Good day ladies and gentlemen, and thank you for your patience. You've joined the Second Quarter 2017 Federal Realty Investment Trust's Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to turn the call over to your host Ms. Leah Andress. Ma'am, you may begin.

Thank you. Good morning. I'd like to thank everyone for joining us today for Federal Realty's second quarter 2017 earnings conference call. Joining me on the call are Don Wood, Dan G., Dawn Becker, Jeff Berkes, Chris Weilminster and Melissa Solis. They'll be 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 of 1995. Forward-looking statements include any annualized or projected information as well as statements referring to expected earnings or stated 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 in our forward-looking statements, and we can give no assurance that these expectations can be attained. The earnings release and the supplemental reporting package that we issued yesterday, our annual report filed on Form 10-K and our other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial condition and results of operations. These documents are available on our website. Given the number of participants on the call, we kindly ask that you limit your questions to one or two per person during the Q&A portion of the call and if you have additional questions, please feel free to rejoin the queue. And now, I'd like to turn the call over to Don Wood to begin our discussion of our second quarter results. Don?

Thanks, Leah. Good morning, everyone. Hope you are all enjoying the summer and hopefully have taken a little bit easy this time of year. I assure you we're not. In an industry that's been under siege at least from an equity valuation standpoint for the last six months in particular, we're performing particularly well and not just measured by plugging holes for today, but most importantly, measured by positioning and investing in tomorrow. So here's a list of seven initiatives that we've been up to that will surely position us well. First, our recently announced, and in our view forward looking, $345 million investment in the partnership of Primestor, Los Angeles-based operator and developer of resale centers serving the underserved and densely populated Latino communities out west. I'll talk more about that in a bit. Second, the decade long creation, expansion and improvement of live, work, shop, play communities at Pike & Rose, Assembly Row and Santana Row. Third, the most active core repositioning program in our 55-year history with planning our construction underway in every state that we have a meaningful presence. Fourth, the investment committee approval to move forward with redeveloping and repurposing CocoWalk for $75 million or so in Greater Miami. Fifth, the $400 million issuance of 10 and 30-year unsecured debt with a weighted average interest rate of 3.6%. Sixth, the sale or near sale of a $120 million of real estate as components of Assembly Row and our San Francisco office building at a weighted average low-to-mid forecast. And seventh, a dividend raise for the 50th year in a row, every year since 1967 to $4 a share; the only REIT in any sector to be able to do so and one of the few companies in any business who have done so. By the…

Thank you, Don and Leah. And good morning, everyone. Federal had another record quarter for FFO per share in the face of increasing challenging retail environment. Our second quarter FFO per share of $1.49 represents a 5% increase over 2Q 2016 result of $1.42. We had another strong quarter on the leasing front with 432,000 square feet of total leases signed and 398,000 square feet signed on a comparable basis, which drove an average increase of 13% on a cash basis. This represents 18% on new leases and 12% on renewals. On a GAAP basis we put up a 27% increase. Our same store NOI grew 3.9%, which was well ahead of our internal forecast. This is impressive in the face - space of roughly 130 basis points of drag from our value creating releasing efforts that Don alluded to in his remarks as well as drag from a difficult term fee comparable relative to 2Q 2016. Our over overall portfolio stands at 94.5% leased and 93.0% occupied, which is flat with last quarter when you back out the impact of our recent acquisition in Berkeley, California which is just 55% occupied; more on that later. Please note that the 150 basis points spread between our leased and occupied rates at quarter end highlight leases that have been signed or rented as yet to commence and which should enhance growth over the next 12 months. On the anchor leasing front, we continue to make progress working for our excess vacancy. Of the 730,000 square feet of space we initially highlighted in November of 2016, we are up to 70% leased on that pool with releasing spreads at a positive 37%. The leases that are currently under negotiation that lease percentage will rise to north of 80% in the coming months.…

Thank you, sir. [Operator Instructions] Our first question comes from the line of Craig Schmidt of Bank of America. Your question please.

