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Federal Realty Investment Trust (NYSE:FRT)

Q1 FY08 Earnings Call

May 08, 2008, 12:00 PM ET

Executives

Andrew Blocher - Sr. VP, Capital Markets and IR

Donald Wood - President and CEO

Joe Squeri - EVP, CFO and Treasurer

Jeff Berkes - EVP, Chief Investment Officer

Chris Weilminster - Sr. VP, Leasing

Analysts

Christine McElroy - Bank of America

Louis Taylor - Deutsche Bank

Jeffrey Donnelly - Wachovia Securities

Paul Morgan - FBR Capital Markets

Craig Schmidt - Merrill Lynch

David Fick - RBC Capital Markets

Philip Martin - Cantor Fitzgerald

Jay Habermann - Goldman Sachs & Co.

Richard Moore - RBC Capital Markets

Michael Mueller - J.P. Morgan

Christopher Lucas - Robert W. Baird

Operator

Good morning and welcome to the First Quarter 2008 Federal Realty Investment Trust Earnings Conference Call. All participants will be able to listen only until the question-and-answer session of the call. This conference is being recorded. If you have any objections, you may disconnect at this time.

I would like to introduce this conference leader, Mr. Andrew Blocher. Sir, you may begin.

Andrew Blocher - Senior Vice President, Capital Markets and Investor Relations

Thank you. Good afternoon everybody. I want to thank everybody for joining us today for Federal Realty's first quarter 2008 earnings conference call. Joining me on the call today are Don Wood; Joe Squeri and Jeff Berkes. These and other members of our management team are available to take your questions at the conclusion of our prepared remarks.

Our first quarter 2008 supplemental disclosure package and our 10-Q provide a significant amount of valuable information with respect to the Trust's operating and financial performance. Both documents are currently available on our website.

Now, certain matters discussed on this call may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any annualized or projected information as well as statements referring to expected or anticipated events or results.

Although Federal Realty believes the expectations reflected in such forward-looking statements are based on the reasonable assumptions, Federal Realty's future operations and its 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 risk and cost of construction. The earnings release and the supplemental reported package that we issued just today, 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 Don to begin our discussion of first quarter results.

Donald Wood - President and Chief Executive Officer

Thanks Andy, and hello everyone. I think that if you take the time to dig deeply into Federal’s 10-Q and supplementary disclosures for the 2008 first quarter, you will feel pretty good about the performance of this portfolio at a particularly difficult time from a macroeconomic perspective and you will be able to draw some conclusions about potential future performance too. With reported FFO at $0.94 a share, we had a very good quarter with strong 10% top line growth, dragged down a bit by some very high legal expenses as we prepare for trial on a long-standing lawsuit that we are working through on the West Coast and by increased year-over-year bad debt expense, reflecting the far more uncertain environment we are operating in.

Joe and I will get into the higher expenses in a minute, but first, let me go back and talk to you about leasing during the quarter and what we might see on the top line for the balance of the year. 85 deals done during their quarter comprising nearly 300,000 square feet at average rents of $30.65. Both of those leases were for comparable space. In other words, spaces for which there was a previous deal in place and were written at average cash basis rents of $29.29, 23% higher than the previous deal. When you drill down deeper into those numbers, you would see strong releasing spreads on new leases and renewals alike, as well as on anchor and small shop deals.

The strongest results came from our Northern California properties. As an example, we did seven deals during the quarter comprising 34,000 square feet at Westgate Mall in San Jose. Our average rents of over $23 a foot, 45% more than the previous deal with no incremental capital. We did four small shop deals at Santana Row at average rents of nearly $80 a foot, 90% more than the previous deals while spending only about $160,000 to get that rent. And while Northern California was particularly strong, every major market that we did deals in during the quarter showed positively leasing spreads. This is a very special portfolio.

Now I’d certainly expect the leasing in this portfolio to continue to outperform as the year goes on, just not so sure that first quarter releasing spreads will be matched given the environment. The obvious impact at $4 per gallon gas prices, falling home values, rapidly rising food costs and job losses in many markets have consumer confidence and then on both the actual sales and the mindset of most retailers is irrefutable.

The outback expansion plans have become the norm. Deals in progress that previously were locked have come undone and we are seeing more [inaudible]. The latest one from Linens 'n Things impact two deals that we have with them comprising about $1.8 million a year in rent. Both stores are Wisconsin Avs, one in the North Bethesda and the other in the District of Columbia and both are eminently releasable if we are locking up to get them the back. Neither unfortunately was… in some respect, unfortunately was on Linens 'n Things initial closing with them.

Conversely, we certainly don't expect leasing progress to stop either. I think the realty is that most retailers have entered into the downturn in a fairly strong financial position having just come off five or six solid years. And while many of the lower or negative sales growth per period most will be able to weather this market. It is the marginal operator, so the companies with weaker balance sheets that have been able to survive because of the strong market over the past five years, who may not be as lucky.

Basically, when we say this economy is venting out those weaker retailers, they’re just not going to make it anyway. It’s just forcing the issue sooner, which really when you think about it, brings us to the only two things that really matter at a time like this. The strength of the underlying real state location and a relative strength of the lease itself, as it relates to the landlord's rights versus tenant's rights. Not surprisingly, they go hand in hand.

Normally, the stronger the location, the stronger the lease from the landlord's point of view. As you'd expect, we fight as hard or harder for critical lease provisions like recapture rights, opening and operating covenants and fixed rent start dates as we do for the rental rate.

In tough economic times, I believe that overall the terms of our leases are a significant competitive advantage, which is why I would expect to report higher lease termination fees in the next year or two, which will allow us get the upside in our properties through releasing sooner than we would have otherwise. These termination fees are a regular recurring part of our business and they have averaged about $3.75 million annually at Federal over the last four years. We had about $1.4 million of lease termination fees included in the first quarter.

Let me now move on to discuss the higher legal costs in the quarter and then I'll finish up my prepared remarks with an update on the acquisition environment. We have included detailed disclosures in our 10-Qs and 10-K since last fall about a lawsuit that we lost involving a contractual dispute over a parcel of land near Santana Row. That way we were in negotiation to our acquire way back in the year 2000. We never came to terms on the deal but the jury decided that a one-page Letter of Intent between the parties was a binding contract.

