Q4 2019 Earnings Call
Greetings and welcome to Federal Realty Investment Trust fourth quarter 2019 earnings Conference call. At this time all participants on in listen only mode. A question answer session will follow the formal presentation. If in once you require operator sister store. The conference. Please press Star zero on your telephone keypad. Please note this cost was being recorded.
I'd now turn the conference or what do you hope mostly a brain. Thank you you may begin.
Good morning, everyone. Thank you for joining us today for Federal Realty's fourth quarter 2019 earnings Conference call joining me on the call or Don Wood Damn G. Jackie Burka wouldn't be fear Dawn Becker and wants to tell us they will be available to take your questions that inclusion of our prepared remarks.
A reminder, that 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 annualize are projected information as well as statements, referring to expected or anticipated events or results.
Although it's not a real people use the expectations reflected in such forward looking statements are based on reasonable assumptions that are realty feature operations and its actual performance may differ materially from the information in our forward looking statement and we can give no assurance of these expectations can be obtained the earnings release and supplemental reporting package that we issued yesterday, our annual report filed on.
Our form 10-K, and other financial disclosure documents provide a more in depth discussion of risks factors that may affect our financial condition results of operation.
Documents are available on our website.
Given the number of participants on the call we kindly ask the limit your questions or one or two per person during the Q and a portion of the call.
But if your question please feel free to jump back in the queue and with that I will turn the call over to Don what we're getting a discussion of our fourth quarter results Don.
Secondly, Ed good morning, everyone.
So for the 10th year in a row AFFO per share was higher than the previous year. Excluding of course last quarter's came or real estate acquisition charts. The income statement for accounting purposes.
Barring some unforeseen collapse 2000, that's why he will be the 11th year in a row as the I'll talk about a few minutes.
Please note that say good we've grown earnings bottom line earnings every single year over this past decade, and expect to do so again next year, yes growth has slowed as the industry continues to morph into something different but it's still growth and there's not a single other publicly traded strip here that can make directly.
Correct of nearly 200 U.S. equity Reits in every sector.
Less than 5%, we're able to grow at that FFO per share each year not surprisingly those companies have a combined average multiple of nearly 21 times.
One of the things that differentiated federal a decade ago when growth slowed following the 2008 recession was the way we relied on our balance sheet strength and broad skillsets to move forward with initiatives that would power us in the years that followed which were not helpful with generating immediate earnings.
We aggressively move forward with Master plans for Pike, <unk> Rose Assembly row, other long term initiatives. Despite the challenging environment and as a result, we were able to health reform is sentiment change because we were therefore ahead.
This feels like that to me.
This dog rather than dealing with a broad recession and planning large decade long mixed use projects, we're dealing with oversupply and changing consumer preferences, but we're doing equally forward thinking things things like doubling down on already successful mixed use communities with less risky and mostly non retail additional phases that.
Capitalize on the communities Weve already established.
We're constructing new midsize projects like Cocowalk in Miami, and dairy and shopping center in Connecticut, and listening to what retailers restaurants, and the communities. They serve tell us about what's important to them.
Why the way if you look at our yearend balance sheet, you'll note $760 million of construction process more than we've ever had and our long history.
We are aggressively moving forward with solidifying our core portfolio by proactively acknowledging the has and have nots among retailers in shopping center environments, where beefing up incredibly well located high quality centers for the next decade with better tenancy with alternative an additional uses it with attractive placemaking using sustainable method.
And environments.
Well recycling assets with little opportunity for future growth nearly $300 million worth that classical coiled free state shopping center the office over retail building at her most a beach, California, and the Kohl's portion of San Antonio Center.
And we're reinvesting those proceeds in far better opportunities in Hoboken, New Jersey, Brooklyn, New York in Fairfax, Virginia.
In other words in a naturally cyclical business, we're always focused on growing long term AFFO per share no matter, what the current environment looks like.
So let's talk about the transactions that closed in the fourth quarter to demonstrate the point.
We did what we said we would do.
First we received before $155 million in December for the Los Altos, California School District for the 12 acre portion of San Antonio Center. So the condemnation process, we've been discussing for months now.
The elevated cash position on our yearend balance sheet reflects us and while we have the obligation to use a portion of those proceeds to pay existing tenants on the site the timing and amount of those payments is uncertain at this time, but the net value to us is more than a little impressive.
We also closed on Cosco anchored plasma going in Los Angeles, and the quarter for $51 million.
When these fourth quarter dispositions are combined with the sales of her most a free state and a couple of smaller parcel parcels earlier in the year $300 million of capital was raised at a mid four cap rate based on expected 2020 cash flows.
And what we recycle that capital into.
Hoboken, New Jersey were 37 to the 39 buildings, we bought in our new partnership closed in the fourth quarter. The other two building to close this month.
We also closed on George Sound shopping center in Brooklyn, and in January the retail strip adjacent to our previous holdings in Fairfax, Virginia.
Basically $300 million invested in properties, which generate a going in yield modestly in excess of the assets that were sold with an eye or our that's 200 basis points fire.
And we expect to be able to expand further given that Hoboken partnership and the opportunities we're saying.
Transactionally the fourth quarter was extremely hot.
Operationally it was too.
[noise], we ended 2019, having signed 457 retail and office leases for nearly 1.9 million square feet.
At average rents a $41 a foot.
And we signed more than 2300 residential leases at average rents of $2, an 82 cents per foot 34 bucks per foot per year.
Just the retail and office leases combined created $77 million of growing annual contractual rent obligations for the next seven plus years.
