Federal Realty Investment Trust Q2 2008 Earnings Call

Aug. 1.08 | About: Federal Realty (FRT)

Federal Realty Investment Trust (NYSE:FRT)

Q2 FY08 Earnings Call

July 31, 2008, 11:00 AM ET

Executives

Andrew Blocher - Sr. VP, Capital Markets and IR

Donald Wood - President and CEO

Joe Squeri - EVP-CFO and Treasurer

Jeffrey S. Berkes - EVP and Chief Investment Officer

Chris Weilminster - Sr. VP-Leasing

Dawn Becker - EVP, General Counsel and Secretary

Analysts

Christine McElroy - Banc of America

Paul Morgan - Friedman Billings Ramsey & Co.

Jeffrey J. Donnelly - Wachovia Securities

Craig Schmidt - Merrill Lynch

Louis W. Taylor - Deutsche Bank Securities Inc.

Tom Baldwin - Goldman Sachs & Co.

Jeffrey Spector - UBS

Michael W. Mueller - J.P. Morgan

Nick Vedder - Green Street Advisors

Richard C. Moore II - RBC Capital

Nathan Isbee - Stifel Nicolaus & Company Inc.

Operator

Good morning, and welcome to the Second Quarter 2008 Federal Realty Investment Trust Earnings Conference Call. All participates will be aided 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 the conference leader, Mr. Andrew Blocher. Sir, you may begin.

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

Well, thank you. Good morning everybody. I want to thank everybody for joining us today for Federal Realty's second quarter earnings 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 second quarter 2008 supplemental disclosure package and a 10-Q provided significant amount of valuable information with respect to the trust's operating financial performance. Those documents are 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 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 factual performance may differ materially from the information contained in our forward-looking statements. We can give no assurance that these expectations will be attained.

Risks inheriting these assumptions include but are not limited to future economic conditions, including interest rates, real estate conditions and the risks and cost of constructions. The earnings release and supplemental reported package that we issued yesterday, our annual report filed on Form 10-K and our other financial disclosure documents provided more in-depth discussion of risk factors that may affect our financial condition or results of operation.

I'll now turn the call over to, Don, to begin our discussion of second quarter results.

Donald Wood - President and Chief Executive Officer

Thanks a lot, Andy, and good morning everyone. I think that if you take the time to dig deeply into Federal's 10-Q and supplementary disclosures for the 2008 second quarter, you feel pretty good about the performance of the portfolio at a particularly difficult time from a macroeconomic perspective. And you also be able to draw some conclusion about potential future performance too.

With reported FFO at $0.96 a share, we had a very good quarter, with strong 9% top line growth dragged down a bit by three notable expense categories. The first is demolition cost and downtime, as we prepared properties for redevelopments, notably the Walgreen site in San Antonio and the Sturtevant Street site at Assembly Square.

Secondly, continuation of the first quarter run rate of higher legal expenses as we concluded trials on a couple of long standing losses that we're working through. By the way, we still haven't received the judge's ruling on these lawsuits and as such no damages are yet reflected in the financial statements. But, as I said last quarter, we do expect to hit sometime later this year.

And thirdly higher year-over-year bad debt expenses across the portfolio, reflecting the far more and certain environment that we are operating in. And we also missed the schedule retail openings of our new Arlington East development in Bethesda by a few months which pushed rents starts back later in the year.

However, as it become customary with Federal, we had some good things happened in the quarter, including some very strong leasing, as well as lease termination fees that totaled about $1.2 million in the quarter, and a legal settlement on lease default $1.4 million. And I'll get to those in a minute.

First though, let me talk about leasing during the quarter and what we might see on the top line for the balance of the year. 90 deals done during the quarter, comprising more than 250,000 square feet at average rents better than $36 a foot. Most of those leases were for comparable space. In other words spaces for which there was a previous dealing place. And we've written at average cash basis rents of $36.39, 25% higher than the previous deal.

And when you drill down deeper into those numbers, you'd see strong releasing spreads on new leases and renewals alike. As in the first quarter, the strongest results came from our Northern California properties, Santana Row in particular had some... has really coming to it's own. 8 more sharp deals in the quarter, four renewals and four new deals at average rents of $80 a foot.

The new deals were 36% higher than the $59 average rent in the deals they replaced. As properties now have been open for five years, and some of the original deals are up for renewal or remerchandising, we couldn't be happier with the progress that we're making. The retail space in Santana is 99% leased. The nearly 300 residential units are 95% leased. And the hotel continues to led the market most financial categories.

Traffic counts of the property continues to trend upward and while Northern California was particularly strong, every major market that we did deals in during the quarter showed a positive leasing spreads. This is a great portfolio.

And I would expect leasing of the portfolios to continue to outperform as the year goes on. But we don't see these consumers spending pressures turning around anytime soon. And it'll be tough to continue to pose these types of leasing spreads in volume in next few quarters, but we'll see.

The obvious impact that the current economy has on consumer confidence and that in both the actual sales and mindset of most retailers is irrefutable. We continue to hear scale back retailers' expansion plans, deals and progress that were locks that come undone, and more store closing.

I continue to believe that Federal has been and will continue to be impacted less than our competitors. The latest store closing list from Starbucks makes the point exactly. At 600 announced closings exactly zero are at Federal properties. We have 33 Starbucks locations, none are on the list.

Which as I talked about last and I like to repeat brings us to really the only two things that really matter at the time like this, the strength of the underlying real estate location and a relative strength of the lease itself as it relates to landlord's rates versus tenants rates. Not surprisingly they go hand in hand, normally the stronger location, the stronger the lease from the landlord's point of view. As you would expect we fight as hard or harder for critical lease provisions like we capture rates, operating covenants and fixed-rent start dates as we do for the rental rate.

In tough economic times, I believe that overall in terms of our leases, there are significant competitive advantage, which is why would I would expect to report higher lease termination fees in the next year too, which will allow us to get at the up side in our properties through releasing sooner than we would have otherwise.

