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Federal Realty Investment Trust (NYSE:FRT)

Q3 2012 Earnings Call

November 2, 2012 2:00 pm ET

Executives

Kristina Lennox – IR Coordinator

Donald Wood – President and Chief Executive Officer

James Taylor – Executive Vice President, Chief Financial Officer and Treasurer

Jeff Berkes – President West Coast

Analysts

Jeffrey Donnelly – Wells Fargo Securities

Craig Schmidt – Bank of America

Michael W. Mueller – J.P. Morgan Securities Inc.

Quentin Velleley – Citigroup.

Nathan Isbee – Stifel Nicolaus & Company Inc.

Cedrik Lachance – Green Street Advisors

Michael Jason Bilerman – Citigroup Global Markets Inc.

Operator

Welcome to the Third Quarter Federal Realty Investment Trust Earnings Conference Call. My name is Lourisa and I’ll be your operator for today’s call. At this time all participants are in a listen-only mode, later we’ll conduct a question-and-answer session. Please note that this conference is being recorded.

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

Kristina Lennox

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

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

Our third quarter 2012 supplemental disclosure package provides a significant amount of valuable information with respect to the Trust’s operating and financial performance. This document is currently available on our website. Certain matters discussed on this call may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements include any annualized or projected information as well as statements referring to expected or anticipated events or results. Although Federal Realty believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, Federal Realty’s future operations and its actual performance may differ materially from the information contained in our forward-looking statements and we can give no assurance that these expectations will be attained.

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

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

Donald Wood

Thanks, Kristina and good morning, everybody. And first of all let me apologize to you for what is effectively a three hour delay in getting our conference call off today, we did had some problem with the conference call provider, we’re not sure whether it was Hurricane Sandy related or for that matter, Andy Blocher is advertising the call.

But we are glad that you’re on the phone with us, now at this point. So let me get going. In a few minutes, we will hear from Jim Taylor in what is his first investor conference call as CFO of Federal. There is absolutely no need to go easy on him during the Q&A session today.

And I could be happy with the way he has tackled the responsibilities in the past couple of months, it’s a great start, Jim. But before you hear from him let me go through a very strong third quarter for Federal and what we think it means for the balance of this year and for next.

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

So $0.06 of this quarter’s earnings to be considered unusual or one-time in nature; of course, we will continue to make my case of lease termination fees on an ongoing and normal part of our business, but this is a big one and should be considered when thinking about our run rate.

Okay, leasing, primary driver of this record quarter. Like the first half of the year, third quarter leasing volume was again off the chart in terms of our historical production. A 100 deals more than 0.5 million square feet of comparable space completed in an average rate of $28.43, a 11% higher than the $25.63 replaced, that now makes over 1.3 million square feet of deals in the first nine months of 2012, more than most year’s 12 month production and more space than we’ve ever leased in the nine month period ever. All that volume equates to $4.7 million of incremental rate.

Rent is on a comparable space mind you, not just newly developed retail space. That was contracted just these first nine months compared with the previous leases. Many of those deals are already benefitting 2012 results and all will certainly benefit 2013 in future years.

You might have noticed that in total, the 51 renewals that we did during the quarter actually generated 1% less rent going forward than the previous deals. No trend or macro-issue here, just one of those 51 leases with a big roll down that skewed the results and that was with Barnes & Noble and Willowbrook shopping center in suburban Philadelphia.

We decided to renew Barnes for five more years significantly less rent because of their strategic importance at that particular shopping center at this time. Without that deal renewals rolled out 3%. And you know those decisions of leasing decision happen once in a while. While we may have a similar impact on one in the fourth quarter or in any quarter along the way you have to look in total, I mean looking at the overall leasing position and products portfolio, frankly I couldn’t be more bullish.