We just completed last week the trial to determine damages on this lawsuit. The trial was in front of a judge rather than a jury and it may be months before he issues his ruling. We have no idea what damage level he will find as the range is a ridiculously wide $600,000 to $24 million. However, we would be very surprised if it was near the high end of this range. We will know when he rules later this year. At that time, we will assess the merits of appeal as we strongly disagree with the finding of liability in the first place. But anyway, we did spend about $800,000 preparing for trial in the first quarter which depressed our results $0.015 per share. In the second quarter, we will continue to show elevated legal expenses reflecting the trial, the cost of the trial itself.

Now, before I turn it over to Joe, let me give you a brief update on our acquisition efforts. As you know, we develop a hit list of properties in three South Florida Counties, Broward, Palm Beach and Dade over the past couple of years for the purpose of expanding the primary markets in which we operate. But we haven't been able to free up the right properties at acceptable prices. As the economy has softened over the past several months, however, we seem to be making some strides. Believe me, we understand the impact of the housing and the credit issues in South Florida today. We are going in with our eyes wide open. It is giving us some opportunities.

We currently have a well-located grocery Anchorage center in Boca Raton under contract, which assuming closing conditions are met as expected, should close in the second quarter. And we are also in negotiation on a second property in the region, which is also looking promising. No guarantees on either, but the purpose of my raising this is to confirm our commitment to entering the South Florida market and to signal what may be an increasing number of acquisition opportunities that are we are seeing throughout our markets, given the changed economic conditions.

Don't be expecting significantly high cap rates, because as we've been saying the good stuff remains expensive. It’s just maybe becoming more available. That’s it for my prepared remarks. As you can see, we are certainly happy to be running this type of high quality portfolio at a time like this and we feel good about being able to remain on track operationally for the rest of year.

Let me now turn it over to Joe and then we will entertain your questions.

Joe Squeri - Executive Vice President, Chief Financial Officer and Treasurer

Thanks, Don. First of all, I’d like to reiterate our feelings regarding the trust performance in the first quarter of 2008. In general, we are very pleased with our first quarter performance. We realized slightly more than 10% growth in top line revenue and close to 9% growth in property operating income. And we delivered strong performance on the FFO line in spite of recognizing nearly $1 million in additional legal expenses in the first quarter.

It is important to stress this performance in light of the ongoing difficult economic circumstance, to highlight the strength of our leases real estate and management's execution of the business plan. While 2008 holds a tremendous amount of uncertainty, we remained committed to our business model, which has proven to be resilient, understandable and manageable even during uncertain time such as these.

From a balance sheet perspective, our decision to issue equity in connection with our inclusion in the S&P MidCap 400 last December reinforced our financial condition, cleared up our revolver, strengthen our coverage ratios and most importantly positioned us to pursue investment opportunities like the Florida acquisitions Don just mentioned. We have no significant maturities coming due this year and given the slowly improving credit markets, we are encouraged about our ability to fund our growth prospects especially from an acquisition standpoint.

There is no doubt that we are operating in a more challenging retail environment as reflected by our occupancy declines on both the year-over-year and sequential quarterly basis. Our occupancy for the quarter on a same-center basis declined to 95.3% from 96% in the fourth quarter and 96.5% in the prior year. And we anticipate that there will be pressure on these numbers throughout the course of the year. Nonetheless, our leases are solid with strong provisions that enable us to cover potential downtime through lease termination fees and, hopefully, release the space at higher rates.

Importantly, through the first quarter of the year, we have seen our lease rollover results remain strong despite the environment, reflecting the quality and desirability of our real estate. In spite of our declines in occupancy, we were able to post strong same-center property operating income growth of 3.7%.

On the redevelopment side, we are in the midst of taking delivery of our ninth phase development of Bethesda Row, Arlington East. We are scheduled for a grand opening of our retail operations in mid-June and expect to have our residential component delivered shortly thereafter.

Despite the challenging environment, our guidance for 2008 FFO per diluted share remains unchanged at $3.89 to $3.94. These numbers do include additional legal expenses associated with that 350 Winchester lawsuit, but do not included any a one-time charges associated with potential damages. We anticipate that the earnings related to Arlington East will significantly ramp up throughout 2008.

In addition, we have several committed anchor tenant rent commencements throughout the portfolio in the third and fourth quarter. Furthermore, we expect that any additional legal fees associated with the 350 Winchester case will be incurred in the second quarter. Consequently, while our annual guidance remains the same, we believe that to the extent you focus on quarterly earnings. We would suggest that you back into your models to account these expectations.

Thanks very much. And with that I will turn it over to the operator and open the call up for questions. Operator?

Question and Answer

Operator

Thank you. At this time, we like to begin the question-and-answer session of the conference. [Operator Instruction] Our first question comes from the line of Christy McElroy with Banc of America Securities. Please proceed.

Christine McElroy - Banc of America Securities

Hi, good afternoon guys.

Donald Wood - President and Chief Executive Officer

Hi, Christy.

Christine McElroy - Banc of America Securities

Can you provide some color on the three projects that you added to you future redevelopment pipeline Barracks Road, and Lancaster and New Britain?

Donald Wood - President and Chief Executive Officer

Yes. Again, early in stage, but as you know, we take our... we've been mining our existing properties for the last five years in a very aggressive way and some stuff we can't get to as early as we would like to. Lancaster is a great example, where we've got a food store that does… a giant food store that does very well there would like additional space and we've been unable to basically accommodate them and now we are closer to be able to do that, close enough to be able to put that on the list. The same at Barracks Road, which is one of our best centers overall. We have been waiting for a particular box… for the lease to expand. It was a regional operator where the lease is up and now we have got the ability to do some pretty cool stuff in that space so that's in the planning process. And the last one is Town Center, New Britain, which was an acquisition that we made I guess about 18 months ago or so something like that may be two years. And again, there is a giant food store there that is now ready to expand and we can accommodate them based on some lease expiration. So the [inaudible] plate, bread-and-butter stuff that I think do pretty well at.

Christine McElroy - Banc of America Securities

Okay. And then I know it’s still pretty early, but can you... do you have a sense for what projects in the future pipeline you're targeting for 2010 stabilizations, given that you probably have to start them at some point over the next year or so? And in an environment where development in leasing might be a little bit tougher, are you still targeting stabilizations of about $100 million a year or so?

