Good day, ladies and gentlemen, and welcome to the Federal Realty Investment Trust Fourth 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 be given at that time.

[Operator Instructions] As a reminder, this conference call maybe recorded. I would now like to turn the conference over to Leah Andress. You may begin..

Good morning, everyone. I would like to thank you for joining us today for Federal Realty's fourth quarter and year-end 2016 earnings conference call. Joining me on the call are Don Wood, Dan G., 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 the supplemental reporting package that we issued yesterday, our Annual Report filed on Form 10-K and other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial condition and results of operation. These documents are available on our website at www.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 of our call. If you have any additional questions, please feel free to rejoin the queue and we’ll happy to answer them.

And now, I would like to turn the call over to Don Wood to begin our discussion of our fourth quarter and year-end results.

Don?.

Thank you, Leah. Good morning and happy Valentine's Day, everybody. A real solid quarter for us with FFO per share of $1.45, the highest quarterly earnings we ever reported and 6% better than last year's fourth quarter which at the time was our highest quarterly earnings we ever reported.

We ended 2016 year with FFO per share of $5.65, 6% better than 2015. We feel comfortable to hit this point reaffirming our 2017 FFO per share guidance range of $5.83 to $5.93 despite plenty of uncertainty surrounding the changing policies of the administration coming out of Washington. So let’s dig into the quarter for a bit.

Same-store property operating income rose 3% in the quarter as it did for the year, and perhaps more importantly, total property income rose 7.4%, reflecting the progress we are making on the income generation side of our new profits, more on that in a few minutes.

So far as leasing goes, we did 77 comparable deals for 275,000 square feet at an average rent of $37.10 in the quarter, 15% higher than the tenants they replaced as cash basis; last year the old lease versus the first year the new lease. When you look back at the entire 2016 year, it was amazingly and unusually consistent.

Lease rollovers up 13% in the first quarter; 12% in the second; 14% in the third; and 15% in the fourth. All totaling nearly1.5 million square feet of comparable space compared with $1.4 million the year before.

Add to that 214,000 square feet of non-comparable leasing on the new products in 2016 compared with 188 the year before and you can see the plenty of productive leasing continues to be executed. The business was solid, despite overall retail headwinds and deals taking longer to get done.

We ended the year at 94.4% leased there are only 93.3% occupied indicative of the signed deals for which rent is yet to start and is good news for later in the year and 2018.

After the quarter was over, we also executed two leases that continued the important progress in our anchor vacancy lease up initiative including the former Sports Authority space at Crow Canyon Commons and San Ramon, California and the former Hancock Fabrics space and Westgate Shopping Center at San Jose, California.

Both the Sports Authority and the Hancock Fabrics spaces were leased to far better uses for the long-term relevance of properties in both a healthy increases to the prior tenant. Crow Canyon Commons and Westgate Center are being repositioned. We merchandised and transformed into modern and relevant retail destination for decades to come.

Rent will commence on those two deals into late 2017 in one case and mid-2018 and the other as the occupancy in the re-positionings are all completed and tied together. Of course, this property investment initiatives and a number of our properties will continue and always result in some dilutiona to our redevelopment.

Right now that leaves us with two vacant, Sports Authority boxes left incorporate, it’s the property repositions. One, Brick Plaza in New Jersey, the other is Assembly Square Marketplace, Somerville. Active negotiations with multiple tenants at both, but both vacancies are being integrated with broader property redevelopment, so they're not done yet.

So we do expect them to be done this year. The earnings drag from those two spaces alone is almost $0.03 a share annually.

On the acquisition front, you may have noticed press release that we put our last week announcing the ground lease that we purchased under 15 acres in a Sears, Marshalls and CVS anchored shopping center, right off 210 in Pasadena, California. We bought it at a six cap.

This Sears paying virtually no rent and while we have no direct path toward getting to that box today, we're patience and optimistic that we will. In the meantime, consider than other yielding LAN play in our portfolio. It does feel like attractive acquisition candidates are potentially becoming more plentiful as they’ve been in recent history.

So not at better prices, at least not in the markets we're most interested in or at the properties were most interest today. We hope that more to share with you on acquisition front for next few quarters.

In the development pipeline, lots of solid news, Assembly Row continues to perform extremely well really cementing itself as substantial and important live, work, play shop environment. They’re now over 300 or 400 partner’s employees working there up from 1,800 last quarters and the daytime traffic increase is palpable.

Adding a boutique hotel, condos our own residential offerings and a larger and richer retail experience will only enhance it. Construction of Phase 2 remains on time and budget 66 of the 107 market rate condos are under binding contracts and we'll start leasing the apartments this summer.

If you find yourself involved in the spring, check our Assembly and then are being created really private. In Maryland, Pike & Rose continues to progress. I will not at the pace of Assembly Row, due to weaker Washington DC markets, particularly Montgomery County.

We just as confident and its long-term value creation by year-end the residential product was over 96% lease, but only 90% occupied, so income will build there during there year. And office and retail, we’re now 100% leased and occupied.

We've been important objective here by getting ourselves in the strongest position possible in terms of leasing before beginning to open pieces of the next phase earlier this year. We'll see how that goes when we start to residential in early summer.

21 of the 99 condos are under binding contract, again certainly not at the peak of Assembly, but where we expected to be at this point. And importantly cost and scheduled for the second phase, remain on budget.