With all that unprecedented level of activity occupancy can help it to go up and it sure did. We’re now 95.1% leased and 94.2% physically occupied both up substantially from last year and from the quarter ago. Let me give you a bit more detail, there were five big anchor deals done during the quarter, but none is bigger than a new state-of-the-art Giant Food Grocery store at Flourtown Shopping Center suburban Philadelphia that with a possible by the sale of certain Safeway’s, Genuardi stores to Giant division of Royal Ahold.

That same sale when compared to the all three of our Genuardi’s locations allowed us to not only upgrade Flourtown at a very significant rent premium, but also to maintain a first class grocer at our premier Wynnewood Shopping Center and to give us the opportunity to significantly transform Ellisburg shopping center in Cherry Hill, New Jersey with a great higher end specialty grocer and by the way collect of $6 million termination fee from Safeway.

We conservatively estimate $20 million of immediate property level value creation because of these transactions, and $40 million over time given the deterioration Genuardi’s was experiencing. Some just doesn’t happen at lots of shopping centers and it’s part of the reason we think that lease termination fees should be viewed as a regular part of our business. Our leases are generally very strong from the landlord’s perspective.

And in our locations they tend to give us a better chance to unlock potential that wasn’t reachable the day before. I also want to mention one other under the radar initiative of the company that is really yielding some strong results and contributing meaningfully to the bottom line.

It’s an ancillary income program that has been expanded from simply the Halloween and other seasonal temporary tenants to such initiatives as an aggressive paid parking program, and expanded number of our properties and very recently our solar energy program that’s being rolled out at eight of our shopping center properties in the Northeast.

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

In the last couple of months, we’ve been working on a couple of shopping center deals as I look like, we’re going to make, and assuming the balance of the due diligence period goes as expected, we should close the both by the end of the year.

We’ll obviously share a lot more information on those centers after closing, but from a big picture perspective the two centers combined if both deals close would allow us to put nearly a $150 million to work for over a 0.5 million square feet of space. In addition, with Jim Taylor heading up the function on the East Coast and Jeff Berkes on the West Coast, we’re looking at a lot of products, but still find real estate in our market that have a clear path of value creation to today’s prices.

But we’re doing our share, and I think we’ll be doing more. In terms of an update on the three major development sites that are under construction, let’s start on the West Coast at Santana Row. I went back to look at my second quarter comments about Santana and they also apply.

We’re moving ahead on schedule and on budget at Misora which is the latest residential building with a $75 million budget, a 7% plus cash-on-cash expected return in a 2014 initial stabilized year.

Looking forward much more to come as we continue to plan for additional retail, additional office and additional residential investments totaling somewhere between $225 million, $250 million may be even a bit more on the Santana Row site.

Second, across the country, just outside of Boston, Assembly Row is under construction. AvalonBay is progressing on their residential buildings. We began construction on the large building that will house, among other things, a parking garage and theater. And the NBCA track work is underway, preparation of the new T-Stop. We expect the 2014 opening on this first phase, with the opening of the new T-Stop trailing by 6 to 12 months.

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

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

As you can see lots going on for Federal over the next few years, $0.5 billion of development spend for the initial phases of existing retail destinations and we have controlled for years and operating platform firing on all cylinders with leasing momentum that is particularly strong and both recent acquisitions and new ones coming with leasing our redevelopment opportunities to exploit and then open an aggressive eye for more, we’re proud of our performance and what is still a very uneven recovery. At this point, let me turn it over to Jim Taylor to talk about the balance sheet, earnings guidance and some initial impressions of the opportunity and risks that we face. We’ll then open it up to your questions and our entire senior team is here and available to address them. Jim?

James Taylor

Don, thank you. Thrilled to be on board and part of such a great team. First, I trust that all of you on the call and your families have come through Hurricane Sandy, okay. At Federal, we have all survived an attack and aside from some minor sustained roof damage in a couple of our sites, we came through it largely on scale.

All of our centers are up and operating and again any damages minor. Before I address financial results and outlook, I wanted to share my perspective with someone who knew the company as an outsider for almost 14 years, has now spent the past 90 days as part of the team.

