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Federal Realty Investment Trust (NYSE:FRT)

Q3 2012 Earnings Call

November 02, 2012 2:00 pm ET

Executives

Kristina Lennox

Donald C. Wood - Chief Executive Officer, President, Trustee and Chairman of Executive Investment Committee

James M. Taylor - Chief Financial Officer, Executive Vice President and Treasurer

Jeffrey S. Berkes - Former President of Federal Realty West Coast

Analysts

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

Craig R. Schmidt - BofA Merrill Lynch, Research Division

Michael W. Mueller - JP Morgan Chase & Co, Research Division

Quentin Velleley - Citigroup Inc, Research Division

Nathan Isbee - Stifel, Nicolaus & Co., Inc., Research Division

Cedric Lachance

Michael Bilerman - Citigroup Inc, Research Division

Operator

Welcome to the Third Quarter Federal Realty Investment Trust Earnings Conference Call. My name is Lorissa, and I'll be your operator for today's call [Operator Instructions] Please note that this conference is being recorded.

I'd now like to turn the call over to Kristina Lennox. Ms. Lennox, you may begin.

Kristina Lennox

Good afternoon. I'd like to thank everyone for joining us today for Federal Realty's third quarter 2012 earnings conference call after this week's stormy few days. I hope everyone is doing well and recovering post-Hurricane Sandy, and I would also like to thank you all for your understanding with the technical issues earlier today.

Joining me on the call are Don Wood, Jim Taylor, Dawn Becker, Jeff Berkes, Chris Weilminster, and Melissa Solis. These and other members of our management team are available to take your questions at the conclusion of our prepared remarks.

Our third quarter of 2012 supplemental disclosure package provides a significant amount of valuable information with respect to the Trust's operating and financial performance. This document is currently available on our website.

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 that expectations reflected in such forward looking statements are based on reasonable assumptions, Federal Realty's future operations and actual performance may differ materially from the information contained in our forward-looking statements and we can give no assurance that these expectations will be attained.

Risks inherent in these assumptions include, but are not limited to, future economic conditions, including interest rates, real estate conditions and the risks and costs of construction. The earnings release and supplemental reporting package that we issued yesterday, our annual report filed on Form 10-K and our other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial condition and results of operations.

I'll now turn the call over to the Don Woods to begin our discussion of our third quarter of 2012 results. Don?

Donald C. Wood

Thanks, Kristina, and good morning, everybody. And first of all, let me apologize to you for what is effectively a 3-hour delay in getting our conference call off today. We did have some problems with the conference call provider. We're not sure whether it was Hurricane Sandy-related or, for that matter, Andy Blocher sabotaging the call. But we are glad that you're on the phone with us now at this point. So let me get going.

In a few minutes, we'll hear from Jim Taylor. And in what is his first investor conference call as CFO Federal, there's absolutely no need to go easy on him during the Q&A session today. And I couldn't be happier with the way he takes his new responsibilities in the past couple of months, it's a great start, Jim. But before you hear from him, let me go through a very strong third quarter for Federal. And what we think it means for the balance of this year and for next.

Reported FFO per share of $1.12 that came with a very strong $1.01 comparable last year. As I intimated in last quarter's call, there's noise in the third quarter, which benefited from a big $6 million or $0.09 a share lease termination fee from Safeway -- I'm going to give you more on that in a bit -- but also carries the CFO transition costs associated with Andy's severance to Jim's sign-on bonus totaling $2.1 million or $0.03 per share going the other way.

So $0.06 of this quarter's earnings to be considered unusual or onetime in nature. Of course, and I'll continue to make my case, at least termination fees are an ongoing and normal part of our business, but this was a big one and should be considered when thinking about our run rate.

Okay. Leasing, the primary driver of this record quarter. Like the first half of the year, third quarter leasing volume was again off the charts in terms of our historical production. 100 deals, more than 0.5 million square feet of comparable space, completed at an average rate of $28.43, 11% higher than the $25.63 it replaced, and now makes over 1.3 million square feet of deals in the first 9 months of 2012, more than most years' 12 month production and more space than we've ever leased in the 9-month period, ever.

All that volume equates to $4.7 million of incremental rate -- rents, and it's on a comparable bid space, mind you, not just newly -- not newly developed retail space that was contracted in just these first 9 months compared with the previous leases. Many of those deals are already benefiting 2012 results and all will certainly benefit 2013 and future years.

You might have noticed that in total, the 51 renewals that we did during the quarter actually generated 1% less rent going forward than the previous deals.

No trend or macro issue here. Just one of those 51 leases with a big rolldown skewed the results, and that was with Barnes & Noble at Willow Grove Shopping Center in suburban Philadelphia.

We decided to renew Barnes for 5 more years with significantly less rent because there's strategic importance at that particular shopping center at this time. Without that deal, renewals rolled up 3%.

Those decisions -- leasing decisions happen once in a while. While we may have a similar impactful one in the fourth quarter, or in any quarter along the way, you have to look in total. And in looking at the over all leasing position and progress to this portfolio, frankly, I couldn't be more bullish.