Lease termination fees are regular in the current part of our business, and they have averaged about $3.75 million a year at Federal over the last four years. As I said earlier, we had $1.2 million a lease termination fees included in the second quarter.

Let me now move on to discuss the status of our redevelopment program, and then I'll finish up my prepared remarks with an update on the acquisition environment. I can't talk about redevelopment, but I'll first talk about Arlington East, the most recent phase of Bethesda Row that we opened to the public this quarter albeit a few months late and a few million dollars more than forecast.

One large building, 180 luxury rental apartments on top of 45,000 feet of specialty retail that solidifies and somewhat completes what has become one of the most successful projects in the country.

Total gross came in at $83 million, it's above $3 million more than forecast. But the result is fantastic. The retail space is fully leased, and we currently have 115 of the 118 apartments leased at average market rents of $2.92 a foot. Not quite the 307 that we forecast, but certainly strong given the environment. On stabilization, late this year, we believe these buildings value would be $50 million to $60 million more than our cost.

Other projects well underway, include our Santana redevelopments Eastgate Shopping Center in Chapel Hill, the Galaxy Building in Hollywood and new mixed used building anchored by Walgreens in San Antonio and the final phases of the village are Shirlington, each of which are expected to stabilize in the next 12 months.

And finally, we've broken ground on the latest phase of Santana Row in 80,000 foot mixed used building, office over retail at Santano's front door, deal will be going up next month in August. We've going a lot going on and continue to move forward on the preliminary planning and entitlement steps that future projects like Assembly Square, Bala Cynwyd and Mid-Pike Plaza.

Now, before I turn it over to Joe, let me give you a brief update on our acquisition efforts. As you know, we closed on Del Mar Village during the quarter for $42 million, our first property in South Florida. Del Mar is a 154,000 square foot Winn-Dixie anchored property at the corner of Palmetto Park Road and Powerline Drive in Boca Raton. And we underwrote it fully understanding the weakness in South Florida these days.

It's a great location for us to enter the market within in Palm Beach County. Rental growth should be solid. And if we can never plan a way to get the Winn-Dixie bag, we'll create a bunch of value here overtime.

We currently had second property tied up in the market. There were finishing at due diligence on and clearly seeing more product loosening up with the economy remains instead [ph] of net. That product loosening up is both specifically in Florida and also nationally. We are fully committed to doing business in three south county, Florida's that we've identified that Broward and Palm Beach and Dade. We would certainly invest here carefully and judiciously over the next to 12 to 24 months. Jeff Berkes, our Chief Investment Officer is with us today and is available for Q&A.

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. We really good be about being able to remain on track operationally through the rest of the year. As you know, Federal business plan is one of the most straight forward and transparent out there. Both of these qualities really stand out in economic times like these.

So, let me turn it over to Joe and then we will entertain your questions after that.

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

Thanks Don. As Don mentioned, we are very pleased to report that in spite of a very challenging environment, the trust performed well in the second quarter with strong top-line growth of 9% and FFO per share of $0.96. In spite a slight decline in occupancy to 94.3% from 94.7% in second quarter of 2007, and 94.6% in first quarter 2008, and the continuing impact of bad debt provisions and legal expenses, we're able to deliver a solid 5.5% increase in our FFO per share.

We are also pleased to announce that we have increased the Trust annual dividend for common share by $0.16, or 6.6% to $2.60 from $2.44 per share. This dividend increase represents the 41st consecutive year of increased common share dividends, along this record of consecutive annual dividend increases in the REIT sector. And the testament of the trust ability to navigate a variety of economic environments over the long-term. As you look forward towards the reminder of the year, we expect the challenging environment to continue. And to see pressure on occupancy in new lease commitments.

Nonetheless, we are encouraged by the continued strong lease rollover figures and furthermore, in spite of the slight decline in occupancy, we are able to post strong same-center property, operating income growth of 4.1%. From a balance sheet perspective, subsequent to the end of the second quarter, we paid off a $4 million mortgage on Leesburg Plaza and extended our $200 million term loan with 2009. And as a result we have no significant maturities coming due until fourth 2009.

Well capital market conditions remain challenging, strong balance sheet characteristics including very low leverage both in our market capitalization basis and on a book basis. Combined with a largely unencumbered asset base provide a great deal of flexibility when assessing capital raising alternatives. With over $270 million of availability on our credit facility, we remain optimistic in our ability to fund our growth prospects over the next year.

With the first two quarters behind us and some visibility through the balance of the year, we are narrowing our 2008 FFO guidance $3.89 to $3.92. Overall [ph] 2008 guidance does not include any damages associated with the two outstanding lawsuits that we have discussed over the past several quarters. In addition, please remember that we have several committed and anchored tenant rent commitments, starting late third quarter with an estimated quarterly impact of approximately $0.01, one penny. So if you staying focused on quarterly earnings, we would suggest you account for these expectations.

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

Question And Answer

Operator

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

Christine McElroy - Banc of America

Hey, good morning guys. Don, you mentioned you're starting to see more products open up in Florida and kind of across the country. Can you provide some additional color on that? What's causing the product to open up? Are starting to see more pressure on sellers, given the financing environment basically forced [ph] sales or is it just kind of typical sellers finally budging on price?

Donald Wood - President and Chief Executive Officer

Well I am going to turn this over to Jeff to give you the color, Christie. But surprising to say, I think first of all when you asked the question, make sure that you are thinking about the type of product that we look at, as opposed to kind of generally what's out there and really the comments on making a very much towards A quality properties in great locations. So Jeff take up from here.

Jeffrey S. Berkes - Executive Vice President and Chief Investment Officer

Yes, hey Christie. We are selling a lot more product coming to market. Particularly, in California and I think what's driving that is somewhat the realization that a cap aren't going down and any longer. And now it's a good time to sell. And we are seeing a broad base of seller types really from institutional sellers pension funds, all the way down to the individuals. And I think, some of those people may be under pressure, but they are not under such extreme pressure that we're seeing huge increases in cap rates, or drops in values within our markets.

