Leah Andress - IR Associate Don Wood - President & CEO Dan Guglielmone - CFO Jeff Berkes - EVP & President, West Coast Chris Weilminster - EVP & President, Mixed-Use Division Melissa Solis - VP & CAO.

Jeff Donnelly - Wells Fargo Ki Bin Kim - SunTrust Alexander Goldfarb - Sandler O'Neill Christy McElroy - Citi Jeremy Metz - UBS Vincent Chao - Deutsche Bank Vineet Khanna - Capital One Securities Jason White - Green Street Advisor Craig Schmidt - Bank of America Michael Mueller - JPMorgan Floris van Dijkum - Boenning.

Good day, ladies and gentlemen, and welcome to Federal Realty Investment Trust Second Quarter 2016 Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference may be recorded.

I would like to introduce your host for today's conference, Leah Andress. Ma'am, you may begin..

Thank you. Good morning. I would like to thank everyone for joining us today for Federal Realty's second quarter 2016 earnings conference call. Joining me on the call are John Wood, Dawn Becker, Jeff Berkes, Chris Weilminster and Melissa Solis. They will 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 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 in our forward-looking statements and we can give no assurance that these expectations can be attained.

The earnings release and supplemental reporting package that we issued yesterday, our Annual Report filed on Form 10-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 Web site at federalrealty.com.

And with that, I would like to turn the call over to Don Wood to begin our discussion of our second quarter 2016 results.

Don?.

Thanks, Leah, and good morning, everybody. I want to be the first to publicly welcome new CFO, Dan Guglielmone -- it is best to just call him Dan G -- to the Federal Realty senior team. As most of you know, Dan joined us from Vornado, where he served as Senior Vice President, Capital Markets and Acquisitions.

He will have those roles here too in addition to oversight of accounting, reporting and Investor Relations. He is going to do great here and play an important partnership role on the executive committee, on investment committee and day-to-day interaction. Dan came in for the Board meeting earlier this week and is here with us today on the call.

We will even make him available to answer your questions. He will be on full-time later this month and can be reached in Rockville at extension 8232. Welcome, Dan. Now the quarter.

It was a really good one, better than we expected with improved occupancy, a strong collections effort and a ton of leasing, more than 100 deals and 467,000 feet of total square footage, all of which resulted in FFO per share of $1.42, nearly 7% better than last year's quarter and the highest quarterly result we have ever recorded.

Remember, this is happening at a transitional time in our company, when we are realigning our operations organization and adding and changing staff positions, when we are building and stabilizing two major development initiatives that are in the throes of disruptive construction in a weak apartment rental market in DC, when there is over $0.5 billion sitting on our balance sheet and construction in progress that is not producing an income stream yet, but certainly will be.

And some of the most sought after compelling product types in the country and some of the most sought after real estate locations in the country. I am really pleased with how our team is responding and the solid progress we are making. Our heads are down and we are executing and the long-term looks as good as ever.

When you break down the components of that FFO quarter-over-quarter result, you will see that it is broad-based; top line revenue increase of over 9% and operating income increase of nearly 7.5% that had contributions from everywhere.

Had contributions from the Sunset, CocoWalk and Clarion joint venture acquisitions in for the full quarter; contributions from same center growth that beat our internal expectations at 3.5%; contributions from strong redevelopment results from The Point, from East Bay Bridge, from Westgate from Willow Lawn among others; income contributions from Pike & Rose and Assembly Row of nearly $5 million, up significantly over last year's quarter; marginally lower interest expense despite higher borrowings as we continue to drive portfolio rate down, and SG&A that is well under control.

Top to bottom every piece of the business is contributing. Last month, as I am sure you have heard, read, we have opportunistically accessed the 30-year unsecured bond market at a spread of only 160 basis points over the 30 year treasury where we are REIT record-setting 3 5/8 coupon, 3.75% effective yield and $250 million.

In effect, world economic dislocation and the flight to quality both in real estate and to credits like ours made the timing of that move really compelling.

Now that money paid down the line completely with some left over in sitting in a bank for a few months, but that deal is dilutive to earnings for the balance of year by $0.03 to $0.04 per share and we have adjusted our guidance by the low side of that amount in order to be prudent.

But, our current construction underway expected to return 300 plus basis points in excess of that money over the next couple of years, 30-year debt short felt like a good call. Okay, a little more detail on the quarter and then onto the outlook.

On a sequential quarter basis, the percentage of the entire portfolio that is leased ticked up to 94.5% at June 30, compared with 94.1% at March 31. Melissa will talk about Sports Authority in a few minutes but for purposes of occupancy and absent offsetting leasing, we would expect a 50 basis point hit by the end of the third quarter.

As I mentioned earlier, leasing results for the quarter were strong, 91 comparable deals done for 373,000 feet of space at $38.21 a foot, 12% higher on a cash basis than the deals they replaced. That is up 17% on anchors, 10% on small shops. It is up 23% on new leases, 7% on renewals.

A couple of the most consequential deals include an important merchandising upgrade at the power center portion of Assembly Square where Trader Joe's will replace A.C. Moore at significantly higher rent beginning late in 2017 and should also help create even more tenant demand when the adjacent Sports Authority vacates later this year.

Also in the first couple of days in July, we were thrilled to complete the last piece of the puzzle for the leasing of the power center portion of Melville Mall on Long Island with an extremely well regarded Italian specialty grocer called Uncle Giuseppe's taking the former Waldbaums box at a higher rent.

