Federal Realty Investment Trust (FRT) Q1 2014 Earnings Report, Transcript and Summary

Welcome to the Federal Realty Investment Trust First Quarter 2014 Earnings Conference Call. My name is Yolanda, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. It's now my pleasure to turn the call over to Kristina Lennox. Ms. Lennox, you may begin.

Good morning. I'd like to thank everyone for joining us today for Federal Realty's first quarter 2014 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. Certain matters discussed on this call may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Forward-looking statements include any annualized or projected information, as well as statements referring to expected or anticipated events or results. Although Federal Realty believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, Federal Realty's future operations and its actual performance may differ materially from the information contained in our forward-looking statements, and we could give no assurance that these expectations will be attained. The earnings release and supplemental reporting package that we issued yesterday, our annual report filed on Form 10-K and our other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial conditions and results of operation. These documents are available on our website at www.federalrealty.com. And with that, I'd like to turn the call over to Don Wood to begin our discussion of our first quarter 2014 results. Don?

Thanks, Kristina, and good morning, everyone. The 2014 first quarter was another very strong one for the trust with reported FFO per share of $1.21, an all-time quarterly record for us and 6% higher than last year's first quarter. Those earnings are strong and were made possible because of continued strong tenant demand and disciplined execution of rent start dates despite a particularly nasty and extended winter season this year, all the way up and down the Northeast and Mid-Atlantic regions. Not only did FFO per share of $1.21 grow 6%, but same-store growth came in at 2.9% when excluding redevelopment, and 3.4% when including it, despite a quarter in which gross snow removal costs were $5.5 million higher than last year and more than $9 million in total. Those costs are reflected in rental expenses with a corresponding recoverable portion included in tenant recoveries. Roughly 80% to 85% is expected to be recovered. It was a crazy and long winter. And the net impact of that excessive show cost was more than $0.01 per share hit to FFO and about 100 basis point hit to same-store growth. I'm particularly pleased with these results given not only the weather, but the marketing and other noise that is and will be part of our numbers all year long related to the big developments coming online this year. Let's dig into the results a bit and start with leasing. Leasing demand and productivity that built on last year's efforts was evident during 2014 first quarter, where we completed 78 deals, 71 of them for 328,000 square feet of comparable space at average rents of $31.84, 18% more than the $27.01 per foot representing the last year of the former lease. Both leases with new tenants and renewals of existing tenants were profitable and grew at 16% and 19%, respectively. This was really a continuation of the strength that we saw through much of 2013, and that sentiment and production feels as though it will continue in the next few quarters. Though not necessarily in the high teens like 18%, but strong nonetheless. A few really good deals in the quarter in each of our major operating regions really drove the results, including a CVS renewal at Wildwood Shopping Center in Bethesda, a new Nordstrom Rack replacing Office Depot at Mercer Mall in New Jersey and some powerful small shop leasing at Westgate in San Jose, California. In any event, a strong leasing quarter and an optimistic leasing forecast. Now let's look at occupancy, which, on both on a percentage leased and physical occupancy basis, remained very strong in the quarter at 95.6% and 94.7%, respectively. Both of those numbers are down a tick or 2 from year end, which is not at all unusual in the first quarter, but higher than last year's first quarter, and in fact, higher than in any first quarter since 2007 and 2008. Those levels won't change very much this year, in fact, they'll probably go down a bit as we proactively re-tenant some anchor spaces for better long-term stability and profitability. Let me move on now to the development pipeline and start with the good work being done at Assembly Row in Somerville, Massachusetts. First, the planning and documentation with Partners HealthCare on the 12-acre former IKEA site is going extremely well, and we hope to have fully-executed documents completed over the summer to allow for a planned construction start by Partners this fall. In a piece of very good news, the deal now contemplates development rights for 900,000 square feet of office space, up from 700,000, making room for Partners' 4,700 plus employees moving in over several years beginning as early as 2016. We continue to work through the accompanying retail plan on that site, which we would own. That investment is expected to include a service retail destination including a drug store, a health club and additional food and service alternatives. We're estimating something in the range of a $35 million investment and about 110,000 square feet, but we'll report with more specificity on this piece and the entire Partners transaction once all the documentation is done. On the other end of the Assembly site, we're proud to report that 97% of the retail space in our Phase 1 development is committed. That's 46 out of 51 outlet, restaurant and entertainment tenants that will open beginning now with the AMC Theater and then throughout the summer in anticipation of a full lineup in the fall. Leases executed in this first quarter included J.Crew, PUMA, Orbis, Motherhood Maternity, Aveda Salon and Sugar Heaven; while real estate committee approved-deals included Kenneth Cole, Express, Carter's, Oshkosh and Francesca's. The first residential move-ins have begun in AvalonBay's apartments, and external construction on the block 2 office building is nearing completion. We're getting close on some office leasing in that building and as I noted, are virtually done with the retail lease in its base. The future looks very bright for Assembly Row and I hope that we'll be talking about another phase in the not-too-distant future. Let's come down to coast a bit to Rockville, Maryland where Pike & Rose is rapidly taking shape and where lease-up on the first residential buildings is well underway and has gotten off to a very good start. Currently, 50 of the 174 apartments in the first residential building called PerSei are leased at net effective rates -- rents, slightly ahead of our expectations at this point. This is particularly noteworthy since until recently, the weather around here has been just awful and the site is full [Audio Gap] construction and frankly, it feels very much like a construction site. Lease-up will continue throughout the year and into next with the first move-ins expected this June, and then transition into residential leasing for the second residential building. That's the high rise tower called Pallas that will begin leasing up next spring. On the retail side, Phase 1 lease-up is nearly complete at 92%, and most of the remainder of that lease-up is in the base of the 300-unit high-rise residential building, which doesn't deliver until 2015. To give you an idea of what the merchandising in that first phase will feel like, consider that the iPic theater, Tanzy restaurant and Sport & Health health clubs will be above the ground level retail, that will include tenants like Gap, Gap Kids, City Sports, Francesca's, Del Frisco's Grille, Summer House, ShopHouse and others, well, you get the idea. And in terms of 80,000 feet of office in this first phase, while I still can't report on a signed office lease at this point, I can tell you that we're well down the road on lease documentation with a great credit for more than half of the available space in the project. Given the way the first phase has been going, we're anxious to figure out the next phase, where we'll significantly lengthen the retail street and add to this vibrant and sophisticated environment that's so lacking in the Rockville area. We're well underway to designing and pricing out the next phase, which will approximate $200 million and we expect to announce it with greater specificity later this year. Out on the West Coast, internal and common area construction will be finished up at Misora in the next 60 to 90 days and leasing has been going extremely well. At present 170, or more than 80%, of the 212 apartments have been leased at rates that slightly exceed our expectations. We expect to be stabilized in terms of both leasing and occupancy by the end of the year. Similarly, in Southern California, construction on The Pointe is well underway and also on time and on budget. We'll be featuring The Pointe, as well as future phases of our entire development and redevelopment pipeline at the ICSC convention in Las Vegas in a couple of weeks. I think I'll stop there in terms of my prepared remarks and just want to express -- end by expressing my enthusiasm for both our continued strong core results quarter-after-quarter, as well as the inevitable delivery of some of the finest retail and mixed-use products available anywhere. I look forward to walking it with many of you later in the year and talking about it at NAREIT in June and elsewhere. Now, let me turn it over to Jim Taylor for his remarks before we open the lines up to your questions in a few minutes.