Christine McElroy - Banc of America

And then, can you give us a sense for the trends that you're seeing, kind of in market rents today? You guys have a pretty hefty mark-to-market, on... in place rents. That's kind of a primary driver of your internal growth. How much of risk is out there that you could see meaningful pressure on your leasing spreads due to the declining market rents.

Unidentified Company Representative

Yes, I am not so sure, if it's, and may be this is semantics. I'm not so sure it's declining market rents in the markets that we are in. Its smart retailers, using as leverage the economy to extract more. They absolutely have more choices in terms of where to go. The good news is obviously, a lot of those cases, we were very high up on the list in terms of what [ph] they want to do. It's more businessmen. And so there certainly will be more pressure, I think on the deals themselves as they are negotiated.

And are seeing a little bit of that right now. We are seeing it certainly, hardly at all at the very best properties and a little bit more as you kind of go down the scale to more normalized stuff. And it doesn't work like office. So you are not going to see wild swings in terms of the market rents and the mark-to-market that we have in place, when I like at it. I still think it's every bit is strong as it was. And I talked about that overall. Within that well, there will certainly be a couple of places where we tell if it's a prospective tenant can leverage the economy to get the deal done, sure. So that's the kind of... that's the kind of incremental, I guess difference that I think, we should be looking at.

Christine McElroy - Banc of America

Are you starting to see the pressure in any particular markets more than others. Or is it really just kind of asset-by-asset?

Unidentified Company Representative

It is asset-by-asset. I, very much though... but you remember, we're only talking about the five markets that we really do business in.

Christine McElroy - Banc of America

Sure. And then lastly, you guys have always been pretty clear about kind of breaking out the different buckets of where the growth is coming from. Can you just kind of walk through where your outlook stands today and whether or not your growth assumptions have moderated much in this environment?

Unidentified Company Representative

Yeah. I think, I think about the schedule that we show you all the time that kind of breaks out same-store growth and adds to the redevelopment, adds acquisitions to that. If I... if you think about kind of how that looks. I think the same-store growth is still the primary contributor to where that will come from. Though there'll be certainly quarters that that's under more pressure than before. The redevelopment pipeline... alright, that still looks like the place that we would be, we used to get a bunch of basics to get through to get done and that's a big focus of ours. So you will continue to see that, making up 20% of our growth or something like that with the balance in acquisitions.

And obviously, it is with higher money costs out there. The notion of accretive acquisitions is not really on the table for us. It really we don't... we won't see almost any situation where we are going to buy an asset that's going to accretive at the start. Given the type of assets that we buy. We are buying that future growth and we are not going to buy a lot of 7.5 or 8 cap, that said our flat yield plays. Because that's not what we do. So you will still see it in, NOI in same-store growth and you will see it redevelop.

Christine McElroy - Banc of America

Thank you.

Operator

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

Paul Morgan - Friedman Billings Ramsey & Co.

Good morning. On Santana Row, a couple of questions do you have... first of all, do you have much more to do in terms of the kind of first generation leases renewing or replacing tenants. And where are you taking the retail from the merchandising perspective when you do that? And then on the office, is that sort of visibility from a prospect... perspective on the 65,000 for an expansion?

Unidentified Company Representative

Let me do it in reverse, if you don't mind. There is no question, we are specking that office in Santana. It's very-very hard in San Jose, California, to kind of pre-lease office space. And may be that's from the years and years of deals, not... promise deals not actually happening. So it takes getting into the ground against feel up [ph]. And so I don't have visibility for you today in terms of the office above the retail at Santana. But there will be more to say about that probably in the beginning part of '09 that is what I am hoping or more to talk about there.

In terms of the Santana's merchandising, I've got to got here we got ahead of leasing here who is done in Chris Weilminster, as well Dawn Becker, who runs our West Coast region. I think I'd like to turn that over to those two. Let me start with you Chris on the merchandising.

Chris Weilminster - Senior Vice President-Leasing

Sure. From the merchandising standpoint, while we've being very successful and over the past 18 months is getting the interest of some of festive class, local retailers that were based out of San Francisco and surrounding areas that when we initial built Santana Row. We are not willing to take that leap. And these are the retailers that have very established reputations in the market and provide more of a multi branded mix of merchandized, which helps kind of provide a different atmosphere or different shopping environment than a lot of the vertically branded retailers that we put in there on the initial go round.

And so that's been a real... that's been very positive for us. And I will may add to the mix there too continue to keep Santana Row very unique and different from any of the competition that we have in the market. Naturally we will focus. We're just focused on making Santana Row the best and most desirable shopping experience for the consumers in the market. Dawn, is there anything else you would like to add to that?

Dawn Becker - Executive Vice President, General Counsel and Secretary

No. I think you covered it well.

Chris Weilminster - Senior Vice President-Leasing

Okay.

Donald Wood - President and Chief Executive Officer

The only thing I'd say to Paul too is the first part of that question was how we rolled over everything. And the answer is absolutely not. You remember this is greater than 500,000 square foot of retail space there. And the five year leases, we opened at November of '02. So, the November '07 kind of time period was kind of the first bit but that will continue going forward. And we had a point because it is 99% leased. Because it is as popular as it becomes. That really for the first time we've got some more options in terms of had it moving along and to continue to grow at... than we've had in the past. So, let's say, now there is more to come, Santana Row was a not a flat property in terms of NOI growth, you can say that.

Paul Morgan - Friedman Billings Ramsey & Co.

Okay, thanks. And then, in terms of just the restaurant business, which has been one of the factors driving some company's occupancy down when bad debt up. I mean, how were the restaurants... you've got a lot of restaurants in some of your centers. How are the restaurants performing? Is that one of the factors driving your bad debt, or they... do you see a lot of tenants there on your watch list from the restaurant industry?

Donald Wood - President and Chief Executive Officer

Yes, let's break that up. I mean when you look at our total full service restaurants, portfolio basically throughout the company, I think, let me put together Andy. Wasn't it like 8% of revenue, basically verbally through and the biggest piece of that is that Santana. And if ... you may or you may not remember, but when we did Santana we invested in a lot of those restaurants there. And so, as a result, I have great visibility in what's going there and they are killing.

