Leah Andress - IR Don Wood - President & CEO Dan Guglielmone - EVP, CFO & Treasurer Chris Weilminster - EVP, Real Estate & Leasing Jeff Berkes - President, West Coast.

Mike Mueller - JPMorgan Jeff Donnelly - Wells Fargo Securities Craig Schmidt - Bank of America Merrill Lynch Paul Morgan - Canaccord Genuity Haendel St. Juste - Mizuho Securities Alexander Goldfarb - Sandler O'Neill George Hoglund - Jefferies Chris Lucas - Capital One Securities Christy McElroy - Citigroup.

Welcome to the Federal Realty Investment Trust Third Quarter 2016 Earnings Conference Call. [Operator Instructions]. I would now like to turn the conference call over to 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 third quarter 2016 earnings conference call. Joining me on the call are Don Wood, Dan G., Dawn Becker, Jeff Berkes, Chris Weilminster, Melissa Solis and James Milam. 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 earnings, 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 operation. These documents are available on our website at FederalRealty.com.

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. If you have additional questions, please feel free to jump back in the queue. And now I'd like to turn the call over to Don Wood to begin our discussion of our third quarter 2016 results.

Don?.

Thank you, Leah and good morning, everyone. Last night we reported third quarter 2016 FFO per share of $1.41, 3.7% better than last year's exceptionally strong quarter and above our internal expectations.

Given these results we're comfortable reaffirming our previously issued guidance range for full-year 2016 in effect narrowing it a bit to $5.63 to $5.67.

I want to talk about the third quarter's reported results, expectations for the balance of the year and most importantly what this means for 2017 since we released initial guidance last night that fall short of Street expectations, mostly for value enhancing initiatives that have a short term cost. More on that in a few minutes.

Let's get started with the quarter. At $1.41 a share following $1.38 in the first quarter, $1.42 in the second, we're happy with that result given the fact that, as anticipated and as we discussed previously, this is the quarter when you really see the full effect of the big vacancies we have been talking about for the past few quarters.

Sports Authority is gone, A&P, Hancock Fabrics, Hudson Trail boxes are gone, etc. And they were all in and rent paying a year ago. When coupled with a particularly strong quarter a year ago where FFO per share had gone 11%, this all made for a tough year-over-year comparison.

Those vacancies this quarter, along with the inclusion of poorly leased Sunset Place and CocoWalk, resulted in a reduction of our portfolios lease percentage of 120 basis points to 94.3% and a physical occupancy reduction of 200 basis points.

Those vacancies, in addition to some strong bad debt recoveries and percentage rent positives in last year's quarter, resulted in anemic same-store growth comparisons by some 150 to 200 basis points lower than they would have otherwise have been.

When you think about it, it does say an awful lot about the portfolio that same-store grew 1.5% in a quarter that occupancy dipped by as much as it did. It would be wrong to conclude that leasing activity has trailed off, however, as can be seen in the leasing done this quarter.

There was a lot of it -- 93 comparable deals, that is more leases than any quarter in the last couple of years, for 427,000 feet of space at an average rent of $31.25, 14% higher than the tenants they replaced.

In fact, over the first nine months of this year we have done 269 comparable deals or 1.2 million square feet, 17% more volume than the first nine months of 2015. And that leads me into the discussion I want to have about our initial guidance for 2017 of $5.83 to $5.93 per share.

So let me pivot now and use the rest of my prepared remarks to discuss 2017. I think this will make us one of the first to issue guidance and this year particularly requires explanation.

And let me start out by being crystal clear, that despite 4% projected FFO growth at the midpoint of guidance next year, nothing has changed our outlook as to the achievability of hitting or beating our long term business plan goal of doubling income over 10 years.

In fact, it is precisely because of the items diluting 2017 that I have greater confidence we will get there. To make it as clear as possible we have included a schedule of this year's -- this quarter's press release and 8-K on the reconciliation of FFO guidance -- on the FFO guidance page that will parallel the comments I am about to make.

A little background first as to why we're so aggressively repositioning so much of our portfolio. We have seen consumer behavior changing and changing at an accelerated pace and impacting nearly every business. Retail real estate is no exception.

That is why a couple years back we turned up the heat on virtually every initiative we had at the same time in every facet of our business at a time when capital was cheap in an effort to put this best-of-class portfolio in the best possible shape to thrive in markets where consumers demand a higher level of service and an environment that they want to hang out in as an integral part of their lives.

Of course it takes time, often more than we would like. But we view it as critical to the long term strengthening of this real estate portfolio. We feel that we're best positioned to do this given the quality locations of our real estate and our track record of success in transforming different types of retail real estate.

So, we accelerated the timing to start the second phases of our big mixed use developments before the paint was dry on the first phases, even though the second-phase construction affects first-base performance until the overall sense of place is established.

We jumped into Miami with not one but two new retail opportunities to fix broken but well located retail destinations even though the existing income stream will of course be disrupted in preparation of that process.

We accelerated the full build-out of Santana Row, first with the option on the 12 acres across the street called Santana West, then with the spec built, but now fully leased, Splunk office building and currently with the approval and announcement to move forward with the $215 million, 310,000 square foot office retail tower that will anchor the end of the street.

We restructured our personnel through a decentralization and systems investment initiative so that the human capital was sufficient, properly aligned and had the tools necessary to accelerate progress in both the mixed use and the core portfolios.

We took advantage of a very favorable capital environment; both by delevering concurrent with and somewhat ahead of, any development spend. And by turning out our debt portfolio with $700 million of 30-year unsecured bonds, creating a level of safety unmatched by any of our peers.