Thanks, Don, and good morning, everyone. This quarter represented another record for the Trust in terms of total revenue, POI and FFO per share. Even with relatively stable occupancy, the drag of snow and increased expense associated with bringing our development projects online, our portfolio continued to deliver impressive bottom line growth, both on a year-over-year and a sequential basis. And, as Don importantly highlighted, our strong leasing rollover continues to set us up well for the intermediate term. That core performance, taken with the successful integration of The Grove and Brook 35 acquisitions, the additional redevelopment activity at East Bay Bridge, Flourtown, and Hollywood and the substantial progress that Don highlighted this quarter towards the successful delivery of 2 important drivers of future growth, Pike & Rose and Assembly, continue the momentum of our balanced business plan. Now turning to the details. Rental income increased $13.6 million or approximately 9% over the prior year quarter. Most of this, or $9.7 million, was attributable to the same-center growth, including redevelopment and the successful integration of The Grove and Brook 35, as well as Darien. The balance of the increase is attributable to higher snow recoveries due to the polar vortex impact in the Northeast and Mid-Atlantic. Other property income, which includes term fees, was essentially flat year-over-year. Looking at rental expenses and POI margin, we saw an increase of $7.6 million, approximately $5.1 million of which was snow. Adjusted for snow, our POI margin remained stable at 70%. As Don highlighted in his remarks, when you look at our same-center portfolio, which represents 96% of our overall property operating income, our same-center growth in POI would've been 100 basis points higher if you adjust for snow. I think we've said enough about snow but the bottom line is that the performance of the core portfolio and the acquisitions that we made continue to be strong, even with relatively stable occupancy. And importantly, our leasing rollover continues to demonstrate strong forward growth as those tenants will take occupancy over the next several quarters. Moving down, we also maintained strict control on G&A, which remains flat when you adjust for the transfer taxes and other costs associated with the closing of The Grove and Brook 35. Interest expense declined $4.3 million due primarily to the overall lower borrowing rate that we achieved through last year's refinancings, which reduced our weighted average rate from 5.5% to 4.8%, while substantially increasing our weighted average maturity. Bottom line, total FFO increased 10.4% to $81.8 million for the quarter and FFO per share increased 6.1% to $1.21 per share, as we continue to match fund our development activity with an appropriate balance of long-term debt and equity issued under our ATM. Again, all of this with an eye towards producing stable, consistent long-term earnings growth with maximum flexibility given volatility that can happen from time-to-time in the capital markets. Turning to the balance sheet. During the quarter, we accessed the ATM for $50 million at a weighted average share price of $111.35. In connection with the acquisitions of The Grove and Brook 35, we issued $65 million of OP units and also assumed $68 million of secured debt. We ended the quarter with $76 million of cash and nothing drawn on our $600 million revolver, leaving us plenty of capacitive and flexibility to fund the balance of our expected development spend this year of approximately $250 million. Our debt to market cap was 24% and debt-to-EBITDA, a strong 5.4x. From an acquisition pipeline perspective, we remain very active and are negotiating a few opportunities on an off-market basis. While we cannot handicap which, if any, of these situations will occur, I would be disappointed if we did not close some of them. They are high-quality assets that would fit well with our portfolio. We are also evaluating a few marketed opportunities but have observed significant cap rate compression for those deals. Now turning to outlook. We reaffirm our guidance range of $4.86 to $4.93 a share. As discussed on our last call, we expect our occupancy to dip slightly during 2014 as we roll larger anchor spaces such as of the OfficeMax and Pacific Sales at East Bay Bridge, the Loehmann's spaces at Friendship and Crow Canyon, Kohl's at Melville, Staples at Quince Orchard, Bally's at Governor and others. Our leasing team has done a phenomenal job of re-tenanting these spaces and driving better long-term deals for the Trust. In the current year, this rollover and associated downtime as we replace these tenants will cause some drag on our same-store numbers, particularly in the second and third quarters. However, the strength of the core will continue to be the largest driver of our growth. On a same-store basis, including redevelopment, we still expect our NOI growth for the year to approach 4% even this with the rollover drag and the impact of snow this quarter. On an FFO basis, we expect our growth to be between 6% to 7% for the year, which again is truly remarkable as we will incur approximately $0.13 to $0.15 of bottom line drag in 2014, associated with the marketing demolition costs and multifamily lease-up that we have discussed in prior quarters. This year, from a timing perspective, we expect to deliver approximately $350 million of development and redevelopment. We are on time and on budget. As Don highlighted, those deliveries include our $75 million investment in Misora; buildings 11 and 12 at Pike & Rose, which represent approximately $125 million of investment, we'll open in phases this year; Phase 1 retail of Assembly Row, which represents approximately $150 million of investment with the office delivering later in 2015. As Don highlighted in his remarks, those projects are substantially leased and we'll bring us significant value both in the near term, as well as over time. We couldn't be more pleased with the execution of our operations, leasing and development teams upon our balanced business plan, which sets us up for many years of continued growth. We look forward to a productive leasing conference at ICSC in just a few weeks and further to seeing many of you in early June at NAREIT. With that, operator, I'd like to turn the call over for questions.