That's not the same all over the country. No question about it, but a big piece of our restaurant revenue stream is I think restaurants in Santana overall are averaging about $900 a foot, which is amazing. It is just amazing and last worthy. And has and that's continued to grow in even through this recession.

When you look broader across the country, there is no question that when you start to see those restaurants that are kind of the more popular, I'm not going to name brands for fear again and you know that. But the more popular middle of the road type brands are absolutely struggling a bit more as people don't go out as frequently, mostly, as they had before. But that's a pretty small part of our business and no, its not... and we don't see a lot of bankruptcies there. We just see slower sales there without question. But that's not a big piece of bad debt, no.

Paul Morgan - Friedman Billings Ramsey & Co.

Okay. And my last thing is just on timing. A lot of then data... a lot of companies have being pushing back redevelopments or grounder projects and I just wanted to see how much, how comfortable are you or what are the retailers telling you about some of the expansions of redevelopments that are your in your pipeline now in terms of, yes, we like but in this environment we would like to push it back a year or two and...

Donald Wood - President and Chief Executive Officer

Chris, I don't think we have any of that. I haven't seen any sign from the retailers of pushing back anything that is we're doing generally on the redevelopment side with one exception and that is Home Depot backing out of the lease, up in Flourtown, Pennsylvania and paying us for it. And, yes, that is the... I think at this point that is the only one there. There is pressure from our side certainly on construction costs to make sure that we can make deals work. And that is a challenge and that continues to be a challenge because I really don't think there has been other than a few of the labor sides of cost or development. That there has been very much decreased, there haven't been decreases. It's been a continued increase in the cost of materials. And so that's the kind of thing that skins [ph] that deals a little bit and has made more cautious in terms of how we forecast that right now. But it's not on the retailing side.

Paul Morgan - Friedman Billings Ramsey & Co.

Great, thanks.

Operator

Our next question comes from the line of Jeff Donnelly with Wachovia Securities. Please proceed.

Jeffrey J. Donnelly - Wachovia Securities

Good morning, guys. I guess the first question is for Andy, I know it's a ways off. But you do have some cheaper loans maturing and I think it's the fourth quarter of 2009 in your ING joint venture. I guess, do you have any sense now what you plan to do with those when they mature and what it would price if you had to refinance some today?

Jeffrey S. Berkes - Executive Vice President and Chief Investment Officer

Hey, Jeff. It's Jeff Berkes. We're just getting ready to sit down with ING Clarion and go through our annual plans for the properties in the next 30 days. So, we'll be talking about the loan maturities with them at this point. Generally speaking I think 10 year fixed-rate life insurance company that today is all at 6.5. The answer to second half of your question. So, if we are like to refinance and nothing changes in the world, that's where it will be. Keep in mind that we are only 30% of the debt on those properties. So it's not a big number.

Jeffrey J. Donnelly - Wachovia Securities

Right.And I guess a few question for Chris Weilminster. Can you talk in more detail about how the leasing dialogue in general is changed in the last 12 months? I guess I'm wondering what has become, really the hot buttons of the retailers to get them to connect to space or connect to renewals. Is that... are they seeking more TI or are they are getting as far as their landlords or they want more upfront concessions?

Chris Weilminster - Senior Vice President-Leasing

I think most of the feedback I've been getting from larger retailers is just the uncertainty factor. They are not really being able to judge. You look at the categories that have two big players, whether it's a Linens and Bed Bath. Linens is doing a bunch of GOB sales, how is that impacting their best performance over the next couple of quarters, and what's that going to do to their outlook on a growth basis. It's that kind of thing that they are trying to get their arms around which really answers that's its more uncertainty.

And that's... it's not really having impact on a lot of what we're doing with these retailers from a renewal standpoint or garnering their interest because of, again our portfolio and where it is located in areas with lots of density and areas where there is probably the most opportunity for discretionary income still to exist. So we're not seeing that as much, but a lot of that French conversations that you have, all the developers that are looking to build on markets where they don't have their density supporting the retailer perspective numbers. They are having challenges. They are getting and re-traded and the retailers certainly balancing earlier taking advantages of this environment to go back and re-trade those deals.

Unidentified Company Representative

That's what we are seeing.

Jeffrey J. Donnelly - Wachovia Securities

Okay. Because we've heard from other retail REITs that for past few quarters that like I call underwriting times... the times that takes for them to make decisions on spaces on lengthening. Do you think that's because they just need more confidence than usual, this side is proven and we'll work for them and I guess is there anything specifically that you guys are doing which you haven't done before to drill home to folks that your sites will generate the sales productivity that they are looking for?

Chris Weilminster - Senior Vice President-Leasing

Looks pretty simple. I mean rents and then making a decision on the deal rents, all the functions and volumes of sales they can do and if we can sit in the shopping center with average sales per square foot, that is an excess of what they would see developing. In another location they are going to be focused on getting our deals done. That's why, I think we've got success because we can support the higher sales per square foot in our shopping centers.

And that's why I guess it's leading to a quicker decision as it relates to some of the larger deals that we are working on. And then there is still some uncertainty with regard to those retailers in markets where they can't get that sales that information and where there is not the positive trend. So, I do think that it leads back to that point of our having sales information and not being able to support on average or higher sales per square foot which gives them greater confidence, that's it.

Jeffrey J. Donnelly - Wachovia Securities

And just one last on this, I guess I'll stick with leasing is, I guess some of these terms are non-financial and hard to see but just given they weren't some of the more tenuous retailing environment, are you seeing guys may be pushing harder things like subletting at assignment or co-tenancy clauses than you might have in the past?

Chris Weilminster - Senior Vice President-Leasing

They always do but we do talk about this. This is very interesting. There is got to be balance, the most important word and when times are great, if you try as a landlord to take advantage of every single points that's going to come back to haunt you when times get more difficult and the tables are certainly turned from the landlord to tenant in this kind of environment. We've always tried to be very balanced and fair in how we negotiate our deals so that our perspective and how and why we fight for those issues, why we fight for recapture rates undergo dark, where they would argue. You are still getting paid the rent, we would argue. The rent's important to us, but having a dark space and not generating traffic is more important. And we want to have the bite of the apple to go back and release it.

