pretty darn good pricing power. We have a very good profitability power, but I don't think you'll see it necessarily in those rent rollovers that are still kind of the levels from '05 -- '04, '05, '06, when it was easier to negotiate with tenants to get that kind of stuff done.

Our next question from Alexander Goldfarb. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Just a few questions here. First, the IKEA in Boston, they've decided to not go forward with that site and hence, all the discussion right now. But in doing the market tours, it just -- it's impressive how big of a draw the IKEA stores are around the country. I mean, drawing people from different states hundreds of miles away to shop. Is there any sense, in your view, that you could get IKEA to come back there just to increase the traffic flow and make it an even bigger destination?

No, sense whatsoever, Alex, nor we even try -- would we even try. I think the idea of IKEA at that site, which IKEA own that or the adjacent site that we traded for more than a decade, I believe, now at this point in time. And there's one thing about trying to get a -- validate, if you will, a destination and IKEA was very important to do that back at that point in time. I don't believe that, that is necessarily the highest and best use of that property today. I think there are better uses. Whether we can get them done or not, we'll see over the next few months. But I think we can do better, I guess, is what I'm saying. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay. And then the next question is just going to the development returns. You guys obviously -- you display the returns in something like Assembly Row where the returns are low. But presumably, when you go to the board and request the funds to build this, they're not looking at the $5 million to $7 million. They're looking at more of a long-term IRR. So can you just give some color on the difference between the returns that we see here versus what the expectation is for an IRR given the long time that Federal tends to own these assets?

I'm not going to give you an IRR on it, but I am going to address your question without the number, okay? You're absolutely right in terms of our discussion with the board, in terms of your basic underlying assumption of would you put $200 million to work at a 5% or 6% yield. If that were in a development project and the best -- were all you were doing, the answer will be no. So there's obviously more, which is your point. The question is, how many of them make? If there is a large office tenant here that finds its home here, and there's no proof that there would be because we haven't been able to do that in the past couple of years, but if is, it would dramatically change the IRR of this project. If there is a hotel in the second phase of the existing street that we're very confident that we're going to do a good job with here, it would increase, obviously, the return in the IRR of the project. How many of those people get off the T-Stop, [ph] which is really going to happen, it's under construction now, would really change the project. Other opportunities that have come up and we're talking about with respect to adjacencies in the land for other uses and some big traffic-generating uses, how much of that happens? So the way I'm -- what I'm trying to say to you is within Federal Realty, $9 billion Federal Realty, we've got a very -- lower risk developments like a $75 million building -- residential building on the back of Santana. That's already proven. Or some of those other projects. Even Mid-Pike [ph] or Pike & Rose, on that street, on that piece of land that's always worked out, it's -- those are lower-risk projects. Can we afford to do an assembly, which is higher beta. No question about it. Higher beta. But could work out a whole lot better to the extent those things happen. And the answer to that is yes. So there is just -- there's too much data on an assembly in and of itself for me to directly answer the question that you want. But when you put it in the context of Federal, I think, it's a really smart risk to take. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Okay. And just the final question, Don, is you're always a big advocate of don't bet against DC retail. The Post on their call specifically mentioned weakness at Assembly Row. Are you seeing any weakness in the retail there? Or retail in DC is bullet-roof regardless of whats happening in -- with defense budgets, et cetera?

I assume you mean Pentagon Row. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Yes. What did I say?

Assembly. Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division: Sorry, sorry. Pentagon Row. Sorry. Pentagon Row.

Yes. When I look in total, and I don't have the Pentagon numbers. I'm depending on Row retail numbers here in front of me. But when I look at where we are in the DC region in total on our retail, no, I am not seeing negativity. I'm looking at, in fact, when you break down kind of the same-store growth, if you will, of the 3 regions -- and I don't want to give you the numbers for the 3 regions, but then you'll always ask for the numbers for the 3 regions. But I will tell you that the Northeast is #1 right now, Mid-Atlantic right behind it, and that's largely Washington, DC at some very, very healthy numbers, and West Coast just behind that. So no, I am not seeing that weakness overall in Washington, DC. I don't know specifically about Pentagon, but I doubt it.

Our next question comes from Cedric Lachance.

Don, when you look at cap rate compression and value increases in the market over the last few years, we can debate the relative changes and how far it's come along. But it appears to me that key assets and second-tier assets are certainly, from a historical perspective, at a decent valuation point. Would that motivate you to start a more aggressive disposition program and a more aggressive exit of some of the markets you don't want to be in?

The whole notion, Cedric, of recycling assets is something that -- I mean [ph] always looking at. But it comes with an overall umbrella, in terms of the business plan of this company, for long term, consistent, stable cash flow growth. And so everything that we look at is through that lens. And I can tell you while there are individual assets that we would sell, we need to -- all of those individual assets, even the ones that we would sell, we carry big tax gains associated with them. And so they need to be sold efficiently, tax efficiently. And I think somebody, maybe it was Jimmy, that mentioned potential 1031 off the Darien purchase that we're going to make. You should expect that. There are a couple of assets that we're looking at now that will be marketed that way, but nothing more wholesale than that because we truly try to run this as a long-term proposition. And I think a lot of that has to do with the consistency and the stability and everything that people can assume and count on. So it's really important. That's in the balance.

Okay. And so you're perception on those assets, as said, [ph] they are reasonably well positioned so that you can continue to harvest the cash flow. There's no evidence of declining cash flow over time or assets that could be declining that would push you to try to dispose of those earlier than we would anticipate?