Okay, thank you. I guess just big picture. Given many of the changes in the retail real estate environment a concern I often hear is that it can be expensive to accommodate these changes, and I guess, the question is are you seeing the revenues or the rents paid in the position to make these shifts profitable?

Yes. That's a good question, Craig, and it's something we're on all the time. There is no doubt that that leverage has moved to tenants as we talked to before from landlords. There is also no doubt that we don't do deals - we don't need to do deals effectively that are - that don't make sense in and of themselves, and that's a really important part. When you look at the value creation that we've got, there is no doubt that even though there is more capital going out selectively, because we're not going to invest capital where we don't believe that income stream is going to be sustainable or be maintained. And I will tell you - let me give you one great example. When you look at our numbers this quarter, you will see that - you'll see a renewal that has a lot of capital in it. That is one specific deal on Greenwich Avenue and Greenwich Connecticut for our completely redone and extended lease term with better credit that we were able to enhance in terms of the deal that allowed us to put capital in a completely redone facts or looking to do that. We won't do that until all obviously it's been supported and it works in terms of the agreement that we have. But would we invest on Greenwich Avenue and Connecticut to be able to lockdown that location for the next 20 years, you bet we will. That's different than just say an overall comment of you're going to throw capital at deals - to make deals, because if you do that those deals often don't work. So the selectivity in terms of where it's being spent during this comes - certainly a change in the - in consumer buying habit has to be selectively applied. With great real estate you've got more choices to do or not do it. Without that great real estate it's harder and I believe that's really true. I'm sorry for the long winded answer but I hope that helps.

And just to change it a little on the Primestor operations, the densities that you're going to be dealing with will they be in line or even higher than your portfolio today?

They'll be higher than the portfolio today.

Fantastic. Thank you.

Thank you. Our next question comes from Alexander Goldfarb of Sandler O'Neill. Your question please.

Good morning. So first question is just going to be the Primestor. Can you just walk us through bit on the sales productivity, the rent upside? And then when you guys are working with Primestor how the relationship is? The press release indicates they're managing it with you guys on the investment committee, but obviously you guys have a lot of capacity on your own. So how you're going to share that responsibility of managing plus the redevelopment?

You bet, Alex, and make sure you calling it Primestor, not star. But Jeff Berkes is on the call and I want to make sure that he takes the first shot at this.

Yes. Alex, let's talk about the second part of your question first and how we're going to run this JV. So as is the case in most JV's you have an operating partner and a capital partner and that's generally how this would setup. And as you pointed out we're pretty good operator at shopping centers ourselves. So we've worked something out with Primestor where they're going to be doing management, leasing, development and redevelopment services, and Federal is going to be handling lease documentation and accounting. So that's what the document says. All major decisions have to be approved by the partners and there's perimeters around what those major decisions are, right. That's a pretty traditional setup in a joint venture of this nature. Practically speaking, I think we are going to fit together kind of hand and glove, whether it's me and Arturo on big picture strategic and investment decisions, Juan Felipe [ph] and his asset management team with Primestor's asset manager Elena Chavez, Jeff Kreshek with their leasing person, Seth Bland with their development team. So that's the crew of executives out here at Federal and will be meshing directly with our counterparts at Primestor. And it's going to be a very interactive relationship. It's not going to be a situation where like a typical maybe institutional capital partner talks to their partner once a month or once a quarter and get some reports and makes a couple of decisions and moves on. We expect this to be a very, very active dialogue back and forth between the two of us. So does that cover you on the second part of your question?

Yes. But the first part Jeff, is on the sales productivity I assume it's the - it's a typical higher than average and then also what that translates to as far as rent upside.

Yes. I mean if you step back and look at everything big picture, there's a couple of things you need to keep in mind. First is, Primestor was or is the leader of developing high-quality retail space in the types of trade areas that Don mentioned in his remarks, which are very densely populated. Craig, to your question the population density within three miles of a Primestor center north of 300,000 and the Federal center is - it's a little bit less than half of that. So significantly more dense than our portfolio on average.