There is not a grocer that we would have rather have done a deal with than these guys at this location on Long Island. Check out the Web site.

Uncle Giuseppe's along with the new Field & Stream deals and Dick's deals over the past couple of quarters is transforming this property and with A&P out of there, we are now actively working on adding additional GLA for shops and restaurants assuming we can get the entitlements. That is what we are working on so stay tuned.

By the way, I'm fresh off a trip to review the completion of two of our latest shopping center redevelopments, Tower Shops in Florida and Mercer Mall in New Jersey. I left thoroughly impressed with a real sense of pride in the transformation.

Not only did they look great with full parking lots but consider this, total combined investment before redevelopment of those two shopping centers was $175 million producing property operating income of $14 million.

Total combined investment after redevelopment was $215 million, $40 million more, producing operating income of $21 million, $7 million more. Value creation at a simplified cap both before and after redevelopment so no assumed benefit from obvious cap rate contraction of $100 million over four years.

Our ability to transform big properties like this, Tower Shops is 370,000 square feet, Mercer Mall is 0.5 million square feet. It is one of the most important components of our business plan and one we are extremely proud of. It is good to own great real estate and have a creative team that can also execute.

On the big development side, no surprises, discontinued execution at Assembly, Pike & Rose and Building 11, that is the Splunk building, at Santana Row. Couple of points on each for you to consider. At Assembly, phase one done, stabilized with every building at least 95% leased and occupied.

Because of some free rent in the office tenants you have to burn off income will continue to increase next year. Nearly 2000 employees going to work each day at Partners Healthcare as of today, double that next year, have already created higher shopping and restaurant traffic.

Now dust and noise are the flavors of the day as roughly 40% of the phase two spend has been incurred and we remain on time and on budget. The Office Occupation, the T-stop usage, the Trader Joe's deals in the adjacent Tower Center I talked about before, all these really show just how important this community has become to the north side of the city.

By the way, check out the video NAREIT did featuring Assembly on nareit.com and as you would expect, it is also available on our Web site. Good things happening at Pike & Rose too, though the pressure on residential rents throughout the market surely isn't subsiding.

Leasing pace, however, progresses well with the Big Palace Luxury Tower now 84% leased and PerSei, the other residential building there, remaining in the mid-90s. With our current pace of leasing we expect to be at stabilized occupancy by year-end as planned.

Nike opens in the old city sports space in a couple of weeks and like at Assembly, noise and dust continue as about one-third of the phase two construction budget has been spent.

More than half of the retail space is spoken for in the new phase two at this point with tenants like Pinstripes, Porsche, H&M, Lucky, REI, Red Door Spots, Sephora, Taylor Gourmet. The environment is shaping up as well or better than we had hoped.

What we really could use here is a bit of firming on the pricing in the residential market which is bound to happen sooner or later. And on the West Coast, Splunk is expected to occupy the building by January and the execution of this construction and build out has been nearly flawless.

We continue to see strength at Santana not only in terms of its desirability as an office location, but also with respect to residential rents that continue to grow above our expectations. The tale of two cities when comparing Silicon Valley and Washington DC on the residential side.

In Florida, plans for our new Miami acquisitions, Sunset Place and CocoWalk continue to progress well and are being vetted by our senior team and partners. The decisions as to the direction and initial phases should go to investment committee later this year at which point we will lay out what we have in mind.

It is likely that we will want to add office and residential components in some variation at these properties. In the meantime, we are heavily focused on grassroots engagement with the local communities and are increasingly optimistic that we will be able to afford the viable and value creative changes at both locations.

At Sunset, we will need zoning changes that permit more height to come up with a viable plan yet we would hope to start out with a retail renovation of the existing important sections of the project first. Fingers crossed, we will see.

On the acquisition front, we are working through a number of important deals and though pricing remains uncomfortably rich, we are not afraid to step up to the plate for the right real estate. Nothing to report on this call, but we are working hard and hope to have more talk about over the next couple of calls.

Jeff Berkes and I will debrief and engage Dan as one of his first orders of business. I have asked Melissa to talk about the Sports Authority impact, our balance sheet activity including yesterday's announced dividend hike for the record setting 49th consecutive year, big celebration for the 50th next, as well as our full-year earnings expectations.

And I'm going to ask Dan G. to introduce himself before we open up the line to your questions afterwards.

But right now, Melissa?.

Thanks, Don, and good morning, everyone. We will start with an update on Sports Authority. First, all five of our spaces were occupied and rent paying through June 30. The lease at Montrose Crossing here in Rockville, Maryland was assumed by Value City Furniture so we will have no down time or lost rent on this one.

With respect to the lease at East Bay Bridge in Emeryville, California, Dick's Sporting Goods obtained designation rights for the lease and we are currently in negotiations with Dick's to take over the space. We will know more on this one in the next 60 days.

So lease at Crow Canyon was rejected effective July 1, with Brick Plaza and Assembly Square Marketplace vacant as of August 1. All outstanding AR for these spaces was 100% reserved as of June 30. In total, we are losing 103,000 square feet of lease space which results in a 50 basis point decline in occupancy that we will see in Q3.

The spaces have a total base rent of $2.1 million or $20.50 per square foot and we expect to be able to release the spaces at rents 10% to 20% higher. We are in discussions with tenants for each of the spaces, final leases will of course take time, typically a full year before new rent starts.