[Operator Instructions] Our first question is from Craig Schmidt.

I wonder if you could describe the marketing efforts that you're going to pursue for the opening of Phase 1 at Assembly Row. And I know you've done some events there just to increase awareness, have you measured that awareness by the Boston consumer?

Yes, Craig, let me start and see if anybody wants to add on. The one thing that we decided last year is that we were not going to do a one big blowout party from a marketing perspective, a one big grand opening here. And that ties to the type of center this is. We're starting the 2 big entertainment anchors, the theater is already open, by the way. And Legoland is opening shortly, a couple of weeks, they'll be there. And then throughout the summer time, there is a long list of tenants that open up, with the final tenants in that first phase opening up in the fall. So our marketing kind of mirrors that. It takes us through -- it takes events all the way through. If you remember, we spent a lot of time and money bringing events to the area, including last year's show, whatever it was called...

Riverfest in Cavalia.

Cavalia last year, to get people accustomed with the area. What we're finding is great receptions. I'd be -- I'm really happy that not only the local community but a broader draw is finding their way into what is now infrastructure that is built, and real streets, it's not fake. There's a reason to drive by them, these are commuter streets now. And so the Riverfest and the other marketing events that we've been throwing have been getting great acceptance from the community, which all kind of sets us up pretty well to a strong fall.

Okay, and then just on a really big picture basis, how much more is there to do at Santana Row?

On a really big picture basis, lots. And here's what I mean by that. It's not only the end of the street, which will be office product and will be retail product, but you know there's additional residential product on the existing site. But then, we've got tied up and I think Jeff Berkes is on the phone, we've got tied up 12 acres directly adjacent, that's a big project. And whether we're able to get that entitled and done and built or not, we'll see, but it's structured in a pretty low risk way for us, in that it's a lease and in fact, it's not even ours if we don't want it to be, if we don't get it entitled, which is just critical. But we could be talking about an incremental $400 million, $500 million to put on and around Santana, very carefully over the next 5, 7 years.

Our next question is from Andrew Schaffer.

Can you talk about the percentage of restaurants in your portfolio today versus your historic average and have you seen a material shift in leasing toward restaurants?

Yes, I've talked about this before and it ties into our strategy and what we kind of believe in. And we do clearly use restaurants as an anchor in our portfolio. Today, if you broadly define restaurants to include the Starbucks of the world and anything that effectively is food-driven, x the supermarkets, our number is something like 12%.

A little bit higher, about 15%.

15%, and that's a very broad definition of restaurants. Now specifically, when you think of a restaurant as a draw or a group of restaurants on a draw, that's a much smaller number, more like 7% or 8%. But we do that purposely and frankly, I think we've gotten pretty good at identifying the right restaurants, the right operators, the right mix, if you will, of all of them. And we consider that in that restaurant business, we expect to lose 2 out of 10, if you will, before those leases are up, and we figure that into our underwriting. So that's how we think about that business. It's a very important anchor to us, and it's actually not a subsidized anchor, which is my favorite part of it, as opposed to a department store to a mall business or even a grocery store to our business.

And then in regards to Somerville, can you break out the demand from full-price tenants versus outlet tenants?

We're just doing outlet tenants so there's really not a demand...

At Assembly, specifically.