Of course at the expense of lower earnings caused by higher short term interest expense and lower overall leverage.

We have and continue to identify more value enhancing redevelopment opportunities with our new decentralized structure than ever before in our history and we're getting more of them started faster even though they hurt short term earnings. Many of those opportunities have been made possible by our ability to get back underperforming anchor boxes.

And it is this last point, the one related to the far deeper redevelopment pool sparked by anchor vacancies, that is one of the three main reasons 2017 appears light, even though it is this redevelopment initiative that will drive significant value creation and earnings growth to follow.

And if the markets are softening and the cost of money is increasing, the quality of the real estate location has always been the best hedge possible. We have got the best quality real estate portfolio. Let me give you some numbers.

The re-lease of the excess anchor vacancy in the portfolio creates an obvious drag -- earnings drag until the spaces are coordinated into the bigger development plan. Then in some cases entitled, then leased, then turned over to the tenant for interior build-out, then occupied and finally rent paying.

Generally we're not just trying to re-lease vacant boxes; we're trying to reposition and fortify retail destinations and that simply takes longer. We have 700,000 square feet of anchor and near anchor vacancy in the quarter, that is more than double the box vacancy that we historically have carry.

It's Sports Authority, A&P, it is Hudson Trail, it is Hancock Fabrics -- you know the names. The prior rent on that 730,000 feet was $19.75 and represented $14.5 million of rent or $0.20 a share of former in-place annual rent that is missing.

As of today we have got 42% of that space Re-leased and re-leased at 37% higher rent than was previously being paid. It is re-leased to Ulta and DSW at Brick Shopping Center; to Field and Stream and Uncle Giuseppe's at Melville Shopping Center; to T.J. Maxx at Pentagon Row; to LA Fitness at Delmar, etc.

Every one of those deals is part of a much more comprehensive repositioning of the shopping center, not merely a re-leasing of the box. But it generally doesn't become rent paying until 2017 and 2018 with a heavy weighting toward the back end of 2017 and 2018.

Accordingly, we have forecast 2017 to be roughly $5 million or $0.07 a share lower than it otherwise would be. Of course the value creation of these redeveloped shopping centers would be significant when complete.

Now let's go to the big developments and talk to the natural short term dilution that comes from the delivery and lease-up process associated with the residential development at Phase 2 of Assembly and Pike & Rose as well as the dilution that comes from the probable reconfiguration of CocoWalk that we considered in our 2017 guidance.

First, the Phase 2 residential building under construction at both Assembly and Pike & Rose. At Assembly a 447 unit residential building whole montage and at Pike & Rose, the 272 unit residential building called The Henri, will both begin delivery and lease up in 2017.

The dilution that comes from this process is expected to exceed $4 million or $0.06 a share. Operating cost, marketing, interest expense naturally exceed revenue as development turns over these buildings to operating teams. Expenses exceed revenues significantly at first, then less so as the buildings lease up.

It is unavoidable and will create an earnings drag of about $2 million before interest and an additional $2 million at the FFO line. Those two buildings alone are expected, however, to create well over $100 million of value when stabilized.

Similarly, at CocoWalk in Florida, while we haven't completely finalized our redevelopment plans and numbers, we do hope to be able to get those plans through our investment committee early next year which will allow us to begin repositioning space and tenants and beginning construction on a portion of the shopping center in 2017.

As you would expect, as you would assume, occupancy at CocoWalk -- and at Sunset, for that matter -- would get worse before it gets better and we thought it prudent to include the impact of Miami's first step toward repositioning, estimated at a couple of cents of share in our guidance.

Obviously the value expected to be created at CocoWalk far exceeds the 2017 accounting costs. Basically our 2017 guidance would have been roughly $0.16 a share higher if we were simply not building Phase 2s at Pike & Rose or Assembly and not proactively taking out our anchor space.

Hopefully the enhancements we're making to our disclosure, including the timing of income coming online, will provide more clarity now and in the future. Those are Dan's ideas. The final significant item affecting 2017 guidance is our lower near term operating income expectations at Pike & Rose.

Continuing softness in the Montgomery County Maryland residential market, especially in the last 90 days and the ongoing construction disruption of Phase 2 simply make me uncomfortable maintaining 7% yield guidance at Pike & Rose.

And accordingly, you will note a change in our 8-K disclosure for both the first and second phases which, as I alluded to earlier, are so integrated and they really need to be viewed together, to a 6% to 7% yield with better disclosure on the time period for getting there.

The disclosure now also includes site maps that we're adding that make the proximity of the Phase 2 construction to Phase 1 quite apparent along with the land and entitlements for future phases. I, we, remain as positive as ever on what we're creating there, but have our eyes wide open as to the additional time that it is going to take to get there.

The combined impact of that lower expected yield and slower pace are negatively impacting our 2017 guidance by about $0.06 a share.

All told, the $0.22 a share or more that is pushed back from 2017 to the next 12, 24, 36 months, in addition to the positive momentum and contributions from the many initiatives we're working on and from those that we will add onto in the future. So that is it for my prepared remarks.

We have got a lot going on around here and a huge investment in our future. A bunch of construction in progress on the balance sheet and the right type of product for the future on some of the best pieces of real estate in some of the best markets in the country, our heads are down and we continue to execute.

I look forward to spending more time with many of you in a couple weeks in Phoenix going through this and whatever else you would like to talk through. Now let me turn it over to Dan before opening up the lines for your questions..

Thank you, Don and Leah. Good morning, everyone. Don covered a lot in his remarks so I will fill in just a few places as it relates to the third quarter and the balance of 2016. Then I want to spend some time going through a few specific areas that will help you with your modeling of Federal going forward.