Donald Wood - President and Chief Executive Officer

We’ve said it’s $75 million to $100 million a year and we've also said that that is going to be lumpy. With respect to the 2010 question, particularly that you're asking, it very well might some of the projects that I just talked to you about or that you just asked about, because those are the ones being generated by a grocer that I don't want to say that they are pre-leased, but basically the deal for the expanded grocer is the key part of the redevelopment. And then filling in the small shop space obviously becomes a whole lot easier when you’ve gotten expanded grocery just opening up. So I would suspect it would be those type of projects and I have to go back and look at probably one or two others also. Yes, look, I don't know... I know that, that $75 million to $100 million is a pretty good estimate to use over 10-year period of time. Whether specifically it’ll be there in 10 or 11 or there will be more in 9, I’m not exactly sure yet, but for modeling purposes, I think [inaudible].

Christine McElroy - Banc of America Securities

Okay. And then just lastly, just still in development, what caused you to push out the expected stabilization of Hollywood Galaxy Building 2008 to 2009? And then you also pulled Hollywood Peterson Building from your future list, is that related and wasn't that it added last quarter?

Donald Wood - President and Chief Executive Officer

I think we just missed Peterson, did we? Andy is shaking his head. I guess Peterson shouldn’t have come out.

Christine McElroy - Banc of America Securities

Okay.

Donald Wood - President and Chief Executive Officer

And it’ll go back in next time. We just missed it basically on the list. With respect to Galaxy, it’s actually good news. We were able in redeveloping the Galaxy building to take a basement that we previously thought was unleasable and basically turn it leasable space. We are able to do a Tesco deal for half the space down below but the other half is not yet leased up. And so because there is new space there and in some respect, it’s actually enough projects. But that other space won't be up and operating until next year. And so yes, it’s pushed back but it's pushed back because we found more leasable space and more value to add.

Christine McElroy - Banc of America Securities

Got it. Thank you.

Operator

Our next question comes from the line of Lou Taylor with Deutsche Bank. Please proceed.

Louis Taylor - Deutsche Bank

Yes. Thanks. Yes, along the same line, in terms of the potential future pipeline, maybe, Don, if you give us a sense for what are the three... of that list, what are the three kind of closest to maybe starting and maybe some ballpark dollars?

Donald Wood - President and Chief Executive Officer

Yes. But let me make sure I'm getting that right. I mean certainly the thing that is actually starting this month is about a $40 million building at Santana Row. And that’s offer over... office over retail. I guess that's actually on the list, you are asking about future.

Louis Taylor - Deutsche Bank

Yes.

Donald Wood - President and Chief Executive Officer

The future pipeline. And I guess I really have to reiterate a little bit about what I just said to Christy. It will probably be... it will be a potentially another stage of Santana Row, one of the residential buildings potentially in the back that we are looking at. We are getting closer on assembly in terms of the overall master plan that will be big and long and take a long time but there will be… the key portion of that will get going in the next year, year-and-a-half or something like that. You will see, and I'm just looking down kind of doing this as I go. You'll see Westgate, which will jump up there sooner because of an expiring Ross [ph] deal, which we will be thinking about how to deal with that and that will be happening sooner. Those are the ones that I put there right now in addition to obviously some ones that are on the '09 list.

Louis Taylor - Deutsche Bank

Great. Okay. And the second question just pertains to kind of Santa Monica places as Macerich’s moves along on the project, how do you really view that from a Third Street Promenade perspective in terms of where... something they can complement what you're doing or to compete with what you're doing or all of the above?

Donald Wood - President and Chief Executive Officer

Yes, Lou, I can't wait. I mean if you asked our [inaudible] about that, that project he is very excited about where it is, because it has taken so long to get it done, to get it to the space that it is right now. I mean it really needs it. And when we first invested on Third Street, it’s funny. We have three blocks from Wilshire Boulevard all the way down to the Santa Monica place. When we looked at it, we thought that our properties would do better, the closer they were down to Santa Monica place and not as well the further up to Wilshire Boulevard. And the actual has – the opposite has actually happened over the last 10 years and those closer to Wilshire did the best and as it got closer down to the mall, not so well because the mall really wasn't offering a very attractive environment. I think what they're doing is fantastic there, I think it will absolutely complement what we and other landlords have done on Third Street. I think it is good for everybody there. I mean if you spend time in that mall before, I think you would agree with me.

Louis Taylor - Deutsche Bank

No, I don’t… could have gotten much worse. Okay, thank you.

Donald Wood - President and Chief Executive Officer

You bet.

Operator

Our next question comes from Jeff Donnelly from Wachovia. Please proceed.

Jeffrey Donnelly - Wachovia Securities

Hi. Good afternoon guys. Don, just one other question on your redevelopment pipeline? There are sort of several small million-dollar increases to many of the projects and I know that seem like small dollars, but on some of those projects it seems to be a big bump up. What's driving that? Is it material costs or the change of scope?

Donald Wood - President and Chief Executive Officer

I think you see a combination of both of those things that you are talking about. The biggest thing that you see on those small projects like that are normally that from a merchandising perspective, we normally... that we underwrite, we don't put very much, if any, tenant allowance in and the actual deal often has more tenant allowance in terms of doing the deal and more rent. So I think if you look, you will see many of these things, which go up, so but they don't change the yield because we are getting paid for it on those particular deals. That's a reason. Certainly higher material costs, we've had minor overruns on... several small projects, but nothing systemic. What I mean, Jeff, I think primarily when you look at it, the overall value creation that we expect to make on those projects is very much intact.

Jeffrey Donnelly - Wachovia Securities

That's helpful thank you. And switching gears, I mean there seems to be a lot of capital out there that I guess anticipating to stress out there in the real estate industry. I mean we can debate whether or not it's materialized. Is there a point where you guys might explore setting up a JV or maybe to the more opportunistic approach in acquiring core shopping centers or perhaps even a product that might allow you to target I guess I would say properties that you might not normally consider but they are higher return prospects?