For the rest of 2016, we expect these three spaces will impact FFO by approximately $0.02 and of course be a drag to our Q3 and Q4 same center metrics. Enough about Sports Authority. Yesterday, we announced an increase to our quarterly dividend of $0.04 per share to a quarterly rate of $0.98 and an annual indicative rate of $3.92 per share.

This is our 49th year of consecutive increases, the longest in the REIT sector and one of the longest for all public companies. While we talk a lot about it, this is something we couldn't be more proud of, to be able to pay our shareholders more every year for almost half a century is pretty awesome. Now turning to the balance sheet.

During the quarter, we issued $59 million of equity on our ATM at a weighted average price of $156.24 per share bringing our year-to-date ATM issuances to $92 million. In July, we opportunistically issued $250 million of 30-year senior unsecured debt at a coupon of 3.625% and an effective rate of 3.75%.

We ended the quarter with 18% debt to market cap, net debt to EBITDA of 5.2x and a weighted average tenure of our debt of over 11 years after reflecting the July offering. This leaves us lots of flexibility with respect to the balance sheet and locking in these historically low rates will benefit our company for a long time to come.

From a capital standpoint, we expect to incur about $250 million in development and redevelopment spend in the second half of 2016 as both phase twos at Assembly Row and Pike & Rose are fully under construction.

The cost will be funded with the remaining proceeds from the July bond offering, equity under our ATM and the line of credit, all with an eye toward maintaining net debt to EBITDA in the low to mid 5 range. Absent a significant acquisition, we do not plan to issue additional long-term debt in 2016. Now turning to guidance.

We have adjusted our guidance range to reflect the incremental interest expense from the July bond offering. We had not anticipated accessing the long-term debt market until late in 2016 or early 2017 and consequently had assumed funding on our line of credit.

The impact is $0.03 to $0.04 and our updated FFO per diluted share guidance range adjusted the low-end of that to a range of $5.62 to $5.68. A few additional items to note about our guidance range as well as items having an outsized impact in the second half of 2016 compared to the first half.

First, consistent with our past practice, our guidance range does not include any future acquisitions or dispositions. The range includes the loss of the three Sports Authority spaces I discussed earlier which is a drag of approximately $0.02 per share.

We will have additional compensation costs associated with our new CFO of approximately $0.015 in the second half of 2016. We still expect same center including redevelopment for the year to be in the 3% area.

Given our year-to-date metric as of 6/30 was 3.8%, we do expect some deceleration in the second half of the year as we feel the impact of the Sports Authority vacancies, anchor rollover timing and expected more normalized levels of bad debt expense.

We expect this to be concentrated more in Q3 as we will see additional rent starts late in the year for anchor tenants like Saks at Congressional, TJ Maxx at Pentagon Row and Field & Stream at Melville. With that, I would like to turn the call over to Dan to introduce himself before we open up the call to your questions.

Dan?.

Thank you, Melissa. I just want to say a few quick remarks. First, let me say how thrilled I am to be here at Federal starting in a little over a week.

Federal is a company whose management team, business strategy and balance sheet philosophy I've truly admired from afar over the past several years and I am really looking forward to joining and becoming a value-added partner to Don, Melissa and the entire senior management team here at Federal.

And second, let me just say how much I look forward to getting to know everyone that is here on the phone today over the next several months as I settle into my new role. Like I said, I could not be more excited to be here. Operator, I think we can now turn the call over to questions..

Thank you. [Operator Instructions] And our first question comes from the line Jeff Donnelly with Wells Fargo. Your line is now open..

Good morning, guys, and welcome aboard, Dan.

If I could, I wanted to go to the California market so if Jeff is on the phone, I just wanted to get your sort of developing thoughts on just the competitive landscape for Santana now and in the future, just with Stanford completing a big renovation, Westfield obviously embarking on one and now Related has approvals for City Place.

Just curious how you think not just about the incremental retail space, but also how that impacts your leasing options? Do think you guys could maybe lose the high-end if you will and could City Place maybe diminish the uniqueness of Santana?.

Hey, Jeff. Those are all good questions and clearly stuff we have been thinking about for a long time. I think I mentioned this on our prior call, Valley Fair at Westfield, they've had those entitlement since pre-recession so this is something that has been out there for a while and we think ultimately going to come to bear over the next few years.

And from our perspective, we are doing what we can do which is being very aggressive about merchandising the Street, making Santana a great place to come, the addition of the Splunk building with 670 more parking spaces, redoing some of the common areas, all that kind of stuff here.

And then thinking about the other parcels we have left to develop and how those are going to get developed out, all of that is being rolled into our thinking. And maintaining Santana's uniqueness in the marketplace is a great place to come and spend time and meet friends and eat out and shop and live and work and all that kind of stuff.

And so far everything has gone very, very well. We do expect some headwinds of course when Valley Fair starts the expansion. That is going to be a little bit of a dogfight for a few years but long-term, we are not concerned about it. As it relates to City Place, I don't know, there is still a lot to be written on that development.

I would never bet against Related but they've got a long ways to go there and geographically it is a little bit difficult to figure out how that intercepts a lot of our primary shopping traffic so more space in the market always affects everybody and they are putting a lot of space into the market but again long-term we are not overly concerned about that.

Stanford is a huge benefit..