Work continues to get CocoWalk investment committee later this year for approval to move forward with this redevelopment as does our plans for variant shopping center, 700 Santana Row [broke ground] a few weeks back.

The core beliefs throughout our Company is that investment and great real estate is increasingly necessary to position if it relevant in the next decade, consumers are demanding high levels of service, consumers are demanding an environment to spend time in that their choice, not a necessary evil.

You don't have to look any further than the predicament many department stores are in today, consumer behavior is changing at an accelerated phase.

It is our strong view that under investing in great real estate today for the purpose of generating higher current cash flow, with the expense of the properties longer-term relevant is extremely short side.

So I would just not going to passed up on opportunities to re-merchandise, redevelop and reposition shopping centers for long-term sustainability even though it hurts short-term earnings.

So I'll take a holistic view of our portfolio and our portfolio and are actively working to better position each and every one of them in places where we can, you'll see a look for other ways to heart has value. So that's it for my prepared remarks.

We've got a lot going on around here, and a huge investment in our future, nearly $600 million of construction in progress on the balance sheet, in the right type of product for the future, some of the best pieces of real estate, some of the best markets in the country.

In addition to that, acquisition opportunities maybe opening up that allows us to apply our core competencies to add value there. We surely never take for granted a balance sheet that some set up over the last few years that provide flexibility and cushion when things don't go exactly as planned.

Now let me we turn it over to Dan for opening up the lines for your questions..

Thank you, Don and Leah and hello everyone. Don covered almost everything in his remarks, which should surprise no one on the call. Let me provide some additional color.

Despite continuing to work in the drag towards by our excess anchor vacancy same-store NOI growth was solid, as we put a 3% for the quarter and 3.1% for the full-year, which is in line with the guidance we provided previously.

Please note that the same-store pool of assets, which includes those under redevelopment, represents 93% of our total POI for the quarter. Lease up at Pike & Rose residential increased markedly over the quarter at 96% overall.

Although, those revenue gains were somewhat offset by higher marketing costs in the quarter into the final push to achieve full occupancy. As a result, Pike & Rose and Assembly Row contributed $6 million for the fourth quarter versus $3 million in the fourth quarter of 2015.

As it relates to 2017, the new disclosure, we introduced in our third quarter 8-K relating to the progress we are making at each of these development is unchanged. Assembly Row Phase I, is running at 100% of stabilized POI and Pike & Rose Phase I is on track to deliver 75% of projected stabilized POI in 2017.

The Phase IIs are on budget, are on schedule to begin contributing POI in 2018. At 500 Santana Row in early December, Splunk moved into its recently delivered 234,000 square-foot headquarters building. We are already seeing the benefits of increased daytime population and traffic at Santana.

Our 2017 FFO guidance provided last quarter of 583 to 593 remains unchanged. We also reiterate our expectation for the same-store growth in 2017 of around 3%. This guidance reflects the continuing efforts to reposition our portfolio to outperform of the long-term in a rapidly changing retail environment.

While we don't provide specific quarterly FFO guidance, we do expect first quarter 2017 FFO per share to be lower than fourth quarter 2016 driven impart by a step up in our anchor repositioning strategies, which I will touch upon in a moment.

As relates to our anchor leasing, in addition to the deals that Don mentioned, we continue to aggressively look to reposition and re-merchandise our portfolio by proactively upgrading our tenant mix.

At Santana Row this quarter, we are preemptively taking back third floor health club space, terminating the current tenant and converting the 34,000 square feet, which has great bonus of [indiscernible]. Publicly traded technology innovator Broadsoft will move in during 2018.

While compelling from an economic perspective, this lease is also a testament to the power of having great real estate.

This location, combined with the immunity base and sense of place we have curated at Santana Row over the last 15 years, allows us to considerable terms of uses such as office, which currently command rents at a significantly higher than comparably located upper floor retail, plus, we received the added benefit of increased population.

On the heals of this success, we are moving forward on the conversion of 32,000 square feet of vacant second floor health club space at Pentagon Row on Arlington, Virginia, where we hope to produce similar results. Other examples of proactively upgrading our tendency can be seen.

At Assembly Square where traded euros will open in late 2017 at a healthy up tick in rent replacing AC Moore who vacated in early January at Westgate in San Jose where you will see us replace two non-credit apparel tenants in early 2018 with TJ Maxx taking possession later in the year, and in Santa Monica where Addidas will replace Express.

As you would expect these preemptive re-merchandising initiatives creates short-term drag on occupancy and cash flow in 2017 and 2018 due to downtime as we deliver the space to tenants. However, this activity will make the assets more relevant to the consumer provide cash flow growth and provide long-term value creation.

Further demonstrating our balanced business plan, we are thrilled with the West Coast teams’ acquisition in Pasadena that Don outlined earlier.

It will be an attractive addition to our West Coast portfolio providing a strong yield, the low market in-place rents and an additional 274,000 square feet on 15 acres, raw material to potentially drive longer-term growth in our portfolio. However, it will not materially increase FFO per share in the near-term solely due to its relative size.

Accretion will be less than a penny, so it will not impact our 2017 guidance. Now to the balance sheet. We finished 2016 continuing to have strong liquidity position with our $800 million credit facility completely undrawn. Our debt-to-EBITDA ratio is at a comfortable 5.25 times for the quarter and our fixed charge ratio remained steady at 4.5 times.