First the third quarter, the $1.41 of FFO per share and same-store NOI growth of 1.5% was fully in step with our expectations for the quarter. As Melissa specifically discussed in our second quarter call in August, same-store growth is expected to decelerate in the second half of 2017 with most of that concentrated in the third quarter.

Now that was due not only to the difficult third quarter comp that we faced, but also due to the impact on occupancy and cash flow of our anchor repositioning activity.

With portfolio occupancy at 93.1% at quarter end versus 95.1% at third quarter 2015, note that almost 150 of the 200 basis point diminution can be attributed to those eight anchor boxes that Don referenced in his remarks.

The three A&Ps, the three Sports Authority's, Hudson Trail and Hancock Fabrics which were all in occupancy in 2015 were gone in third quarter of 2016.

Also note that this vacancy totaling over 320,000 square feet is of highly productive centers located in dense in-fill markets, many of which we're redeveloping, re-merchandising like Assembly Square in Boston, Melville Mall on Long Island, Montrose Crossing in North Bethesda, Westgate in San Jose to name a few.

Needless to say we feel very good about our ability to reposition these boxes effectively. Through the first three quarters of 2016 our same-store growth stands at 3%, 1.9% excluding redevelopment. We project fourth quarter to be in line with this run rate and expect same-store growth for the year to remain in the 3% area.

Next, on the development front with respect to Assembly Row and Pike & Rose, contribution for the third quarter was $6 million, up from $4.9 million during the second quarter. Assembly Row Phase 1 is 100% leased and now is producing approximately 95% of its projected stabilized property operating income or POI.

As Don mentioned, Pike & Rose Phase 1 is behind from a run rate perspective mostly driven by softness in effective rents at the PerSei and Palace apartments and currently we're closer to a 60% projected stabilized POI on a run rate basis.

Although we're pleased to be hitting or occupancy projections with PerSei almost 98% leased and Palace almost 86% leased at quarter end. Further we continue to command a premium to the market of 10% to 15%. Out west at 500 Santana Row we're slightly ahead of plan and expect Splunk to open at the end of the fourth quarter.

Just a reminder, this 234,000 square foot development is delivering a 9% cash on cost yield.

Given the success at 500 Santana combined with the continued strong demand for office space in the submarket, we're moving forward with the development of 700 Santana Row, a 310,000 square foot office and retail development located at the end of Santana Row which will effectively finish off the street.

We're projecting a stabilized cash on cost of 7% with projected delivery in 2019 and stabilization in 2021. Now, let me cover a few areas to provide additional clarity to your modeling of Federal going forward.

As it relates to the core business and the impact of our anchor repositioning initiatives, we expect overall portfolio occupancy to stay at its current 93% through fourth quarter and remain at this level for most of 2017. We project occupancy will begin to improve at the end of 2017 and continue into 2019.

With respect to the 730,000 square feet of anchor or near anchor vacancy in effect during the third quarter, 42% or 310,000 square feet is leased. Of that 310,000, 135,000 will be rent paying by the end of 2016 with start dates for the remaining 175,000 square feet coming on over the course of 2017 and into 2018.

At this point, I would like to take a moment to highlight the new disclosure in our 8-K regarding Assembly Row, Pike & Rose as well as the recently added 700 Santana Row.

In our supplemental information exhibit starting on page 16 we have added detail which provides annual guidance on the timing of property operating income at these developments as each of the phases grow toward stabilization.

We have also included site plans on the following pages for both of these communities to provide you with a sense of the progress and the scale of these projects. And also to provide some context to the interconnection between the phases at each development. Now let's turn to the balance sheet.

As you know, at the beginning of the third quarter we raised $250 million of 30-year unsecured notes at a REIT record yield for a 30-year of 3.75%. That issuance is now reflected in our quarter end metrics. Let me highlight a few of them.

Net debt to EBITDA stands at 5.2 times, our average debt maturity remains at a sector leading 11-plus years and our weighted average interest rate is just above 4% with almost all of it fixed.

On the equity side we raised $55 million of common stock through our ATM program during the quarter at an average price per share of $159.38 bringing our year-to-date total ATM issuance to $146 million.

As a result of this activity, at quarter end we had cash on the balance sheet of $100 million and our $800 million credit facility was completely undrawn. From a capital standpoint this significant level of liquidity positions us well as we close out 2016 and head into 2017.

As it relates to development and redevelopment, we expect to spend approximately $150 million in the fourth quarter and $400 million to $450 million in 2017.

We will fund these capital requirements through a combination of cash on hand, free cash flow, opportunistic issuance under our ATM program and utilization on our line of credit which we expect to repay through a bond issuance in late 2017, early 2018 or sooner if an attractive window avails itself.

This mix will be dictated by our objective of maintaining our debt to EBITDA ratio in the 5 to 5.5 times range. Finally on the acquisition front, while we don't have anything concrete we can report at the moment, we continue to pursue a number of compelling opportunities.

While the market remains frothy from a valuation standpoint, we do see long term value in these opportunities and will be aggressive in our pursuit.

With 13 years of investment experience in my previous seat I couldn't be more excited to bring that experience to Federal and work with Geoff Burkes and his acquisitions team on the West Coast and with Barry Carty and team as my partners on the East Coast, as well as with the entire Federal Realty investment committee.

Lastly, before I turn it over to questions, I'd like to talk to you about my initial impressions from being here for almost three months from call it a new-to-Federal point of view.

First and in my view most importantly, the understanding that the commercial real estate business is constantly changing and changing quickly, especially in retail, is ingrained into Federal's DNA.