With all that unprecedented level of activity, occupancy can't help but to go up, and it sure did. We're now 95.1% leased and 94.2% physically occupied, both up substantially from last year and from 1 quarter ago.

Let me give you a bit more detail. There were 5 big anchor deals done during the quarter, but none bigger than a new state-of-the-art Giant Food grocery store at Flourtown Shopping Center at suburban Philadelphia that was made possible by the sale of certain -- of Safeway's Genuardi stores to Giant division of Royal Ahold. That same sale, which affected all 3 of our Genuardi's locations, allowed us to not only upgrade Flourtown at a very significant rent premium but also, to maintain a first-class grocer at our premier Wynnewood Shopping Center and to give us the opportunity to significantly transform Ellisburg Shopping Center in Cherry Hill, New Jersey with a great higher-end specialty grocer. And by the way, collect a $6 million termination fee from Safeway.

We conservatively estimate $20 million of immediate property level value creation because of these transactions, and $40 million over time, given the deterioration Genuardi's was experiencing.

Stuff just doesn't happen at lots of shopping centers and it's part of the reason we think that lease termination fee should be viewed as a regular part of our business. Our leases are generally very strong from a landlord's perspective. And our locations, they tend to give us a better chance to unlock potential that wasn't reachable the day before.

I also want to mention one other under-the-radar initiative at the company that is really yielding some strong results and contributing meaningfully to the bottom line. It's an ancillary income program that's been expanded from simply the Halloween and another seasonal temporary tenants to such initiatives as an aggressive pay parking program at an expanded number of our properties and very recently, a solar energy program that's being rolled out at 8 of our shopping center properties in the Northeast.

Together, ancillary income now generates about $11 million annually, about $3 million in the third quarter, which is up from about $5 million annually just 5 years ago. The increase has been steady and resulted in a compound annual growth rate of 15%. And we fully think that there is far more room to go with this program.

Okay. Let's move on to acquisitions and development. In the last couple of months, we've been working on a couple of shopping center deals that look like they're going to make it. And assuming the balance of the due diligence period goes as expected, we should close them both by the end of the year. We'll obviously share a lot more information on those centers at the closing. But from a big picture perspective, the 2 status combined, if both deals close, would allow us to put nearly $150 million to work for over 0.5 million square feet of space.

In addition, with Jim Taylor heading up the function on the East Coast and Jeff Berkes on the West Coast, we're looking at a lot of product but still find it hard to find real estate in our markets that have a clear path to value creation at today's prices. But we're doing our share, and I think we'll be doing more.

In terms of an update on the 3 major development sites that are under construction, let's start on the West Coast at Santana Row.

Going back to look at my second quarter comments about Santana, and they all still apply. We're moving ahead on schedule and on budget at Misora, which is the latest residential building with a $75 million budget, a 7% plus cash-on-cash expected return and a 2014 initial stabilized year. Looking forward, much more to come as we continue to plan for additional retail, additional office, additional residential investments, totaling somewhere between $225 million, $250 million, maybe even a bit more on the Santana Row site.

Second, at across the country just outside of Boston, Assembly Row is under construction. Avalon Bay is progressing on the residential buildings. We've begun construction on the large building that will house, among other things, the parking garage and theater. And the MBTA track work is underway in preparation of the new T-Stop. Expect the 2014 opening of this first phase and the opening of the new 2 T-Stop trailing by 6 to 12 months.

Retail leasing at Assembly has real momentum, with negotiations with multiple tenants for each available space well underway. The first phase includes about 300,000 feet, and about 30% of that is committed to date under executed leases to tenants like Brooks Brothers, like Chico's, like Legal C Bar, among others. That's good news as we didn't expect to have signed leases beyond the theater deal until year-end. I have some more familiar names that I can't talk about yet, but the merchandising is shaping up very nicely.

We continue to evaluate the IKEA site to determine whether it makes financial sense for Federal, but don't have a point of view on that yet, more to come. And thirdly, the first phase of Pike & Rose, that's at our Mid-Pike Shopping Center is well underway including site work and foundation work on each of the 3 buildings comprising Phase 1. No changes to budget or timing on this one either. $250 million for the first phase, with the expectation of a late 2014 opening for the first couple of mixed-use buildings, and a larger residential building following after that.

As you can see, a lot is going on for Federal over the next few years, $0.5 million of development spend for the initial phases of existing retail destinations that we have controlled for years.

An operating platform firing on all cylinders with leasing momentum that is particularly strong in both the recent acquisitions and new ones coming with leasing or redevelopment opportunities to exploit, and an open and aggressive eye for more.

We're proud of our performance in what is still a very uneven recovery.

At this point, let me turn it over to Jim Taylor to talk about the balance sheet, earnings guidance and some initial impressions on the opportunity and the risks that we face. We'll then open it up to your questions and our entire senior team is here and available to address them. Jim?

James M. Taylor

Don, thank you. Thrilled to be on-board and part of such a great team. First, I trust that all of you on the call and your families have come through Hurricane Sandy okay. In Federal, we have all survived intact, and aside from some minor façade and roof damage at a couple of our centers, we came through it largely unscathed. All of our centers are up and operating, and again, any damage is minor.