Why do you say it's a benefit? And I guess when the dust settles -- I know that is a few years from now -- do think your retail positioning changes at all, and maybe you build more restaurants and away from fashion? I guess maybe another question is, are there any critical tenants for you or anchor type tenants there at Santana that expire in the next few years?.

Jeff, you know Santana pretty well and you know since they opened 14 years ago that the mix of the tenancy here has changed and a lot of the luxury has shifted out already and that happened a long, long time ago and really didn't affect us here at all in terms of our shopper traffic and sales of the property.

So the high-end going across the street to Valley Fair and continuing to do so, I don't think matters. Our whole strategy with Santana Row as it relates to not only the experience we provide people that come here to shop, but also tenants who say look, if it is your 400th store, you should probably be at Valley fair.

If it is your 10th, 20th or 50th store, you are very sensitive about the image you project to your customer base, Santana is where you should be and we have been very successful over the last few years bringing in some really great merchants like Kate Spade and Made Well and Bonobos and WarbyParker and the list goes on and on and that is continuing to happen in spite of the fact that everybody knows that the Valley Fair expansion is going to happen.

So, like I said and like Don said in his comments, our heads are down and we are doing what we need to do on a day to day basis to continue to maintain our position in the marketplace..

And just sticking to that area, I know this is a different county and sort of a different property type, but San Mateo recently put the topic of rent control on the ballot out there.

Just as someone who is local I'm curious what your reaction is to that and do think if it has legs, it has the risk of flopping over if you will to Santa Clara or not a concern, if I think about it..

I mean all the communities up and down the peninsula are considering that right now and if it is not on the ballot in November, it has already happened or it is going to happen, right? I mean the cost of housing here is a big issue and everybody knows that.

San Jose has had rent control for a very long time and they recently tweaked some of the rules around how that rent control works. That primarily affects owners of much, much older product than we have and even when you work through it, rent control in and of itself is in my mind not a good thing.

But it doesn't really have the adverse impact in a normal market. So yes, I think you are going to continue to see that and how the rubber meets the road is still TBD, but generally speaking most rent control laws are dealing with much older product..

Just a last quick one for Melissa, do you have an estimate of when I guess the decentralization plan will be fully implemented and be in the new run rate for G&A?.

2017, Jeff..

Thank you. And our next question comes from Ki Bin Kim with SunTrust. Your line is now open..

Thanks.

I was wondering if you could provide a quick update on Sunset Place and the recent lease up that you have shown?.

Surely. So the recent lease up is the Restoration Hardware deal that is taking long vacant space for what will be a short-term deal for them.

It may turn out to be a long-term deal but a short-term deal and they simply looked at the location of the real estate and said we don't know what you guys are going to do long-term, but this is a place that we need to be right now and we think we can do a lot of business out of there. So that is what that was about.

I want to talk about in terms of longer-term and basically here is the situation. As you know this is a dysfunctional property that has not been good for a long time.

What we are doing right now, the dawn side of our business, the operating side of the business is doing everything again it can to keep it moving, to do new deals like that and to keep it in place. The development side of our business is saying this needs to be fixed. It will be fixed if we can get the entitlement to do so in two stages.

One will be part of that property that is the best functioning part of the property today needs to be fixed up. There will be effectively a renovation to create a good shopping center there. The second part of the property will in order to do what the real estate needs, need to go vertical. We will need entitlement changes to do that.

The question will be do we do the first part without the entitlement for the second part? That we are not sure about yet. In fact we are leaning toward no until we know that we can get the entitlements to make the whole thing make sense. That is why I have been less forthcoming with respect to our plans.

We know what we're trying to get to but it really is going to depend upon the ability to get the entitlements to do so and that should happen over the next year and we will have an economic plan before that time to the extent we get them..

Okay.

I'm guessing it is probably way too early for some type of dollar spending scope?.

It is, I would be guessing right now. I don't want to do that to you..

Okay. And just a general question.

Have you guys adjusted your return hurdles at all or thinking about it just given the interest rate environment and probably every market environment we are in right now?.

A little bit. We have come down a little bit in terms of what we want. We are willing to be more aggressive on acquisitions for the right property and a lot of that frankly is around where we are able to do 30-year money. That has changed things for us.

The ability to do that not everybody can do 30-year because I do believe you've got to match the left side with the right side and I don't think 10 years is long enough frankly. So that has helped us an awful lot in thinking that through. But I have to say it is not about can you do acquisitions or not do acquisitions in my view.

It is about where do you allocate capital and how do you allocate capital? As you know and Melissa just said, who has got $0.25 billion to spend in the balance of this year on development projects that are expected to yield 300 basis points plus over what we are borrowing at? So when you think about capital allocation it is not so much about is there an acquisition to do, it is about is there a way to grow.

I mean any public REIT has to continue to grow. We just feel fortunate that we have the development opportunities to be able to do that and there certainly will be an occasional acquisition and we will certainly stretch to step up to what we need to step up to do for that occasional acquisition but I stress occasional..

Do you think private market cap rates in general for a good quality real estate has moved at all in the recent half-year or so or is that pretty much as well as a cycle?.

I think that is pretty darn consistent.

Jeff, do you have anything to add to that?.

Yes. I think things have gotten a little bit more expensive over the last three to six months. So cap rates I think and IRRs are a little bit lower than they were three to six months ago.