And Alex what they had to do to get this going is develop a story for the mainstream retailers, and if you look on Page 10 of the slide deck that we posted on our website their top 10 retailers are listed in there. The same retailers that you would see in our centers, right? And they started doing this literally 25 years ago but in this portfolio a solid 10 to 15 years ago, right? So the retailers that came into these centers got first-mover advantage in terms of rents. And if you look at the box rents in the portfolio the ABR is only 15 and if you look at the overall lands in the portfolio its only 21. And I would say two a box, every box in the portfolio is below market and below market by a pretty good margin. The most recent leases that were done at the redevelopment, two of them start with the two and one of them starts with the three. So that will give you a benchmark as to the spread between the in-place box rents and the market rents in these concentrated areas today, and its significant. Sales productivity, unfortunately, like our portfolio it's not like a mall portfolio where you have 85%, 90% of the tenants reporting. I think 35%, 40% of Primestor's tenants report. And when we look at those volumes and match them up to the volumes for the same tenant in our portfolio that's a very, very good matchup and when you look at the occupancy cost ratios and consider my first comment about where the rents are the occupancy cost ratios, particularly for the anchors and junior anchors are very favorable. We're talking low-to-mid single digits. So does that helps?

Yes, that helps. And then just quickly just following up, and then I'll get back in queue. You guys - are you guys paying any management fees to Primestor or that's all part of the cap rate?

No, we're paying a property management fee. And that's typical in a setup like this. Just like we got paid property management fee as part of our joint venture with Clairon that we formed in 2004 and dissolved in the last couple of years. The operating partner just paid management leasing fees.

Okay. Thank you very much.

Thank you. Our next question comes from Jeff Donnelly of Wells Fargo. Your line is open.

Good morning and thanks for taking the questions. Dan, you mentioned the prospect of additional asset sales by year end. Federal has not historically been a seller of assets and with the stock I guess of an NAV discount. But the appetite for high quality product is still pretty robust. Have you guys considered using dispositions as an even larger funding source for your development pipeline or asset purchases in lieu of common equity?

Yes. Now I think it's something that certainly we've stepped up this activity this year. I think this year we expect to achieve the total asset sales we've made over the last five years. We are still constrained by the fact that we have significant gains embedded in our assets, so that gives us a little bit of limitation on how much we can step up that activity without kind of using 1031s to kind of mitigate those gains. However this year, I think we expect to - we have one asset under contract we expect to close as Don alluded to. We've got…

On that contract, just to be to clear to Dan's point, Jeff, that's because we bought River Point earlier in the year, we're able to 1031 into this. So we have a huge gain to the extent this property closes which we expected to. So we are limited by that in terms of creating cash beyond this. But there are some cases that we can cover it and that's what we're working through.

I guess as a follow up. Are there any lack of a better term sacred cows in your portfolio? I mean do you see opportunities to dispose of some assets that might frankly be trophy quality but are fairly low growth and I guess I'm wondering can your 2018 disposition potential exceed what you're planning to do in '17?

It's great question, Jeff. There are absolutely no sacred cows in this portfolio. But what we do believe I mean this is a handpicked portfolio, one off. And so when it comes to - I hate using the word trophy but to the extent we've built something or created something which we believe is the future, which is a real big part of what you should be thinking about, right, 2022 instead of 2012 out there. We believe in the long-term growth of those assets. It's not because they're sacred cows, it's because we love them is because the future potential on them. So I hope that helps.

Okay, thanks.

Thank you. Our next question comes from Christy McElroy of Citi. Your line is open.

Hey, good morning. Just a follow up on Jeff's question in regard to asset sales, the $54 million plus another $70 million to $100 million of sales that helps you keep Primestor at an almost leverage neutral basis, it doesn't get you all the way there. How are you thinking about leverage given all the irons in the fire you have in the redevelopment side as well? And just to clarify in the $70 million to $100 million maybe some more color on what you're planning to sell on timing?