Before I address financial results and outlook, I wanted to share my perspective as someone who knew the company as an outsider for almost 14 years, has now spent the past 90 days as part of the team.

First, I have been thoroughly impressed by the quality and depth of the people in this company. Granted, it does take a great portfolio of internal assets to produce organic growth that is as predictable as it is impressive. However, our leasing, operational and legal teams led by Chris Weilminster and Dawn Becker, know how to drive the very best performance from our assets. An interior merchandising mix or weak leases can wreak havoc at even the very best location. When you see these teams operate up-close, you realize that the Genuardi's lease term fee of $6 million is no accident, nor is the resulting value creation opportunity that are available to us at Ellisburg and Flourtown. They are the natural outcome of that singular focus on driving performance.

I've also been impressed by the quality of our information systems, and our finance team led by Melissa Solis. Of course, having known the company for 14 years, I expected to find strength in this organization. But the quality and depth of this team and its leadership has exceeded my highest expectations. One surprise that has really struck me since joining the team has been truly the universal spirit of finding ways to drive shareholder value. Whether it's leasing, legal leasing, tenant coordination, redevelopment, legal, expense management, et cetera, the mission within the company is clear and embraced by all on the team.

Looking forward for me, a key challenge will be sourcing and capitalizing on install acquisition opportunities that are accretive from a long-term growth perspective to our core portfolio.

Our pipeline is active, as Don mentioned, and we believe that there may be opportunities for us to continue to identify assets like Plaza El Segundo and Montrose Crossing, our 2 most recent acquisitions, that fit our criteria. These are assets and locations where we are confident there will always be strong relative tenant demand.

Rest assured, we will maintain our discipline as we evaluate potential acquisitions, but we are very focused on making sure we turnover a lot of stuff. Hopefully, you all have seen our recent press release announcing the addition of Harold Nafash, our acquisitions team reporting to Barry Carty. I am extremely excited about the contributions Harold will make to our team, particularly in the Northeast region. We are up for the challenge.

Turning to results, allow me to provide some further insights on this quarter's performance, our capital markets activity, our increased midpoint guidance for 2012 and our outlook for 2013.

Don covered our FFO for the quarter, which again, was up 12.7% on a gross basis and 10.9% to $1.12 per share over the prior quarter. Again, $0.06 of this increase is attributable to the Genuardi's lease term fee, net of the CFO transition cost of $2.1 million.

No surprise here, the other main driver of our quarterly performance is our growth in same-center operating income, which excluding the lease termination fee, was a strong 4% up including redevelopment and 3.5% excluding redevelopment.

Our same-center growth was driven by the strong leasing activity of our core portfolio, both in rollover on occupancy and redevelopment.

This quarter, we achieved an 11% increase in cash rents, as Dawn mentioned. And over the last 4 quarters, we have averaged 12% increase. Our same center lease percentage at quarter-end increased to 95.1% from 94.2% a year earlier. We should expect to see the benefit of these newly signed leases over the next few quarters.

On the redevelopment side, we continued to benefit from 300 Santana Row, and the apartments on Lot 6B, in addition to the ongoing delivery of redevelopment to Bala and Willow Lawn. These were partially offset by the downtime from the redevelopment of Shoppers World as well as demolition of marketing expenses for the first phases of assembly in Pike & Rose.

The acquisitions at Montrose Crossing and Plaza El Segundo drove the balance of the increase in property POI, which when you factor in the debt of state, drove approximately $1 million in FFO benefit.

Both of these acquisitions have outperformed our initial acquisition underwriting, and we are very pleased with our operating performance to date.

Our G&A expense increase of $1.6 million was driven by the $2.1 million of transition costs to the CFO position I mentioned, offset in part by lower transaction costs incurred during the quarter.

Increases in interest expense due to the higher average balance during the quarter were largely offset by lower rate.

Turning to the balance sheet. During the quarter, we raised an additional $52 million under the ATM program at an average price of $107.43 per share and refinanced the $175 million of 6% notes to $250 million of notes at a coupon of 3%.

These transactions leave us in a very strong and flexible capital position with approximately $147 million of cash and the balance sheet at quarter in $400 million of capacity under our revolver. We remain in very solid shape to match-fund appropriate acquisitions and plan redevelopment and development activities through the capital markets.

We'll keep our balance sheet metrics at appropriate levels and thereby provide ourselves maximum flexibility.

With our strong year-to-date performance and visibility on the remainder of the year, we increased the midpoint of our 2012 FFO per share guidance to a range of $4.29 to $4.31 per share.

Looking forward further, we feel very good given the quality and stability of our core portfolio and strong leasing performance to provide visibility on 2013 FFO per share in the range of $4.50 to $4.56 which, adjusting for the impact of the Genuardi's lease term fees and the CFO transition, represents a solid 7% FFO per share diluted growth at the midpoint.

Here are a few things to consider as you're updating your models. We anticipate that occupancy in the core portfolio will remain relatively flat in 2013. Our same-center growth expectations are in the 3% range, excluding the impact of the lease term fee. Note that we still expect to generate this level of same-store growth even with the drag of redevelopment at Mid-Pike and Santana Row.