All those issues are fundamentally what we do from a leasing standpoint to our core which regardless of the environment, kind of leads us down the same path. So we don't back off, we don't change those positions. We want opening covenants. We do not want to do deals just for income, we want to do a deal to have a vibrant shopping center, because if we can create that environment, you're grow sales and we're going to able to continue to drive additional rents.

So we've been very careful about it in both good and now in challenging times to maintain that same focus.

Jeffrey J. Donnelly - Wachovia Securities

Great. Thank you, guys.

Operator

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

Craig Schmidt - Merrill Lynch

well, thank you. I guess, I am thinking about the resiliency your portfolio has and how that might have changed if you had lot more Florida properties in your portfolio. And just wondering what really gives the Federal portfolio the resiliency as of the individual real estate or is it that the market are in or what portion of those factors keep you off from suffering less in these kind of environments?

Unidentified Company Representative

Oh Gosh, Craig, I do want to make a point that you're inferring to first of all on Florida. But, first let me say, look there is no question that when you pick a market, that the definition of market is very different for everybody that's referring to it. The real estate within that market is the fundamental thing that we need to get right. So you can sit and talk to people about Washington, D.C. and say, well Gosh, we are in the Washington, D.C. market and it's not particularly doing that well.

And the person you may be talking to, maybe mostly talking about 11 Loudoun County and Ashburn and that section of the Washington market. That's not the case in the capacity [ph] or which is also the Washington market for example. So be careful on the market itself that we are talking about, the individual property is by far the most important thing within that. I mean, think about it. Think if you have the best shopping center in a submarket, even in bad times the object is then is to do a lot more canvassing. Going to the second best and the third best and the fourth best shopping center in those markets and getting those tenants to trade up. They didn't have an opportunity to do that in the best of times. They got an opportunity to do that as they return. But only, if as Chris said a minute ago, you have the best place with the higher sales.

And so by and large that is number one. Secondly, remember, we're making the decision again into Florida now. We didn't make the decision to get into Florida 15 years ago or 20 years ago when there were not the barriers to entry that are today. All of the buildup, causing all of issues today, gives us an opportunity to get in today. And, over the next couple of years at those type of prices, and as this all gets through in Florida market, there is no question long-term, it will be a very better, it would be a much better economy that has been there. So it truly is the combination of picking the markets with those three things that we consider most important: density, affluence and barriers to entry, coupled with making sure we're doing it at the right specific properties within those markets.

Craig Schmidt - Merrill Lynch

Great. So, I'm just wondering then the reason you've limited yourself to five markets, is that just to be... you're not trying to understand every market in the world or have those markets lend themselves to having greater opportunities just fit in with the Federal perspective?

Unidentified Company Representative

Yes, it's, first of all both and a couple of more reasons, but the latter is the largest. The... we firmly believe that when you look at what happens in these countries, affluent density of the jobs go to the coast. They just do and they have for a very long time. And we have up to this point certainly not, we've been able, we've been successful in being able to find additional assets in those particular markets. Florida, it has grown up to a point where we believe that over the next twenty years which is how we look at things that this company will have those same type of criteria.

And I am not saying you can't making money in Kansas City. I'm sure you can. But, when you are running the place, I think it's got to be about picking where you believe you have the greatest opportunity to make the greatest impact with the tightest group of people to be able to do that. And that's why we've chosen those markets.

Craig Schmidt - Merrill Lynch

Thanks a lot.

Operator

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

Louis W. Taylor - Deutsche Bank Securities Inc.

Hi, thanks. Good morning. Joe, can you talk about the August debt maturity you've got here and those bonds that were put back to the company. What were the circumstances that allowed the bondholder to put the bonds back to you?

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

Hey, Louis, it's Andy. Yes, these were bonds that we... that were issued long ago. Their original maturity was 2,026 and within those bond agreement date of one-time put from I think, it was June 15th to July 15th, put those bonds back to us at par. So, roughly half of bondholders was $21 million or the $50 million outstanding, put those securities bask us at par.

Louis W. Taylor - Deutsche Bank Securities Inc.

Okay. And any other debt out that has that ability over the next two to three years?

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

No.

Louis W. Taylor - Deutsche Bank Securities Inc.

Great, thank you.

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

Sure.

Operator

Our next question comes from the lines of J. Habermann with Goldman Sachs. Please proceed.

Tom Baldwin - Goldman Sachs & Co.

Hey guys it's actually Tom Baldwin and I am here with my colleague Yohan Mohammad [ph]. One of the things that we have been seeing this quarter as too dramatic slowdown in sales productivity, but meanwhile do leasing spreads and core NOI growth seems to have remain pretty healthy. And someone on an earlier call today mentioned that the corelation between sales productivity and growth in operating income, at least over a shorter term horizon is not that strong. The question I pose is how long ago in sales productivity and sales growth remain at the press levels before it starts to have a more pronounced [ph] on your ability to drive rents.

Unidentified Company Representative

It's very fair question, J. very fair question. And it's not a quarter or two for the well capitalized company and that's for sure. Whether it's two years or three years or a year, frankly depends on the health of that particular retail. There is no question that some of the better retailers in particular are using this period of time and will continue to use this period of time, as the opportunity that haven't had to get into the better places.

Even though their sales have flattened down. And it's because they are well capitalized. It's because they're basically investing these days for the future. Those folks that can won't be able to and so to answer to your question is it's a whole lot shorter period of time. And really I think J., I mean it's hard for me that to be able to answer that question on an overall macro basis in the United States of America. But I know how to answer it, as it relates to specific properties that we're trying to do deals on. And that is really much more about dealing with those folks that are the strongest. And that have the ability to write-out cyclical changes in their businesses.

Tom Baldwin - Goldman Sachs & Co.