From a capital standpoint, during 2017, we project to spend approximately $400 million to $450 million in development, redevelopment and releasing and $30 million for our recently completed Pasadena acquisition.

We expect to fund this capital through a combination of free cash flow draws on our lines of credit and opportunistic issuances on our ATM program. On unsecured notes offering still slated for late 2017 or early 2018. We did modestly utilize our ATM program during the fourth quarter, leasing $29 million at an average price of $1.41 per share.

Now let's stay on this topic for a moment. One of the things I’ve come to appreciate in my first six months on the job here at Federal is appreciating federal skilled management of its balance sheet.

As I work through the refinancing of our mortgage at Plaza El Segundo, which should be completed in early June, a new tenure loan with a rate inside of 4% I realized that we do not have another sizable debt maturity until late 2019, almost three years away.

I then began looking back over the last five years I have noticed a meaningful average spend on development, redevelopment and another property investment of roughly $350 million annual. That’s roughly $1.7 billion in total and another $500 million in acquisitions.

Federal’s funding of these investments included $1 billion of equity, 700 million of 30-year debt at a 4.2% blended rate and roughly $350 million from free cash flow and asset sales. As a result, over this five-year period, we have maintained debt-to-EBITDA steadily in the 5.2 to 5.4 times range.

We have increased our fixed charge coverage from 3.2 to 4.5 times, achieved an A minus rating from all three major credit rating agencies and we've lengthened our weighted average debt maturity to a current 10.5 years along the way producing FFO growth and a rock solid five-year CAGR of 7.2%.

Truly impressive track record of stability and consistency further evidences of our long-term focus and commitment to a balanced business plan. Now before we start with the Q&A, I'd like to congratulate my colleague Craig Klimisch, Federal's Controller and his promotion of Vice President.

Clearly a recognition of value he brings not only to me and my partner Melissa Solis, but to the finance and accounting function as a whole and to the entire Federal organization, well deserved Craig. And with that, operator you can open the line for questions..

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

Good morning, guys. Actually Don, I don't mean to gloss over the upcoming investment and work ahead of your Pike & Rose and Assembly, but maybe is the bigger question is that for many years, I'll call the mega projects like those as well as Santana have been the focus for investors and your organization.

But in a little over a year or so from now you're going to be in the final innings of the Phase II investments there. And I'm just wondering what seeds your planting today and how that bodes for that period beyond 2018.

I'm just curious if you think going forward we should expect a similar type of commitment to these kind of chunkier projects or do you see yourself cycling more to smaller projects or even more external growth?.

That’s a great question, Jeff. I appreciate you’re asking it. It’s funny. While I absolutely agree that Pike & Rose and Assembly get the most attention and the things that sit up on top of the Company. You got to know how hard I try to fight to make sure that everybody understands the balance of this $15 billion portfolio of real estate.

So I never want to gloss over that we do with core and the redevelopment. Having said that, without question, we also talk about Pike & Rose and Assembly as being a decade long project, and so certainly in the case of Pike & Rose with the second phase opening up, starting later this year and then into the next.

We still have a ton more entitlements to do; we have a bunch more to do the same thing at Assembly. So thinking about those two projects as time being done from a value creation perspective is way too premature.

On top of that sitting and looking at what we'll be doing with CocoWalk, sitting and looking at what we're doing on the West Coast at Santana with $200 million plus project at the end of the street effectively there, sunset, a little bit further down the road, but coming after that.

And inside our company the amount of redevelopments has never been higher and so the combination of using all those arrows in the quiver from the larger projects to the smaller redevelopments to the core, it's all really important. So don't think about Pike & Rose and Assembly as being done after 2018, please.

In addition, when you see the type of acquisitions we've made, what we bought, when we bought San Antonio center a number of years ago, if you were at that property today, you would be as sure as we are that there is a whole lot much more to do there and maybe that will be done in one big way, more likely it will be done in phases until it ultimately is a mega project, if you will.

Similarly, when we look at what we just bought at Hastings. It's all about big pieces of land that really should be a whole lot more than they are today. Obviously, it takes time to get to them and I know it’s a long winded answer. But I wanted to give you a full and complete answer of all the tools that we have in a toolbox..

Just to clarify maybe not done, but I guess is it fair to say that.

Beyond these two projects will begin to see your development and redevelopment pipeline becoming maybe broader in each asset being maybe a little bit smaller in scale, little less chunky?.

Until the next great mega project makes a lot of sense for us to do. I mean so as I sit here today and look at that. Yes, I would expect it to be if you will broader and less chunky. But the right opportunity avails itself at San Antonio center or Hastings Ranch or at Pike 7 and I go back on what I’ve said.

So it's about finding the right risk adjusted project and everyone separate projects of size because obviously it's a whole lot different thing to be talking about $1 billion investment on one piece of land or more.

So just by definition, how many of those things there are, it's likely to be smaller, but I don't want to count out that possibility of finding the next one..

And just one last question, is just many of the assets you guys have historically targeted I've been privately held for an extended period, with all the discussions that are going on out there right now, but changes in tax policy around 1031 elimination or deductibility of interest.

Are you finding any rumblings from owners being more willing sellers or is it just too early to know?.

Well I will say, I mean I don't know if that's it. Listen there is no question that this new administration and whatever happens with respect to tax reform and not just 1031 depreciation rules, it's the board of tax that retailers will have to pay.