From a capital standpoint, in addition to the cash we currently have on our balance sheet and capacity under our revolver, we expect to opportunistically tap into the equity and debt markets, with issuances under our ATM and a refinance of our senior notes, which mature in December of 2013.

All this will be accomplished, again, with keeping an eye toward strong credit metrics and our balance sheet flexible enough to fund appropriate acquisitions as well as $250 million to $300 million of planned development and redevelopment spend as detailed in our 8-K.

In sum, we've had a terrific quarter of positive outlook for 2013 and a balance sheet with flexibility to fund our growth.

We look forward to seeing you all in San Diego in a little over a week. And with that, operator, we'd like to turn over the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] We have a question from Jeff Donnelly from Wells Fargo.

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

Just a few questions. And I apologize, Don, because I ended up getting on a minute late, so I'm sorry if this is repetitive. But just on the CFO transition cost, I think on the last quarter's call, you had mentioned that it was going to be about $3 million or $0.05 largely in Q3, and it came in under that. Is that because there's going to be some that spills over into Q4? Or did you --

Donald C. Wood

No. I think, and I'll ask Jim or Melissa to -- I think, it's because Andy has found a job sooner, frankly. And so we didn't have the cost that went into the fourth quarter and effectively into the early part of next year. I think that's a big piece.

James M. Taylor

That's most of it, Jeff, and in sum, we were about $0.01 lower than we thought we'd be in the estimated transition cost.

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

Okay. And then concerning just your guidance for 2013, as we look at Pike & Rose, can you walk us through, I guess, maybe how much displacement you think is going to come as a result of that -- moving towards the development process, either just to hit the occupancy or at revenues, and maybe even talk about how it flows through the quarters in 2013?

Donald C. Wood

Jimmy, I know you're going to do that in a second. But with respect to it, Jeff, and there's a bigger point here that's real relevant, not only for 2013 but also for 2014 as we move this up. There's really 3 or 4 categories that you got to think about. One, is as your intimating, lost rents, right? There's a Mid-Pike shopping center that's being taken down or that -- it was existing stream of income continues to dilute effectively, as you head out through the development. That's number one. Number two, at the same time, there's heavy marketing expenses that are necessary in order to introduce the world to the new product, both at Mid-Pike -- or all, at Mid-Pike, at Assembly, and at Santana. In addition to that, there's demolition. When we physically knock down the building, there's offsets that come from that. And obviously, as we get out into 2014, it gets a little muddier because as capitalized interest doesn't match up exactly with the new rents coming on, you've got further dilution there from an earnings perspective. Obviously, all of these things are very value-additive, as we move it from one to the other. So I don't know, if you could -- if you want the specific numbers, or how you want to get through it on this call, Jim, Melissa, you got this side. But those -- so that's the concept that I'd like you to be thinking about for the next 2 or 3 years effectively.

James M. Taylor

Yes, Jeff. When you look at the drag Don referred to, whether it's lost rent or marketing or demolition, just in 2013, you're looking at anywhere from $2 million to $2.5 million that we have forecast in '13 of that drag. So when we talk about our same-store growth, it's net of that drag, if you will. So again, I'm glad you asked the question because I want to emphasize, we're still forecasting 3% in-store growth with that drag in it.

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

Okay. That's helpful. And then just maybe, Don, if I could switch gears. On Assembly Row -- you mentioned the IKEA side, is there a timeframe for like, such as a bid deadline where you'd have to go after that property? Or is it not that hard and fast yet?

Donald C. Wood

That's a good question. In the negotiations we're in right now, we're pretty comfortable that we're going to have until the first part of 2013 to kind of decide what it is that we want to do there. And as you can imagine, Jeff, we're talking to folks. We've -- that's got to be entitled. There's a lot of issues there that -- we want clear visibility on before we were to do anything on the sites there. Because at the end of the day, it doesn't make sense as a standalone investment. I just assume that somebody else do what they're going do there. And believe me, it's the base of a brand-new T-Stop. Somebody, whether it does -- or somebody else is going to be developing on that 12-acre site. But yes, we'll bee into the first piece of 2013 before we have better visibility.

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

And are you able to give us a rough sense of how the lease deals are getting structured there? I know it's early, but just in terms of the -- are the rents achieving what you're hoping? Do you have to get take-out clauses? How are things sorting out?

Donald C. Wood

Yes, that's it, and it is early. And a couple of different places. There are couple of guys and we want those tenants, man. And as is very typical in a development deal, there'll be subsidized deals. In others, our rent is exceeding, what -- with what we were going to be able to get there. So as you can imagine, we're in the throes now with the first real phases of lease negotiations. And that will play out however that plays out over the next year or so. But the initial stuff has worked pretty much, no surprises yet. I hate the deals where we have to subsidize a bit more, I love the deals where we're more successful on getting the rent that we thought, or better. A balance.

Jeffrey J. Donnelly - Wells Fargo Securities, LLC, Research Division

And just one last question is why didn't you guys look at Westwood, the property down there in Maryland?