So we continue to see in the markets where we do business particularly out here in California, cap rates being in the 4 range and unusually the low 4 range and IRRs with an aggressive exit cap rate assumption in the 5s and low to mid 5s and I think that is somewhat consistent depending on the market and the asset over the last year, or so but I think things have strengthened in the last half a year..

Okay. Thank you, guys..

And our next question comes from Alexander Goldfarb with Sandler O'Neill. Your line is now open..

Good morning. Just two questions here. First, actually for Jeff, just out in California maybe just more general if you could just give an update on what you are seeing on the health of northern California as far as -- the apartment guys were talking about you obviously oversupply, but also softness on the job side and the tech.

And then, you listen to the office guys and it seems like office is pretty good.

So can you just give us your sense of what is going on in northern California as far as the economy and your expectations as you look out to next year?.

Yes, sure, Alex. I think the Bay Area gets painted with a broad brush which I think everybody understands and probably expects, but I think things are a little bit different maybe in San Francisco than they are in Silicon Valley right now particularly on the apartment side where there is a lot of product coming online in San Francisco.

And when you think about what it costs to build a condo or an apartment in San Francisco, you've got to get a pretty high sales price or pretty high rent so most of the stuff that is coming online is targeting the same customer.

And there is definitely some softness up there from what we have seen and heard both in condo sales prices and in apartment rents and concessions creeping back into the market. Down in the Valley, I think it is probably a little bit different.

I mean like Don said in his comments, we are doing better on our rental increases at our apartments here and Santana Row than we expected to be doing this time of the year, this part of the cycle. And I think that goes to a couple of things of course. One is supply; there is a little bit of a supply lull at the moment.

We will see how long that continues but also job growth and I think that is different between San Francisco and the Valley as well. Things might be a little bit more choppy in San Francisco as it relates to that, down here in Silicon Valley, they are very, very healthy.

We look at job growth closely and we are still seeing not only a lot of jobs being added, but a big queue of unfilled jobs at most of the major employers.

You are at sub-frictional unemployment rates right now in both San Francisco and Silicon Valley and there is a lot of competition still from the big firms to hire the right people and the big firms here are still very, very profitable and they have a ton of cash on their balance sheets and they are growing.

And while that may not be at the same pace that it was a year or so ago, it is still extremely strong from a historical perspective. So we are really bullish on Silicon Valley right now, always cautious as you know but very bullish and I think what you are hearing is more broad brush effect than what we are seeing in our product..

Okay.

So bottom line is San Francisco maybe a little soft but Silicon Valley is still very strong it sounds like in your view?.

It is..

Okay. Second question..

Alex, let me say something about Santana Row a little bit and Donnelly asked about it before and I want to get this thought out of my head. The reality is similar to what we have seen on the East Coast, there is the supply that is around, the pickling on the office side is not necessarily what employers are looking for.

So you see vacancies, you see "softness" in product that is in some respects not leasable and what has happened at Santana, while there is no question in my mind that we will be under pressure in terms of the rents that we will get on retail because of the Valley Fair expansion -- because of any kind of expansion when you add that much space over the next few years, the place itself is so solidified and is so good at what it is that we do benefit big time on both the residential and on the office.

Now at the end of that street we are going to have to finish out one of these days and we are working through an office plan for the end of that street with retail on the ground floor and we are obviously boosted by the success that we have had with respect to Splunk.

Now I'm not ready to announce that or to talk about that but given the environment, and all the comments you just heard from Jeff, we are going to have, there is going to be support around here to add incremental office and retail space to -- a small amount of retail, restaurant primarily -- space to Santana Row that captures what it is that we have done.

And I think that type of environment, that aminity base, that place that we have created will serve us real well on the office and continue on the residential side. We got to get specific on the questions you are analyzing..

Okay, Don, I appreciate that. Second question is maybe for Dan or Melissa. You guys issued debt earlier than you thought. Rates only seem to go one way for the past almost decade. A year out from now you have the Plaza El Segundo mortgage that comes due, pretty high coupon.

As you guys think about your capital needs over the next year, is your view more let's get stuff early like you did with the 30 year; let's half the market early, maybe prepay? Or your view is now, look, rates just only seem to stay low anytime people try to hedge early or do anything early; it ends up costing because rates keep coming down.

Given your balance sheet, it is not so bad; you can certainly support it to wait longer until that mortgage naturally matures? Or do you think about maybe attacking that early?.

Listen, what you just said, Alex, is exactly right. Where we look at the future is very much determined by what we have done in the past, and now we have an awful lot of flexibility.

So with respect to the particular loan that you are talking about at Plaza El Segundo, there is a requirement in our partnership agreement that we have some level of debt on that asset. And that particular loan is not prepayable until three months --..

May..

May of next year. So the likelihood is we will wait until May to effectively do something there. And again, we will wind up putting probably some level of debt back on that property on a secured basis because we need to give tax protection to our partners. In almost any scenario we see, it will be a benefit.

It will be cheaper than the debt that is there..

Okay. That is helpful, Don. Thank you..

Thank you. And the next question comes from Christy McElroy with Citi. Your line is now open..

Hi, good morning, everyone. Just a follow-up on the cost of capital discussion, as you mentioned earlier, you just issued the 30-year debt in the mid-3s, your shares trade at we are calculating around a 3 on an implied rate basis. You might have the lowest weighted average cost of long-term capital of any REIT.