Donald Wood - President and Chief Executive Officer

Yes, it’s possible Jeff as you say it. I mean look, what... in our company it is the real estate that drives how we structure the deal and not by person. So and I'm sure there will be a question on acquisition somewhere in your coming. Jeff will give his point of view on where the markets are etcetera. But basically, when we find product in our markets, markets that we want to get and that we can figure out way to make it available, believe me, we look at all structures possible to make that happen. And that was the original reason for getting the Clarion venture done a couple of years back. We still have a great relationship with them and those conversations are ongoing as they are with other people. But we really do look at it as the real estate driving the decision on how to finance and how to structure a deal and not the opposite way around. I don't know if that is helpful or not. So as we see stuff and we are seeing more stuff, there is no doubt about it, that's available. Trying to figure out how to make that create the most value absolutely would include using other people's money as part and parcel of that.

Jeffrey Donnelly - Wachovia Securities

That was actually my next question and maybe I can make it a team question, perhaps part for... maybe for Andy and part for Jeff. I was curious where do you guys see financing markets today and then may be you could relate that to where the acquisition market and pricing is today?

Jeff Berkes - Executive Vice President, Chief Investment Officer

You want me to take that, Don?

Donald Wood - President and Chief Executive Officer

Yes, go ahead and start and then, Andy or Joe please feel free to stumble in.

Jeff Berkes - Executive Vice President, Chief Investment Officer

I mean clearly, I won't touch the unsecured market. I’ll leave that for Andy and Jeff. But on the secured side, there is no CMBS market. And what that’s doing to pricing on assets is if you’ve got a property that's not a great property for whatever reason, poor tenant sales, poor location, secondary market, there is really no doubt to put on that property today. And pricing for that property has dropped significantly. But if you’ve got a property that can be financed by a life company, you still see pretty aggressive overall interest rates for the life companies and there is life company money or balance sheet lender money out there to do those deals so you see aggressive pricing. And in the markets where we do business, the coastal markets and the locations within those coastal markets that are better locations, pricing is still incredibly strong and whether it's 100% equity purchase or equity plus a balance sheet lender, there is plenty of money to buy good shopping centers today. What we've seen over the last quarter or so is maybe a couple of more data points. The market does seem to be loosening up more things, seem to be coming to market and again for the type of stuff that we look for and go after with strong tenant sales, barriers to entry in the trade area and ability to move NOI, real aggressive pricing. In DC market over the last quarter, we've seen a grocery anchored neighborhood center traded at sub five cap. We've seen another grocery anchored center go through a fall marketing multiple bid pricing process and not trade... the reason it didn’t trade was bidders push the cap rate all the way down to kind of 54, 55 level and the seller wanted a five. But 54, 55 is very, very aggressive pricing particularly for those assets. South Florida we're watching in assets in our marketing process right now similar to the two that I just mentioned in DC. Very well located in neighborhood center, very strong grocer sales and it's going to trade at a sub six cap and a probably a low to mid seven's IRR. And we are seeing similar type things out in California and a significant amount of money chasing those kinds of deals today. So there is no shortage of capital, either debt or equity for well located performing retail real estate

Jeff Berkes - Executive Vice President, Chief Investment Officer

And just to touch on the capital markets. You obviously know we have our revolver that's clear. I'll touch on the bank market, I think that, that is from a regional bank standpoint, we would classify that as available. The larger banks have pretty much had stopped lending for the time being and now... from regional banks. People in our syndicate from conversations we are having is that we can get funded term loans done at prices that we find acceptable. And on the unsecured market, I'll let Andy comment on that, but we think there is a window that's opened up that we could access that is accessory.4.?

Joe Squeri - Executive Vice President, Chief Financial Officer and Treasurer

Yes. Jeff from touching on his comments, I mean on the term loan side, I mean obviously pricing has widened out since we executed our term loan in November. And on the unsecured side I think what you're seeing is, I'm not saying that the strong has passed, but conditions are certainly improving. Obviously, there has been some real issuance in the last several weeks, which is a positive sign. The credit curve across maturity is very. very flat and you're looking at all-in rate ands probably... the 6% to 7% depending on maturity that you pick.

Jeffrey Donnelly - Wachovia Securities

And just one last question, I’ll yield the before is that. Joe, can you remind me again where you see your same-store NOI growth for full-year 2008 and maybe how you... how you see it on a quarterly basis as we progress the year?

Joe Squeri - Executive Vice President, Chief Financial Officer and Treasurer

In the way they were modeling forecasting, we think it will be consistent where we were between 3% or 4%.

Jeffrey Donnelly - Wachovia Securities

Thanks.

Operator

Our next question comes from the line of Paul Morgan with FBR. Please proceed.

Paul Morgan - FBR Capital Markets

Hi, good afternoon. On the lease term fees, you said based on the strength of your leases, you expect that to be kind of incremental positive. Do you see this $1.4 million as being kind of a run rate and that number being, the full-year number being materially above what you saw in '07?

Donald Wood - President and Chief Executive Officer

Well, it's hard to say, obviously. But I guess I do. I guess I see it, I don't know, Joe, in terms of run rate, but I don't think there is anything operational about the 1. 4 at a time like this and then I think a time like this frankly continues into '09. So we expect that number to be elevated.

Paul Morgan - FBR Capital Markets

Okay. Maybe you could talk a little bit about the categories of how retail leasing right now, in particular... what's going on with the Federal lot this earning season from your peers about fall out in the restaurant space kind of to be added to what we already saw in the homes and the videos at sites. So could you just talk about the exposure in your portfolio, what you're seeing right now in terms of renewals and leasing for those categories?