Donald C. Wood

Because I think in -- oh I'm sorry, I was actually thinking of something else when you said that. I got a couple of things to talk about on that but basically, that is a real complicated deal, that's going to be. And basically unlocking value there. And it does. Jeff and the team, it's a great team. And they very well may be able to get to the value that they need to get to. They're going in price that's certainly going to require them to get to that value, to make any sense. And when we kind of look at what has to happen to get there, at that kind of price, it was too steep for us, frankly.

Operator

Craig Schmidt with Bank of America is online with a question.

Craig R. Schmidt - BofA Merrill Lynch, Research Division

I was just wondering that Pike & Rose, I mean we've been talking it for a while. And now, it's starting to really be upon us. I wonder, what has changed when you first started the vision, what you're going to do for that property versus about what you're doing today? And what have you learned to, given the -- you have some potential other large redevelopment efforts that are coming up after Pike & Rose?

Donald C. Wood

Well Craig, when you sit back and you think about the pieces of land that federal has, inherently land banks in its portfolio, there really isn't a better one out there than Pike & Rose. And so, one of the things that we set up early on, and I think it's still the right thing to do, is the phasing of that project. So taking off and biting off this piece, this first piece of it, while keeping the rest of it operating, makes a lot of sense in terms of balance and risk mitigation. I think as we get into the leasing of the residential piece particularly there, which is hard because we won't know that for some time, what we are finding is that the demand we're getting for additional residential, maybe even condo, as that market starts to come back and hotels, is higher than we thought it was going to be at this stage. And so, I don't have a good word on economics of those things yet because we're in that -- those initial stages. But I think, everything that we've learned has validated the quality of the real estate and the piece of land that we have. I like what we're doing in the first phase. The tricky part for us is going to be how to grow it all out. Do we bring in a partner with us to get there? Over what period of time do we do that? And what particular uses such as a hotel, such as for sale versus for rent in several new sites, that still has to be vetted. So, in terms of where we thought we'd be, we are. And as you say, it's upon us and away we go. But when you look at that piece of land, coupled with the Assembly piece of land, coupled with Plaza El Segundo and The Pointe, coupled with Santana, there's a large land bank here that has to be vetted in a very reasonable way in a company that is primarily an operating company and will always be so. So that balance is what you'll be hearing more about then as we'll decide about, over the company's coming quarters and years.

Operator

Mike Mueler from JPMorgan is online with a question.

Michael W. Mueller - JP Morgan Chase & Co, Research Division

Maybe a question or 2 for Jim at first. I think you know the answer to this. But for your 2013 guidance, there are no acquisitions in there, correct? Because I know Don mentioned a couple that may close by year-end?

James M. Taylor

Yes, Mike. Thanks for clarifying that. There are no acquisitions. And of course, as those materializes, we hope we'll provide further guidance at that point.

Michael W. Mueller - JP Morgan Chase & Co, Research Division

Okay. I know you mentioned tapping the -- using the ATM to tap the equity markets. Can you put any parameters around that at this point?

James M. Taylor

We are very careful about that. We like to keep our activity when we feel its advantageous to tap into it, under 10% of the average daily trading volume. And even then, we're not going into the market haphazardly, we're looking at it opportunistically. So when you look at our plans for the coming year, we have plenty of capacity to access it when we want.

Donald C. Wood

Mike, can I just add one thing to the acquisition comment that you asked about those. The -- listen, if its acquisitions that we're making, it's going to be really good stuff, and really good stuff's expensive. So it is true, the guidance does not include acquisitions. But it's not like we're going toward the type of product that is going to be extremely accretive from an FFO perspective, if you will, in the early years normally. I just want to make that point.

Michael W. Mueller - JP Morgan Chase & Co, Research Division

Okay, fair point. And then I guess on the flip side, even though there may not be any dispositions at guidance, are you currently marketing any properties for sale? Or...

Donald C. Wood

No, we're not marketing them yet. But we are looking at certain assets to think about that. And basically, that's really about doing the leasing and making sure that those properties are in the best shape to be disposed. And so there may be more to say on that in future calls but not right now.

Michael W. Mueller - JP Morgan Chase & Co, Research Division

Got it. And last question, at Assembly, you rattled off a couple of tenant names, I think it's -- Brooks Brothers is on there, maybe a restaurant or 2. Is the Brooks Brothers, is that an outlet? And is the focus of what you're trying to lease on the retail side still outlet-oriented?

Donald C. Wood

Absolutely, absolutely. I'm thrilled with that, frankly. This combination. This is going to be new product. It's outlet with restaurants, big theater and people living above it. So we're -- this is -- we can tell from the supply/demand characteristics that we're doing -- that we're building the right products. But this is pioneering, to some extent, in terms of that merchandising. So that's where we're working through heavily right now. That's what Brooks is, that's what Chico's is. That's what the other conversations that we're having with tenants in negotiations are. So you should absolutely expect to see basically, an outlet mall with the addition of great restaurants, some service and residents living above.

Operator

Quentin Velleley from Citi is online with a question.

Quentin Velleley - Citigroup Inc, Research Division

Just in terms of acquisitions, it seems like there's sort of more confidence and enthusiasm that you can sort of do more deals, and the appointment of Jim and a new Acquisitions Manager in the northeast. However, my understanding is that the pipeline of high-quality assets is actually pretty small, and yields are firm, and if not, getting firmer. Outside of those 2 potential deals that you've spoken about, that you're looking at, at the moment, what can you sort of tell us about the acquisition pipeline for better quality assets?