Our rental stream comes from an incredibly diverse set of retail office and residential tenants.
On the development side, we're incredibly active with 700 Santana row complete and just turned over to Splunk last week.
$210 million, which is on budget and yielding seven the half percent.
This building is a home run at the end of the Street anchoring Santana row really something you should check out on your next trip to north in Northern California, It's impressive.
Across the street at Santana West construction is well underway roughly 100 million hours of spend and 20 $150 million. The spend in 21 with no income until 22 strong interest in the building at this very early stage is encouraging.
[noise] full blown construction at assembly on both the residential and the office building continues unabated.
Projects are on schedule and on budget.
Roughly 200 million hours of spend in 2020 $800 million, It's 2021 with no significant income contributions until late 2001.
This is one big development phase that will really change the feel of assembly row Coolness North American headquarters is the office anchor there.
Construction of 99 rose the flagship office building. It play can Roes that will house Federals New headquarters in August of this year is on budget is on schedule with roughly 50 million in spend expected in 2020.
We're currently trading paper with other tenants for more than 40000 square feet inline with our underwriting.
Cocowalk is moving along beautifully with 87% of the retail space and 57% or the office space spoken for under signed lease are fully executed ally. Another 30 million of capital. This program there for 2020 and they come we'll begin to be generated here later this year.
And finally, we can now say that demolition and construction are underway there in where will we will completely changed the character of the grocery anchored shopping center, where we will at 75000 square feet of new lifestyle oriented retail space to complement our strong equinox after banker.
122 apartments at 720 parking spaces directly adjacent to their own train station in the area.
$120 million, an incremental 6% yield with 25 million hours spent 20 and most of the balance beyond that.
No incremental income here this year next.
I go to the status of just those large development projects for obvious reasons, our balance sheet at year end showed a $760 million of construction in progress and wall. The Splunk building at Santana delivers this year and will reduce that number and additional 400 million or so we'll be added in 2020 300 million a 20 twond.
He won for these projects are turned over to rent paying tenants after that.
Back to the remarks I made initial we're doing a ton of investing in leading edge real estate projects in markets as we look toward a very bright, but different future would trade and consumer demand and retailer business plans.
We expect to be at the forefront of that change all while continuing to grow AFFO per share, albeit more slowly in the near term.
That's about it for my prepared remarks.
All the focus on short term occupancy current earnings and lease up expectations that this uncertain time is understandable and certainly important.
What a company's clear path to growth and mid and long term relevancy of its real estate long. After the current vacancies have been leased up is in our view far more important.
Let me turn it over to Dan before addressing your question yeah.
Thank you Don and good morning, everyone. Another record year AFFO per share as we posted $1.58 cents for the fourth quarter with the full year for 2019 at 633 as adjusted for the acquisition, but became more to the assembly an uptick in AFFO versus the same periods in 2018 I remember.
In 2019, we faced an increase in GNS of roughly two cents per quarter from the new lease accounting standard.
The numbers in the fourth quarter were driven primarily due to higher term fees and higher rental income than last year offset by a shift in timing on property level expenses.
Both from real estate taxes were a meaningful forecasted tax refund was pushed into 2020.
And Nonrecoverable property level expenses, which were pulled forward from 2020.
Both of these are primarily timing issues that should come back to us positively in 2020 represented roughly two cents of drag in the quarter versus forecast.
While this quarterly if our pro result may see muted this was driven primarily by timing.
And we had a really successful quarter in terms of all the positive activity Don highlighted in his comments.
Our comparable POI metric came in at 2.4% for the fourth quarter and 2.9% for the year.
Basically inline with our previously increased annual guidance.
With respect to retail space rollover, the 99 comparable retail leases during the fourth quarter for 462000 square feet were written at an average rent a 30 778 per foot, 7% higher than the prior rent.
Those results closely tracked the 379 full year 2019 comparable deals, which were written at $40.48 on average or 8% higher than the deals they replaced.
Our portfolio remains well leased at 94.2%, though we do expect that to move lower than the first half of 2020.
While we don't typically provide guidance on our occupancy metrics given the aggressive level, a proactive releasing and some of the recent retailer fallout, we expect our occupancy metrics will trough in the first half of 2020 to the mid 93% level for leased in the mid 91% range per occupied.
However, we should see a steady rebound back up to historic levels over the latter half of 2020 and into 2021, given our strong pipeline of leasing activity.
A few additional comments I'd like to highlight in our disclosure this quarter that further demonstrate the strength in our business that is not directly reflected in the quarters numbers.
On our development schedules in the 8-K. Please note on page 17, we closed out another $50 million in projects four of them.
On time and on budget and on page 18, we raised our projected yield on one Santana west to 7%, reflecting continued strength in rental growth so that sub market for the Amenitized office product we offer there.
Now why do I mentioned this it's because the redevelopment and mixed use development, we do is challenging and it's really difficult to execute effectively.
Through Federals experience and 20 year track record, we have meaningfully de risks these parts of our business model.
Now, we'll turn to 2020 guidance.
We have formally provided a range of $6.40 to $6.58 per share.
This formal guidance takes into consideration some of the projected tenant failures that have occurred since our late October three Q coal.
You see more pier, one and fairway the most prominent.
We felt it prudent to take a more conservative posture as these restructurings play out.
This range represents 25% growth.
In 2020 AFFO at the midpoint.
While this guidance range reflects some discrete headwinds facing us in 2020, which I will get to shortly.