At Assembly Row, yes, if that is your question. It is an outlet. The soft goods tenants that we will have in Assembly Row are outlet tenants, so they will not be full priced, we have drawn the line on that.

Was that your question?

Yes.

Our next question is from Paul Morgan. Paul Morgan - MLV & Co LLC, Research Division: You mentioned for the marketed deals that you've been looking on the acquisition market that you've seen cap rate compression. I mean, cap rates, it's not exactly -- cap rates have never been really high for your types of products, I was just -- maybe see if you could provide a little bit of color there where -- how much have you seen over the past 6 months or so and what kind of numbers are you talking about?

Well, Jeff, you can certainly chip in here but, Paul, where we may have seen some deals getting close to 5 or around 5, we're now seeing deals clearly in the 4s and in some instances. The low 4s for kind of core in-fill retail properties. So over the last, I'd say, 6 to 12 months, we've seen further compression.

Yes, Paul, I agree with Jim. Definitely for the better stuff on the West Coast that's fully marketed and institutional quality, piercing 5 is where things have headed and seem to be staying for a bit. Paul Morgan - MLV & Co LLC, Research Division: And then just a couple things on Santana. I mean, a little bit bigger picture, I guess, as you think about the future phases, the office and then especially as you go across the street with the new site, how do you think about ownership structure for those phases? And this is from kind of from the perspective of diversification and concentration risk, is it as strategic to own everything you do across the street as it is things that are on the row there, because obviously, it will get to be a very big chunk of your overall investment?

No, it's a big consideration. Let me start there and Jeff, you can finish up. Let me actually start with the end of the street. The one thing that it's really important to remember about our developments over phases is that a lot of people keep thinking of Santana and things that we've owned for a long time as developments, but they're not, they're stable shopping centers. And when you look at Santana Row in particular, that is probably one of the most stable shopping centers in the entire portfolio. And it -- while geographically it is obviously all in one spot, it is diversified, not only in terms of the retail itself but also with the larger financial base there. So when we think about office at the end of the street, I can tell you we'll absolutely think about partnering with some money on the -- to take some of the risk off the table on the office at the end of the street. What I will also say that if we can't come to a deal where we think -- if we think we're giving away too much, we will do it ourselves at the end of the street, simply because the balance of it is a very stable shopping center already. And so that incremental decision is just that, it's an incremental decision. Having said that, your point with respect to geographic concentration is not lost, but the company really has grown a ton since we talked about each additional phase. And when you think about what has happened to the market cap of the company, it is still a much smaller part of geographic concentration than it's been historically. So that combination of 2 things, I just want you to know we do look at its height [ph], closely, but I could see us going either way. In terms of across the street, we're really early on. But Jeff, you want to talk that through a little bit?

Yes, don't know that I have a whole lot to add to what you said, Don. But one thing, Paul, we don't know exactly where we're headed across the street yet. We have a lot of work to do there with the city and the community and all that kind of thing to figure out ultimately what we're going to be able to get entitled. One of the thoughts is to obviously put a significant residential component on that site. And when you step back and kind of look at where you can invest in residential in particular, long-term, it's hard not to be real bullish on owning residential in Silicon Valley. As you know, from living here, it's just very, very difficult to get residential built and then entitled in an area where there's effectively very little remaining land and a lot of long-term upward pressure on NOI from residential properties. So yes, I think on the office, we're obviously thinking through everything Don said we are. On the residential, maybe not so much, just because of the long-term prospects. Paul Morgan - MLV & Co LLC, Research Division: Great, and then just lastly on Santana. It sounds like you might be losing Loring Ward, which is one of the bigger tenants in your other office property there. Remind me that came on at a pretty soft time in the market, is that upside potential?

Loring Ward has been a great tenant here for 10 years and the principals that run Loring Ward are great people, they've got a great company and we would've liked to have been able to keep them. We just couldn't accommodate them and there's a lot of demand for the office space here at Santana Row and the economics just didn't work to figure out a way to accommodate them. So yes, I think, ultimately, there's clearly upside between their contract rent and market rent, and we're not really concerned at all about backfilling the space.

But Paul, you do bring up a great point that way. We have found that the office demand at Santana, particularly over the past couple of years, 2 or 3 years, has grown disproportionately. We don't have any space there and we would have loved to have kept Loring Ward, as Jeff said, but we just couldn't, we didn't have the space to be able to keep them. And they wanted to stay badly but we didn't have the space to be able to keep them. So that goes in part into our thinking too, about how to really continue that part of this business to create the place that Santana Row is truly a common, that is the center of the valley.

Paul, again, from being out here, how important an amenitized office experience is to the people that work at the companies out here. And like Don said, over the past few years, Jan and I in particular, in talking to the people that run the businesses here at Santana Row have just seen incredible affinity for wanting to be in this type of environment. Their employees love it.

Our next question is from Jeff Donnelly.

Actually, sticking with Santana Row, I'm just curious, this is for you, Jeff. On the Winchester site, it may require something of a complex answer to an easy question but do the ground lease terms that you guys signed there necessitate a certain mix or density or even timing of construction that might make the development ambitious? I don't know if there's a way you can kind of contrast your plans there versus Santana in terms of density and mix?

Well, there some timing hurdles in terms of what we need to do to entitle the site, Jeff, but beyond that, there's a lot of flexibility in what we can do. And like Don said earlier, if we can't entitle it the way we want to entitle it, we're not obligated forever over there. So I mean, without getting into a lot of specifics that really probably aren't appropriate, I can't say whole heck of a lot more than that, but I think that answers your question, right?