Donald C. Wood

I think, you'd -- I am going to jump in front of you, Jimmy, or in front of you, Jeff, whoever is going to say something about that in that, and first of all, to completely agree with you. I completely agree with your characterization, of limited supply and -- of the stuff that we would want, and a firmer environment, not a looser environment in terms of being able to get that. Having said that, this isn't -- it's not a business that you'd turn on -- in a public company in our business plan, that you turn on and turn off at your leisure. And so, by the time things do turn, this is about doing the hard work, that undercover work, the digging-up work now. It's about making sure that we have the right team in place in a guy like Jim, in a guy like Harold to -- boy, I hope you do your due diligence on him because I think you'd be very impressed with the guy that we got there. So that, during that regular process, we do want to -- or you will unlock an opportunity or 2 or 3 here, but it's not because of, as you suggest, an overall macro loosening in the environment and increasing supplies that we see coming that made those moves obvious.

James M. Taylor

Yes, and Quentin, I would just add, this is not a quantity game, this is a quality game as you've pointed out. And as Don alluded to, there's a lot of prospecting work that we're doing to make sure that we're in front of the opportunities as they arise. But it's difficult to predict when that will be. I just think we're -- what we're really focused on is making sure we're in a position to capitalize them as they become available.

Donald C. Wood

And maybe, Jeff, can you just add your thoughts on the West Coast?

Jeffrey S. Berkes

Yes, I don't know that it's any different than what you guys have said. And how you started Quentin, I mean, it is very difficult to find the kind of assets we like where we could get comfortable and an ability to grow NOI over time. I do expect we're having a number of conversations. Like Jim and Don both said, we're always sort of scratching and clawing out here to find whatever we can find. And we're having some good conversations right now but nothing to talk specifically about at this point.

Quentin Velleley - Citigroup Inc, Research Division

Right. And just a question for Jim, and I know you've only been there a short period of time. But maybe, if you could give us a few thoughts in terms of whether or not you have any difference in opinion on property investment, development and allocating capital versus what the federal way of doing business has been?

James M. Taylor

I don't. I think what's really impressed me, as I alluded to in my remarks, are really the mission of the company is very clear. It's embraced by all on the team. Our retail can't be characterized by a particular type of asset or class of asset, but there is a common underlying theme, and that is that, we like locations where we're confident tenants are going to compete to be there. That's the simple formula. And so, whether that's a street retail asset or a small grocery, anchored community center, or a super regional power center or big box center, again, that's kind of the underlying theme. And I think that the results kind of continually speak for themselves as you look at how the companies performed. Their performance has not only outperformed, we're consistent in that outperformance. So hard for me coming in as the new guy to suggest that the company ought to be doing anything differently, Quentin. From a development and redevelopment perspective, again, it all ties into the same theme, which is these are locations where we have a good belief in terms of what the demand will be there. I think we're seeing it materialize at assembly clearly, at Pike & Rose and obviously, at Santana in terms of the future developments that we have ongoing there. So, no. Again, my addition to the company has not been one to really change that focus at all. If anything, I just try to accentuate what we're doing here in the eastern half.

Operator

Nathan Isbee from Stifel, Nicolaus is online with a question.

Nathan Isbee - Stifel, Nicolaus & Co., Inc., Research Division

Jim, can you quantify exactly what the impact is from the redevelopment on your '13 same-store guidance?

James M. Taylor

We have, again, the -- we have lost income in marketing expenses that are dragging down our same-store performance of about $2 million to $2.5. million. And that's lost income, principally, lost income at Mid-Pike as that center begins to shut down to accommodate the Pike & Rose development.

Nathan Isbee - Stifel, Nicolaus & Co., Inc., Research Division

And then, as you look at the possible opportunity on IKEA, can you talk a little bit about your potential competition there? Is there anybody looking at that beyond retail use? And I guess, do you see yourselves, given that you control the rest of the property, possibly being able to justify paying more, given some synergy that we can't see?

James M. Taylor

Am I negotiating with you now? Is that what's going on in this call? Nate, look, I don't personally have specific knowledge of who else is involved in the process per se, because it is a quiet process, if you will, with IKEA. Would I expect that there is other demand for that site and other people with other users? Absolutely, I would. Are there some real impediments to doing that from the standpoint of entitlements that would make that hard to do? Sure. But those are just development, assumptions that have to be made and underwritten. So I would clearly believe there are other folks there. In terms of us, does it make the most sense for us? Yes, it probably does. But Nate, we own a lot of land there. We've got a lot of opportunities to continue to grow there without owning that 12 acres of land. So we got through -- and as you can imagine, in the negotiations in any company within the company, well, do we need to do that to protect the existing asset, is that -- should that be looked at separately, how should it be viewed, is something that we debate and argue very vociferously around here. And we have come down to, as a result of that process, a pure belief that that piece of land should stand on its own from a development perspective and in terms of what we would be willing to do. If it goes to somebody else, that would be okay. And, but if we think we can do it, do we think we can compete as well or better than somebody else? Yes, we do because of how well we know it, the entitlement process from which we've been through before, and all of those subject agreements.