Federal's approach is proactive and dynamic; it does not approach filling vacancies simply to maintain occupancy and cash flow at a property but where it makes sense uses that vacancy to reposition, re-merchandise and redevelop the entire asset.

Each decision that is made is made with a long term goal of ensuring that each center is relevant for the long term. Second, the real estate really is that good. Before coming to Federal I was aware that it had a best-in-class portfolio.

In my first months here I've traveled the East and West Coast seeing about half of the portfolio so far and the properties are even better than I had imagined. Third, I am convinced that we're creating the right environments with the mixed-use properties that we're currently developing. I spent time at Assembly Row, Bethesda Row and Santana Row.

And to give you a little insight into my personal life, I currently live at Pike & Rose, I work a block away and I spend the majority of my free evenings and many weekends at the property.

So you could say I have done my due diligence, a real, live, work play experience and I couldn't be more confident in the communities we're creating at Pike & Rose and Assembly Row. Lastly, I have been truly impressed with the management here.

It would be easy for senior management to sit back and simply rely up on the power of its best-in-class portfolio to grow, but there is foresight and dynamism in the way management is looking to implement its growth initiatives and is proactively making investments in its people, in its systems in order to make this happen.

As you can imagine, I have been in the weeds during the first 2.5 months here digging into the details that support these initial observations, so I share them with you with confidence and conviction. I look forward to seeing many of you at NAREIT and spending more time with each of you going forward to help you see what I am seeing at Federal.

With that, operator, you can open up the line for questions..

[Operator Instructions]. Our first question comes from Haendel St. Juste with Mizuho. You may begin..

I bet you haven't been asked this one in a while, but given your historical valuation premium, but what a difference one quarter makes.

So my question is, how are you thinking about stock buybacks these days with your stock now trading at a double-digit discount by our estimates NAV? And how are you currently thinking about buybacks versus other capital allocation alternatives?.

Haendel, this is a long term business and the notion of changing the capital spending plan and issuing equity versus buying equity, etc., etc., versus based on a three-month quarterly earnings point to me is not appropriate. We have capital needs that are very clear, very much in place and all value accretive.

The notion of continuing the program where we're is what we believe. Now, for things that have not started -- for developments that have not started, the CocoWalk conversation that I had in my prepared remarks, etc., it's very possible that those -- the decision could start additional will depend on where the marketplace goes in 2017.

But every single thing -- I mean, the big point of being disappointed by the guidance of where we're, for the most part, as I think is pretty clear to you, is necessary to create the value that we're creating. So the idea of doing a significant buyback at this point is off the table..

And you mentioned getting rents 37% higher on the new -- the leases you are signing for the boxes, 42% of the space.

Curious if you are expecting similar upside for the other remaining 60%-ish, how those conversations are going and when do you think you will have that space tied up?.

Yes, it is good stuff. I mean what I have got -- and we're going to talk through this in Phoenix to the extent there is more time to do that and the ability to do that -- have got a schedule that shows that whole 730,000 feet.

I have got a schedule that shows the 309,000 of it, the 42% that is done already that shows the specific deals and the timing of those specific deals for the 37% rollover. The rents, I have got -- that schedule shows prospects and shows approximately where we think the rents would be.

Approximately they wouldn't be at 37%, but they would be double-digit and maybe more than low-double-digits, maybe higher than that. But again, that is the process that we're going through.

The most important thing you have to come away with on this is that these are part and parcel of bigger -- of shopping center repositionings as opposed to filling the boxes. And I just don't think that is really kind of understood as well as it should be. It is a value creative proposition here, not a defensive one..

Our next question comes from Jeff Donnelly with Wells Fargo. Your line is now open..

I am curious on Pike & Rose, how do the net rents that you are now putting into 2017 guidance compare to what your original pro forma was? And maybe, Dan, can you kind of walk as through the timing of the NOI and FFO drag in your 2017 guidance at Pike & Rose just as it opens? I mean, just kind of one of the things here, like that pace and price of absorption and some of the other factors that are going on there..

Yes, let me take the first part of that and, Dan, jump in on the second part of Jeff's question. One of the things we really wrestled with this time is pretty -- Washington DC in general pre-election kind of every year goes into a fold your hands and not do much kind of mode.

And we have seen that in spades over the last three months, not only at Pike & Rose but anecdotally. Everything we hear with respect to not only any other residential project but other real estate projects, other decision making that happens has really slowed down. Now we want it to be -- we're 86% leased at Palace at about $2.40 a foot, Jeff.

We expect that $2.40 a foot to grow, but far more modestly over the next couple of years than we had initially projected. So I think we're expecting that $2.40 through the next few years to go to something like $2.55 and initially that number was $2.85 or $2.90. So I want to do something for you for a second if you wouldn't mind and indulge me.

And it relates to our residential operations and our ability to figure out how to do them. I think this is a good time to talk about it if you wouldn't mind.

If you take a look at what has happened with us in Bethesda, what has happened with us at Santana Row, what's happened with us behind Congressional -- we know how to build residential and I think we do a really good job on it.

If you were back in 2008 when we opened up Bethesda Row's upstairs product, 180 units there, we underwrite $2.55 and we hit $2.40 or $2.39 or something like that. So we missed those numbers in 2008 too and if you can imagine what 2008 was like, I think that is probably understandable.

We're at $3.10 a foot today and that is an over 3% CAGR over that period of time in a market that also has a lot of additional supply.

So the notion that -- and from my perspective, the prudence to take that 7% to 6% to 7% is simply a recognition of not only the supply in the market but what is happening to create that real street with the second phase right on top of the other. And accordingly, I just didn't feel right keeping that number where it was.