Our diversified platform is executing on all cylinders as evidenced by delivering Santana at 700 Santana row to Splunk last week at a return in the mid Sevens. The stabilization of the phase Twos at Assembly and Pike and rose delivery of smaller projects over the course of 2020, including the Prime store Jvs Freedom plan.
The aka Jordan Downs, beginning delivery to start this year.
Pelican would residential opening in Q2, and a newly renovated cocowalk expected to start delivering to tenants in the second half of the year.
While none of these smaller projects will meaningfully Ed to 2020, they will be additive in 2021.
We also have the Steven stabilization of the $50 million of redevelopment at a blended incremental yield averaging 9%.
And we also have a core portfolio, excluding headwinds caused by term fees repositionings and recent tenant failures, which otherwise would deliver comparable growth than that you want to have to 3% range.
Also note that we executed on roughly $300 million of new investments and over $300 million of noncore asset dispositions during 2019, which will be a couple cents accretive in 2012, but provide more meaningful value creation in growth over the longer term.
What are other retail read can tell an asset recycling program, that's accretive to FFO in year one.
These items together would drive FFO per share growth into the 6% to 7% range, if not for some discrete but somewhat disproportionate effect wouldn't.
Let me give some additional color.
First term fees.
We had a record year in 2019, earning over $14 million in gross fees.
Whether it provides headwinds or Tailwinds. We include term fees in our metrics because it is part of our business and the overall strength of our lease contracts provide us with a competitive advantage, we can leverage over time.
While we expect a strong year again in 2020, we do not forecast getting back to 2019 levels and therefore forecast a meaningful drag here.
A second headwinds.
Late last year, we identified several attractive proactive remerchandising repositioning opportunities across our portfolio and continue to evaluate additional opportunities, which will drive significant longer term value creation, but at the expense of 2020 AFFO.
Changing out struggling retailers limited runway in terms of long term relevancy, replacing them with tenants, who we project to be thriving in 2030 and beyond.
It will be another source of 2020 drag.
Ed in the forecasted impact than recently announced retail failures on top of those previously identified so it's just stress dressbarn and collectively these items get us to a range of 1% to 4% AFFO growth and 22020.
With respect to other assumptions behind our guidance.
Comparable POI growth is expected to be at zero to 2%, which reflects the headwinds we just highlighted.
The first and second quarters of 2020 will be the weakest and may even be negative due to term direct.
We assume roughly 100 basis points of credit reserve.
Comprise the bad debt expense unexpected vacancy and rent relief.
This is roughly in line with past years projected reserves and actuals. Please note that projected lost revenues from the recently announced tenant failures previously mentioned had been incorporated into our guidance and are not part of this reserve.
With respect to DNA, we forecast roughly $11 million per quarter up modestly from 29 teams run rate.
On the capital side, we project spend on development and redevelopment of roughly $450 million to $500 million.
As is our custom this guidance assumes no acquisitions or dispositions over the course of a year, we will adjust guidance for those as we go.
And finally were projecting roughly $60 million to $80 million, a free cash flow generation after dividends and maintenance capital.
Now onto the balance sheet as big as it has become a federal realty custom we've positioned our capital structure exceptionally well to handle the current wave value, creating development or redevelopment activity at the company.
We finished the year with over $100 million of excess cash and nothing outstanding on our newly expanded and extended 1 billion dollar credit facility. As a result, our net debt to EBITDA now runs at five and a half times are fixed charge coverage ratio, who hold steady at 4.2 times, our weighted average debt maturity remains near the top of the.
Sector at 10, plus years and the weighted average interest rate on our debt stands at 3.8% with all of it effectively fixed.
Or a rated balance sheet equipped with the diversity of low cost funding sources allows us to execute our diversified business plan with a meaningful meaningfully lower cost of capital than anyone in the sector, which is another way we de risk the development activities, we have underway.
Our game plan for 2020 has all the components in place to position federal for sustainable outperformance in both FFO and any the growth.
Over the next decade.
That's all I have my prepared remarks, and we look forward to seeing many of you in Florida and few weeks operator. Please open the line for questions.
Thank you at this time, we will conduct a question answer session if you'd like to ask a question. Please press star one on your telephone keypad a confirmation Tony indicate your line is in a question Q you May press star too if you like to remove your question from the Q.
For participants use the speaker equipment, it may be necessary to pick up your handset before press the star Keith one moment, while we pull for our first question.
Our first question comes from Nick Yulico with Scotia Bank. Please proceed with your question.
Thanks, just first question on the on the guidance. She has to look at the FFO range, you put out versus the goalpost you talk about.
On the last call.
Are you mentioned that AC more fairway and some others I think affected things what was there also.
Our decision to start more redevelopment.
Is that is that also causing any additional drag versus what you expected last quarter.
No no I think painted by the way good morning.
Yes, we that additional redevelopment is really didnt come into it was really just taking a more conservative posture as we looked at.
Some of the news that has come out since late October three and half months ago.
Really that's that was the met the primary driver.
Okay. That's helpful. Then and then I guess just second question is.
As we think about this year and you talked about earnings growth being affected by a few significant move outs that are unrelated to tenant bankruptcies and they've always been sort of ahead of the curve in terms of remerchandising boxes, but.
This year is clearly a more impacted year than most so what I'm wondering is just a function of the retail environment and I think it'd be a new theme in the federal portfolio. How should we think about risk of there being a similar type of downturn downtime vacancy impact in 2021.
Yes, well, let me start on that it hit you know we've taken a very holistic approach to to all of our centers and really trying to take a look at where we believe these things will be more powerful in 2025 in 2026 and that that means the the.