Donald Wood - President and Chief Executive Officer

Yes. And think about it Chris, because I’m just looking over our head of leasing is here today, I asked him to stop into this meeting, so maybe you can add more to what I'm about say. But there... let's talk about a couple of things. I look hard at our restaurant sales. Restaurants in total make-up about... what do they make up about, 8% of our GLA throughout the portfolio. And when you looking at where that is, it’s very heavily weighted towards things like Santana Row, which obviously has a huge restaurant component, Bethesda Row, which have a large restaurant component. Both of those are as of… I have seen now April sales, Everything through April and talk to a number of those operators. They are stunned, certainly a bit by higher food costs very recently without question. But the top line numbers are still very strong, and in fact surprisingly so. I would have thought they would have backed up a little bit throughout the portfolio more than they have. So we’ll see what happens. I think its on the margin level as you go forward and see what happens with the sustainability of food costs and things like that and food cost increases in the restaurant business. But look, I don't want to just say location is everything, the location is pretty darn important. And when you are doing a... when you got a project like Santana or a project like Bethesda, these are the places where people do come to be entertained and those numbers that have held up pretty strong. See where that goes. I also don't think as you look across the portfolio that I'm able to really say this category or that category is particularly weak over and above the obvious things related to housing. But I do think it... I do think it comes down to more of the strength of the operator, and we've always talked about the number 1 and the number 2 operators in a particular sector versus the number 2, 3 and 4. And I mean Linens is a pretty good example of what you are seeing. Borders is a pretty good example of what you are seeing, Circuit City is a pretty good example and when you compare those to the relative Bed Bath & Beyond competitor or Barnes & Noble competitor or Best Buy competitor, tough. I don't... and I see that throughout industries and throughout the portfolio. I don't see necessarily small shops doing disproportionately worse than regional, for example, or even than smaller nationals. The small shop tenants, in some cases, these are family-owned businesses that obviously if they are not well capitalized, they have got an issue there. If they are not good operators, they've got an issue, just like in any business. But they also have... they are also based very heavily on the service that they provide to customers and they are family-owned. They are punching in at 9 and out at 6.30 or whatever they are doing. They are doing what they need to do to get through this period of time. So I have got no general macro comments as it relates to that. It really does come down to the individual operators at a time like this. Anything else, Chris, on that?

Chris Weilminster - Senior Vice President, Leasing

Yes. No, Don. I think you did a great job summarizing what we are seeing consistently and I think your last point is the important one. I think it’s all about the capital [inaudible] where you tend to see the franchisees and the [inaudible]. Ones that we are seeing struggling and the ones that are a little bit as capitalized and don't have as much money to rely upon to be successful. And Don hit the point on all the nationals. I mean I think it's in all the papers, the ones that are struggling for the reasons Don mentioned. So we are not seeing anything different than probably our competitors have already mentioned in their calls and we stand very focused on proactively releasing space, who are proactively figuring we are going to back to release and do the best that we can do to mitigate the downtime on this.

Paul Morgan - FBR Capital Markets

So, I need just to clarify, on the restaurant side, you’re just not saying are not seeing that much power in your portfolio right now?

Donald Wood - President and Chief Executive Officer

No, not at this point, not at this point.

Paul Morgan - FBR Capital Markets

Okay. My last question just in terms of Arlington East, what should we think of in terms of the lease up of the residential and the timing over the course of this year?

Donald Wood - President and Chief Executive Officer

First thing you got do, Paul, is get down here and lease a unit, because you are going fast. We are really proud of this project and if you do honestly anybody, anybody who is visiting the Washington area, if you do, if you can't get to Bethesda, we've just opened up the project a week ago basically and we have the first four or five now retail tenants open on the street. It is completely leased at the street level from a retail perspective. Those will all be opened up by the end… through this year as they move down in fact before the end of the year.

On the residential side, there is 180 units, we basically have 70 of them done already at this point, which is just very encouraging in a very tough market. Whether that pace continues, and I do think that there is pent-up demand for those units, that's jumped in. Whether that pace continues or not, that's a million-dollar question in terms of... in terms of the lease up of the remaining 110 units there. We're expecting or hopeful to see something along the way of 15 to 20 units a month and roll it out from there. So far we've been able to get the rents that we perform at and everything is solid in that. I'll report back in three months and then three months after that.

Paul Morgan - FBR Capital Markets

Thanks.

Operator

Our next question comes from the line of Craig Schmidt from Merrill Lynch. Please proceed.

Craig Schmidt - Merrill Lynch

Yes, just curious about the acquisitions in Florida. If there were something in the Boca Raton project or asset that you saw some immediate opportunity. And I guess bigger picture, I mean your resolve to get into the Florida market seems doubly strong given the troubles that are there right now. Maybe you could reiterate what you're finding attractive or what you see that will be a good fit for Federal?

Donald Wood - President and Chief Executive Officer

Yes, let me make the first comment and Jeff who has been spending an awful lot of time on market research there and making sure that we’re doing the right thing can add to it. But your first part of your question is going to be answered the way I answer, any thing else that we look at buying, absolutely, we see in the particular asset that we're looking at the opportunity to both on a shop space basis maybe able to ramp up the leasing using our network, and also on anchorage side, nothing immediate but from a long-term perspective, the ability to turn the asset into much better product. That's what I would say whether we were looking at this particular asset that time I'm talking about in Florida or that particular asset in Washington, DC or Northern California or wherever. That is what we try to do. And the reason that we are in Florida is because we really do see an awful lot of similarities in terms of the ability to exploit our core competencies, and that is leasing and redevelopment there in a similar manner that we do in the markets. Let me... Jeff, give the overall… the reason we picked these particular counties to be strong about in our beliefs.

Jeff Berkes - Executive Vice President, Chief Investment Officer

Craig, like Don said, we are looking real hard in Miami-Dade, Palm Beach and Broward counties and we think that part of Florida, called South Florida, shares a lot of the same characteristics as our other target markets. Over the years those have become very densely populated, built out in a lot of cases. There is obvious geographic constraints to those markets, which help create that sort of in-fill nature and when you look at population and job growth over the long-term, all very strong down in South Florida and when you look at retail rent growth over five and ten-year periods, it’s equally strong. And there are obviously some short-term concerns we think with South Florida, and we take those into account when we go out and target individual assets and then when we underwrite and price those assets, but long-term we think it's a market where there is going to be barriers to entry, cap on ridiculous amounts of new supply and a lot of upward pressure on rents and that's why we want to be down there.

Donald Wood - President and Chief Executive Officer

Just let me add one thing to that, Craig, unlike every single market we are in, there are all kinds of product types within that market. And so this has to be a real estate's local discussion. It depends on the particular assets that we're buying and we are... just like in Philadelphia or in Boston or even in Washington, while there are macro conditions that you have to talk about and consider, it really does come down to the micro opportunities at the particular assets, and that's what we are looking hard for just like we do here.

Jeff Berkes - Executive Vice President, Chief Investment Officer

Yes. It's a real kind of property-by-property, trade area-by-area analysis, Craig.