Yes, it does. And I understand it's early on. And then I guess, maybe switching back to Pike & Rose and Assembly, are you guys able to talk a little more specifically about the pace and price of the shop space retail, leasing and maybe how concessions such as like TIs, kick outs or free rents have fared versus expectation?

I think we're very pleased with the outcome of where it's going to go, and I think we're very bullish on these deal structures that we have in place at the Assembly to take advantage of the momentum building there. I'm very optimistic that we're going to see some good percentage around payment over the years as this center matures and as we have more density. Having Partners and 4,700-plus employees there in a couple of years really creates a great captive audience for the restaurants that we're putting in, the entertainment uses. And as it relates to Pike & Rose, I think those deal structures are more comparable to what we've seen in the DC area. They're at very strong rents and I think if the sales -- if we have the sales success that we anticipate, we're also going to see the potential for percentage rent there as well. So we're very -- from a leasing standpoint, very pleased. I don't know if Don has anything else to add.

The only thing I'd say, Jeff, is I will give you some more detail on that. I don't want to do it this quarter yet, I'd like us to get tenants moved in. I'd like to move that process along regularly, the way we're doing and -- but as we get into the fall, I will give more detail on kind of where we are on rents, where we are, where we see things overall. But the guidance in terms of the overall returns are sticking. And so, you can get a pretty good idea of our initial thoughts. But again, I'll have more on that as we get them open and into the fall.

And just one last question, can you remind me why, I guess, why you guys are making the effort at Union Square in Somerville? It's a small project and I guess, I'm wondering, is it about sort of amortizing your city relationships? Or is it something that actually has a much bigger, longer-term possibility than I guess we're thinking about?

Let me -- it's probably the latter, and I'll tell you why. There's a couple of things: first of all, I have no idea whether it's going to be us. It's down to a few people and having the productive city relationships, as you can imagine, is both a good thing and a bad thing. And so we'll know more as to whether we play a role there or not in the coming months, but we don't know that answer today. I will tell you that as a -- for being here as long as we have, our team, and seeing what Bethesda Row was, and Bethesda Row is, and how that came across and the value that was created there, there are a lot of similarities in Union Square. There's a lot of similarities. And so the ability to kind of piece meal that together and create something that just would be amazing for the constituents there and also be very rewarding in terms of our value created, it's appealing, plus we have our best team in terms of that type of product sitting right there with Briggs in charge. So when you kind of look at it all together, we looked at Union Square as something very desirable. We'd love to have the opportunity to do that and hope we get the chance to.

Our next question is from Christy McElroy.

Jim, just when you thought you said enough about snow [ph], I'm going to ask you about snow [ph]. Regarding the 100-basis point impact in the quarter, Don, I think you talked about an 80% to 85% expected to be recovered. Did you book all of those recoveries in Q1? And that was, that difference was the 100 basis points? Or should we be thinking about some of those recoveries occurring in Q2 or Q3? I'm just trying to get a sense for how to think about the recovery rate for the balance of the year and sort of what caused that 15% to 20% of leakage?

Well, what causes the leakage is the fact that we have assets that don't all have net leases, whether they have office uses or residential uses and in certain circumstances we have caps [ph]. We do look at our expense recoveries on an annual basis, but almost all that impact is in, from a drag perspective, is in the first quarter. We will have a higher recovery rate for the balance of the year, but unlike some points made by others, the impact of that increase in the recovery rate for the balance of the year is marginal.

Okay. And then with the promotion of Chris Weilminster to EVP, Real Estate and Leasing, can you talk a little bit about any changes to the split of responsibilities at the executive level?

Yes, I can. What has become apparent over the years -- I hate to say nice things about Weilminster while he's sitting right here. I am going to look in the other direction, Christy, as I say it. But what's become apparent is that Chris is more than a real good leasing guy. He is clearly an executive in the company that gets involved with other things including a hotel deal that we're trying to do in the second phase of Pike & Rose, for example, including the office deals that we work through at Pike & Rose, including, strategically, what we do with our assets. And basically, this promotion, from my point of view, is a recognition of what he's grown-up to be effectively. And I thought it was important to have that recognized externally, as well as internally.

So no changes to any other -- any of the other roles on the team?

The other executive team roles? No.

Right, exactly. Okay. Got you. And then, just a quick follow-up on the restaurant question, how do you think about the leasing to sort of entrepreneurs versus national and regional restaurant operators? And is there any differences in how the leases are structured?

Well, let's -- let me talk to that broadly, and let's see where Chris wants to go. There are better financial deals usually, on the face, with the local entrepreneurs than there are with the big national retailers. That's all about leverage, not much different than any retail category, general comment. Secondly, it's all about the mix. And so, it's really important -- when I think of restaurants, I'm not talking about using restaurants as an anchor, as an anchor for all the national chains, that's -- that wouldn't accomplish, in our view, the goal we want. But a national chain like a Yard House or somebody like that with local entrepreneurs, as we're doing up in Assembly with a Papagayo that should open up this month for Pete’s sake, who's great locally known. That mix creates the impact to the anchor for the tenancy that we want. And when it comes down to the thing of the individual structures, I just gave you a kind of an overall. But each deal is a negotiation and each deal is our risk-adjusted guess, if you will, educated, I hope, with respect to what they're going to do in sales, what they're going to do in profitability and what the appropriate share is for us.