First I’ve been thoroughly impressed by the quality and depth of the people in this company. Granted it does take a great portfolio of rental assets to produce organic growth, that is as predictable as it is impressive, however our leasing operational and legal team led by Chris Weilminster and Dawn Becker know how to drive the very best performance from our assets.

And in theory our merchandizing mix or week leases can recap at even a very best location, when you see these teams operate out close, you realize that the Genuardi’s lease team fee at $6 million is no accident nor as a resulting value creation opportunities that are available to us at Ellisburg, Flourtown.

They are the natural outcome of that singular focus on driving performance. I have also been impressed by the quality of our information systems and our finance team led by Melissa Solis. Of course, having known the company for 14 years, I expected to find strengthen this organization, but the quality and depth of this team and his leadership has exceeded my highest expectations.

One surprise that has really struck me since joining the team has been truly the universal spirit of finding ways to drive shareholder value, whether it’s leasing, legal leasing, tenant coordination, redevelopment, legal, expense management et cetera the mission within the company is clear and embraced by all on the team.

Looking forward for me the key challenge will be sourcing and capitalizing on install acquisition opportunities that are accretive from a long-term growth perspective to our core portfolio. Our pipeline is active as Don mentioned and we believe that there maybe opportunities for us to continue to identify assets like Plaza El Segundo and Montrose Crossing our two most recent acquisitions that fit our criteria.

These are assets in locations where we are confident that will always be strong relative tenant demand. Rest assured, we will maintain our disciplines as we evaluate potential acquisitions, but we’re very focused on making sure, we turn over a lot of stones. Hopefully you’ve all seen our recent press release announcing the addition of Harold Nafash to our acquisitions team reporting to Barry Carty.

I am extremely excited about the contributions Harold will make to our team particularly in the Northeast region. We are up for the challenge.

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

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

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

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

This quarter, we achieved 11% increase in cash balance as Don mentioned and over the last four quarters, we’ve averaged 12% increase or our same-center lease percentage at quarter end increased to 95.1% from 94.2% a year earlier. We should expect to see the benefit of these newly signed leases over the next few quarters.

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

The acquisitions of Montrose Crossing and Plaza El Segundo has drove the balance of the increase in property PUI which when you factor and that assume drove approximately $1 million in FFO benefit. Both of these acquisitions have outperformed our initial acquisition underwriting and we are vey pleased with our operating performance to-date.

Our G&A expense increase of $1.6 million was driven by the $2.1 million of transition cost, the CFO position I mentioned, offset in part by lower transaction cost incurred during the quarter, increases in interest expense due to the higher average balance during the quarter were largely offset by lower rate.

Turning to the balance sheet; during the quarter, we raised an additional $52 million under the ATM program at an average price of $107.43 per share and refinanced $175 million of 6% notes with $250 million of note that a coupon of 3%; these transactions leave us in a very strong and flexible capital position with approximately $147 million of cash on the balance sheet at quarter end and $400 million of capacity under our revolver.

We remain in very solid shape to match fund appropriate acquisitions and plan redevelopment and development activities through the capital markets. We’ll keep our balance sheet metrics at appropriate levels and thereby provide ourselves maximum flexibility.

With our strong year-to-date performance and visibility on the remainder of the year, we increased the midpoint of our 2012 FFO per share guidance to a range of $4.29 to $4.31 per share. Looking forward further, we feel very good given the quality and stability of our core portfolio and strong leasing performance to provide visibility on 2013 FFO per share in a range of $4.50 to $4.56, which adjusting for the impact of the Genuardi’s lease term fee and the CFO transition represents a solid 7% FFO per share diluted growth at the midpoint.

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

From a capital standpoint in addition of the cash we currently have on our balance sheet and capacity in our revolver, we expect opportunistically cap into the equity and debt market with issuances under our ATM and refinance of our senior notes which mature in December of 2013, all this will be accomplished again with keeping an eye toward strong credit metrics and our balance sheet flexible enough to find appropriate acquisitions as well as $250 million to $300 million of plan development and redevelopment spend as detailed in our 8-K.