Thanks, Don [ph]. It's actually, Tom. I'm here with J. and Yohan [ph]

Unidentified Company Representative

Sorry, Tom.

Tom Baldwin - Goldman Sachs & Co.

No, it's okay. I have one more question, I guess I would direct this one towards Jeff. You usually have some pretty good color on cap rates. And I'd just like to get an update on your view with regard to two things. One, how much cap rates have moved to date, since I guess February '07 inter strips, inter space. And two, what market charter [ph] is with regard to when we could potentially see a stabilization and the upward movement, we've been seeing up rate in cap rates?

Unidentified Company Representative

Alright. Let me try to answer in this way. We buy data from Real Capital Analytics. And what Real Capital Analytics does for us is they provide us with cap rates for open-air strip shopping center in neighborhood and community center sales in United States. And then they sort out the sales that are in our target markets. And transactions volumes then lower the last six, nine, twelve months, but what that information shows is about a 75 basis points spread on average over the last couple of years between cap rates in our markets and cap rates in rest of the country.

That will remain pretty consistent for last two to three years. So that's kind of broadly speaking, when you get down to our markets, what we have seen and the handful of deals that have closed in the last three to six months and plus two, three and four deals what we did on in the last couple of weeks is for the better properties and the better submarkets and our target markets. People seem to be willing to pay somewhere between a 7.5 and an 8 end year unleveraged IRR. So, if you are underwriting the property and its power center or a newer neighborhood center where the bulk of the rent comes from a grocery store, drugs store and pads, this power centers and newer neighborhood centers generally grow 1% to 2% on an year over that 10 year period. So when you back into the cap rate you end up with cap rate, I call it, 6.5 to 7, which again stepping back and looking where 10 year fixed rate debt is from the life companies make some sense.

When you look at the assets that we like to buy that have an NOI growth of 3% to 4% on average over a 10 year period, the cap rate drops down into the high five below sixes. And I would say from the frothy period you mentioned at February '07 those IRRs are up 50 basis points or so. We actually saw some deals may be trade below '07 10% unleveraged IRR when some of the pension funds go really Hungry back in 2007.

And they are up year and out of 7.5 to 8. So, I again I think it's important to look at the IRR because not just the cap rate because it really depends on the growth on the asset, that's what we are seeing.

In terms of what is going to stabilize, like I said earlier in the call, that we've seen a bunch of stuff coming into the market in California. We placed three or four deals, couple of hundred million plus in the last week or so. We didn't get any of them. And there is still people paying that kind of 7.5 to 8 IRR. So, for the time being may be things have stabilized a little bit.

Tom Baldwin - Goldman Sachs & Co.

Okay. Thanks for that. And then I do have one final question. You mentioned you are using pretty conservative underwriting standards and looking at Florida. I'm just curious, can you elaborate a little bit on exactly what those assumptions are to the extent possible and also how do they compare versus the underwriting assumptions you utilized when looking at different regions in which you operate?

Unidentified Company Representative

Now, that's good question. I mean they should have mentioned this earlier. There is no question that everybody that's buying an asset today is scrutinizing an asset more carefully than a year ago. There is no question that underwriting standards have tightened. And I would imagine you will see that not only from the buyers but also no surprise from the wonders, right. Everybody is getting more selective and everybody is thinking through underwriting assumptions a lot more carefully.

We think we've always done that. As it relates specifically to the differences in South Florida versus the Bay area and California, where things are still pretty healthy. I have the best example to give you as the way we looked at the underwriting on Del Market Village which reduced spot. And we underwrote small shop runs on average of that property, end of 15% below the level that the owner had achieved on 11 or 12 deals that they have done a year and a half or so before we bought the asset, or what's in the year and a half or so before we bought the asset.

We assumed a lot slower lease up pace. We assumed when leases come up to a lot more tenants vacate the normal and we also held our market road growths flat for several years and tell everything kind of settles down Florida. We are not necessarily being that tough in some of the other markets where we still think that leasing velocity, we still think sales growth and we still think pressure to get into the better centers.

Tom Baldwin - Goldman Sachs & Co.

Okay, great. Thanks a lot guys.

Operator

And next question comes from the lines of Jeff Spector with UBS. Please proceed.

Jeffrey Spector - UBS

Good morning. Could you provide an update on the health of sort of local tenants to mom and pop, and your leasing plan with them I guess going forward the next 12, 24 months?

Chris Weilminster - Senior Vice President-Leasing

Hi. This Chris Weilminster. Some of the franchise driven retailers we've seen, some challenge with some from of the franchise operators, but aside from that most of the mom and pops that we've seen, which tend to maintain from 20% to 30% in their centers, I have seen some good success. I think a lot of that has to do with the anchor tenants that we have in our centers driving strong traffic through the properties.

So we've not really seen too much of an outflow of our small shop retailers, some of the recent openings that once we had in Bethesda has far exceeded what our initial sales opening expectations were. So, again I think it gets beck to the fundamentals where our core real estate is located. And it's helping drive this small shop tenant sales. We certainly do here in treasury markets where there is a lot more trouble, where there is more vacancy in small shop, we're just not seeing the sales. But on the mom and pop tenants that we tend to have in our centers were very diligent about the underwriting from our capitalization standpoint. They tend to be pretty well capitalized and we're doing... we're very happy with what we've seeing so far.

Donald Wood - President and Chief Executive Officer

And the only the other thing I just want to add to... I don't want, I mean Chris is talking about specific things that he is doing and working on day in an day out. And if shift that I look at the whole portfolio, there is no question that there is slowing in the growth of sales across the board throughout the portfolio, if you look in total. And which makes it more important to do the things that Chris is talking about with respect to staying on them and staying tight. But, yes, there is... it's the question was that before, whether it's mom and pop frankly regional guys or some of the anchors. I mean you're absolutely seeing the consumer spending impacts on sales of tenants.

And to this point and even looking forward, we don't see any disproportionate amount of stress among the mom and pops. These are the others in our particular centers. That point is really right. But still you're still going to see a slowing of sales generally throughout the portfolio, I would suspect.