But I am hoping that you don't view that as, well, my gosh, what in the world are these guys doing in residential. Take a look at Bethesda, take a look at the actual numbers in the West Coast, take a look at Congressional and I think you will feel a whole lot different about it.

But that is where we're -- $2.40 to the mid-$2.50s or so over the period of time that we have got it as opposed to something that was much closer to $2.85 or $2.90..

I don't know, Dan, if you have had anything to add on there?.

I think I will point you to -- in terms of the ramp up, we have added that additional disclosure on page 16 of our supplemental where we -- I think that gives a fairly good guidance with regards to how property operating income at Phase 1 of Pike & Rose will ramp up.

We project kind of a stabilized $17.5 million property operating income on Phase 1 and we -- in 2017 our assumptions assume that we will get about 75% of that income in 2017. And it will progress into 2018 and stabilize in 2019 at that number.

I think that that provides -- and I think for each of the phases that we have made an attempt to kind of give you that guidance, you can see how that ramp up progresses..

And just sticking with Pike, where, Don, where are the retail rents that you are sort of achieving for Pike today compared to original pro forma? Have you seen sort of differing trends versus the residential? Just curious how that is sort of sorted out..

Yes, that is a good question. Right where we expected them to be in that first phase, but even there a little slower than we had hoped. And the second phase, the big pieces that we have in place -- where is that schedule that has what was leased? The big stuff that we have on schedule; the smaller stuff that is to come will be weaker.

So there will be a little diminution I expect on the retail rents that we're getting. In total on the project where we're today 48 plus 16 -- 64% of POI is already -- is basically leased or heavily under lease negotiations now and at 77% of the GLA.

So a lot of it is locked in including the big important boxes that need to be there from Porsche to Pinstripes to H&M, Sur La Table, Lucky, REI, etc..

And you kicked off condo sales at Assembly in I think Q2.

How has the pace and price of sales there performed versus your expectation?.

Yes, the easy one to talk about is Assembly. We're kicking it. We have got like 55 of them already locked up way ahead of where we thought and ahead of the numbers that we thought we were going to get.

And at Pike & Rose we're on pace, it is only -- I think we have got 19 or 20 of them effectively of 100 done and those have been done at or about where the underwriting was. That also though has slowed down, it has been the same kind of slow process over the last three months that we saw at -- we see in the rental product.

So I am looking for this election to get over; I am looking for some sense of freedom, if you will, in the greater Washington DC markets, particularly Montgomery County..

And just the last one and I will yield the floor. You guys have a lot on your plate going on.

Are you still active in the acquisition market or are you kind of stepping back a little bit until all of this gets digested?.

It is not an on/off switch as we've talked about before, it is a knob. And you turn it up as those markets look more attractive, you turn it down as they look less attractive. Certainly the stuff we have been looking at when you start talking about forecast and low forecast on a lot of this stuff is hard for us to make sense of.

We absolutely remain in the market, we're on a couple of things right now that if they make I think are a real positive but we have got a ways to go to see if they can make. But again, it is not and on off switch, it is been deemphasized because you compare it to the premiums even at 6% obviously that you are getting in development..

Our next question comes from Christy McElroy with Citi. You may begin..

Maybe I missed this, but what is your overall same-store NOI growth guidance for 2017? And just in thinking about the trajectory of that growth rate through the year given the expectation that some of the anchor re-leasing will commence sort of midyear toward yearend, presumably you start to face much easier comps year over year.

But in addition to the closings that have occurred, are you expecting further closings next year? So, done -- proactively pursued or otherwise, as you said in the release?.

Well, I will take the first piece of that first. With regards to our [indiscernible] of what is embedded in same-store guidance for next year. Given some of the volatility and just the amount of moving pieces in our anchor repositioning initiatives, we think that kind of staying in line with this year, kind of a 3% area is what we have in our model.

There are a couple of boxes that we project will be coming back. One is already re-leased. The AC Moore box at Assembly Row which effectively we proactively went after, it is still occupied and they will vacate at the end of the year. That space will be vacant for most of 2017 until Trader Joe's takes a big chunk of it..

Same with Bay Club here at Santana Row which is being converted out and transferred to another use. It is going to be a very big closet, but it is going to come out in 2017. So that process is and I think should continue. Net-net you should see increases overall, particularly as you get into the latter part of the year, though..

Okay. And then just a follow-up on Jeff's question, you talked about slower growth, expecting slower growth in residential rent at Phase 1 of Pike & Rose.

But are you actually expecting there to be any rolldown of resi rents at Palace or PerSei over the next year or so? And maybe you can give some color on how the retail and restaurants are performing in the midst of all the construction..

Yes. No, we don't expect rents to roll down at Palace and PerSei. In fact, one of the things that has been very clear is they continue to command a premium in the marketplace and that is a real important fact.

We're not going to see -- I don't think we're going to see the increases that I had hoped that we were going to see as the rest of the supply in the marketplace dissipated a little bit given the construction that is underway. The construction has absolutely impacted the Phase 1 restaurants a little bit. The restaurants are doing fine, just not great.

The retailers are not doing well until that second phase opens up. So there is clearly softness throughout Pike & Rose. But it is funny, you have got both Milam and you have got Guglielmone who both live there and spend their time there. And every single time they come in and say, don't worry about it, we're cooking in terms of getting it right.

Also with respect to the construction and how that is moving along, we're moving along on time and on budget which I am really pleased about.

So that the -- and when you look at who is coming here, REI is not adding new space; REI is relocating from two miles away or a mile and a half away to a place that is a whole lot better in terms of what they believe their future customer is, the same with Porsche, the same with a number of the restaurants and retailers that we're talking about for Phase 2.