And the only thing I would add, Don, to that, is that we love the local restaurateurs because they're able to modify their menu on a daily basis to give the consumers what they want. So it adds a very good dynamic and a unique experience to our customers as we try and give them more reasons to come shop our centers versus the competition, And that's what we find in the local guys, much more so than the chains, which have to go up a whole hierarchy of decision-making before they can change one item on the menu. So the combination of both, as Don says, really gives us a powerful mix.

We have a question from Jason White.

I just had a quick question on your resi portfolio. Do you guys keep a metric that's kind of same-store NOI metric for your -- for the resi?

I'm sure we do. I don't have it right here. As resi becomes a bigger number, it's not necessarily becoming a bigger and bigger part of the portfolio, that said we are always going to be a retail company. But it is becoming 7%, 8%, and sometimes 9% of our total base. In 3 years it will be $1 billion company. And so we're going to go through and think about our reporting on resi and see if we can maybe include in the 8-K some additional information that way on it. I don't have it right here and I don't know if any of our...

Jason, we look at it asset-by-asset in our quarterly reviews and we've got different types of resi within the portfolio. We've got some older resi, some more what I call B+ resi and then we have the higher-end mixed-use. I'll tell you that across-the-board, the performance has been very strong. We haven't seen, for example, in our DC portfolio, some of the softness that I think some of the other multifamily folks have seen that have assets more downtown or in the Crystal City submarkets. I think part of that is also reflected in the good lease-ups so far that we've seen on PerSei. So as Don pointed out, we don't do it as a portfolio yet, but certainly as it becomes a more significant part, we will consider that.

Okay, and then just one more question on Pike & Rose. You have quite a number of entitlements remaining on the property, and I'm just wondering what Phase 1 has kind of taught you about what Phase 2, and maybe beyond, what the demand looks like? So before you were obviously cautious about how much you were going to build out in the near term but do you have a better idea on that, now that you've started to build out and lease some of the space?

That's a great question, Jason, and yes, particularly as it relates to retail demand. There's a lot more retail demand than we're able to provide in this first phase. And so very anxious to kind of continue on that experience and create enough retail stuff there to be able to give us the experience that we're looking for. I'm very happy there. In terms of the residential, we're just, as I say, we're just kind of getting started, and so far, so good. The real key there from my perspective will be what happens in the Big Tower and that will be a 2015 -- we'll have a lot of information there. But enough so that we are real comfortable that the second phase, which will be much more heavily retail, hopefully include a hotel, and I think it will. We're real close on a deal there. And then, on the resi, we'll probably do a small condo component there because all of the resi questions are, "Can we buy something here?" And so we know there's some level of demand, we don't want to take a lot, obviously, condo risk is different than rental risk, but we'd like it to be some component of what we're building going forward.

Okay, so you build out Pike & Rose and you have so much other redevelopment potential on the corridor there. Is it more of a daisy-chaining of deals where you do all you can at Pike & Rose and then you move on to the other adjacent properties and see about densifying those, or is there some element of mixing in some densification on the other sites while you're in the process of building future entitlements on Pike & Rose?

Well, yes. It's not -- the one thing we don't -- it is not, it's a daisy-chaining among properties. Each property's look at very individually in terms of what it is, what it is that we can do or adding pad sites today across the street at Montrose. There's still more to do, we believe, at Montrose in terms of a longer-term redevelopment there. When you come down to the properties like Federal Plaza, it's pretty built out. There's one other opportunity on the pack that we're looking at hard, as soon as we can get to that, we'll get to that. In terms of Congressional Plaza, in the next 2 or 3 or 4 months, we're going to be building another small residential component to the back of it, to complement our Crest I residential complex there. So each specific asset gets handled as a specific asset. But in terms of Pike & Rose, it's 10 years. There's 10 years’ worth of stuff to do there. It's a big piece of land and even after Phase 2, there's a Phase 3 and a Phase 4. So stay tuned. We're just at the beginning part of what I think will be a very long growth development period for what we already have under control.

We have a question from Haendel St. Juste.

Quick question for you first on cap rates and capital allocation. You mentioned earlier that the cap rates for high-quality assets you're looking at your core markets were in the high 4s. Can you give us a sense of what you think the IRRs pencil out to and why perhaps you think it makes sense to pursue these deals if, well, given return, attractive return opportunities on development and redevelopment?

Well, it's a very good question, and every investment decision we make, Haendel, is weighed against what our alternatives are and the relative risk of each particular opportunity. What I was alluding to on the marketed side with what we've seen on both the East and West Coast is a true compression, not just in cap rates but IRRs. Recently a center's gone under contract in Reston, Virginia with a Whole Foods. We think the IRR in that is a 5-handle IRR and was, in fact, marketed as a flat-6 IRR. So that's where it was marketed. You make your own judgments as to where that ultimately was traded.

We won't do that deal. We won't do that deal.

We will not -- we will not do a deal like that. And so what we've found with marketed opportunities right now is that, it's got to have some complexity, something that we can add value to, for us to be interested. Where I am pleased with the level of activity that we're seeing on both coasts is frankly more structured deals that involve tax deferral or other things where we have a unique competitive advantage to really get to a value that makes sense and clears our hurdles long term. So we feel good about that, but from a capital allocation standpoint, you're absolutely right, we weigh it against what our alternatives are.