Craig Schmidt - Merrill Lynch

I guess, when I think of the market, I see a lot of bifurcation in the mall market, meaning there are some fantastic malls and then there are some below average malls. In the strip space, and maybe this place to your favor, I really haven't seen that sort of spread. I see a more generic product out there, meaning a lot of public [inaudible] dominance, but then those kind of shops lead beefed up to it rarely exploiting the theme or a certain strength at rather just sort generically filling in the space. And I’m just wondering maybe the older markets like some other ones here in DC and so forth, they have more time and maybe the strong have gone stronger and in that example, you’re trying to get your leg in there.

Donald Wood - President and Chief Executive Officer

I'm not exactly sure what question you are asking but...

Craig Schmidt - Merrill Lynch

I guess what I’m saying is when I think of let's say, the Washington DC's market, I can see in... I guess what I'm saying is there is a real spread in terms of the best malls and the less best malls and there is also that have the same spread in the strip center property, meaning there are some really fantastic strip centers and there are just some malls around. I don't recall and I wouldn't place myself as any expert at all, but just in my travels in Southern Florida, I rarely see the really outstanding community centers. And I don’t know if that we just think there is an opportunity or that plays no part...

Joe Squeri - Executive Vice President, Chief Financial Officer and Treasurer

That's part of what we're seeing as an opportunity and a point I probably should have made when I was talking earlier is one of the things that's happening in South Florida is there are lot of nationally strong regional tenants that maybe up until a few months ago were making a big push. But we still see making a push into South Florida and again with our leasing strengths which we've demonstrated in DC and other target markets, we think we're going to have the ability to help those tenants find space in those markets in the centers so buy and upgrade small shop and junior anchor tenancy and we definitely see that as an opportunity.

Donald Wood - President and Chief Executive Officer

Yes. Let me say to you, Craig, because I completely agree with your observation. We've all had exactly the same observation, not the sound to whatever, but I think that was a very similar situation in Washington 25 years ago and 30 years ago. And you need a company that goes in and does differentiate that and the way you start that is with the right locations and with the right kind of tenants that would give it a shot in those locations and that's why we are being really picky about. I mean if you look at it, it is a very fragmented strip center ownership market down there. And it's very hard for an individual or even a big company that has a lot of generic property to move the bar up, if you will, in specific locations. But we don't take this overall approach of large portfolio and trying to do that over an entire portfolio, we are not trying to do 15 of the same check-cashing machine guys and that kind of stuff all the way through the portfolio. We want to pick the right real estate in one of those shopping centers that looks like all the rest of them and turn it into what we think we can do and what we have done in another markets. So and it's a little arrogant in terms of our approach, but that's what we think we do.

Craig Schmidt - Merrill Lynch

Great. That's just what I was talk about. Thanks.

Donald Wood - President and Chief Executive Officer

Our next question comes from the line of David Fick with Stifel Nicolaus. Please proceed.

David Fick - Stifel Nicolaus

Good afternoon.

Donald Wood - President and Chief Executive Officer

Hi, Dave.

David Fick - Stifel Nicolaus

The Boca and the other acquisition that you say you have teed up your, is this intended to go into a fund or on balance sheet?

Donald Wood - President and Chief Executive Officer

They would both... if we get them done, they both will be on balance sheet. But again there are not closed yet, it was... really the whole purpose I mean we bring it up will simply just signal or loosening up, if you will, a product on the area. So it's not these particular ones, it’ll be other ones.

David Fick - Stifel Nicolaus

Okay. When you say you haven't seen a change or uptick in cap rates, can you sort of give some points of reference that you are talking about, the South Florida Centers are traded in the low fives last year, because we are hearing those are up to... sort the six level or you just... what used to be a six is still a six?

Donald Wood - President and Chief Executive Officer

Go ahead, Jeff.

Jeff Berkes - Executive Vice President, Chief Investment Officer

I think generally speaking, Dave, we saw in a lot of markets whether it's South Florida, DC or certain of the California markets assets over the last year or so traded between five-cap fair, 5.25 cap and 5.50 cap, I think those cap rates are very difficult that's not possible to replicate today. But the kind of mid five to six cap is where we are seeing high-quality retail real estate trade today. May be certain assets drift above the six for a certain reason.

David Fick - Stifel Nicolaus

Be specific, I'm sorry to interrupt you, but we are not seeing any of those trades at this point and I think that --?

Jeff Berkes - Executive Vice President, Chief Investment Officer

Well, you know what, I'm talking about deals that are in the pricing process right now and they haven't closed yet. So that might be the disconnect.

David Fick - Stifel Nicolaus

Okay. All right, that’s a good point. Your legal fees increase, was that in your original guidance or not?

Donald Wood - President and Chief Executive Officer

It was not specifically in our original guidance, no... and you're talking about the fees as to put on this trial and to get... we didn't have a trial date set. So we didn’t exactly know when these were going to hit up. So now, it really was, but both... we'll cover it in our guidance. We have not changed our guidance.

David Fick - Stifel Nicolaus

Okay. Can you comment on pre-leasing at the same center office development?

Donald Wood - President and Chief Executive Officer

No such things. No such things. In that marketplace, the hard decision we had to make was do we get... do we go under construction without preleasing on the office side, you just can't do it in that market until there is a building and people really believe that there is going to be to product there. That followed of course a year on the office side, with the right office extra representation and are feeling pretty darn confident obviously that we'll get it done. I don't think you will see that done for nine months or so to a year. But again we are looking for a late '09 stabilization there.

David Fick - Stifel Nicolaus

Even though if people will be able to see another construction, you're not going to be able to lease your thing.

Donald Wood - President and Chief Executive Officer

That's where the process starts to take done.

Joe Squeri - Executive Vice President, Chief Financial Officer and Treasurer

Yes, Silicon Valley is another pre-lease market, Dave. Once steel is up, that's when most developers start marketing their buildings and that's what we will be doing.

David Fick - Stifel Nicolaus

What is your average pro forma rent there?

Jeff Berkes - Executive Vice President, Chief Investment Officer

$50.

David Fick - Stifel Nicolaus

Okay, great. Thanks.