So what we're seeing -- and that makes me really happy because it is not adding more retail supply into the marketplace, it is relocating the better tenants to a better product. That is what you should expect as we move forward. But we have got to get Phase 2 open..

Our next question comes from Mike Mueller with JPMorgan. You may begin..

Question on the disruption I guess at Pike & Rose.

How come we keep hearing about the disruption there but we don't necessarily hear about it at Assembly? What is unique to Pike & Rose where it is becoming more of an issue than it is at Assembly?.

It is really clear, it is really easy to say, the market stinks compared to Assembly. So you have construction -- same thing going on at Assembly, but you have got a very strong residential market. You have power right through to the extent human beings are coming in deciding where they are going to live compared to what their supply choices are.

At Pike & Rose in Montgomery County, we don't have that luxury. There are other choices; there are other places. There was lower rent, bad debt alternatives that you can take given the environment that is there.

If you just think about that in so many different ways, when you have a strong market, some of the stuff that is happening out here in Silicon Valley and we're having this call from Silicon Valley today [indiscernible].

It's just blowing me away the things people will do and put up with when there is limited supply in the marketplace, it just doesn't matter. There is a lot of choice in the markets, it does..

Okay. And then for that second bucket where you are walking through for the 2017 bridge and you talked about the development and value creation drag.

How much of that $0.06 to $0.10 is really tied to the Miami kicking off those projects as opposed to Pike & Rose and Assembly?.

Yes, it is a couple of cents in Miami. We really thought should we put that in guidance, should we talk about that. But here is what is happening in Miami. Let's talk about that for a few minutes. The easier of the two to talk about is CocoWalk.

CocoWalk -- the dilution that would come from CocoWalk is part of a plan that would knock down part of the shopping center and affectively redevelop physically a big part of the shopping center. And obviously -- from demolition cost to lost rents to disruption, obviously that is dilutive.

To the extent we can't get the numbers to work -- and again, that will come through investment committee next year -- we won't do that. But I did not want to not include that in guidance to the extent that we can get to it. Over at Sunset it is a different story. At Sunset -- there is a broken property.

We have known that from the beginning, we had some nice income and FFO from that property in the first couple years that we had it. But obviously that income stream is being reduced as the conversation of a redeveloped property becomes very clear and as tenants sit there and don't perform.

So there we know we have got at least another year of entitlement work to do to be able to get to what is a much more significant redevelopment. We're not -- the only impact in 2017 will be a slowly shrinking income stream over there. So most of what we're talking about here is CocoWalk and a little bit of Sunset in 2017..

Our next question comes from Paul Morgan with Canaccord. You may begin..

Just going to the 700 Santana that you talked about 2019 opening and 2021 stabilization. Obviously in the case of the Splunk site there it was pre-leased.

Could you give any kind of color about how you think about the tenancy for 700 Santana, how much you would look to pre-lease, how kind of chunky it might be?.

Remember on 500 Santana Row we did not pre-lease that building. We started at spec and after construction was underway we leased 100% of the building. So just want to make sure you understand that. Before I get into specifics on how we intend to approach the leasing of 700 let me tell you what 700 is.

500 Santana Row was adding an office building to Santana Row and a bunch of parking spaces that we can use nights and weekends. 700 is a lot more than that. With 700 Santana Row we're capping off the end of Santana Row.

And really for all intents and purposes, except for our last residential project over on the east side of the site, we're finishing Santana Row.

So 700 Santana Row is some 30,000 square feet or about that of additional retail and a restaurant on the ground floor with a magnificent plaza in front of it that is really going to complete how Santana looks and feels.

And it is a 1,300 space parking garage which is going to significantly add to the parking pool at the end of the street and help us drive rents and sales for the south end of Santana Row.

So, unlike 500 Santana, it is not just a spec office building, it is kind of a signature development that really caps off and finishes 700 Santana -- or finishes Santana Row. Now, as it relates to the lease up of the office space, we're already out in the market, it is way early, we already have a couple of nibbles which are exciting.

But leasing really will kick off in earnest, like it does with every building in Silicon Valley, when there is actually a hole in the ground and construction activity and that is not going to be until sometime next year.

As we get into the year and we start to do tours and field interest in the building we will be making a decision about whether we look to lease that building 100% to one tenant or whether we break it up. When we leased 500 we were very intent on leasing that building to one tenant. 700 we will have to wait and see.

I think there is a higher likelihood we go multitenant at 700 which is why you are seeing an extended stabilization period vis-a-vis a building like 500..

The only thing, Paul, I would add to that is that -- and we had our Board out here and Jeff and I have been talking about it ad nauseam, is the requirement by tenants here, just like everywhere else in the country, to be in places that are fully amenitized and really environmentally friendly to what they are is huge.

And the notion of the -- finishing up the back parts looking straight down Santana Row has a whole lot of appeal to a whole lot of office developers.

And there is no other product that's gone -- that can be like that which is what we heard from Splunk which is why that [indiscernible] by the way validates this, in addition to AvalonBay having their West Coast headquarters here, in addition to --..

Cushman & Wakefield..

Cushman & Wakefield, there is 300 Santana Row that is fully leased. So this is becoming or has become a far more validated office location. Of all the possible places to put offices at Santana Row that is the best spot. So with considering all of that we decided to move forward..

Yes as you look through the supply pipeline, Paul, in the market right now there is really only one other sort of amenitized place where office tenants can go. And by the time we're leasing 700 that option may go away and we may be the only amenitized place. But regardless nobody has got the amenities we do.