Notion of place.
And place, making is a much it's always been important part of what we do but it's it's a more important it's a bigger focus in terms of what we're creating including the type of co tenancy.
That is that is happening there clearly less clothing.
If you will more.
Experian, Joel type of stuff, including health and beauty.
Including.
Uhhuh different food sources so.
We look at this holistically as a major change in how retail and centers, including mixed use centers serve their communities over the next 10 years as you know our stuff is not in the middle of the country generally it's sitting in the coast in.
In populated areas with.
Lots of money and lots of people around so we we are forward thinking if you will in terms of that and it's not just the battle Backfilling space. So you know does this continue yes, I do think it continues.
Because they think this is a major change in how how people are are going about their lives when it comes interacting with with retail.
What we do it on a balanced basis and there's nothing more important than that to us to note that as a public company. We can't tell you well you know our earnings are going down, but it's going to be great.
In the future we need to balance both of those things current earnings along with.
You know the sustainability of great real estate and that's the thread the needle that that we thread.
Alright, Danya that make makes sense just last question is.
On the releasing progress on the spaces that are drag on 2020 I know why for example, now Kmart Assembly shop in shop, dairy and Banana Republic third Street in Santa Monica.
Yeah, let let me go through those because those are those are big ones. The the.
Kmart at Assembly, we made temporary lease up.
The space, but the purpose of that was that's an acquisition to be developed and that'll be a continuation of.
Assembly row now we've got entitlements to do that takes couple of years that at the time that the timing in the planning as necessary. So we'll certainly look for some kind of mitigation. If you will have the lowest.
Kmart rent, but it's not the driver the driver if the value thatll be created on that six acres.
Which is why.
Still on understand the accounting that as it goes through the Pinedale frankly that is an acquisition all day long come up to come up to dairy and we are now under construction that stop in shop gone going away and so as a result that will be a completely different use on that on that.
Parcel and so you won't see income income contributed there we're not trying to backfill the sovereign shop, we knock it down and so the whole notion there is how to create a whole bunch of value on a piece of land that was obsolete that shopping center.
Wasn't needed as another grocery anchored shopping center at that train station. So look forward to that in the coming years.
In terms of banana, Jeff I don't know how much you want to say at this point.
Footwear were well, we're making some real good progress on Backfilling that added incremental rent.
Yeah, Thanks, Sean and Nick Yes, we can tell you more hopefully next quarter were down the road, but not to the point, where we can really give a lot of detail on the on the leasing progress or because we're in negotiations so.
More to come on that one but trending in the right direction.
Okay. Thanks, everyone.
Our next question comes from Christy Mcelroy with Citi. Please proceed with your question.
Hey, good morning, guys and thanks for thanks for the call out on our conference for promoting it in terms or Don you talked about at 400 million of additional spending 2020 300 million at 2021, I know you have many options for capital or anything to fund that but just sort of generally how should we think about the mix.
Yes, Dan you set free cash flow and if your 60 to 80 million you've also got equity issuance as an option, but how should we think about the potential for additional dispositions as well.
Yes that will always be part of our plan Christy. So first of all let's start with the balance sheet that you're looking at which has over 120 million or the cash on it so starting out with with.
A balance sheet that as you know.
Is about as strong as can be including a completely unutilized.
Billion dollar credit line. So that's on a bet start on top of that Theres No doubt, we will continue to recycle be portfolio that you should still.
Assume that I can.
I'd love to say 150 million or 200 million of dispositions, but the reality is that's very opportunistic and it depends you know we just did $300 million last year, we did very much less than that year before I don't know exactly where that will be in 2020, but it's part of the program. It's part of the capitalization if you.
We'll have the company and we're comfortable in doing that because of the uses of capital that we have to reinvest so between the existing balance sheet.
Okay capability along with.
Asset sales along with cash flow generated by the business where more than covered I think has kind of we've shown you for the past 10 years.
Okay, and then Dan Thanks for all the color on sort of the drivers behind the comp POI range I'm wondering if there's any properties that are sort of entering the pool and 2020 that have you know sort of an impact there and then in regard to the term fees. It sounds like there will be relatively backend loaded 30 here.
I'm wondering if you could you could say how the 2020 absolute amount is is supposed to come out NFL relative to the 14 2019th.
Okay.
Well, maybe I'll start with the the term fee question.
$14 million is significantly in excess of our.
Yes, 20 year average, which typically is about $5 million per year per annum over the last 10 years, it's been about $6 million per annum.
Maybe a better way to look at up because we've grown over time is it's roughly to 80 90 basis points of total revenues. So that creates a book end of maybe $5 million to $8 million of term fees, which is kind of what we have currently in the range. We don't expect to get back to the $14 million level I wouldn't say.
Necessarily it's backend weighted.
Yes, we'll probably have a little bit of a tougher headwind in the first quarter from term fees, because we had such a big one.
In the first quarter of of 19.
With the lows term fee at Orchard.
Supply.
Uh huh.
And then.
With regard to your first question just repeated yeah sure just what the entering the pool and 2020 that might have an impact.
There will be some things moving around I mean, I think that work, but they won't be materially kind of moving.
Things, we are going to move.
The residential assets.
Assembly row.
So the pool, we're going to be moving phase one.
Of Piken rose as well as the residential in phase two.
Into the comparable pool.
And we'll probably also be moving to house in residential but all of those have stabilized and so there won't be a material boost that you'll see from those entering the pool they've stabilized in kind of for the kind of one year seasoning, we do as part of that.
Methodology for comparable.
But you won't see a big boost there.