Operator

Our next question comes from the line of Philip Martin with Cantor Fitzgerald. Please proceed.

Philip Martin - Cantor Fitzgerald

Good afternoon and thank you for the time. My question is really on just leasing activity, I'm hoping I can get a break down comparing Federal's more mature material portfolio versus the assets acquired over the last four to six years in terms of... again leasing activity such as tenant retention, leasing spreads, interest, et cetera.

Donald Wood - President and Chief Executive Officer

Philip, did you asked this question a couple of quarters? Somebody asked this question a couple of quarters--.

Philip Martin - Cantor Fitzgerald

I think it was... I asked it a couple of quarters ago and I guess my interest now is, now that we are, we are within or in for a period of sustained economic weakness, if you have seen any difference there?

Donald Wood - President and Chief Executive Officer

Oh, gosh. I can tell you without specifically looking at the answer, that the answer is no.

Philip Martin - Cantor Fitzgerald

Okay.

Donald Wood - President and Chief Executive Officer

I'll tell you exactly why? I thought your question a couple of quarters ago was that, what you were basically implying was, well, how about the new stuff that we bought three four years, is that as good a product as you have had in this portfolio for a long time, it was a great question. And so we went back and I think we went through every acquisition that we made from 2002 forward and we compared the leasing statistics from that time forward with our overall portfolio and in fact I think at that time, we got very comfortable and I think we conveyed the message to you that those properties that we just bought actually had more value created, more opportunity within them than even the existing portfolio. Two quarters, later the data would show exactly the same thing. There is just not enough of activity that would show any difference.

Philip Martin - Cantor Fitzgerald

Okay.

Donald Wood - President and Chief Executive Officer

However, what we know as real estate people is the particular is that those assets in the locations that we bought, if they have been performing really well for that period from '03 when we bought them till to today, they will certainly perform as well or better on a relative basis with everything else in and around the market. There's no reason to believe that those properties would under perform the market. So I think if the same answer as we gave you last time.

Philip Martin - Cantor Fitzgerald

Okay. And my reason for asking it again here was just the difference between the economic environment. But at this point, there is no change, no differentiation. This might in fact it might be a little bit better on the new…

Donald Wood - President and Chief Executive Officer

That's right.

Philip Martin - Cantor Fitzgerald

Okay. All right. Thanks again.

Donald Wood - President and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] Our next question comes from the line of Jay Habermann with Goldman Sachs. Please proceed.

Jay Habermann - Goldman, Sachs & Co.

Hey, good afternoon here with Tom as well. Just a question on the guidance. And I know you mentioned 3% or 4% same-store NOI growth, but can you just remind us of how much downside and occupancy you are anticipating to stay within your guidance range?

Donald Wood - President and Chief Executive Officer

Yes, I mean we talked about this [inaudible]. I mean you should expect occupancy to stay pretty close. It may be 20 basis points, 30 basis points lower or 20 or 30 basis points higher frankly, depending upon what we've got going. But we know we've got a bunch of anchors that are coming on later on the year. And there will be some unexpected things that go away later on in the year. So, I wouldn't expect much of a change to what you have.

Jay Habermann - Goldman, Sachs & Co.

Okay. And then just another question, on the Florida assets, the dollar volume of what you're looking at this point, can you quantify that?

Donald Wood - President and Chief Executive Officer

I'd rather not... I'd rather not. The average shopping center size these days is probably $35 million to $50 million number for something in the 150,000 square foot to 175,000 square foot range in the markets that we are looking at. And whether we get one done or two done or five done is going to really depend upon the acquisition process. So I wish I can give you more guidance on there. I hate giving acquisition guidance in terms of volumes at this company, because as you know it’s not something that we target. None of our people are paid based on volume. And so I'd really rather... I really rather leave it there.

Jay Habermann - Goldman, Sachs & Co.

Okay. And then lastly in terms of asset sales, anything you're marketing at the present?

Donald Wood - President and Chief Executive Officer

No, we've got assets that we continually look at on the kind of the recycling machine, if you will, to look out, see where our growth is, see what's going on. But we don't have anything that’s teed up right now.

Jay Habermann - Goldman, Sachs & Co.

Okay. Thank you.

Donald Wood - President and Chief Executive Officer

You bet.

Operator

Our next question comes from the line of Rich Moore with RBC Capital Markets. Please proceed.

Richard Moore - RBC Capital Markets

Yes. Hi, guys. Just a quickie, Don. You opened the can of worms, so I'm just going to keep on it for a second.

Donald Wood - President and Chief Executive Officer

Rich, [inaudible] pose your question.

Richard Moore - RBC Capital Markets

Exactly, the Florida stuff that you're looking, I mean there is of all kinds of stuff out there right now. There is the thought that there is going to be distress type things, there is value-add type things, there is core stuff. Where are you guys seeing the opportunities? Is this the stuff you are looking and maybe the other stuff you are thinking about, is that going to fall into this some things distressed then it's got value-added opportunities or is it more core for now and over time you do things, how do you look at the quality of what you are getting immediately?

Donald Wood - President and Chief Executive Officer

That's a very fair question. I will tell you that getting into a new market clearly we are taking a less risky approach to things. So you should be very surprised if in the next six months we announce the giants distressed, mixed-use project that we are going to turn around in South Florida. We're not going to do that. You're going to see more of our down the middle of the plate stuff, whatever, whichever particular assets that is with modest ability to create value, or not modest, but not homerun, let’s call them basics that we are looking for, until we spend some time in that market and really have done ourselves. So, you are right, it’s injustice from a leasing perspective et cetera. And then going forward, I would expect you to see us having the same kind of game plan in Florida as we do in our other markets. But initially, that's what I’d tell you.

Richard Moore - RBC Capital Markets

Okay, very good. That's wonderful. Thank you. And the last thing is it doesn't appear at the moment that you guys need any immediate capital for refinancings. Is there anything you are actively you having to go out and seek at this point in terms of refinancings?

Donald Wood - President and Chief Executive Officer

No, not at this time. No.

Richard Moore - RBC Capital Markets

Okay, great. Thank you guys.

Operator

Our next question comes from the line of Michael Mueller with a J.P. Morgan. Please proceed.

Michael Mueller - J.P. Morgan

Hi. Going back to Florida one more time.