Well, I think the $70 million to $100 million is inclusive of the West Coast office building that Don alluded to, and we've got another asset or two that are in the market and in the queue. But with regards to - I alluded to it in my remarks and I think we positioned the balance sheet to allow us to be opportunistic with additional issuance of debt and equity. Be opportunistic on the asset sale front, utilize the free cash flow that we'd continue increase and generate in our business. And the A minus rating affords us other opportunities to tap into the capital markets. We'll be opportunistic but we think we've positioned the balance sheet to absorb Primestor I think very, very comfortably.

Christy, the only thing I would add to that is, if you look at our track record, this whole notion of balance where it's so critical to who we are. So we do equity we don't do big amounts of equity. We do debt deals, a big source of debt in relation to the overall market and even on the asset sales for other reasons. We try to use all the tools in the tool box here. So it's all on the table of course, as we run our business plan including finishing out the Phase 2s of these assets. But you shouldn't expect to see anything that makes us say, oh my god, well - crazily diluted or anything. The choices that we make are balanced, it's just critical to what we do.

Got it. And then just Dan, you might have then used 3% or better forecast for same store NOI growth, how should we take that? I think you were previously expecting a deceleration in the second half, has that changed now? How should we think about the trajectory there? And how much of this Splunk lease really contributing to the growth rate?

Yes. No, I think that given in combination with a lot of the proactive releasing activity that is a drag on our portfolio, I think that we will see some deceleration in the second half of the year but we still feel comfortable that we'll exceed that 3.0% number. And Splunk, over the course of the year, is kind of in that the ballpark of about 200 basis points. But we fully - if you think about the drag that we have of about a 130 basis points on our proactive releasing efforts relative to last year, I think that we felt comfortable, given the first half performance on the same store basis to kind of a give a little bit of increased and modified expectation of 3% or better.

Christy, I want to add one thing if I can about Splunk. It's important. It's hard if you think about all the irons in the fire and the office stuff that we do, the residential stuff that we do, all the proactive redevelopment. It's hard to kind of put a matrix up and have Federal's numbers on an apples-to-apples basis with every other shopping center company that's out there. You know I don't believe in it in terms of how we look at the over the lines module on same store. But Splunk, the ability to put - you guys, our investors gave us $112 million that we put to work at a nine, and we put that to work here at Santana Row because of all the decade and a half of work that created the environment in the first place to allow that to happen. So I never want to sound or feel anyway apologetic for that investment - actually the investments that we make, and that it's at a stabilized property of ours. And I just want to make sure that when you look at Federal in total it doesn't fit the box exactly of a shopping - a grocery and a shopping center company which we're offering compared to. It sure checks every box in terms of growing cash flow and value creation. That's the only point I want to make.

Great. Thanks, Don.

Thank you, our next question comes from Paul Morgan of Canaccord. Your question please.

Hi, and good morning. About the Primestor acquisition and to say that's part of your strategy, I mean how specific is this to the opportunity that you sourced and how would you consider expanding that type of focus in terms of your investments to the rest of Coastal California or South Florida or other markets that have kind of similar kind of stuff markets where there might - those opportunities might exist for you?

That's a great question, Paul, and I - and let me put it in this context. Our job is to on a risk adjusted basis make investment decisions that give us the best chance to create an increasing stream of cash flow and value creation. And when it comes to thinking about 2022 and not 2012 and you think about the fact that there's a lot of retail in this country that mind you is obsolete in terms of where we are going, not today, where we are going. And when you sit and you think about that and you've got a community that has basically 6.5 square feet of retail space per capita and a ridiculously low number compared to everywhere else in the United States, it's pretty clear to us that the serving of those customers is behind the income generation and the population growth and the education increase that have happened within that population. So sure, we love that. In fact as I said in my prepared remarks, I mean we wanted to do this, I wanted to do this in Miami six or seven or eight years ago. We just couldn't find - first of all, we didn't have the expertise and second of all, we couldn't find enough critical mass. The fact that Primestor has been doing it and getting it to this point over its period of time, and that we can have this relationship with them is really important to the future. And when you think about the high-end mixed used stuff that we have on one side of the company and that's 25% or 30% of the company or so, this part in terms of demographics and density that is so important to us on the other side and growing, yes, I certainly hope we can use this as a platform to increase first in Southern California and then over time we'll see about other markets. But there's clearly more to do in Southern California.