Okay. Thanks, guys.
Our next question comes when Samir Khanal with Evercore. Please proceed with the quest.
Hey, good morning, guys I guess this shifting subjects a little bit here on the acquisition front you guys were pretty active and 2019 kind of wondering what's in the pipeline at this time.
[laughter].
Sometimes you don't want me to give you the yellow wise that we've got right I mean at the end of the day the.
The.
Our pipeline for acquisitions.
Does change all the time there is no question that we were heavily focused on the New York Metropolitan area in 2019 and that will stay. So we will continue to try to increase our holdings.
You know in those in those markets, where we just answered but that doesnt mean that that and by the way the same thing for the northern Virginia market that doesn't mean.
Something else won't pop up one of the things that we are noticing.
Right now are clearly a more sellers.
Who are who are looking to get out for all the reasons you would you would.
You know assume the trick for us is making sure that workbook picking up assets that we believe in the long term for.
I could even be a box center in the appropriate play in a place or too, but it's it really depends on the metrics. So there isn't.
There isn't anything that is imminent at this point, which you should see US active if you will throughout 2020, particularly in the areas that we've targeted for future growth.
And what about on the disposition side I know you guys.
You kind of had the strategy to sort of.
Disposed some of the noncore assets.
Yes, you are a little bit activity last year, I mean, what should be how should we be thinking about that sort of.
Disposition volume, possibly in 2020 from a modeling perspective.
Yes.
I don't know how to say too much more than I did.
On the on the first question the Nick.
You know, whether whether I don't know whether you'd been number is 150 million or 200 million or you know what it should be I will tell you we've identified assets that we would like to two.
Dispose of because we have things to spend that capital on.
But in the preparation for the those packages in figuring out what the market what makes sense in the marketplace. We do that very opportune to opportunistically and so there is not a budgeted number if you will that you can just.
Put in the the model.
How much dispositions, we would have you should assume that anywhere from zero to two or $250 million is what we have historically done and we'll approach in the same way in 20 as we have over that period of time.
Okay. Thanks.
Yes.
Our next question comes from Derrick Johnson with Deutsche Bank. Please proceed with your question.
Hi, good morning, everyone.
So we're going to urban Hoboken, and now Brooklyn.
Can you go through the near term opportunity at Georgetown shopping center, Mark to market opportunities merchandising improvements you're planning I mean, they have a fair way they had a dress barn, a game stop a buffet to be fair some stronger retailers Starbucks Carter's five below AAA. So the question is what.
The near term plan and where are you actually going with this longer term as a nine acre parcel on August 575 parking spaces.
So Eric let me just let let me just started start something going on as Wendy to jump in thereafter that but.
Well go in urban I mean, we've built around the density and the population.
Centers, So I don't think Theres any change in Brooklyn, New York.
There than there is more Bethesda, Maryland, or Santa Monica, California, or.
Fairfax County, Virginia that is that is what we are where those were those close in.
Suburbs, if you will have major cbds and so I think.
Frankly, a grocery anchored shopping center with the density that that Brooklyn has at the price that we got to that.
What's hard to pass up tell you the truth and and obviously we underwrote.
The weakness in fairway as the.
As part of that underwriting process does Didnt know, it's still don't know the timing in particular of what we can do there, but we know that demand for grocery there is ridiculously strong and so you should assume that that will be a grocery anchored shopping center in the middle of a very densely populated area with raw.
Upside.
Based on how it was previously managed and Ron compared with how we will previously we will.
Prospectively run.
Shopping center, so you shouldn't expect it to be torn down and something else happening. There you should expect that to be are really.
My view.
Hopefully better run higher rent better.
And it did nine acre park open parking lot in the middle of Brooklyn.
Okay.
And then San Antonio Center, you know certainly seems to have worked out fine I think you guys paid around 62 million in 2015. So it was sold on a combination for the 155.
When will you have to pay out the tenant award portion from the proceeds and can you share you know, how that's determined and how that works.
Jeff you want to take it carefully.
Yes, it's going to play out over the next couple of years and.
Yeah, we've been able to work things out with most of the comments, but not all the time and so still TBD on that.
You know the processes.
Yes, relatively straight forward and mechanical.
But it's not going to start.
Not going to start for a couple of years. So Don I don't know if there's much more than that we want to add.
During the only thing I would point you to maybe a point you to is the financial statements, where there is a record to gain and obviously inherent in that game.
As an estimation of the expenses that are they have to be paid out so I hope that's helpful.
And you should know that that is by design very conservative.
Thank you, everyone and it's very conservative, but it's actually an excess of what we expected and we had kind of guided folks to kind of net proceeds after those payments of 90 to 100 million.
And net net were closer to 110 million, so and Thats, where the conservative estimate.
So obviously, a good result, and better than we had.
We had hoped.
Dan.
Our next question comes from Craig Smith with Bank of America. Please proceed with your question.
Thank you.
Page 17, you breakout the delivered projects, which are returning at 9% and then the active redevelopment projects, which are delivering at six I wonder if the 6% and if the new norm or is this just a temporary mix issue.
Yes, well a little bit of both Craig I think it's a great question the.
Resulted the reality is near construction costs are high [laughter] and there are significantly higher than they were a couple of years ago as we started.
These are the projects so theres steps that certainly part of it call. It I.
I don't know, whether it's half of the difference or whatever else. The other half its certainly mix certainly makes and you can see add dairy and has a disproportionate piece and that's a complete redevelopment of a shopping center and one of the reasons, we're willing to do.