Donald Wood - President and Chief Executive Officer

No.

Michael Mueller - J.P. Morgan

Sorry about that. But if pricing hasn't really changed, I mean what has changed to the point where you feel more comfortable that we could see more money being put to work today say versus six months ago?

Donald Wood - President and Chief Executive Officer

Jeff, you will answer, but I’d tell you the one-word answer is mindset. The mindset of sellers has changed. It has always been about with us and you can substitute the word Florida, you really can for any other major markets that we are in. We simply have lists of assets, a hit list, if you will, of assets that we would like to own. We work as best as we can with the sellers, for their sellers, with the owners of those assets as best as we can to develop a relationship so that over periods of time when we are able to convince them that this is a good time to sell to us that they do when they talk to us and hopefully they talk to us only. Yeah, that doesn’t always happen but that's what we aim for. This… all you need to do is live in a market where you are seeing some economic distress and you are seeing, you are feeling, you hearing about your friends, you are seeing what's going on in the credit markets, it changes your mindset in change terms of your willingness to sell. That's the difference that you are saying much more or so in the stuff we are looking at in pricing. I don't know, Jeff, is there anything else to say on that?

Jeff Berkes - Executive Vice President, Chief Investment Officer

I think the mindset is an accurate way to put it. Some of it quite frankly is seasonal too. You don't see people bring a lot of property to market generally speaking in the fourth quarter of the year, because they want to finish up what they have on their plate and stuff starts to come to the market after the first of the year. And maybe that's part of what we are saying. But we are seeing more property on the market right now and the investment sales brokers, I and the rest of my team talk to on a regular basis seem to be handling more RFPs these days. And part of that’s mindset, part of it’s the time of the year and I think part of it too is some of these transactions that are going to prove out at that for good property, there is plenty of capital so there is not a reason not to bring it to market and maybe six months ago when everything was beginning to melt down, bringing something to market didn’t make a lot of sense. I think now that again for the quality of property that the markets prove to be pretty liquid and very aggressive on pricing, people that may be held back six months ago are thinking about coming to market today.

Michael Mueller - J.P. Morgan

Okay. Thank you.

Operator

Our last question comes from the line of Chris Lucas with Robert W. Baird. Please proceed.

Christopher Lucas - Robert W. Baird

Good afternoon, guys.

Donald Wood - President and Chief Executive Officer

Hi Chris.

Christopher Lucas - Robert W. Baird

Just a quick question, Don, you've talked a lot about the opportunities you are seeing in terms of the opening up for the core, the wholly-owned portfolio. Do you see the same opportunities for the JV going forward?

Donald Wood - President and Chief Executive Officer

Well, I don't know how to answer this, Chris, different than I've answered before. I guess the short answer is probably yes. But it is yes, driven by the particular real estate that we are looking at and finding a way to get that real state out of the hands of the existing owner and into our hands and add a return that makes sense to us. And if there is more property on the market then there may be the chance to do a few more deals than there is very much the chance that will done with partners, in addition, good for our own balance sheet depending upon the characteristics of that piece of real estate.

Christopher Lucas - Robert W. Baird

Can you remind us a little bit about what kind of capacity that the JV has under its current format?

Donald Wood - President and Chief Executive Officer

Yes, where are we, Jeff?

Jeff Berkes - Executive Vice President, Chief Investment Officer

I think we, roughly speaking, have $200 million invested and it was intended to be at $350 million JV, but that's... it's a deal by deal and kind of at the time decision for both us and for our partner ING Clarion. It's not like there is $150 million sitting in account somewhere that we just tap when we need it. It depends on the deal and depends on what's going on at the time.

Christopher Lucas - Robert W. Baird

And can you remind us sort of the differentiation between sort of what kind of product would go in there versus what you would look the wholly... on a wholly owned basis?

Jeff Berkes - Executive Vice President, Chief Investment Officer

Yeah, the product that was intended to go into the joint venture is core, return profile product property with prototypical grocer, stabilized occupancy and little need for capital going forward. And what we buy for our own account is more of a core plus to value-add property, which has probably a need for capital, maybe a redevelopment or remerchandising play and expansion play. So a higher-return, slightly more risky asset, but an asset that we are comfortable buying and have been comfortable leasing or redeveloping, expanding just like we have the rest of our core portfolio for a very long time.

Christopher Lucas - Robert W. Baird

So, in terms of just the product that you're seeing that's sort of come on... that's being maybe more available today is that can you talk a little bit may be about the difference in terms of the change, in terms of the availability between sort of the value-add type stuff that you'd be looking for in the core portfolio versus the sort of core assets that you would look at for the JV?

Jeff Berkes - Executive Vice President, Chief Investment Officer

Rephrase the question for me, if you will. I want to make sure I’m…

Christopher Lucas - Robert W. Baird

Yes, I guess I'm just trying to understand... if you, when you talk a little bit about more product maybe being available right now--?

Jeff Berkes - Executive Vice President, Chief Investment Officer

Right.

Christopher Lucas - Robert W. Baird

If you could give us a sense as to the characteristic between core--?

Jeff Berkes - Executive Vice President, Chief Investment Officer

Are you asking these are more core product or more core plus value add?

Christopher Lucas - Robert W. Baird

Correct. Right.

Jeff Berkes - Executive Vice President, Chief Investment Officer

That's real hard to say. It's again in the markets that we are in, which are, in our view, the best markets in the United States in which to invest and the type of our real estate we own and the locations within those markets that we look at, which have all the characteristics that we continuously talk about, barriers to entry, heavy population densities, above average incomes, and effectively a shortage of space. It's never really a huge distress or huge opportunistic at the property level type property. It generally falls to within the core to core plus to value-add, and telling you whether there has been a change in the mix within those three categories that have come to market is very difficult, because it's a very kind of lumpy analysis, if you will.

Christopher Lucas - Robert W. Baird

Okay. Thank you.

Operator

This concludes the Q&A session for this call. I would now like to turn the call back over to Andrew Blocher for closing remarks.

Andrew Blocher - Senior Vice President, Capital Markets and Investor Relations

Okay. Thank you everybody for joining us and we will talk to you next quarter.

Operator

Thank you for your participation in today's conference. And this concludes the presentation. You may now disconnect. Have a great day.

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