Nathan Isbee - Stifel, Nicolaus & Co., Inc., Research Division

Okay, and am I correct in assuming there's no sort of reciprocal easement that would give you any say in terms of what somebody else could do there?

James M. Taylor

I believe that you're correct in assuming that.

Nathan Isbee - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then Don, you've previously expressed caution to analyst and investors about the future growth profile of Federal getting back to where it was pre-crash. Given the recent strength in the shopping center industry, have you changed your thoughts on that at all?

Donald C. Wood

Yes -- I like that Nate. That's well put, very polite. The bottom line is, in the days of '04, '05, '06, '07, the ability to raise rent significantly, it was something across-the-board that really boosted every portfolio out there. Certainly, that's harder to do. I can tell you, what I'm really excited about is the value that we'll be creating in the development pipeline, as well as some of the acquisitions that we're doing. It's just -- it can't happen in the 2013, '14, '15 time frame because by the very nature of development, there's going to be dilution than -- in the form of those 4 things that happens before there's accretion. And so, if you sit and you model Federal out at it at 8% to 10% growth, if you will, through '14, '15 and '16, and you're -- it's hard to do that. Now, we aim for both cash flow investors and NAV investors. And we try as best we can to be a balance and to be able to make it work for everybody. But it is about NAV at the end of the day and trying to create that value. And when you choose development as a component of your business plan, then you got to look at a longer time frame and sure, so we're going to create the value, but it won't be that FFO growth in '14 and '15. It almost can't.

Nathan Isbee - Stifel, Nicolaus & Co., Inc., Research Division

And how about the growth out of your existing portfolio, the Congressional, the Valley Kenwoods, et cetera?

Donald C. Wood

As good or better than ever. And that stuff is just -- I mean, it's the rock. There is -- and we're going to do $420 million or so of property level NOI this year. And as Jimmy was saying, despite the fact that there's dilution from the marketing and the development stuff, the -- it's still growing at 3. So strip that out, it's 3.5 or 4. And that's pretty darn good, man. That's pretty darn good.

Nathan Isbee - Stifel, Nicolaus & Co., Inc., Research Division

Just to finish off the question I think you started answering before with Jeff. The Pike property that Wynne Garden [ph] acquired, was that something that you had looked into?

Donald C. Wood

We did. It's half a mile off the street or less from our offices here, as you know. We are not shy about owning real estate on Rockville Pike. I think we've proven that more and more, including $250 million more that we're putting -- and Montrose Crossing. But that's a small property, it's got some -- think about a ground lease. It's on a ground lease, it's got some pads out in front that are paying big old numbers. And so, when we look there, we say, "Well, how are we going to make more money here?" based on the value of going in and -- I mean, maybe Wynne Garden [ph] can do it. We just -- we didn't see a clear way to value creation.

Nathan Isbee - Stifel, Nicolaus & Co., Inc., Research Division

Even at 74% leased?

Donald C. Wood

Yes, [indiscernible] because you'd certainly have to pay for that. I mean, it's not like JBG, was selling that saying, "Hey, it's free" because it's not leased. Believe me, you got to pay for that.

Operator

Cedric Lachance with Green Street Advisors is online with a question.

Cedric Lachance

Just want to go back to the rent question a little bit. And thinking about your portfolio in 2 segments, anchors and small shops, if you were to mark to market all your leases today in each of those segments, what would be the increase in rent on a percentage basis in each of these segments?

Donald C. Wood

Well, I'll tell you, on this call, I don't have the ability to do it in segments. I can sit there and tell you that we got about $23 in place. And I believe we're sitting -- if you were to go through our system and you would understand all the market pieces of all those, the leases in total, that should be looking at $8 more, or $9 more, something in that kind of line from an adjustment to market. I don't know how to do that, Cedric, for you. I don't have the ability to do it. I'm looking across at people shaking their heads no. In terms of how much of that -- it's segmented the way just like that, 3 segments. And I'm sorry, but there's certain -- the point, from my perspective at least, is that there is still a very significant amount of market upside in the portfolio.

Cedric Lachance

Okay. What's your ability to capture it? And the reason I'm asking about the anchors is that obviously, it's a lot more difficult to roll those leases? So what's your ability to capture this 25%, 30% upside in those rents over time?

Donald C. Wood

You know, Cedric, it's been happening for an awful long time around here. And the one thing I will tell you about this portfolio? One of the greatest things about this company is there's not much of a mystery to it. And so, when you look at that, you can grab every 10-Q or 8-K basically, for the last 10 years or 15 years and all that information is there. It will show you the following thing, almost always, we recapture more than is contractually coming due, because stuff happens. And I think the greatest example just happened this quarter, as it relates to the Genuardi's sale and what that did at our shopping center, so that's -- there's a brand-new -- these are recaptured boxes effectively that are out there, long before those leases were up. It happens all the time. So I'm not trying to duck the question. I don't know the specific answer beyond the contractual expirations that we disclosed. But when you go back and look at what actually happened compared to the contractual expirations, it's almost always more. So we have the ability to get to it, because we've proven we have the ability to get to it.