Great thanks. And then to my other question, Dan you mentioned going from, I think, it was 70% to over 80% soon in terms of the 730,000 square feet of anchor space. And I was wondering if you give me an update about kind of the cadence of those openings and how much will kind of hit in the fourth quarter versus various points in '18 and into '19?

Yes. That schedule that we've been handing out does exactly that and it does do exactly that. And actually I'm just buying time for Dan to get out - get that out in front of him. So you can get a pretty good idea as Daniel, if he can kind of layout just in rough numbers how much in balance of '17, how much in '18 and then '19. '19 on those deals - yields are when do you've got most of it in there. But it will be coming up rather strongly through the second half of '18 and that's probably the deal - is the second half of '18 deal, for example, at Assembly.

Yes. And just to go on and in terms of - I think we had talked previously that we would expect kind of the balance of the leasing and - the lease rollover on the latter half of our - the pool of leasing to be done to be lower than the first half. The first 70% was done at 37%. We still expect the lease rollover to be north of 20% on the balance of this based at what we're looking on, and kind of a handful of deals that we expect to sign over the next quarter or two that won't start producing until and rent commencements until later in the year in 2018. We would expect that in the balance of '17 roughly 35% of the prior rent would hit go up to 66% in total for 2018 and then hit a run rate and hit a kind of more stabilized level in 2019.

So those newer deals are more consistent with that kind of 20% range than what you've done in…?

It's probably, yes, more kind of in a - on a blended basis called in a mid-20s as opposed to kind of what we had talked about 15% to 20% previously. So we continue to see on our anchor releasing, strong productivity for that pool that we - that 730,000 foot pool - square foot pool that we talked about last November.

Great thanks.

Thank you. Our next question comes from Ki Bin Kim of SunTrust. Your line is open.

Thanks. Good morning, everyone. So going back to Primestor, I think you guys mentioned that this might your vehicle to do more deals and - it is vehicle, right, versus wholly-owned on the balance sheet. So just curious why would you choose to use this vehicle versus wholly-owned, and if there is also a promote going back to the GP?

Yes. Let me start and then Jeff, please feel free to join in. Look the - all the conversations that we've had on this call so far do talk about how it is that we can best execute on a principal that we believe in. The principal that we believe in is clear. Demand exceeding supply in those markets. Now you have to ask how you go get it done, what's the best way to get it done, and we have - personally, we've had little success previous to this in - and as I said in Miami, where this was the specific thing that we've been looking at. And frankly, and let me just jump in for a second, Art Coppola is a great guy to talk to about this at Macerich, I know you're jumping on his call later. Ask him what he thinks about this strategy. Because the issue has always been how to execute under this strategy and to be able to take the work that was done for basically two decades in this space by folks that understand their customer way better than we do. It makes - it's such a risk reducer from a Federal Realty perspective to have a near 90% interest in these real estates - but more importantly this real estate but mostly to have a partner. That is - Primestor is a real company, I mean there's 30-35 people of at that company who are out there every day working at this. We can't duplicate that on our own. And so if you believe you've got something or you've found something where demand exceeds supply, and I think challenge most of the stuff you're talking about in our business over the next five years to give you comfort, that demand will exceed supply. This one is the easiest to do that. And so the execution of it this way gives us the best choice. Jeff, you want to add anything to that?

Yes, I mean - just following up a little bit Don on what you said. Keep in mind that like Don said, Primestor is not two or three guys and a New York [ph] office that just happened to have a few assets and needed some capital, right. They've been around since 1992, 25 years. 30 to 35 people, and they have a material investment in our joint venture going forward. They are committed, as are we, to growing and expanding this strategy in Latino community in Southern California and hopefully beyond that and other markets where we operate, provided we're able to find the kind of trade areas like we have here in Southern California where demand exceeds supply. That's what it's all about, that's what we intend to do. And it's important to know that because a lot of times when you hear about joint ventures where read or some other institution is coming in with an operating partner, the operating partner is just that. It's a handful of people that don't really have a real investment in the deal and that don't have the unique skill set and Primestor certainly does. This is not something that really we or anybody else that's like us could go and then do. It's taken them years to develop relationships with the communities that they operate in and the tenants - to help the tenants understand that they can come into these centers and be very productive and make money and that's very valuable. And without them…

And to promote what we are doing.