You know, what Gary in or something like that at an incremental.
Six is because of the nature of the project than where we believe the future in that asset goes this isn't the same as.
Putting a pad out on a.
In front of a shopping center, where the new income in the new income and Thats, what it will be for 10 years at something like dairy and with a big residential component to the should say you'd aren't too and we'll do Darien Ariane at six because of the incremental.
Rent increases, we expect to get not only on the residential side, but in terms of lifestyle part of the center has it as against traction. So you've got a big mix component in that but also as I said construction costs are up.
Great and then.
In terms of releasing space like you see more pier one.
Can any of that occur before the end of 2020 or is that all 2021 event.
There's nothing better than be looking at Wendy's here right now and because I love the gas that question Wendy.
Thank you Craig.
I do think that we will be able to do some of the re leasing and get those documents signed in 2020 in terms of then opening I think you'll see that more in 2021 button. We do have construction activity in the pipeline right now, which which gives me encouragement that we will get up a fair amount of it down in 22.
[music].
Great. Thank you.
Our next question comes from Jeremy Metz with BMO capital. Please proceed with your question.
Hey, good morning, Dod Dan I, just wanted to go back to the growth topic again, you guys mentioned growth. This year growth next year and obviously appreciating your year end is for the long game.
Also specifically detailed a number of projects in your opening remarks, which is clearly helpful. But sounds like income will be a little more phased in possibly backend loaded through 2021.
So just broadly thinking about a bridge is it fair for us to be thinking we should have some tempered expectations at this point for any sort of big Reacceleration a reacceleration of growth next year. Obviously, recognizing there is you know number the moving pieces in the pipeline than the repositioning as you guys have talked about.
Yeah, Jeremy you understand that you understand it well and it's kind of laid it out.
Really well there.
There's a lot of there's clearly uncertainty in our business.
I Love, what we're doing in terms of what were.
You know.
What the capital that we're putting to work its its contribution as you said will be later in 2021, the big question and answer to your question is how many holds our there at the on the bottom at the bottom of the bucket and that's what is you know for anybody in this space in retail.
Based the big unknown.
And and so.
It does make us it does make it harder to predict it does make it harder to say okay growth will go back to this number you know on May six 2022, or something like that but but.
So all we think we should be able should be doing is looking toward making sure. This stuff. All of this portfolio is extremely relevant and as good as it's ever been at better.
As we go through the Twentys and so you know balancing it to keep that growth keep growth in place, but not knowing when we're able to to really accelerate to another.
To another level is just the facts today and I would tell you with the facts with everybody no matter what they tell you. The difference is we got $1 billion of.
Incremental capital that will create that incremental.
Growth going forward.
What's the negative coming at the bottom of the bucket nothing I know.
Yeah, That's fair Dan just a quick one you mentioned the 100 basis points of credit reserve.
You also mentioned they see more fairway pier. One just wondering are those baked into that 100 basis points or you're giving yourself or those on top of the hundred and and that's separate.
Yes, our guidance reflects a projection of what lost revenue, we should achieve or what will be hit with in 2020. So that's reflected in our guidance. If we deviate and it gets more negative than then that's covered in the reserve, but kind of an expectation of.
All things will play out with regards to those recently announced retail failures is reflected in the guidance and then a reserve on top of that if it's worse than we project.
Got it that best Yep. Thanks.
Our next question comes from Alexander Goldfarb with Piper Sandler people see was a quincy.
Hey, good morning.
Two questions Brad.
First Dod you've spoken before that you guys are retail company. You know you do office he do apartments, but at the your core your retail company that said the office has got a bright spot. This cycle odd because you guys think about where you're going to spend on development pipeline are the assets that you're looking at how are you having your.
Team to focus more on assets or opportunities that could involve more office or your view is look where retail company focused on retail if it has office if it has residential great but retail as is our core.
I guess, Alex the best way for me to say it is.
We are real estate people and the best thing that we can do with real estate is U.S retail to be able to get people to come to that piece of property that we have.
So there is always a how do we get people to come to our real estate as the primary driver now what can we do with it.
Absolutely involve other real estate uses I think we've proven that I think what you've seen in the past number of years from US is actually just the natural evolution of mixed use properties, where you create that retail environment, and then add residential or office for hotel or incremental.
Uses that play off that retail that will continue and so when you. When you you know it doesn't mean, we won't do a pure retail play like in answer to the previous question, we did in Brooklyn, when we.
I have our bread and butter and we know how to create value from the from increasing rents in that in a net dense environment watch when you have have.
Other uses that include Hoboken, which has a large.
Residential component to it or as you see what it is that we're doing obviously, a financing and at war, Gary and or Cocowalk, we're going to take we're going to look at it with a broader view.
I think then then other folks in the.
And the shopping center World and we don't do that for just one or two projects. We do that with every possible piece of real estate that we own or looking at.
Good morning to actually very long time with us.
I realize that's just it's funny this cycle off it seems to me you know the Golden child. So you had the positive yield revision one Santana. So I didn't know if that was leading you to try and push or more to office, but you know.
The second question, let me say, one let me say one thing to you there Alex it's important that if we don't do this for cycles.
We don't invest to times like.
This is this is you know there'll be a timeline offices no good and retail is back better and and we are building long term sustainable real estate destinations and so no. We don't we don't move along with you know you're not going to see us buying industrial properties, because it's hot right now for example.
And I, just just always want to make sure. You know we are long term focus company and we act that way.
Okay.
My second question.
With all the retailer closings that are announced some are obviously when it comes but some are retailers pairing stores in general as you guys look at your portfolio troubled retailers are you generally pretty good about calling.