Cedric Lachance

Okay. And in terms of just moving Santana Row with the residential market being in better shape, at the very least in the Bay area. Do you have the ability to convert some of your rental units into condos? And is it something that's rising on the radar?

Donald C. Wood

We have the ability to do it, and now I'm going to turn it over to Jeff Berkes because I'm dying to hear what he says about this.

Jeffrey S. Berkes

Yes. As you probably know from discussions with us over the years, everything here at Santana Row is set up as a condo. And all the units are individually mapped. So if we wanted to do a conversion, it would be relatively simple and straightforward. That's we did, back in 2005 and 2006 when we sold the units in buildings 3, 4 and 6. So we like having that flexibility here and going forward whenever we put up a residential building, we will build that flexibility into the legal ownership structure. Right now, I got to tell you we like having the income from the rental units. And at least, over the past couple of quarters and going forward, we expect to be able to maintain or grow that income and the condos sales market has not yet caught up to that rental value. We keep an eye on it. We keep an eye on it every month, or every quarter. And to the extent, we start to see things like we saw back in early 2005, which was incredibly strong condominium pricing, we'll take advantage of it. But we don't see that happening yet, although we do monitor it closely.

Donald C. Wood

Cedric, let me ask -- let me answer -- add one thing to what Jeff said, which I completely agree with. But every single building that we build there is not just done obviously stand-alone. It's integrated into the entire district which is now Santana Row. And so, there's different property tax. We're aiming for different types of people. When we're building Building 8, this Missouri building that we're building right now, for example, it's -- we're looking for -- we will have lower price points. There'll be some smaller units in there to get people into Santana and the Santana experience at -- maybe some younger people at a lower price point because we already have products that they can move to in a higher price point. Some of the stuff leaves itself or lends itself to being condo -- being sold, if you will, as condos down the road. Some of it doesn't. So it really is a master planning exercise that -- which is, as Jeff said, is in part, impacted by the timing, if you will, of the market. But it's also impacted by the product it is that we're building to always be able to create the ability to own, or to rent at a lower level or rent at a higher level within the property.

Operator

[Operator Instructions] We have a question from Michael Bilerman from Citi.

Michael Bilerman - Citigroup Inc, Research Division

Jim, just in terms of cap interest in terms of your forecast for next year, you're running year-to-date at about $7.5 million. I assume, just as the redevelopment spend starts to pick up, that the 2013 number would be greater than the 2012 number. And therefore, have a little bit of an offset relative to the $2 million to $2.5 billion drag that you were talking about previously?

James M. Taylor

Yes, that's right. As you look at what we expect to spend during the year and our current plans for financing that spend, our cap interest will be going up in 2013, by somewhere between $7 million to $8 million.

Michael Bilerman - Citigroup Inc, Research Division

So this year we'll end up -- I don't know what's the impact to the fourth quarter? You've been running about $2.5 million a quarter. So is that a decent number for 4Q?

James M. Taylor

Yes, that's a decent assumption, Michael.

Michael Bilerman - Citigroup Inc, Research Division

So effectively, your guidance for next year sort of has a positive, call it, $0.03 impact rather than a negative, $0.03 impact?

James M. Taylor

That's related to cap interest and again, we are incurring capital to fund that development. So it's really the spread, if you will, between the rate at which we're capping it for GAAP purposes and where we're raising that capital, it's a little bit less than that, but that's about right. When we talk about -- that's obviously, going to FFO. But when we were -- Don's covering before Michael, was more of the impact on our NOI line.

Michael Bilerman - Citigroup Inc, Research Division

Right. But I'm just thinking that people were sort of taking the queue that the guidance is a little bit lighter. Certainly, it's below where the street is today, that people were coming to the conclusion that there is just drag from redevelopment, not thinking about that there's actually a positive impact from spending capital when you're spending it at your line of credit rate and capping it at your weighted average interest rate, at least from an FFO perspective.

James M. Taylor

Yes, but again, it's just a couple of cents, Mike.

Michael Bilerman - Citigroup Inc, Research Division

Right, but it negates the drag that we're talking about.

James M. Taylor

The drag's higher than that benefit but yes, I understand your point.

Michael Bilerman - Citigroup Inc, Research Division

Are you capping any expenses at all, from any of these redevelopments? Any of your operating expenses?

James M. Taylor

No.

Michael Bilerman - Citigroup Inc, Research Division

Okay. And then Don, I apologize, I missed it. You talked about 2 deals during your opening comments. Were they each of $150 million size, or that was an aggregate?

Donald C. Wood

No, Michael, that was in the aggregate.

Michael Bilerman - Citigroup Inc, Research Division

And those 2 deals that you're talking about, that would be $150 million going in, how much incremental capital, if you were able to get to those deals would those have associated with it?

Donald C. Wood

Yes, we'd look at very little and actually, at least for a couple of years.

Operator

There are no further questions at this time. Kristina Lennox, do you have any final remarks?

Kristina Lennox

This concludes our third quarter earnings conference call. We're looking forward to seeing everyone in San Diego.

Operator

Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.

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