To promote, yes, there's a promote. It's a backend promote and it's over an IR hurdle just like again a traditional joint venture structure.

Okay. And before I get to my second question, I've realized you guys definitely deserve the market credit for using your capital correctly on kind of a risk-adjusted basis for a TI usage. But I'm looking at Page 25 in your supplemental and your new lease deals. If I look at deals in the fourth quarter of '16 and third quarter of '16, they were cash flow accretive deals, meaning the rent increase you got offset the annual full-in CapEx that you were spending. But if look at the couple of deals this first half and in second quarter, first quarter, it looks like the TIs you're spending were above the annual rent increases. Obviously this is not meant to be a gotcha question just curious to see what was happening there.

Well, I'm going to - Dan's looking at the schedule particularly, but let me give you the overall answer to that, Ki Bin. When you look at the deals we do and a bunch of these deals are in properties that we're redeveloping because that's just part of what we do. One of the things that I've always had an issue with and that we're trying to figure out in our reporting is how this works out with the redevelopment schedule. Because overall, when we're doing deals in a redeveloped shopping center or a shopping center that we're trying to redevelop, I can tell you that the capital that is going into any particular deal works within the overall investment committee approved budget of that overall shopping center redevelopment. Are there deals that we will do to effectively - subsidize deals that effectively get other things done in that redevelopment, sure there are. But overall, that when you look at the value creation in that redevelopment the capital in there works. Now how to translate that to the specific 8-K and what it says, I got to turn it to Dan and let - because I don't have to add anything to it. But that is the single biggest thing and I love that you're looking at capital. I think you should look at it all the way around and I think you do. If you come back - if you come down and we kind of go through some of those redevelopment economics you'll see what I mean pretty clearly.

Okay. Thank you.

Thank you. Our next question comes from Steve Sakwa of Evercore ISI. Your question please.

Thanks. I guess just two quick ones here. Maybe just to kind of bring the discussion back to the core portfolio. Don, could you or Chris maybe just discuss kind of what you are seeing in the overall leasing environment and maybe if you guys have looked at a kind of watch list or have a running watch list how would you say that that watch list of tenants sort of stacks up today versus maybe six to 12 months ago?

Yes, I'll start on that and Chris is here and will add to it certainly. I mean look when I look at it there is no doubt I still worry about a senior [ph] more than anybody. That's the single biggest tenant that I look at and try to figure out what's going to happen with them, how they're going to remain relevant and pay rents and stay in deals. That is a six months certainly - six-month tenant that's impactful. Overall, it's about - it feels like all of the concern with respect to the environment that was really at its peak I guess it's really the end of the first quarter and in that period of time hasn't changed much in the past 90 days, from what we could tell. When we're looking at our perspective bad debt, when we're looking at some of our outperformance has been because things that we thought would go wrong have not, yet to this point. Will it come in the future? Sure. It's our watch list, it's our worry about the business which is why it's so important to make sure you've got visibility on cash flow growth wherever it's coming going forward. But I don't see it over the last 90 days as a very different, actually a little bit better than maybe the overall worry, but it's there. Chris, you want to add to that?