I mean there's a lot of stuff out there that could impact the real estate business that time and so having a presentation by NAREIT and by our own efficiencies is critically important. And that’s up even talk about changes to immigration law, what it does in California, retaliation [indiscernible] there is a lot out there.

So there is no question that there is more uncertainty in our business as I think about looking forward in the next year, 18 months, two years than there’s been. And that has to impact the way sellers think about their real estate. I will tell you what we have seen as we have seen more opportunities for acquisitions.

What we have not seen is any weakening in the pricing that does that those sellers expect. I don't expect that the change in any of the locations..

Okay. Thanks Don..

Thank you. Our next question comes from the line of Alexander Goldfarb of Sandler, O'Neill. Your line is now open..

Hey good afternoon. Don, just two questions here. First is maybe just following up on Jeff’s. As you guys have been restocking the redevelopment kitty for some time, Darien a few years ago, Coco, the latest one in Pasadena.

As you guys stockpile these and work through entitlement, so whether it’s in entitlements are trying to get at the actual box itself.

How long do you say that you work on something versus you say, look, we've tried this thing, we're not getting where we want to go and it’s time now to put the asset on the market and move on?.

Well, there is not – I’m not able to say to you again nine months 14 days, three hours and two minutes Alex, but it – and I’m trying to be thesis there and trying to say we have a local teams that as you know by focusing on smaller portfolios within this Company.

Clearly within that they need to prioritize where they spend their time with – I mean Darien is a great example. We're still not there completely with Darien, its taken time. But we are running the assets anyway that we own. The teams are there anyway.

And so everyone of the assets, whether it's something we've just bought or something that we've held for 20 years, but it’s been tied up with leases and things that restrict what we can do or all under that the pressure here to be able to create value in real estate.

So there are clearly times as have happened where we have a base in a specific development plan because they haven't panned out.

The latest one I could point to would be for our shopping center, where we really thought we'd be able to do a pretty comprehensive residential plan there and that's just not panning out the way it is, so it will remain a retail property.

And so that conversation happens in each of these small groups and then up through investment committee on a regular basis. And that frankly is why we're able to turnover in my view as much as we do with a really reasonable size team here. We get to a lot of development and redevelop..

Okay, that's helpful. And then the second question is, as you guys talked to tenants and there seems to be obviously more interchange from mall tenants going to open-air, maybe some of the larger open-air going to the malls.

Do the tenants think of it like a linear relationship, so if their occupancy cost goes up by 2x, they expect sales to go up by 2x or vice versa if they're willing to trade to lower cost venue they don't mind, lower production sales or is it less of a linear and more something else that the tenants trying to drive out when they make a decision whether to go mall or open-air?.

I'll let Chris add with respect to what you are seeing out there. But you are asking a really what you are generalizing a specific – generalizing a financial model that really is different for every specific company. It depends on our operating margins, it depends on their online and verticality in terms of their business plan.

It's not about percentage of sales, right it's about percentage of products and our whole industry has been very focused, as you would expect on occupancy costs for the last 40 years because sales data from stores something that's askable and attainable, but the reality is that that really just a surrogate for profitability and those metrics are changing.

So when any particular company, whether it's a retailer or restaurant or an entertainment source or whoever it is, is considering the best way to distribute their goods or services, it's got everything to do with their particular business model where they're going in profitability.

So trying out to make it as linear, a conversation has it would be helpful, obviously would be easier to analyze.

If you aware, we are seeing in almost every case, a tenant that we are trying to convince to come open-air with us, what we are seeing generally is the belief that their customer is shopping in our type of shopping center rather than in a mall. That's almost the driver to everything.

Where is their customer? Where they likely to find their customer then the economics in the business plan is huge on that and they have to find how to balance..

Yes. All I would add to that comment is that from a holistic standpoint with the retailers are good example just happen out at Santana Row where in Valley Fair also floor is at a very successful store. They opened a store at Santana Row right across the street.

There has been – as we are hear no impact to Valley Fair store and they picked up a whole new grouping of customer. So I also think the retailers are getting a lot more holistic interview of customers that shop all may not always because same customers that shops on the street retail environment.

So I think the pool of opportunity of our retailers looking in the types of assets that Federal Realty owns is really it provides a lot of optimism for us on a going forward basis..

Okay, thank you..

Thank you. Our next question comes from the line of Michael Mueller of JP Morgan. Your line is now open..

Yes, hi.

I was wondering with the Phase IIs at Assembly and Pike & Rose starting to open up soon, I mean how are you thinking about the initial NOI drag when these types of projects open up compared to what we saw in the Phase Is opened up?.

Go ahead Dan..

Yes. Now with regards to the drag, I mean, I think we are trying to outline some of that in our disclosure in the third quarter with regards to the range of about $0.06 to $0.07 of drag from the opening of Phase II in 2017 and likely into 2018.

And I’d just point you to how we expect in 2017 and in 2018 and into 2019 how the NOI will proceed in terms of growth at both Assembly and Pike & Rose. I mean, I think that's the best way to kind of express to you kind of how we see that ramp up.

But $0.06 to $0.07 that we outlined is the impact on 2017 as they open and as capitalized interest rolls off and as we lease up some of the residential with very limited pre-leasing..

Got it. Okay. And then just one other question for you.

In terms of equity in 2017, is it in the range of call it $150 million to $200 million or something which is embedded in guidance, a good proxy?.