You talked about being more aggressive on acquisitions for the right deals. I know you have always maintained a list of properties in the U.S. that you would want to own someday.

With your cost of capital where it is today who knows how long that will last, are you being more proactive in going out to some of those owners to try to create your own supply of new deals?.

Well, I don't know, Christy, that we are being more proactive. We are certainly being proactive. You may be seeing parts of that in the next few months and I will talk about that when I can. But again, I really need you to understand on the capital allocation side what we are putting to work in development and it is aggressive.

I mean we are aggressively putting money to work in a way that is far more value creative than with any acquisition no matter what is available on the marketplace today.

So it is not only, I only want to use this great cost of capital not to create one or two years worth of FFO, but to add value and right now it is pretty darn clear that the development alternatives over the acquisition alternatives are a slam dunk.

Now if we didn't have these development alternatives, you would see whole -- we got to grow, right, you got to keep going. That is the deal but we do and we do for years to come so that is really all I can say about that at this point..

Okay. And then, just following up on the guidance I just want to understand sort of the delta. So you lowered guidance by $0.03. I understand the debt issue causes about a $0.03 to $0.04 drag. You've got Sports Authority in the back half of the year that is another $0.02, the additional comp is $0.015.

I know you talked about this a little bit in your opening remarks but what are sort of the offsets to that? It seems like that all adds up to more than $0.03..

We did have better than expected during Q2 so I think there was some additional benefit from Q2 that was able to offset that, those negative throughout the rest of the year..

You know what it really is, Christy? It is our general sandbagging. It is the general reality that we wind up in running this portfolio with good things happening that we could not predict, that is what's happened.

So we don't take every negative thing and reduce guidance for it and consider the base at this property -- the base of this real estate allows us to have things happen that are not predictable, whether that is a lease termination fee, whether that is collections.

In the second quarter, we were incredibly successful with collections of some old stuff and that is -- nothing happened by itself. That happened with very aggressive running, but not something that we could have predicted.

So that is when I say sandbagging, that is what I mean, it is not intentional sandbagging, it is a benefit of a great portfolio that good things happen. So I mean we are conservative people, we do the best we can to make sure we are not surprising you guys to the negative but things happen in this portfolio so we didn't take it all the way down..

Got you. Thank you..

Thank you. And our next question comes from the line of Jeremy Metz with UBS. Your line is now open..

Thank you, guys. In terms of the shops at Sunset, I think around the time of NAREIT, you are close to filing those -- indensification there.

So just wondering have those been filed at this point? And if so, what has been the initial feedback so far there?.

We have not filed them yet. We are working through the strategy with the government officials down there on what the right timing would be to file that and there are some things going on, but I would anticipate over the next 30 to 60 days we are going to be in a position to file..

Okay.

Then just in terms of the Sports Authority lease at Assembly Marketplace -- sorry if I missed this, but do you have control of that box and with the Trader Joe's already slated to come in, who is on the target for that space?.

Yes. We do have control of the box. I don't want to give you the names of the tenants that we are talking to because we are having them compete with one another and trying to create the best deal, Jeremy. You understand that.

But I will say if you take a look at the merchandising in that shopping center, particularly with the Trader Joe's announcement that they are coming in and the success of the Row, the [indiscernible] Plaza adjacent to it, I mean that is pretty much ground zero for boxes. So we would very much anticipate competition for space for that box..

The only thing that I would just add is how really thrilled we are with our partner, Trader Joe's, that they are coming in with construction we have going on and all of the residential being added. It is a great co-tenant for those residents and there is already excitement and benefit that we are seeing..

Great, thanks..

Thank you. And the next question comes from Vincent Chao with Deutsche Bank. Your line is now open..

Good morning, everyone. I just wanted to go back to the cost of capital kind of discussion and you mentioned the attractiveness of 30-year yields today.

Obviously did a record-setting deal but just curious, your cost of equity looks pretty much equally attractive there and not that you need to delever further, but just wondering how you are thinking about equity versus 30-year when your FFO yields are pretty similar?.

Absolutely. And it is a balance and you know, we will do, we will try to do about $50 million a quarter on the ATM for the next two quarters through the balance of the year. We have done a little bit more than 100 -- we have done $92 million in the first half of the year off of the ATM and as you know we did an overnight that way. So it is a balance.

We are not trying specifically to delever. We are trying as you know to wind up -- we are working a 10-year business plan here where we are trying to double the earnings of the company from a few years ago. And in doing that, we said we'd do that and we are trying hard to do that on a leverage neutral basis.

So that means when we lay out these development opportunities, when we consider new development opportunities or new acquisition opportunities, that does, we look opportunistically at both markets and we are accessing both markets. You will never find us going wholly one way or wholly another way. The beauty of this business plan is it's a balance..

Got it.

What would be the downside of going more equity if the cost of that is similar?.

We have got money going out in a big way to produce development returns. We are trying to do that in a way that results in 6%, 7%, 8% FFO per share growth a year, that is one component of the plan and you are right, does that matter for equity over debt? No.

But we firmly believe that in not overly diluting shareholders in any one period of time to balance that with cost of debt that it 30 years is pretty close to equity frankly -- in balance that that makes sense.

Does that mean that we couldn't do more equity? No, it doesn't mean we couldn't but we don't think we need to because all of these markets have been pretty even in terms of their value to us..

Okay. Thanks, guys..