And like Don said, that is hugely, hugely important, to all the companies, tech and non-tech, in this market to recruit and retain employees. So we're pretty bullish on it..

I don't know if I missed it or not, but did you give the cost and yield target?.

Yes, it is in the 8-K on page 16..

Okay, I will take a look, thanks. So my other question then on -- going back to Pike & Rose, just bigger picture. If you kind of think about, you have had a lot of the mixed use projects and some kind of you have gone more all in and Pike & Rose you started more modestly.

A lot of this is case-by-case and market-by-market, but in retrospect as you look at Pike & Rose, would you have tried to structure Phase 1 a little bit differently or was it just an issue in terms of the residential market there and kind of you still think the phasing was right?.

Paul, hindsight is a tough way to look at things, there is no question about it that, given everything I know, we would've probably put the money that is in the residential building in Palace on the retail street first, at least I would have done that.

We have some disagreement within the Company whether that made sense because at the time we did what we did for a very good reason. And that was the existing shopping center that was there which we did not disturb during the initial phase, was extremely productive.

And effectively allowed us to move some of the tenants from that shopping center into the new shopping center like la Madeleine. So there would good reasons to do it, but it is important to have enough critical mass on the street to be able to create the environment.

Now, if the residential market had stayed as strong as it was none of this would have mattered. And back to Mike Mueller's question before, the residential would have powered right through without the environment on the street fully created.

But when you have a weakness in the marketplace there is no question that the reliance on or the help of the established retail street is a critical component. I don't know if that helps or not but that is what happened..

Our next question comes from Craig Schmidt with Bank of America. You may begin..

Looking at Pike & Rose and I guess Palace specifically, how much value is embedded in the top floors versus the rest of the building? So you may be 80% -- 86% leased but how much of that top floors -- is that value related to the rest of the building?.

That is a good question, Craig. There is no question that the top floors and we have got, I don't know, 20 units, 12 left? 12 left to go up there. It is disproportionately higher. Those units have been slower going, that is part of the math in me feeling uncomfortable with the 7 number that was left there. So you are onto an important part of it.

Basically, the lower floors and the cheaper rents have more price sensitivity in a weaker market effectively than we had hoped.

So I can't do a percentage for you, but I will tell you that the preponderance of units left are in those upper floors and that that does -- we don't believe we're going to get the rents that we wanted to get to up there and particularly in the first roll or two..

Okay and then just thinking about Pike & Rose in total, how much value is assigned to retail, office, resi and then other?.

Gosh, I don't have that here. But, listen, man and you will never get me to think differently on this. These projects are integral, they are integrated projects. The retail is critical to the resi, the office is critical to the retail all the way around. So we look at them as total projects. So I don't have the pieces here.

I suspect we will have it -- we can have it there for you in Phoenix. But you will never get me to suggest that those things would be looked at separately..

And then just real quickly, in terms of the anchor closings, how many would you put in the bankruptcy bucket and how many would you put in your proactive repositioning bucket?.

It is about half-and-half. I am looking in total, I have got spaces that are a couple of sixes. We're breaking them up, they are part of bigger redevelopment. So it is not as pure and as clear as you would like them there. But I would say about half-and-half..

Our next question comes from Alexander Goldfarb with Sandler O'Neil. You may begin..

Just a question for you, you guys have obviously spent a lot of time thinking about the redevelopment projects that you are rolling out. You have a lot that you have done over the years with experience of Santana and Assembly and others.

And it sounds like the residential -- like we understand that the residential Montgomery is more, so that is pressuring the rents on the residential side.

But can you just walk through why the retail would be pressured there? Is that purely because some of the retail that leases at the smaller spaces is sort of directly attributing to how the residential is going and then those are amenity based and they are saying, hey, if the people aren't here I am not going to pay the rent? Or just help us walk through how those two are intertwined..

Well, I guess what I would say to you -- and Chris is here, I don't know if he would -- I assume he will add on to what I say.

But the reality is today and we have been talking about this for a while, retailers -- and this includes the boxes, this includes small people -- small shop, it includes really most categories -- are a whole lot more cautious with their underwriting and they are a whole lot more -- the negotiations are more retail centric than they are landlord centric at the moment in a number of places.

And when it comes to development the ability to underwrite sales in a new development is less predictable. So if the market is softer and I do believe the market generally is softer from the standpoint of propensity to take risks and it certainly is in the Washington DC area, then you underwrite lower numbers.

Lower numbers at lower rent, lower rent is a harder negotiation, it takes longer to do and it also includes the other terms associated with it. That is really what it is about from my perspective as I sit and say it.

The other thing and you see it up in Assembly to the other -- going the other way, when you have got a big sample size of a first phase retail project there and that first phase is very successful it makes it a whole lot easier to lease that second phase.

We don't have a big sample size in the first phase of Pike & Rose and that goes a little bit back to the question that was asked before. And accordingly it is -- you have got tougher economics to negotiate here.

Having said that, I just don't -- I don't want to -- I can't over emphasize enough the fact that the anchor system in the second phase is done and is critical to the project. So even if rents are a little lower in the remaining small shop space, that is not -- it is not a big cause for the differential in the yield..

I would just add -- I would add on exactly what Don said and I would just remind you we have got 1 million feet on Rockville Pike, we need to make sure that we differentiate our projects. Pike & Rose is truly unique and authentic to anything else we own on Rockville Pike.

The fact that we're almost 80% leased on our retail in the Phase 2 GLA is fantastic. So just keep all of that in mind as you are talking through that. As we get more strength as the street is open, as the experience can be more of a full experience for the consumer it is only going to get stronger..