Yes. We've got a $150 million modeled in for 2017 at this point..

Okay. $150 million, great. That was it. Thank you..

Thank you. Our next question comes from the line of Paul Morgan of Canaccord. Your line is now open..

Hi, good morning. There have been some comments by some of your peers this earnings season about kind of a further widening in cap rates between A&B assets.

And warning number one, I guess if you're seeing the same thing and the number two, is there any signs kind of early on that it might be kind of blending into the types of valuations for the centers that are in your target markets are A centers and in A markets?.

Hey, Paul. Let me start and Jeff wouldn’t mind jumping in from your perspective what those.

I'd like to say that I recognize a widening in terms what we see between A&B&C centers, but frankly we're only looking at real estate and I can tell you at the stuff that we've been looking at and having some more success and hopeful of looking to turning into some substantial negotiations and then hopefully getting deals done that we have not seen any backing up of cap rates on stuff that we're looking at.

Jeff, anything further from your side..

Hey, Paul. Yes, I mean anecdotally, Paul we hear that B&C properties are either not crediting are not getting the buyer pool of these two which is affecting pricing, but thinking we are not really out looking for B&C real estate. I can tell you no change at all of the pricing for A’s it still extremely competitive and expensive..

I will add one thing to you, Paul that you might find interesting. There is a shopping center here in the DC area that has been on our list for a long time. It's not a regional center, but it is that’s more of a strong community center with some opportunity both in leasing and potential into small development.

We basically dropped out at a high 3s, 4 cap on our underwriting and it went for significantly more money than that to a private company not a public company, but private company now that is in our business.

And when I looked at that and I shook my head and said that we’ve been looking really carefully to see if we could see any kind of weakening in or backtracking if you will of cap rates and that one looked extremely high and we’re not being able to looking at that property either and it just want for a really big number in the 30s..

Yes. I understand. Thanks. And then just to follow-up on kind of on re-leasing spreads, first on the renewals, they were lower than what you had recently was plus 1% renewals and I just wonder that’s anything about kind of what you're seeing in terms of small shop rent growth.

And then on the anchor stuff you’ve provided I think 15% to 20% expected spread on the anchor leases that were vacant that were remaining to be leased, and you've done a few more deal since than and I wonder if that number is kind of still what you're ball parking?.

Yes. Too many questions, listen with respect to the fourth quarter renewals, I mean that’s an anemic number, 1% anemic number anyway you look at it. I also have to start by saying it's a quarter, so what.

And inside of that, when you look at it, there is one particular deal in there where we specifically roll down a tenant to keep them in the properties that we were looking to or looking at to redevelop and we're not ready yet, so we didn't want to lose them to the center all the way.

So we keep them and that brought us down without that would be in the mid single-digit still, nothing wonderful to write home about, but a whole lot better than 1% what that looks.

And then with respect to anchors we did the guidance that you just is something that we are comfortable with in terms of the rest of the anchor leasing to lease up in the two deal that I talked about were two of the better deals. In terms of that rolled up that we're remaining list.

So we still expect to be rolling up the balance and the teams certainly but not maybe down to 20s..

Okay, yes.

But including the deals you did, I mean overall it's consistent with kind of what you provided, even though you may picked off some of the better one so far?.

Completely consistent make a little bit better..

Okay, great. Thanks..

You bet..

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

Hi, good afternoon, everyone.

Don, you talk about the change in retail environment and changes in the way people are shopping and realizing that’s more longer-term, but you also an environment right now were you seeing by spending on apparel and accessories, many retailers are struggling and it could be another tough year for store closures, aside from some of the occupancy loss that you've already suffered what impact is the current retail environment having on your business strategy today? How are you thinking about tenanting your centers differently and maybe you were just a year ago?.

Yes, everything is around the edges, Christy.

I'm very much believed that this is – what we've been talking about for years, is accelerating and tenants that have kind of hung on coming through the recovery are under stressed, payless is the next one – that closed and we’ve got a $900,000 or $1,000,000 where the payless income that is that certainly the risk at six different properties.

So the reality is it gets down to this real belief that in everything I’ve been talking about that we need to provide merchandising that is so much better balanced toward the type of food offerings, the type of entertainment offerings, the type of clothing offerings, we need to be making sure that we're doing deals with retailers as best we can that getting.

And a lot of that does mean investing in these properties and making sure that we're giving them the best mousetrap, if you will to be able to offer their good sense.

One of the things that as you know we struggle with and I would hope our competitive struggle with is how much do we take to the short-term to be able to make sure these properties are as strong as they can going out and we just completely taken the point of view that we're going to the large because we have the real estate where we can get paid back for such investment and we were going to accelerate that notion of the right type of mix of all of those tenants with the people who are getting it more in terms of providing customers the services that they demand today then with the older brands that are slower on the uptake..

So in the context of your 3% same-store NOI growth forecast, if I think about some of those at risk tenants that you could payless is $900,000 to $1,000,000 and some of the others that may result in further store closures.

What is the risk potentially to that 3% forecasters or to what extent do you have something embedded in there, some buffer for further…?.

And I will leave the specifics to Dan and Melissa, but just notionally how we try to do this, courses risk and on all of these companies today, I do think there is more variability, if you will in the standard deviation, on all of these numbers that are out there being given in that time of cycle that we are in our business in terms of that.