And let me just add to that, Haendel, because I love the question. It is a battle. Each one that we look at, we could be doing a whole lot more given our cost of capital, our own cost of capital, and what we could get done. Having said that, you have -- when you look at our last one, just talk about The Grove this time, and you look at The Grove, what we believe we can bring in terms of our retail leasing expertise, coupled with the local expertise of that team is lease rates that are significantly higher than they would otherwise be, bringing us up into 7 effectively in terms of the IRR and probably north, but that's where we're underwriting it. So it's got to show that kind of ability to get there and not just a coupon clipper. And as I think you're implying, why do that, rather than development?

Okay. And following up, speaking of low cap rates, I was hoping you could talk a bit about New York City street retail. Even though that, too, is super low cap rate. And maybe your cost of capital is not quite at a place where the numbers can work, but is there anything out there you're looking at or that you think that makes sense to you economically?

It's in -- boy, it's on the list, we're certainly looking at it. So just like in every other market, very, very little of what we look at can we can say, ah, we can make it pencil from an IRR perspective. And so far, I don't know, Jim, what you want to add to that, but so far we've been skunked.

Yes, we have looked at a few opportunities in Manhattan and, yes, the returns just don't underwrite for us.

We have a question from Jim Sullivan.

Really just to follow on the prior question here. It's interesting that when you talk about cap rate compression, I guess we can talk or debate whether the cap rate compression is more cyclical or secular. I'm curious, as you think about your own portfolio and allocating capital to development, does the reduction in cap rates that you're talking about, does it lead you to either consider selling more assets, number one, and number 2, perhaps lowering your hurdle rate on development or neither or both? I'm curious how you think about how you're going to devote capital, given what's happened with cap rates.

Yes, every -- you raise a good point, and the way we think about it is, even a decision to hold an asset is effectively an investment decision. As we look across the portfolio, and we've alluded to in the past, there are a few assets that we are looking at selling. We don't feel pressure because to hold IRR is not a bleeder but certainly, thinking about timing of the market and the value that we could get for some of those assets today. We've not included any asset dispositions in our guidance, Jim, but you might see a disposition or 2 of some smaller assets that we think don't present much growth opportunity. So we do look at that and think about it all the time. In terms of the second part of your question, we take a long-term view on return hurdles. And we take a long-term view as it relates to acquisitions, what type of reversionary cap rates we should underwrite. We take a long-term view in terms of required returns on development. And while we may have a marginal cost of capital that's low today, we don't lose sight of the fact that our investors expect us to produce growth. And to deliver that, we -- and deliver it responsibly, we've got to balance the risks associated with the development activity, the returns and the visibility that we have. I would tell you, what I'm personally most excited about as we sit right now, is that we have 2 very large development opportunities where we've taken a lot of the risk out of the equation, in the first phases of Pike & Rose and Assembly, where I think an institutional investor would come in and pay us for the value that's created there. So I think we've got value delivering very shortly in terms of the initial phases, but also, as Don alluded to, as we think about future phases, we do so from a much more informed perspective, as Jason was pointing out in his question, but also with a lower-risk profile, because we're adding on to a base that's already been established, if you will. So I'm excited about it, and I think we have a lot of opportunities to exploit. And then, what you're hearing in our discussions is continuing to plant seeds for the future. For example, what Jeff has done across the street at Santana. It may or may not happen, but I think it's evidence that we're always looking out and trying to set ourselves up to find opportunities like that.

Okay, then second question for me. We focus on same-store NOI, or talk about same-store NOI, we tend to focus on obviously leasing spreads and occupancy rates. And I'm just curious at this point in the cycle, Don, as you think about that, with occupancy rates pretty much it seems as high as they're going to get, I mean, correct me if I'm wrong, I just wonder to what extent there are other levers to push in terms of same-store NOI? And then I'm thinking about whether it's occupancy, operating cost, recovery rates or the nature and type of the bumps you're able to get at this point in the cycle, what else is there besides pushing pricing at this stage in the cycle to boost your same-store NOI growth rate?

Jim, I'll tell you, man. The -- I'm going to give you a little downer answer here. But this is -- I say this every call, and I just really need to get this out. Our business is a 3% growing business, that's what it is. Sometimes it's 2.5%, sometimes it's 3.5% and in tight periods of strength like we're in right now, it still can be 4%. I don't believe that the shopping center business, in general, is that type of business, I think it's much lower than that. I think it's a 1.5% to 2% grower. And so, when you sit back -- and I don't think that's our portfolio, as I said, I think our portfolio is 3%, 3%-plus. But that's what this business is. During any period of time, you're working real hard to get it to, say, as tight as you can on costs. I think we've done a good job there. I think we could do a little better, to tell you the truth, in terms of leasing spreads and pushing that is always a kind of a deal-by-deal, shopping center-by-shopping center, market-by-market basis. But it's always the most important component of that same-store growth. Operating not only up on expense costs, but it is always incumbent upon us to find -- to make sure, and we spend a lot of time on this, that the contractual rents -- the contractual contracts, if you will, are as strong as they can be to allow for the best recoveries that we can find. I do think we have an advantage there. I think our advantage there is simply because the real estate is better, we have more leverage in those nonquantitative, if you will, qualitative parts of a lease, which we work hard on. But when you cut through all that, this is a 3%, 3.5% growing business from Federal's point of view, and it's a 1.5% to 2% growing business in most of our competitors and I'll just go to my grave believing that.