Right. Yes. No, look you go to the site, you can see that. But I guess the question is, Don, from what -- when you guys talked about sort of at NAREIT and in second quarter when you revised down the yield expectations until now and now they are being revised down.

I guess is it just that the market has been continued soft so therefore that has impacted the retail discussions more? And then the second part of that is for Dan G., should we expect then with the delay through 2019 until stabilization, does that mean that this project weighs on earnings until then? Or there are other things in the Company that will act as offset, so it is not as though mentally we think about Pike & Rose weighing on the Company through 2019, but it is that it takes longer to stabilize but there are other positive offsets to that within the total organization?.

The Phase 1/Phase yield reductions are largely residential. Don't make a big deal about the retail, it is not that, that is the answer to the first part of the question. The second part of the question is Pike & Rose is accretive to the Company. It is not weighing down the Company. We're talking about a value additive project here.

And if you look year-over-year, I mean they gave you the numbers of the income that has contributed from this project and that continues to go up. So it was not that at all.

And certainly when coupled with the anchor lease up, when coupled with the opening of Splunk and other development projects, when coupled with the redevelopments all the way through that the total Company continues.

And as I started to say at the beginning of my remarks, our business plan is flat on right where we thought it was going to be in total over that long term.

So, you clearly have a soft period of time here and from an accounting perspective, if you will, a cash flow perspective relative to value creation, but not from a long term value creation perspective..

Our next question comes from George Hoglund with Jefferies. You may begin..

Just one question in terms of kind of medium term strategy¸want to look past the current projects. Kind of what is your appetite to do further projects or take back certain anchor space that will cause near term drag? Because I fully get the longer term value creation here.

But what is that appetite to take more space back, things that will cause that near term drag to where, okay, 2017 growth will be muted, but then if you do more projects will then 2018 be muted as well because of these longer term value creation projects?.

George, it is such a great question and it so gets down to the balance of the business plan. And I tried to address this in my remarks as best I could, the combination of all of the things, including the decentralization which is really working well as it relates to getting to redevelopment and getting the focus.

Those things, as you have pointed out, are dilutive in the short term. There is a lot of it, there is no doubt about that. It is happening at the same time that the two major development projects, Pike & Rose and Assembly Row, are coming up to the heavy construction phases which are also dilutive.

So all of those things happening at the same time have the balance, moves down to 4% growth rather than 6% or 7% growth or as they are coming out 8% or 9%. If we don't do any more, George, you are looking at 8% and 9% earnings growth. The notion of getting there but not having additional future raw material doesn't excite me.

So I suspect what you will see is heads down and executing what we have, a slow down at the period of new raw material for new projects for the bulk of 2017 to allow us to get back into balance. But this long term business plan includes those initiatives as the way that we create value. So you will see them.

I am not going to tell you every year you have to wait until next year, you have to wait until the year after that, you have to wait until the year after that for earnings because that is not fair to do and it is not what our anticipation is. You should see an acceleration in 2018, you should see an acceleration in 2019 of the earnings growth rate..

Our next question comes from Chris Lucas with Capital One Securities. You may begin..

Just a couple of quick questions, Dan, just going back to the same-store NOI guidance for next year that you softly provided.

Is that inclusive or exclusive redevelopment? And just trying to understand whether or not things like CocoWalk would be included in your thoughts or not?.

Yes, that is inclusive of redevelopment. And, yes, we're including CocoWalk in that number which obviously will have a negative impact on that number and that is why --. There is a lot going on; I think with our anchor repositioning, with including CocoWalk and Sunset, but that 3% is something we're -- area is something we're comfortable with..

And then just do you have any maybe additional color on guidance as to what relates to maybe G&A?.

G&A for next year is going to be call it $36 million, $37 million, roughly about $9 million a quarter..

And then last question, Don, the development exposure, at least as it relates to CIP, is continuing to move higher as you guys put more money into projects that will deliver revenue down the road.

Do you have a sense as to what peak CIP levels will be? And then when you think about how you manage risk what are you comfortable with and how do you measure that risk as it relates to the amount of development that is in progress?.

Yes, that is a very fair question, Chris. And by the way, CIP at the end of the fourth quarter will be lower than CIP at the end of the third quarter as we put the Splunk building into service. And that is, for all intents and purpose, a stabilized building. So the notion that it will continue to always rise is not what you should be assuming.

Basically at the end of the day 10% of the value of this Company with respect to big development is what I feel comfortable with and not more than that.

In fact, if you sit back and you take a look at -- take a look over the last three years, you will see that we peaked even higher than we're today a couple of years ago, I can't remember [indiscernible] -- remember what year it was, 2013 -- when effectively we had all the Phase 1s that were not yet in service but going.

So you are seeing this heavy construction in the Phase 2s right now. Those things, as they are put into service, will reduce the CIP.

And I don't think -- I think the way you should look at it is debt to EBITDA coverage which we're very comfortable with in the low to mid-5s, fixed charge coverage through the roof is kind of why we have refunded a bunch of this development in the form of reducing our leverage in the Company, terming out for 30 years what we got.

But on a broad basis, Chris, look at 10% of the enterprise value as kind of our rough estimate of the math. It is really much more limited by our debt coverage, though and our fixed charge coverage and what we place into service..

Thank you. I am showing no further questions at this time. I would like to turn the call back over to Leah Andress for closing remarks..

Thank you, everyone, for joining us today. We do have a few additional meeting slots open for NAREIT. If you would like to meet with the team, please reach out to me directly. We look forward to seeing many of you in two weeks at the conference. Thank you for joining us today..

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