That's exactly right, other than a couple of them. And we will try to dispose those for other reasons at whatever cap rates they go at, frankly. But by and large, in this portfolio -- this portfolio surprises me quarter in, quarter out with great results from -- even what you would you consider the B assets. Because its where the B assets are. And its a definition of what's a B assets versus the world of "B assets", I think the better.

What's the right gap in cap rates between an A and a B?

What's the right gap, or what's happening today? Because they're very different.

No. What's the right gap? And what would make you change your mind on acquiring As versus Bs if you see that this gap is not in the appropriate level?

Let me answer that for you. Jim is dying to answer this one, but I'm going to jump on this one first. There would not be a gap that would change -- that would cause me to change the business plan of the company. And you can see that as obstinate or whatever you think. I am a firm believer. Firm. That through cycles, there's just no doubt in my mind that A properties will significantly exceed the results of B and C properties. That doesn't mean any particular time. That means absolutely. When you look in through a cycle, we've just lived through the difference between A properties, B properties, and C properties. And I wish there were more -- it was more review, if you will, of what has just happened between 2007 and 2011 to the cash flow streams. And on top of that, when you look at a bunch of those leases that will be up for re-lease, 10-year deals that were done in '05, '06, '07, when they come up, I think a lot of the stuff you're going to see, even with strength, is going to show reductions in the cash flow. And so I'm not going there. We're not going to reduce the quality of the portfolio. In terms of the spreads, go ahead, Jim, you could -- anything you want to say?

Not much to add there, Cedric. What I've been surprised by, as we've looked at assets, is that there's very little differentiation in cap rates between what I call nice but flat assets and assets that provide opportunities for upside. So the compression in cap rates, particularly in the markets that we're focused on, has been pretty extreme.

Sorry, [ph] I guess that leads me back to my first question. Would that sell more B assets?

I don't know. I guess the difference should be 300 basis points or more.

Our next question comes from Quentin Velleley.

Just going back to Jeff's initial questions on Pike & Rose residential. Are you looking at maybe de-risking that residential exposure and bringing in a partner on the initial 493 units?

Cedric, it's a bigger question than that. I mean, when you look out at the entire development pipeline that Jim alluded to before, we are trying to figure out whether given the phasing here, we want to de-risk a portion of that entire pipeline. Obviously, Pike & Rose being a part of that, with the right kind of strategic partner. Now that sounds like it's a -- it should be a simple decision. It's really not. And the reason it's not is because each of these projects that we've got, we've got to this stage where we have taken a lot of risk out and we've had a lot of value in these things. And so the idea of somebody else coming in today after all the entitlement process, after the land accumulation, after the design and after the construction, and not paying what it would be on a stabilized basis here, is very hard for us to give up . It's not like there are a lot of other projects out there that you can go and reinvest those proceeds into and do better. So, yes, we're looking at it but it's a tough hurdle to reach.

Okay. Makes sense. And then just a clarification. The cap rate on Darien in Connecticut, I think, you said was around about a 5. I just wanted to confirm whether that was a GAAP cap rate or a cash cap rate?

Cash.

Michael Mueller. Michael W. Mueller - JP Morgan Chase & Co, Research Division: Just a couple quick ones for Jim. Jim, going to the notes offering that you're talking about for the second half of the year, what would be, I guess, the deciding factor to get you to move it up earlier? And then if you do an earlier deal, should we assume it's going to be a bigger deal than what you have been contemplating in guidance?

No, I don't think there'll be a bigger deal. And obviously, what we're really watching, Mike, and I appreciate the question, is just the strength in the new issue market right now, where treasuries are. It's pretty compelling. Obviously, the use of proceeds would involve some prepayment penalties potentially, so that's what you got to balance the decision against. But the nice thing is that I think we have the opportunity to access that market very efficiently and effectively and we're looking hard at it. Michael W. Mueller - JP Morgan Chase & Co, Research Division: Okay. And then I guess for the Darien acquisition, were there any significant acquisition cost either last quarter or in the second quarter?

Our total cost there were $150,000, something like that. Pretty small.

And our last question comes from Vincent Chao.

Just maybe a final question just on the overall Connecticut sort of market. The last year or so, there's been an increasing amount of activity from yourselves, peers, et cetera. I know it's kind of a strange market. I mean you've been tracking that deal for what sounds like about 10 years, which seems to be the case for a lot of stuff that goes on out there. Just wondering though, given the increased activity, are you seeing more opportunities there? Are sellers coming out of the woodworks now that there's been a couple of deals that have happened? And is there any opportunity to grow in that market in a more significant way than just sort of on a one-off basis?

Well, we think on a onesie or twosie ph] basis, it's frankly the best way to do it. That's how you ensure you get the quality. We are seeing some more activities in it, but it's -- a lot of it is off market. So I'm cautious about it because, one, as I've often said, just because it's off-market, it doesn't mean you're not paying a preemptive price. And two, there can be a lower probability that the transaction will happen. We are hearing from our broker friend about a bulge of new activity in their pipelines. We just haven't seen it yet. But clearly, with the addition of Harold's [ph] up in that market, all around the Northeast, frankly, it's really helped us increase the level of tire kicking, if you will. And we're hopeful that, that would result in a couple more acquisitions.

There are no further questions at this time.

Thank you, everyone. We'll see you at ICSC and look forward to talking to you on the next conference call.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.