Yes, I would just say that where we do get sales info we certainly pay attention to the rent of sales ratios and keep an eye on it. I think in general when we match that up against what you can find on this companies on a public basis or reported basis, we're in fairly good shape from that standpoint and where we do see those issues I can tell you we are very proactive in our releasing efforts to be prepared when they go down. As far as Steve, is the activity in the market I mean we are seeing a lot of good activity in the market. We are seeing in bulk category, the entertainment category, the arts & crafts category, cosmetics and programs, fast fashion. Target certainly is out there still looking at doing these smaller deals and the Total Wine is growing in a big way. The at leisure apparel whether its Lulu, Atheleta or Nike or Under Armor, all of those categories are growing. So we are finding the replacements. They may not be the ones that looked at in the past but we are finding lots of replacement tenants that lease to move being value added to the merchandize mix in our properties. And then the other thing we're keeping our eye on as the - as you do and you guys have a much better sense based on the mall related rents sales ratios, as these retailers that are mall based say, “I can't afford to continuing to operate those high rents sales ratios”, we are actually starting to receive phone calls than what have been traditionally mall-based retailers say, “Hey, Federal, I want to earn more value portfolio” and the opportunities are for us. So overall even though as Don talked about and as we clearly acknowledge the retail world right now is very unpredictable, we do and are mining grade opportunities to back fill our assets in a way that I think is improving what we offer to the communities we serve.

Okay. And I guess just second question. Don, when your sort of look at the Primestor portfolio and the growth, I mean I guess you guys have historically been very good about finding little jewel box assets you can add to the portfolio that have generally had equal or maybe better long-term growth. How do you sort of look at the growth of the Primestor portfolio over the next say five years? I know Jeff talked about getting some of those boxes back at higher rents. And then what do you think the opportunity is to deploy more capital with this JV partner over the next say three to five years?

Yes. So well first of all, we closed - let me take it from the end to the - so and we closed this morning or last night. So figuring out how our relationship's going to work and what that turns out to be, its early. Obviously, you always start out with big hopes and also we are going to make sure that we've done everything we can to let that happen. But we know - I mean the relationship that Jeff has with Arturo, that I have with Arturo - and that company, we've had a lot of discussion. We've been talking about this for a long time with respect to this is the opening day. This is the last day. So there is no doubt that with respect to the existing portfolio I think Jeff has - I mean it's obvious that the rents are under market, it's also obviously that they're long-term leases. And so the idea that immediately there's going to be a big pickup in the rent growth as a result the of big pieces in the portfolio that's not the case. This is longer term in terms of that. But the notion that we are right away working together to see where else we can exploit this notion of serving customers that are underserved that's starts now. So I am hopeful that you'll see us grow this portfolio over the next few years. And it probably won't be outside of Los Angeles for the first couple of years anyway. And then to the extent going away we hope it's going, maybe there's something we can do in other markets with this team. It's a real team. I mean this is a real strategic add to Federal Realty's arsenal. The five-tool player thing maybe it's a six-tool. Jeff, you want to add?

I think you covered it pretty well, Don. The growth on our underwriting is not - is similar from our existing portfolio comparing on how you look at it or over what period of time you look at it, it's kind of mid-two to three without giving any space back early. And without maybe tweaking around the edges on some of the assets and adding a pad here and there or acquiring an adjacent property. So I'd call it again, right now down in the middle of the play in terms out backs up from annual NOI growth perspective to the rest of our portfolio.

Okay, thanks. That's it for me.

Thank you. Our next question comes from Nick Yulico of UBS. Your line is open.

Thanks. Just a couple on Primestor. First, was this a marketed deal?

It was, but in a different way that we ended up executing it is probably the best way to say it. They came to the market with an advisor to a select group of people and what they were looking for really didn't work or fit for our needs, and we were able to craft a bigger relationship with them out of the discussion and ended up where we ended up.

Okay. Yes, I'm just wondering also what other types of buyers may have involved in the bidding process here, just sort of curious?

Yes, I would say the usual suspects. I would imagine that their advisor did a good job of talking to other institutions and possibly other REITS, and what you would expect in this kind of process, right.

Okay. And I guess…

Let me just add one thing to that. Primestor had a lot to say here in terms of who they wanted to marry up with because we basically took out cap serves in terms of the money to in the biggest way. And so the idea of who they were going to partner with was going to be where was their shared vision, where was there something more than just a money partner who was going to put this together and be able to see things in terms of the way we see merchandising communities and where we're at we're adding value. So I think there was a common ground early on in our negotiations with the Primestor team that was important.