But we do that – when we give a number of 3% so 2.5% or 3.5% and you look at the kind of numbers that difference is that it takes to move that, it's not a lot.

And so, surely we have some question put in there, but we also know we believe some of that, if not all of that question which we are trying as best we can to give you a balanced view in a time that I believe that in our business is less predictable than it has been..

Thank you..

Thank you. Our next question comes from the line of Craig Schmidt of Bank of America. Your line is now open..

Thank you and good afternoon. I'm looking at the 2006 acquisitions and the vast majority of them include a supermarket anchor or supermarket exposure. I'm just wondering if Federal looking to increase its exposure to supermarkets and just kind of given those comments you just made is that part of the draw that will be part of the future federal mix..

Just want to make sure, you said 2006 and I'd love to go back to 2006..

I would too..

I do expect you mentioned 2016..

Yes, I did. I'm sorry. The six assets you’ve bought, five of them had a supermarket anchor..

Yes. So remember that was us buying out the 70% that we didn't own of our joint venture with Clariant and those – that particular portfolio was meant to be a supermarket-anchored portfolio and so that's why it – when we look specifically at risk-reward, we make any money with that investment of those net 70%. We said, yes.

That was not a specific supermarket initiative that position in 2016. So I don't I think relating into that all. Generally, we are all about the best real estate and the components of it or the format of it is just playing less important to us, it's about the real estate and what we can get at and what we can do with it.

So I don't think we should read into that at all. We are a retail company although in terms of the way we think about things. Yes. We want to make money vertically above it in cases with residential and with office, but our bonds are retail, but as this broadly retailed and not just supermarket on shopping centers..

And just looking at the development opportunities at Hastings Ranch, is that on existing land or would that be the conversion and repurposing of some of the anchor space there?.

Yes. Jeff wants to talk about Hastings in a little bit more..

Okay. Sure, Don. Hey, Craig. Yes, I mean I think find the best way to look at Hastings is way down laid it out on one hand, we are sitting on 15 acres land or 274,000 square feet of improvements on it that generates the 6% return that it’s going to grow roughly the rate the same is the rest of our portfolio over the foreseeable future.

And that's the scenario we priced and underwrote and that’s something we can happen obviously, if we don’t get control over the land or get control over the Sears box. On the complete other end of the spectrum what you're getting to Craig, is if we do get control the land and we do get control over the Sears box.

There is a significant opportunity to reposition that property over the coming years. It's got a zoning that allows anywhere from a 1.0 to 3.0 FARs roughly 650,000 feet three times that. It's right next to the 210 free ways where there's 240,000 cars a day that goes by and walking distance to the metro gold line.

So it’s fundamentally great real estate with a wide range of potential outcomes and we won't know we're headed on it for several years, but it's again what we always look for this real estate which is protected downside, which in those case has been sitting there and run it like it is today and running the six and watching it grow or doing something significantly different.

And then of course there's two or three scenarios in the middle that could work out to just way too early to tell..

Craig, I want to add one thing to that just a – the Sears box has paid very little rent here, it’s partially sublet thing that HomeGoods….

Yes correct Don..

And so from a profitability perspective for Sears, this is a great piece of real estate where they pay little than they earn. So we don't think that there is past the day to have basically said we're not interested in giving the space at this point, we just want to be there to the extent that situation changes..

I was just looking at Google maps, it looks like there could be some interesting opportunity just give us surrounding retail and uses on that area?.

Clearly, 15 agents that far is a lot of land..

Yes, it’s a great note Craig. Great note, that’s a great piece..

Okay. Thanks a lot guys..

You bet..

Thank you. Our next question comes from the line of George Hoglund of Jefferies. Your line is now open..

Hi, guys.

Just wondering if there's any sort of additional color you can give on plans for CocoWalk in some sort of place?.

Yes. I gave have some last time and we're work the numbers of like crazy because constructions expenses.

But yet coco in particular we’ve settled on a plan that will effectively part of the shopping center down as you're looking at the fund at the right side of down and create office overall retail with a completely reconfigured center if you will of the common area there with the Starbucks is today.

And overall renovation, not only of the outside areas of the retail part, but inside of the Cinepolis Theaters that is a critical anchor there and so as we pull that together will have a total numbers of down yet, but it we'll be a $50 million or $60 million redevelopment plan that is that really should said that property up to be a great held asset, if you will, for the next 20 year and 30 years.

And over it Sunset it's all about the entitlements and that is the case in all the markets that we're in I don't think we are in one market we're getting the uses in the high-end and the entitlement to do what we want to do is easy.

Now one market we're in that's why we're in those markets and we I don’t want to say, we want to be hard to get the new investment, but it's hard for us, hard for everybody. And so we still have time. I think I would say into working through that in the meantime, we are doing the best we can operating a less than perfect retail assets.

So stay tune that we more Sunset I will be more coco. But I just told you, it is probably where it's going to end up, so we can get the numbers, where we need to get the numbers..

Yep thanks..

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

Hey, good afternoon, everyone. Just question we've talked a lot about the training consumer behaviors and how that changes now accelerating as well as the fact that there's more acquisition opportunities out there, but the pricing hasn't changed.

So I'm just curious, obviously have a very high quality portfolio already, but any thoughts on taking of the current conditions and making portfolio little bit better quality of asset sales at this point..