You're kind of this is going to close or do you feel like some of these closings are sort of haphazard or wouldn't necessarily follow productivity logic that you would otherwise could take meaning are you caught off sites by some of these closing announcements are all the ones that have happened you're pretty much apart from a full liquidation you're pretty much like yeah, we'd a feeling they close that's one of that one.
Well, that's a good question and I would.
Putting in a percentage on this not for exactness, but to be illustrative I would say 75 or 80% of the deals we kind of of a real good idea as to what's going on and you know why logically attendant would would close the store where to renegotiate a store do whatever obviously, but.
Yes to your point here eight percentage, 20%. Some percentage. If you will have decisions that are being made today that are not as obvious.
As they used to be and some of that is because there are broader market decisions that are being made so.
Good performing stores can be can be closing two because they don't fit in a business plan of a company going forward. There are other reasons that that sure. They do take us by surprise occasionally.
Yes see it certainly in in.
Some of the categories.
Like restaurants for example, where you can have a decent performing restaurant, but because of that ownership structure.
We get surprised with the closed door, but overall the the point here is really to make sure whether surprised or not.
We've got Backfills, and we've got alternatives to be able to fill that and.
I don't know how you.
Better mitigate that risk more then with great real estate.
Thanks.
Our next question comes from Ki bin Kim with Suntrust. Please proceed with your question.
Thanks to fund to go back to the kind of bigger picture and the growth rate that we can expect from federal hi. So maybe you can is there any way you can give 'em.
Some color on how much I know why you expect from redevelopment development from Doug just from the known projects that you have on the ground today that we should expect in 2020, and how that looks like and 2021.
Well I mean, let's do it let's do it. This way you know when you go to page 17, and 18 of our 8-K that does a pretty good job I think of laying out capital in laying out the.
The returns you can get a pretty good idea of what ultimately those projects.
And then what's coming up are going to contribute now on the timing, there's no doubt that that much of the big numbers on those two pages will not be producing income untold. Starting later in 21, and then forward their big projects.
And by the way that construction does have in certainly in the case of.
Hi can Roes are an assembly it does have.
Impact slight what has got an impact on the rest of the project because theres more stuff happening with dump trucks and that kind of stuff. So you should assume later in 21.
Is when you're going to is when the big stuff on pages 17, and 18 starts starts producing and as Dan went through you'll get some of that in 20, including by the way a big one and 700 Santana row, and Splunk, why but there's a lot more coming so.
After back weight that.
But we're still growing ki bin was still growing.
Yes, I mean, everything I asked that is that we've had a couple of years of low growth and I know you're investing for the future and it's all the right decisions but.
At least in the near or medium term debt market is trying to figure out when we get back to that four or 5% AFFO growth trajectory is one that's why I suppose question.
No and just ABS go ahead.
And <unk>.
Are you working on anything to perhaps try to decrease the downtime when you already have a lease on hand, and when you have a tenant moving out kind of trying to narrow that gap.
The downtime.
Absolutely absolutely, yes in fact that if you if you could read our goals and objectives for for the company. It is the single biggest thing not from you from the from the first you know.
Leasing persons discussion with a tenant to the first dollar of rent that gets recorded in the PNM. All all along that process major initiative to reduce that time and it includes some things that you would.
Assume like a simpler lease it assumes some things that might not assume like how.
Got it coordination happens and who does the work and how it gets priced out and things like that it assumes some changes in terms of the marketing.
Materials that leasing agents using how they use then and all the way through it is a primary focus of this and I would suspect most companies in this space in 2020.
Alright. Thanks.
Our next question comes from Michael Mueller with JP Morgan. Please proceed with your question.
Yes, Hi, two things first I was wondering can you talk about the the timing and the magnitude of the.
Recently, the recent unanticipated bankruptcies that you've been talking about.
Yes.
Yeah, I think we've taken a kind of on the let's stick and.
View of look this uncertainty and these restructuring processes and we've taken a.
An estimate of how we anticipate getting.
Central stores back.
What stores will stay in place and so forth and we've made that estimate I don't think that there's a.
I guess kind of as a good answer for you in terms of helping you with your with kind of the specificity like pier one I mean, I think we're in pretty good shape at Pier, one where we're basically released on one of them. Another one is going to stay because it's one of their top performing stores in the region and the remaining two out of three.
We're trading paper and should have them leased up probably a by ended the year.
But it's tough to kind of go through each one of them and you know the bankruptcy process is is an unpredictable and so we'll we'll we'll see how it plays out.
Got it and maybe a couple other numbers questions here what was the lease term income in the fourth quarter.
Lease term income was a gross fees of about 3.8 million.
In the quarter and that was roughly in line with kind of what we had expected.
Got it another and then.
Got it okay. Thanks, and last question with no dispositions in the guidance and poor fit I think it was four to 450 of spend the investment spend what what's the equity assumption baked into 2020 AFFO guidance.
Over the course of the year with reflected in our guidance is about $125 million of incremental equity consistent with what we have done over the years.
In that range and it would be kind of.
Played out over the year in terms of your models.
But we've got the balance sheet that we don't have to use that.
We've got other sources that will fill the gap whether it be incremental.
Leverage leverage neutral.
<unk> leverage.
Assets sales cash on hand free cash flow.
We've got a lot of tools in the tool box. In addition to kind of the opportunistic equity issuance that we've been fortunate to be able to.
Issue over the years.
Got it okay that was that thank you.