Okay. And just one last Primestor question. How much is left at Primestor that you would be interested in buying or is there other California land they own that would be development opportunities, and I'm also just wondering if you have any source of rights of first offer on any future properties Primestor is looking to sell?

Yes, to take the last part of the question first. We definitely have priority on new investments, again, that's a pretty typical feature in any joint venture. In terms of what they have in the portfolio right now that didn't come along with us, I think for the most part we got license that we got - we were able to invest in what we wanted to invest in.

Okay, thanks.

Thank you. Our next question comes from Floris van Dijkum of Boenning. Your line is open.

Great, thanks guys. I wanted to follow up on the comment Dan made about the way that your tenant base is mixed up or mixed I should say not mixed up, and how that - how has that changed over the last five years? Have you seen increases in food and entertainment for example, and decreases in apparel, I'd be curious to get your take on that obviously. The malls are rapidly changing as well.

It's a great question, Floris. I mean look the idea of our overall investments in our properties and what we're trying to do to make them as relevant and that is such a word, man, that's the word, relevant five years from now. We kind of - everything we kind of do is look forward five and look back five. And when you think about the difference between back five and 2012 in terms of where the prospects future are and forward five to 2022 they're very different. So obviously we want to use retail. But the reason we use retail as the center piece is because that is how we get gatherings of human beings to experience life. So whether that is in a grocery anchored shopping center that is - in very most of in our cases the best center in that market or whether it's a big mixed used project or whether it's in a Primestor asset frankly, what we are talking about is the merchandizing that is going to be sustainable relevant five years from now. So you bet, you've obviously seen because of the mixed used form of our business, the increase in our residential income stream and the increase in our office rent income stream. So that starts out as 15% of our income stream between the two at this point, and yes, that is - that continues to grow. But you do see additions to entertainment, the right type of food uses, there hasn't been an increase in our grocery business in any significant way. There's been redevelopment and bettering of the ones that are there, there's been investments that way, but not in the overall income stream. That is 8% that has been about 8% more before we had the residential and the office component throughout the company obviously. And when you get down to health and beauty, there is no question. We've made the specific effort to increase health and beauty and fitness as a component. And it all ties in to where we see the world going in 2022 in the particular markets that we're in. So I hope that helps.

Thanks, Don. Appreciate it.

Thank you. Our next question comes from Jeff Donnelly of wells Fargo. Your line is open.

Hey guys just two quick follow ups. One, I think Dan, you had said that the drag on same store NOI in the quarter was about a 150 basis points from the managed vacancy. Is that a similar pace that you maybe expect in Q3 and Q4 this year?

Yes. And I think it should - it may moderate a little bit as some of the proactive releasing the tenants take occupancy and start rent pay. So it should stay healthy but it should moderate as Trader Joe's is opening here at Assembly, kind of this month, and so, we would expect obviously that would reduce the amount of drag for the third quarter. But it still will impact kind of the balance of the year generally, but it should kind of diminish over the third quarter and further on the fourth quarter as tenants open.

And on CocoWalk, I'm just curious as you move towards I guess the getting demolishing work at that property, how should we think about maybe the dilution that could hit FFO in 2018 from that?

Yes. It's a real good question. I'm looking at over a bit. I want to make sure that doesn't get lost. I don't want everybody to supply numbers because we do have dilutive value creative of things. The demolition will basically be done in the first quarter of 2018, that goes the right to the P&L. Number, rough, pick a number out of your head. I'm looking at - there's all kinds of things happening. I mean that's $0.015. So that's the start. That doesn't include the fact that tenants that were paying rent will no longer be paying rent while we work it through. So that's - I don't know if you want to use two cents on that enough, but you got two cents sometime certainly in that on CocoWalk in 2018.

Thanks, guys.

Thank you. I'm showing no further questions at this time. I would like to turn the call back over to Ms. Andress for any closing remarks. Ma'am?

Thanks for joining us today. Have a great rest of summer and we look forward to seeing you this fall. Goodbye.

Ladies and gentlemen this concludes today's conference. Thank you for your participation and have a wonderful day.