Jeffrey Spector - UBS

Great.Can you talk a little bit about operations, is there any cost savings that improve your bottom line over the next 12, 24 months?

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

Yes. I think that's right. We have absolutely as a company built up over the past couple of years of invested in lot of areas. Some of have really resulted in lot of improved returns that you seeing, some of that didn't worked out as well. And so when we look out forward, we are very diligent on trying to be very tight and keeping us flattened organization as we can. And at a time like this when it happens all the time but particularly the time like this we make some up decisions as it relates to the investments, investments in people, investments in just like investments and properties. So, yes, we are going to try to slowdown the growth in what it costs to run the place probably back it up a little bit.

Jeffrey Spector - UBS

And on the redevelopment, do you still expect stabilizations of $75 million to $100 million a year?

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

Yes. I think that's a good estimate that doesn't mean that in any particular year it won't be there. But as you are looking out for models, the value of this company in terms of where we have money to spend and everything else. That's a good long-term run rate.

Jeffrey Spector - UBS

Final question, Paul, I haven't seen any thing new on Tysons, is there any update there?

Unidentified Company Representative

You are talking specifically about the metro to go through Tysons?

Jeffrey Spector - UBS

Yes.

Unidentified Company Representative

There is a lot of update sometimes, what's updated on Monday is reversed on Thursday and back on again to Wednesdays afterwards. So, our only property there is really at ground zero. It's a great piece of land called Type 7 [ph]. The... all I would say is the timing of getting anything done in terms of a metro there is certainly pushed into the mid-teens, same kind period like that. And we are sitting there with... at ground zero when those plans get specified. In the meantime making a lot money Type 7.

Jeffrey Spector - UBS

Great. Thanks guys.

Unidentified Company Representative

Thank you

Operator

The next question from the line of Michael Mueller with J.P. Morgan. Please proceed.

Michael W. Mueller - J.P. Morgan

Yes, hi. Just one another question on acquisitions. I think Jeff you mentioned, you were seeing more product. But due you think we'll actually begin to see more trades clear at this point? And just if you look over the next 12 months, do you think you will be putting more money to work than you have been over the past 12 months?

Jeffrey S. Berkes - Executive Vice President and Chief Investment Officer

It's really hard to say. I know it's not kind of answer you want to hear. One of the other things obviously we are seeing is deals take a longer to get done. They don't always get done with the person that initially ties up the property. There is more property on the market again particularly in California. So I would expect to see more deals get done over the next six months as opposed to the last six months. And we hope that we can do more acquisitions. But we're going to it also makes sense and like Don said I think it his prepared remarks, property in the markets where we want to invest and the type of properties within those markets. So we want to buy or still or to combine and in my opinion still relatively expensive. So I can't really tell... I can't really answer... I can't give you a direct answer on that.

Michael W. Mueller - J.P. Morgan

Yes. May be as a follow up, is part of the issue more on the pricing side that you're still being more significantly update or type of product you're looking for hasn't necessarily flowed in terms of the market, in terms of being available.

Unidentified Company Representative

It's a combination of two. And in terms of getting out data, that was clearly happening in '07. I think that margin has narrowed somewhat and like I said, the first buyer that's tying up or getting a deal isn't always getting it done. And hopefully, we'll hang around the hoop and some of those would bounce back to us.

Michael W. Mueller - J.P. Morgan

Okay, thanks.

Operator

Our next question comes from the line of Jim Sullivan with Green Street Advisors. Please proceed.

Nick Vedder - Green Street Advisors

Hi, this is Nick Vedder here with Jim. Just, just along with the broader market that your occupancy has been trending downward. Can you comment on where the vacancies are coming from in terms of market. And is the fallout more on the large boxes, or is it with the small shops space?

Unidentified Company Representative

Yes. I can tell you it across the Board, Nick. I have looked at it hard. It's... we are not talking a lot, but we talking 30 basis points. I think as an example this past quarter. And that was spread out all over. That was one box, and in Richmond actually. And then a bunch of smaller things throughout the portfolio, and basically, all markets except for the West Coast which has truly stayed stronger than any other.

Nick Vedder - Green Street Advisors

Great.

Unidentified Company Representative

And that's what I would expect to see going forward. I mean there will be increased vacancy as these lease termination fees are paid and we get properties back, all of which we want. The way we look at it, short-term hit, for long term growth.

Nick Vedder - Green Street Advisors

Thanks.

Operator

Our next question comes from the line of Rich Moore with RBS Capital [ph]. Please proceed.

Richard C. Moore II - RBC Capital

Hi good morning guys. Actually I am still with RBC. We hear a lot about the tenants that are having trouble. But who are back dealing with. I mean either names or categories, I mean who are the tenants you think that are making some progress in this environment?

Unidentified Company Representative

Hi, Chris. Certainly, some of the situations where Don mentioned, we've got Home Depot issue in Flourtown PM. And one of the things that we've always been very good at is looking at space that may be functionally obsolete in our vision in figuring out a way to help right size in existing retailers. So we are very focused right now, whether there is way to take our existing grocery and get them my sized.

Unidentified Company Representative

And that's by the way is trend throughout. That's a very, that was a specific example, but that's a broader answer grocers absolutely are continuing to expand, continuing to move along.

Unidentified Company Representative

Now, that same theme runs through all the other categories. Do we have a retailer that's in a property? I mean it will align with a Ben Franklin store. I am a local operator that I think had tenants lot [ph] stores in the market. And when we did that redevelopment that was a player that was in 10,000 feet. They wanted to be 20 somewhat thousand square feet and we helped them. So, you internally first and then you look at some of the national players that won upgrade in location like Donse [ph]. We had some strong success where we taken retailers that had been in secondary locations. And been able to gain an interest in relocating and upgrading and position the markets some stuff, whether is offbeat stuff or Rockville Pike or just off of Rockville Pike where they want to have Rockville Pike presence with three assets here. We have got a real good lock on providing those opportunities so --

Unidentified Company Representative

The other one category Chris didn't mentioned is banks with all the stuff going out there in the financial community, there are absolutely weaker players for sure lot of them. But whether its Banc of America or couple of others that want to take advantage of that. We are seeing them take over spaces, that they of one of their competitors in areas and I just looking down our specific results for this quarter and last quarter and there is no question that that is a trend.