Our next question comes from Vince to Bone with Green Street Advisors. Please proceed.
Hi, Good morning, I'm, just curious what when you lose a grocer such as fairway, how does it impact the adjacent small shop tenants are there other typically co tenancy clauses that allow them to immediately pay lower rent once the grocer closes.
No there and there are not Vince.
Particularly in any strong.
Strong located place like that it wouldn't be it wouldn't certainly wouldn't be entered into in our release.
And while we didnt write that lease that was before that there is no such.
There's no such impact there. So just the grocer just that box, but on the other side of that can you imagine putting a a better grocer in that box and what the impact that would have in terms of traffic to the balance of the balance of the space something that we're counting on.
Right, let me make sense I'm, just kind of on that I, just told surprise, where you buy the fairway bankruptcy and just in general like how worried are you about some of the smaller regional grocers out there like are you expecting more bankruptcies to occur over the next five years lets say as the grocery industry is kind of evolving here.
Well, let me let me answer that question two ways, one not surprised at all with respect to fairway bankruptcy frankly was one of the most [laughter] one of the most important parts of our due diligence on on buying the asset.
And if you knew what we did for due diligence much of our time was spent figuring out how much demand there was for that space and what rent they would pay [laughter]. So so no no surprise there at all in terms of the bigger question you know TBD, Vince I mean, I don't view groceries is very different than any other category.
And this kind of goes back to two.
The beginning part of what we were talking about here I.
We're not just about filling boxes up.
We really are about.
Bringing these retail products to places.
Shopping centers and mixed use properties to places that will be the best five years from now and so to the extent more grocers go out smaller gross of less less well capitalized grocers, which if they don't have a particular niche sure. They are under their under margin pressure all the way through completely agree with that but.
Again.
So what to the extent you've got backfill opportunities that are more sustainable to what that shopping center should be in any particular neighborhood or community and our stuff as you know is a lot bigger.
On average and a lot more regional on average than than a traditional grocery anchored shopping center in a lot of markets. It's more than doubled the size on average Ngls for example, and land land. So it's all about from a landlords perspective.
Options alternatives and you know it's hard to imagine there isn't more disruption the grocery business of course, there will be just as they will be in every other.
Sector as we move forward, but I think we're well prepared to use that to create better retail destinations.
Thanks, Don a very interesting color.
Our next question comes from then decide with Jefferies. Please proceed with your question.
Hi, I'm in terms of occupancy troughing to 93% leased and 91% occupied but then getting stronger in the second half of 2020 to 2021, where are you hoping to end the year terms pocket see.
2020.
I would say that kind of back at kind of current levels.
Yes, we expect kind of the dip.
You know over the course of the year and targeting getting back to kind of what our yearend levels were a 2019, but over the course of that obviously, we'll we'll work our way through.
None of that trough.
And then still grow.
Bottom line.
Thanks, and then do reimbursement see more of an impact this year given lower occupancy.
Sure.
I mean.
Absolutely with the you know.
And we don't talk about that no freight with with.
Well net leases effectively losing any tenants in that space in somebody's got to pay those bills and its us. So so there's no doubt that hurts earnings too I think the point. That's that's really important understand here, though is with reduced occupancy as expected.
We are projecting FFO growth.
That's pretty.
Pretty incredible actually at speaks to the balance of the project the balance of the portfolio thing.
Great and then do you have any lucky's, our earth fare just on the topic of crushers.
No we have neither.
Okay. Thanks.
Our next question comes from Floris Van Dyk term with Compass point. Please proceed with your question.
Great. Thanks, guys.
Quick question, the 1% credit a reserve that you have baked in how does that compare to your five year historical at your realized credit.
Losses.
It's actually very much in line with our five year history, and actually where we come out in terms of actual there's not a material difference.
The 100 basis points has been pretty consistent at least since I've been here and and the actual results or kind of inline roughly with the with those reserves.
Okay.
And then maybe a quick.
Question on the residential rents what is your experience been on the rental increases after the first years rents on on a newly developed departments, what kind of increases have you seen at.
Assembly or at Santana, and how should we think about Pike and rose in terms of increases for for residential or do you think that market is different than you think is going to be little softer than than Boston and San Jose.
Yes, the floors to great question, I mean, obviously our best.
Yes population from which to get that information is Santana because we've been open.
As long as we haven't I can tell you that the annual Cagar for those residents residential rents have been about 3.8% almost 4% over that period of time not every year during it but but strong now come over to.
Assembly assemblies real interesting because it you know if you remember we started out with Avalonbay.
During the first phase of the residential we then added.
Montage, which is a big good 500 unit.
Building and now we are adding more supply and even with all that happening we've seen.
Rental growth. That's that's again, it's only a couple of years in excess of 4%. So that's real strong in terms of Montgomery County, It's clearly been weaker Montgomery County, and therefore for Viking rose on the residential rent side over the past three or four <unk>. The first three or four years was essentially flat we are now.
Now in the last 12.
The 15 months seem the first signs of real strength.
From that perspective, and by the way not surprisingly.
That is very much in line with the strength, we're seeing on traffic counts in sales on the rent on the retail. Please so as these these communities become more mature or there is no doubt that that doors to reach the residential up top so very hopeful to.
See sustainable call it 3% add at these properties over the long term.
Great. Thanks, Tom.
You bet.
Thank you at this time I would like to turn the call back over to Leo Brady for closing comments.
Thanks for joining us today, we look forward to seeing many of you and the next couple of weeks. Thank you.
This concludes todays teleconference. You may disconnect your lines at this time and thank you for your participation.