And our next question comes from line of Vineet Khanna with Capital One Securities. Your line is now open..

Good morning, folks.

Just maybe could you talk about the demand that you are seeing for your Sports Authority boxes?.

Sure, Chris, do want to do it? Jeff, do the West Coast, do the East Coast..

Sure. Of course as Melissa mentioned, two of them are not really ours to manage. The two that we have here on the East Coast are brick, there is active negotiations going on with multiple tenants as part of the redevelopment of that property where we also had the A&P box we got back.

So I would hope that in the next year or two, Don is going to talk about Brick Plaza and the vision for it just like he mentioned earlier on Mercer and Tower. I feel very confident about that. And as it relates to Assembly as we said earlier in the call, there is a lot of active interest.

It is important from a merchandising standpoint to nail that with the right type of tenancy and take advantage of it being a complement to the Row property next door and the outlet mix on softgoods that we have. A lot of interest. As soon as we are able to provide you more guidance on exactly this time we will..

Let me add one thing to the bigger picture if I can on the vacancies in the boxes that we have. As you know we work hard to get vacancies from A&P and Sports Authority is giving us vacancies that we didn't necessarily count on, but we got them anyway along with LA Fitness and some of the other stuff we talked about in the past.

You should know that since we started talking about that we have done five key deals, Uncle Giuseppe's at Melville, Field & Stream at Melville, Sachs Off Fifth at Congressional, Trader Joe's at Assembly, LA Fitness at Delmar. That is 200,000 square feet of deals where the old rent was about $18 a foot and the new rent is about $27.

So the notion of what it is that we are doing -- does that guarantee that the remaining ones are going to be like that? Of course, not.

But it does say that this idea of creating better shopping centers for the next 10 years is what our focus is and demand on the East Coast and then Jeff will got on the two on the West Coast, you will see that this real estate will not have a problem releasing and really changing completely the shopping centers that they are in that those Sports Authorities are in, particularly Brick..

Out here on the West Coast, we have got two, a small format store in Crow Canyon which we have back and like Chris said, we have got multiple interest from retailers on that as well and the rent will be higher than the rent that Sports Authority was paying.

And then at East Bay Bridge, Dick's acquired the designation rights to that lease so we don't know exactly how that is going to turn out, but I will tell you the lease rent is a low double-digit rent and we have interest from multiple tenants to take that should we get it back. But we don't control that at this point..

Okay, great.

And then just at Palace and PerSei, I know you guys talked about this a little bit, but have you seen any change in rents and in abatements there?.

No, we really haven't. It has been from the last quarter to this quarter consistent including pace. Pace has been consistently good and the rents have been.

I frankly have been looking for more, I've been look for a change in the Spiderman characteristics of the rent to be able to allow us to push rents and we have not seen that and also it has been consistent with what I've been talking about..

Okay, great.

And then just lastly, Don, has the vast majority of the East Coast operations restructuring related hiring been completed?.

It has..

Okay, great. Thanks for the time..

And our next question comes from the line of Jason White with Green Street Advisor. Your line is now open..

Hey, guys. Just a quick question on Pike, you talked about the construction hampering kind of the feel of what the property is going to become.

When does the dust really settle there where it kind of becomes what it is going to be without all the construction?.

It is really 18 months. We will be sitting there in 2018. The first tenants and this is the way the stuff kind of works, REI will be the first tenant in the next phase open and that will be open by the middle of next year. Then the numbers kind of follow after that, Pinstripes follows after that, those are in a smaller building.

But the bigger building particularly the Tower that has condos on top, a hotel in the middle, retail on the ground floor and the adjacent building on the other side, we are going to be in 2018 as that is being turned over. So it is really that period of time, Jason. When those two things are done, you will see, you will feel what we are talking about.

If I could get you onto the parking garage today at Pike & Rose and look out over it, you would get this completely. You would see exactly what I'm talking about. So really it is like anybody who is going to be on the East Coast anytime over the next 30, 60, 90 days, I would be happy to walk up there with you..

Great, thanks. Just one more.

On your lease spreads, the options or the renewals, do you have it broken down into negotiated renewals versus the contractual renewals?.

I don't.

Do you?.

Options aren't in there. It is all negotiated..

Everything in renewals is negotiated, there is no options baked in the renewals?.

No, that is right. If it is not a piece of paper that was an executed deal, it is not in the numbers..

Okay. Thank you..

Thank you. And our next question comes from Craig Schmidt with Bank of America. Your line is now open..

Thank you. I guess my question is concerning the experiential retailers and I would like to use Legoland at Assembly Row as an example.

One of the pushbacks I get when I talk about these type of retailers is they say once you visit, are you done? Do you ever go back? So I guess I am asking you one, do you know anything about repeat visitors to like a Legoland or is it just a matter that their draw is so much broader that they continue to see good attendance regardless of not repeat?.

Got you, Craig. Let me give you my point of view and Chris is going to jump in as soon as I am finished. There is no doubt and I agree with the basic concept with experiential tenants particularly that first of all, you know as soon as they open whether there is something that resonates or doesn't and Legoland resonated in a big way.

The challenge then is to say okay, is that the level of business that they are going to maintain throughout their lease life? You can't assume it is.

It is not like a restaurant -- at least we have found and it is not just Legoland, this kind of notion, it is not like a restaurant that gains in popularity all the way through and it is a lot of small visits that continue to happen.