Unidentified Company Representative

Sure, and then the only other point that I'll make is there is other categories. We've always been a big fan of the health club category. We believe that they bring in a daily draw, and when the opportunity is right, where we've got the right parking there some interesting things we're working on now right now is some health club operators that were very comfortable with where if we can put that together that would work in. And then again I think it's the stronger retailers in categories. That we're always working with whether it's the Bed, Bath, the Michaels, Barnes & Nobles, you just go down the list of those different categories players and we're constantly in touch with them and making sure that we have our opportunities. And as well as I said [ph] we work very hard and diligently to get those transactions done and that's been what we've always been able to do. We've been pretty successful at it and there is no doubt in my year mind that we'll continue to do that.

Richard C. Moore II - RBC Capital

Thank you, do you guys see any of these... any international tenants that hit your centers and it's a big topic of conversation for the mall guys. I am curious if any of that kind of constitute your centers as well.

Unidentified Company Representative

Well I was going to say and then Don [ph] will add on here. But so much of that is driven, most of the international players are south group players. So when you look really at our portfolio. There may be 15 assets within our portfolio that may be lend itself to where meet the needs of our south group players. Certainly at Santana, we are very pleased with the success that in our ability to get a deal with H&M there, as well as their success over the past nine months at the project. That's worked out really well Third Street Promenade, in Santa Monica we have got some interesting things we are working on and some international retailers.

There is no question that I think that will be certainly for the mall guys a great answer for some of the trouble that's going on with some American retailers right now and as those international retailers, as they get more success in those A plus malls, I think that will lend themselves to absolutely look at alternative opportunities whether it's the lifestyle redevelopment or the lifestyle projects like we have or some of the main street opportunities we have. So I think it will be learning curve, but there is no doubt that I think that's that they are here to stay and they will actually improve. They will force the American retailers I think to get better in some categories and how they get merchandised to market quicker.

Richard C. Moore II - RBC Capital

Okay, very good. Thanks guys

Operator

Our next question comes from the line of Nathan Isbee with Stifel Nicolaus. Please proceed.

Nathan Isbee - Stifel Nicolaus & Company Inc.

Hi, good morning. How big is your tenant watchlist right now?

Unidentified Company Representative

About 3 inches to 2 inches, what do you mean on that watchlist. We have mains on that list that are small folks, all the time. Is it significantly bigger than it was a year ago, Nate. It's a little bigger, but not significantly. Frankly, we went though some of the toughest ones for the starter and that was Tower and sold out in comp [ph] USA and compared to that it's not even as big. But generally on the smaller shop, these folks that we are looking at, but not, take a look at our top 25 in our 8-K, make sure you understand that where we are, I know you understand where we are. But you understand where the value comes from and make your own assessments that way.

Nathan Isbee - Stifel Nicolaus & Company Inc.

Clearly, it's not going to... we don't expect any huge occupancy declines on the margin there, I was just trying to get a sense?

Unidentified Company Representative

Yes, I think you should plan on small occupancy declines, I think that trend that was asked about before we will continue. And we get inevitable in the markets that we're, what's going on in the economy right now.

Nathan Isbee - Stifel Nicolaus & Company Inc.

Okay. To book a property, we're hearing a lot about stuff [ph] for the vacancy. Have you seen any store closers there, since you started to under-write since you acquired it?

Unidentified Company Representative

We have, we have got a couple in there. Both by the wake that happens were under-written that way.

Nathan Isbee - Stifel Nicolaus & Company Inc.

Okay.

Unidentified Company Representative

Yes, we applied a pretty conservative vacancy rate and pretty conservative, we are going to leave the property when our lease comes up when under-write it, like I mentioned earlier.

Nathan Isbee - Stifel Nicolaus & Company Inc.

Okay. And just trying to get your sense of how the acquisition market is involving like you spoke about. Do you see any materially different pricing between the book and the next product acquisition understating it's not a full apple-to-apple comp?

Unidentified Company Representative

Not really. Again, if you want to better stuff, you have got to pay for it. So not materially different and going forward I think that depends on where interest are headed and what happens with the supply institutional capital which is really driving the lot of the pricing today. So not materially different.

Nathan Isbee - Stifel Nicolaus & Company Inc.

Okay. And just one last question, Don you had mentioned before that you all have to least quality in this environment and the value could provide in maintaining your numbers. Can you speak a little about any non-standard clauses you would find in a Federal lease that could give you a leg up here.

Donald Wood - President and Chief Executive Officer

Yes. I'm not sure it's non-standard. I just think it's... we're in a better position to negotiate it. And I think frankly the Home Depot that we talked about at Flourtown is a perfect example. I mean that they had a requirement to build out that store. And they had a requirement to now only build that store but to get the store opened. And for one day. And when you think about that why in a world would you fight for at least provision that's we deal upon for one day, what good is opening in one day.

It got to be opened one day, you got to build out the store and once you have that capital in and that requirement to put that capital in, it's a whole lot better for us. Now that is not something that any retailer wants to have. They want the flexibility to be able not have that covenant they wanted it. And the only way we got that done is because of the quality location and I think that's probably a perfect example.

Nathan Isbee - Stifel Nicolaus & Company Inc.

Okay. Thank you.

Donald Wood - President and Chief Executive Officer

That's what I'm thinking there.

Nathan Isbee - Stifel Nicolaus & Company Inc.

I appreciate it. Thanks.

Donald Wood - President and Chief Executive Officer

Alright man. Take care.

Operator

There any further questions. I would now like to turn the call back over to Andrews Blocher for closing remarks.

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

Great. Thanks everybody for joining us. We look forward to seeing you next quarter.

Operator

Thank you for your participation in today's conference. This concludes the presentation. Everyone, have a great day.

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