We have a question from Brandon Cheatham.

This is actually Ki Bin. So kind of tie in your commentary about internal growth rates, obviously, Devon [ph] is a big part of your story but could you help, I mean, you just kind of put it together, I mean, you have big projects and potential in Santana, Assembly and Pike & Rose, all these things together. But when I piece it out throughout the next 3 to 4 years -- so 2 parts to that question though, how much is a realistic amount of investable dollars per year around those 3 to 4 years. And are market rents and economics currently healthy enough to justify those builds?

We've got couple of hundred million dollars of spend per year for the next several years. We've done it in phases, Ki Bin, to get to the second part of your question, because certainly there are cycles. But in terms of the demand that we see today, we feel very good about it. And it's evidenced in our results. I mentioned before we had some rollover coming this year, of some pretty significant box space, as Chris and his team were all over it, we're effectively done with a lot of that. And as it relates to the leasing momentum that you see in the first phases, as we talked about, 92% lease at Pike & Rose, and I'll tell you the balance of the space is an internal debate over what kind of small salons or spas we want to put into the balance of the space. And similarly, 97% leased at Assembly, I think really underscores the strength of what we're seeing now. And, of course, we're doing it in phases because there are always cycles, but we feel real good about the momentum. Our ICSC conference is really going to be talking a lot, Ki Bin, about Phase 2 of Pike & Rose or Phase 2 of Assembly or what's left to do at The Pointe at Plaza El Segundo. So we feel good about that. In terms of investment within the core itself, what we talk about as more of the tactical redevelopment, we continue to identify opportunities there which bring higher returns admittedly, higher attractive risk-adjusted returns. But there's always so much that you can do at any one point in time for a myriad of reasons. But there you're going to see us to somewhere between $40 million to $70 million annually of spend at much higher rates of return, and I think complementary to what those centers will be post-redevelopment. I don't know if that answers your question, but that -- we see a pretty decent pipeline and feel good at least what we see currently in terms of demand.

So that, that -- if I understand you correctly, is that about you're projecting about $300 million per year?

It's about -- yes, about somewhere between $250 million and $300 million, somewhere in there, yes.

We have a question from Chris Lucas.

Two quick questions. One is, Don, as the recovery has sort of continued to progress and there doesn't seem to be any macro pickup at all in new center construction, have you, in the areas that you guys are active, have you noticed or have you gotten a sense that there is a greater sense of urgency among the tenants that, in fact, they need to make deals now, relative to maybe where they were 6 months ago?

Yes, I have, Chris. And it -- I mean, part of it -- take The Assembly development for a second. Now it is new developments, new product, there's no question that we got a lot more interest in it because it was new product and because, physically, of where it was. And with the timing of the way it was going to open, by definition, there had to be a greater sense of urgency so that's part of this answer. But beyond that, I mean, where we were to where we came at Assembly, the same thing that happened at Pike & Rose, clearly indicates a sense of urgency to get stores open for 2015. And every tenant is a little different, most of them have certainly filled their '14 book, some of them have filled their '15 book also, but not all. And so when they haven't there is a big sense of urgency right now to get '15 deals open, and they get '16 deals going. So I would expect to see a pretty good ICSC coming up in 2 weeks. And I -- it's very hard to tell, you will all be asking, after that meeting, how -- what's the sentiment now, how is that -- what kind of convention did you have? But that is where you'll get some kind of an idea and it's a gut feel, more than it is done deals, as to where that sense of urgency is, for what periods of some time you're trying to fill space. So keep an eye on that over the next few weeks.

And then, Jim, just a quick question, kind of going back to this issue of the cap rate compression dispositions, how do you weigh your equity capital requirements for future spend between -- using the ATM and the opportunity to do dispositions?

It's a balance. We have -- we're fortunate that we have a lot of great capital opportunities ahead of us and we always want to have a balance sheet that's flexible and doesn't put us in a position, Chris, where we have to access the capital markets in any particular point in time. And I think we've demonstrated that, we don't need to really raise any external capital to fund all that we have underway and then a little bit more. But it's a balance because we're taking a long-term view. And as it relates to dispositions, this company was built one asset at a time over 50 years. So while we have some assets that we think are on that list, they're not significant from a capital perspective. So they form a part of the capital plan, sure, and the cap rates make that capital look very attractive, but it's not going to be a substantial part of our funding plan.

I guess I was just thinking about the Clarion JV in terms of the life cycle of that particular investment and sort of how the markets progressed.

Yes, and there, as with any joint venture, it's not a sole decision. So -- and that's -- you're on the nub of a very important point about joint ventures and that is that you have somebody else who has to agree that it's time to sell. And we've got a great relationship with them and you may see us sell an asset or 2 out of that, but not -- certainly not our decision solely.

We have no further questions at this time. I'll turn the call back over to Ms. Kristina Lennox.

Thank you for participating today. Our team looks forward to seeing you at the ICSC and then at NAREIT in New York. Have a good weekend.

Thank you, all, for participating. You may now disconnect.