Yes, great question, Vin and let me give you the answer is yes, but let me specifically point to what the challenges are in this portfolio. The first I talk about forever as we've got some really significant tax gains in just about every asset that we own.

And so without having the ability 1031 it's hard, so we1031, whenever we buy an asset for cash as opposed to what units dealer or some other financing. We do look hard at trading out. So I do hope you see that this year starting with using the facing for proceeds.

The other thing that should really keep in mind with respect to this portfolio is when spin off big part of the company or sell 20% of the assets or whether. It’s whole lot easier make that work when there is a big giant standard deviation between the great stuff that’s you have and then anchors are great stuff that you have.

And as we’ve looking over for years and really what that standard deviation is, I mean, we certainly have property better than others, but I will say that even on worst assets are awfully play in terms of growth rates and things like that.

So spending off 10% or 15% of this Company, you do all they long, if you could bring the 3% same-store growth that’s the 4.5% or something like that which you might not do it if it was the 3% to 3.2% or something like that if you kind of get my drift.

So it will likely continue to be a one-off selective philosophy of improving the quality of the portfolio, which we should always be doing and just like we buy these assets one at a time you'll likely see a trade out one at a time..

Okay, thanks a lot. That’s all I had..

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

Thanks. Just a couple of follow-ups here.

First on lease spreads, can you give us some sense of what type of vintage you are rolling over for rent leases that you are signing in 2016? And tied to that is, how long is your runway for continuing to post these very healthy double-digit lease spreads?.

Ki Bin, I’ve been asked this question for 10 years and I keep looking for the end of the runway, but I will tell you well certainly there are quarters and there are periods of time when we don't roll as well as we would like to.

Overall, we're still sitting here at a portfolio, which has basically, in total, as far as we could tell, we've got sales from everybody, but something like 9% or 9.5% cost occupancy in it.

So, as you look and I love the schedule that we have in the road show, which basically shows here are the average rents that we're getting, and here is the average in place rent for as you say all the vintage, but former leases that there is still more upside in this portfolio.

I think in terms of those roles overall than in any of the other reported information that's out there for the competitors. So I feel like that will continue. That doesn't mean is there every quarter and I don't have a specific answer. I'm looking over it.

Dan have said specifically the vintage that we get here, but you do know that our average leases on hand are between 7.5 or 8 years. So whether at this specific quarter on average where we’re rolling over leases every 7.5 or 8 years..

Okay.

And the second question on the Pasadena asset, could you just talk a little bit about like how you source that type of deal and maybe some commentary around, I believe there is a ground lease on it?.

Are you asking for Jeff Berkes, secret soft? Hi, Jeff, how are you going to answer that question?.

Well, I wish I could like say that we’re superhuman, but we're not, the asset was actually marketed for sale back in 2015.

And there were some complications of getting the deal done and what we've done in the past, we have hung around the hoop and work through some of those issues with seller, we developed really, really good relationship with and we are able to get the eventually the deal done. So nothing more magic to it than that.

We’ve found over the years persistence and patience to give the kind of real estate that we want to payoff and this will be a great example of that..

And Ki Bin, the only thing I'd add to that is buying something whatever it is in these locations and with the opportunities here at six is great, but there's a reason for it. It is not a ground lease. We are at 40 years of term or so in terms of that.

And there is no direct path to getting the fee, there is no direct path to getting to this year's which pays no rent. So it makes sense that is that a six or six plus something like that. But when we look at and say okay, what's your downside if you never do, downside we never do is 40 years of 2.5% to 3% annual growth in a great real estate location.

So pay for itself if you will in 13 years or 14 years and then what 25 years after that of cash flow. So economically I think it works all day long, but specifically having it turn into the next best mixed-use project or whatever it's ultimately going to be, we don't have any visibility too..

Okay, thank you..

You bet..

Thank you. Our next question comes from the line of Chris Lucas at Capital One Securities. Your line is now open..

Yes. Don, you basically answer the question I was going to ask, but maybe just one more on Hastings, if I could, which is if you we're able to get the feasible interest, if that deal was completely put together, what kind of a cap rate with that go for in the marketplace today.

If you were able to get in six with kind of giving the leasehold interest?.

I’m going to provide a crazy number and then Jeff going to argue with me, so you are going to see it right here on the call. He is 3,000 miles away, I can’t even look at him Chris, so can get two very independent things.

Everything that we've seen in and around California in the markets that we're talking about where we would like to be, if you were completely fee owned with the climate upside that 200,000 square foot Sears and HomeGoods and part of the shopping center that doesn't pay a lot with that upside, it would shock me if this were not of sub four.

It’s just pure guess..

Well, I would say there is a lot of nuance in all these deals, Chris and I’m sorry that I kind of pinpoint that number, but on Don’s point not far off whether it's high 3’s or low 4’s that’s kind of the range..

Okay, thanks. And then just, Don one quick one kind of a follow-up to an earlier question about sort of change in tax policy.

But I guess I was wondering if you guys are finding more opportunity and whether you're actually pushing this idea or not of doing more down REIT type transactions given the environment?.

You know, more or less is a relative term, I will tell you anytime we go into a property that we would love to have an interest and we try to use whatever tool is in the toolbox. As you know we're not of volume acquirer.

So it's not like there is a memo that comes down from my office or from Dan’s office, it sounds like the acquisition guys use more down REITs in every units. It really is what can we best do to convince a seller to do a deal with us and sometimes it works, and sometimes it doesn’t. But, no, not more, no trend difference there at this point..