The question is does it settle into a place because of its big draw from a large area where it is always something that people continue to go to once a month. At first they will go a lot and then over time they go less.

What we see there is first of all, is like a huge opening and that was so validating to the property that it was critical and they have settled and they have settled down a number from the beginning in a place though that still works really, really well.

Now what will be interesting to see is from this point, do they grow slowly like other retailers from here? Do they reprogram the space with different attractions and things like that? How does that work out? That is what we expect to happen but the level that they are doing today is pretty darn impressive albeit not what it was when it opened up..

I would say and I think Don answered the business side of it, from our perspective on why we did Lego there and why this experiential use was really important was that it provided a daily draw -- or it provided a draw to the 18 million tourists that come into Boston every year.

We got on the same program as the Aquarium and the Duck Tours and the Science Museum so that those constituents coming in came to Assembly to drive traffic to every other use we have there.

So there is the business answer and I think that will drive growth but there was also a very defined purpose as to why we did it which was creating a use and a need that attracted a regional draw. There if you talk to them, they draw from about 120 mile radius. We see field trip buses there all of the time.

And I have got three kids, I remember when they were younger, the same destination. At the point in time Chucky E. Cheese local for birthday parties I think that probably whether 30 times over a window of time. So I just think that Lego is also serving that same purpose of families and bringing back that recognition.

And so we are thrilled with Legoland there. We just added iFLY at the White Marsh which is the same kind of thing.

So in the right places for the right draw I think these are uses that make a lot of sense but you have to have the big picture as to what the end use purposes is for this and this was very disciplined in our decision-making to bring them here..

Great. Thank you for your thoughts..

And our next question comes from the line of Michael Mueller with JPMorgan. Your line is now open..

Yes. Hi.

I guess first on the sub-under property expansion and conversion opportunities, what exactly is being contemplated for 3rd Street Promenade?.

I'm sorry, can you restate that, I missed the last part of what you said?.

Yes.

Third Street is listed under property expansion and conversion opportunities and I was just curious as to what the conversion or expansion opportunity is there?.

Yes. It relates primarily to some of our second floor spaces and our multi-story buildings.

A good example would be 301 Arizona which a couple of years ago we had a two-story retailer and we found some upside in the building by converting the upper levels of the retail space to office, reducing the size of the retail space and making it ground floor only and therefore getting a lot more rent for it.

So we have a couple of other buildings that fit into that general configuration that still have two-story tenants or two floors of retail in them as they come back to us we will think through that as well..

Not only that, Mike, but because we are a landlord on the street but we don't own it all, we are always looking for adjacencies. So to the extent the primary reason it is on that schedule is for the second floor things that we got to do stuff with.

But taking that and moving it across to an adjacent building is why we maintain and try to build on great relationships with those owners and those are the other possibilities that we try to go for..

Got it.

And then just going back to something I think Melissa said, looking at the renewals, were you saying that any lease that expired where there is a fixed option for new price that is being excluded from this pool?.

It is anything that would be a contractual option so if it is already in the lease agreement when we execute it and it is a contractual option that is not included..

So if you have something that is a 3% increase that is not in here?.

Right..

Okay.

And do you know about how big that pool of leases is compared to the 267 that was signed or renewed this quarter?.

I don't have it in front of me, no. It is typically a fairly small percentage for us..

It is pretty minimal? Okay. Thank you..

Thank you. And our next question comes from the line of Floris van Dijkum with Boenning. Your line is now open..

Great, thank you.

On the previous call asking for updates on the Chicago strategic expansion possibilities and I know that the person looking into that previously is no longer there but could you comment on that job now?.

We are not selling those assets to the person previously looking at that responsibility by the way. You know, I can tell you this, I can tell you that Jeff Mooallem has taken over for Jim on the responsibility for the Chicago properties as a part of that division of the company.

That Jeff Mooallem, I shouldn't speak for him but I'm going to -- is more bullish on opportunities in that marketplace and at those particular assets than necessarily we were thinking previously. And so he is going to get some time to do what the previous guy in charge in coming up with a [indiscernible] wasn't able to do.

So you're going to have to keep asking it every three months and that is fair..

Fair enough. You sort of alluded to some of the rental softness in the DC markets and what kind of tax -- would you see any further impact now that you have got the two buildings at Pike leased so far.

How has that impacted future [technical difficulty] and?.

I think I got you, you are coming in and out so excuse me if I haven't fully gotten your question. But I think what you are saying is if we don't see any improvement or further deterioration are our future yields at risk? And the answer is sure, they are. Now where we are today and this is what is interesting to me frankly.

We have absolutely even with the construction zone validated that this type of living is what people are willing to pay more for in terms of the marketplace. So we continue, we have gotten -- continue to get premiums to the marketplace for Pike & Rose apartments.

The next phase will add more Pike & Rose apartments and in fact we still have more to do in Palace this way. There will be a change in the supply and demand dynamics in addition to a project that is getting a whole lot more as we talked about before stable in terms of what it is going to be.

But to the extent it continues to soften yes, there will be pressure on the yield. That is just a matter of fact the way it is..

Great. Thanks, Don..

Anything else operator?.

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Leah Andress for closing remarks..

Thank you everyone for joining us today and we look forward to seeing you in the coming weeks. Please reach out with any questions you have. Thank you. Bye..

Ladies and gentlemen, this does conclude the program for today. You may all disconnect. Everyone have a great day..