Great, thank you..

You bet..

Thank you. Our next question comes from the line of Collin Mings of Raymond James. Your line is now open..

Hey, good afternoon. Just Don going back to just the acquisition opportunities you're starting to see out there.

Has there been any really discernible pick up of deal flow, any specific markets that has you particularly encouraged or that you're particularly focused in on ongoing back to some of the prepared remarks?.

And I don't know if this is the direct impact – has it had a direct impact or not, but I really do like the fact that we are operating on more of a decentralized basis now. We are in –there is a team in Boston that looks at Boston. There is a team that specifically looks to Chicago.

There's a team that specifically is working on the West Coast and in Washington et cetera. And so, while I'm constantly frustrated because I'm a cheap guy with the cost of deals, the type of deals that we are seeing in terms of is it real estate that we have the potential to do something with. That does seem to be stronger in all of our major markets.

Now whether that converts into actual deal flow or not for billion reasons including the one that took Hastings Ranch. That small acquisition, 18 months or 20 months to get done, these things there are unpredictable in terms of what we're actually looking at. But there is certainly more in each of these teams that is being served up, today, frankly..

Okay.

And then maybe just switching gears, just given the pressure on labor and then clearly some commodity prices, just maybe a broader update on your overall outlook for construction costs as you pursue potentially some additional redevelopment opportunities or what have you, looking out over the next 12, 18 months?.

Yes. You must have our conference room booked, because the last Investment Committee we specifically were talking about expectations with respect to construction costs, Boston in D.C., certainly in California and we don't see it going down anytime soon there. This is where we are and probably a little bit more expensive.

This is where we're going to be in terms of where we're planning to be in terms of the ability to buy out these jobs. On both the material and labor perspective and that's another area that when you start talking about immigration, when you start talking about workforce changes, there is some unpredictability.

And so it’s a reason I’ll always say we're not totally – we're never going to go all-in mixed use development. We’re never going to go all-in on shopping center acquisitions if you will.

We're never going to go all in on any piece of our business and we've got them use to more, but we're certainly not expecting any significant change, there's no change down and no significant change above in the cost construction over the next year to 18 months..

Okay, thanks..

You bet..

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

Great, thank you. Hey Don, one thing that things a little bit loss that is another year of 7.4% overall NOI growth, which is pretty impressive for any REIT, alone of REIT of the size of Federal. But obviously you guys have a plan of doing this for a number of additional years as well.

As you look out over the next couple of years, how would you rank the risks to your growth in your overall NOI and by order of magnitude, whether it's cost pressures, whether it's tenant bankruptcies, whether it's financing markets or the potential other events that you – that we don't know about this stage, how would you rank that the risk?.

It's a great question, Floris. I think you're really asking why would sleep over and I can’t just give you my standard everything because it's true. What it really - what I feel best about is the cost of money.

When I feel best about is that balance sheet and so I’ve got to tell you that is the single biggest – I mean 2008, 2009 showed everybody what is important tool that is to have that right and we’re heck of a lot stronger than we were even 2008, 2009.

So the one of the things I worry about lease is the financing, because of our track record and because of the strength of the balance sheet at the way we have set.

Now, so I guess I start with what I worry about lease and you ask what I worry about most effectively and most has everything to do with the changing retail environment and the ability to have retailers clear enough in their business plans to make decisions to open source. And that is just the single biggest thing. It's less about the bankruptcies.

I always expected to be bankruptcies it’s part and parcel of our business it often results in and don't just mean bankruptcies I mean tenant failures.

However, more broadly defined it all these results and some level of lease termination fees that part and parcel of our business, it always results in opening up the redevelopment opportunities, which are always a part of our business, a huge part of our business, but the deal making requires a retailer to be very clear or residential or apartment dwellers to be clear on where their future is.

And right now to me that's the fundamental question it's the changing consumer and it’s online shopping, uncertainty in the administration that stuff is what worries me because the end of the day, we need to people for REIT space before I think REIT space I think a bunch of money.

So that's the overriding risk I see our business, and frankly a lot of businesses that that you forget in good times, when people are clear about when management team CEOs are clear about where their companies are going they invest, they invest in good factory, they invest a new shopping centers, they invest and what are people work hiring et cetera.

In our business with the change in consumer with changing – all the change we talk about that is my largest worry..

Okay.

One follow-up question I guess and this from a couple of calls ago, but update on Chicago, I noticed you mentioned earlier, you now have a specific Chicago team, is that new and should we expect more investment into that market?.

Well, I don't know whether you're seeing with their more or not in Chicago. I do know that the team that has the responsibility for Chicago we really like. And if you just get down to the centralization part and you think about a specific team that really like the market that they're in, for whatever the reasons are.

I would expect to see more stuff coming up for investment opportunities in that and all our market and all of our markets from those individual teams. Now whether they work their way through investment committee and whether they make sense or not stay tune that is yet to play out, but that's probably how I would answer Chicago..

Great, thanks. End of Q&A.

Thank you. And I am showing no further questions at this time. I'd like to hand the call back over to Leah Andress for any closing remarks..

Thanks everyone for joining us today. Looking forward to see many of you as well in Citi Conferences in the coming weeks. Thanks. Good bye..

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today’s program. You may all disconnect. Everyone have a great day..