In sum, we had a terrific quarter, have a positive outlook for 2013 and a balance sheet with flexibility to fund our growth. We look forward to seeing you all in San Diego in a little over a week.

And with that operator, we’d like to turn over the call to questions.

Question-and-Answer Session

Operator

Thank you. We’ll now begin the question-and-answer session. (Operator Instructions) We have a question from Jeff Donnelly from Wells Fargo.

Jeffrey Donnelly – Wells Fargo Securities

Good morning guys and good afternoon, I should say.

Donald Wood

(Inaudible)

Jeffrey Donnelly – Wells Fargo Securities

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

Donald Wood

No, I think and I’ll ask Jim or Melissa. I think it’s going to be any sort of job sooner from frankly and so we didn’t have the cost that went into the fourth quarter and secondly into the early part of next year. I think that’s a big piece of it.

James Taylor

That is most of it, Jeff. And sum we were about a penny lower than we thought we would be in the estimated transition cost.

Jeffrey Donnelly – Wells Fargo Securities

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

Donald Wood

Jimmy, I know you went through that in the second. But with respect to the Japanese, a bigger point here that’s irrelevant now and for 2013 but also for 2014.

Jeffrey Donnelly – Wells Fargo Securities

No, it’s a follow up.

Donald Wood

Great, as I move this stuff, there is really three or four categories that you got to think about. One is as you’re intimating, loss rent, right. There is a Mid-Pike shopping center that’s being taken down or that was existing stream of income continues to delude effectively as you head out through the development. That’s number one. Number two, the same time there is heavy marketing expenses that are necessary in order to introduce the world to the new product both at Mid-Pike or all at Mid-Pike, at assembly and at Santana.

In addition to that there is demolition, when we physically not down the building there is costs that come from that. And obviously as we get out into 2014, it gets a little money or because as capitalized interest does it match up exactly with the new rents coming on. You’ve got further dilution there from an earning perspective. Obviously all of these things are very value additive as we move it from one to the other. So I don’t know, if you want this specific numbers, how you want to get to it on this call Jim, Melissa, you’ve got the side. But those that’s the concept I’d like you to think about for the next two and three years effectively.

James Taylor

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

Jeffrey Donnelly – Wells Fargo Securities

Okay, that’s helpful. And then just maybe Don, I would like to switch gears, on Assembly Row, you mentioned the IKEA site, is there a timeframe is such as a big deadline when you’d have to go after that property? Or is it not that hard and fast at?

Donald Wood

That’s a good question. In the negotiations we’re in right now, we’re pretty comfortable that we’re going to have until the first part of 2013 to kind of to decide whether that we want to do there. And as you can imagine, Jeff, where we’re talking to folks, it’s got to be entitled. There is a lot of issues there that we want clear visibility on before we were to do anything on the sites there. Yeah, but at the end of the day, it doesn’t make sense as a standalone investment, I just had just as soon as somebody else do, what they are going to do there. And believe me, the base of a brand new key [stop].

Somebody, whatever it does, or somebody else is going to be developing on that 12 acre site. But yeah, we will be into the first piece of 2013 before we have that visibility.

Jeffrey Donnelly – Wells Fargo Securities

And then are you able to give us a rough sense of how the lease deals are getting structured there? I know it’s early, but just in terms of the other rents achieving, which you are hoping, yes this pickup clauses and how are things sorting out?

Unidentified Company Representative

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

Jeffrey Donnelly – Wells Fargo Securities

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

Unidentified Company Representative

Because I think in I am sorry, I was actually thinking of something else when you said that. I got a couple of things to talk about on that. But basically that is a real it’s a real complicated deal that’s going to be. And basically unlocking value there and Jeff and his team, it’s a great team. And they very well maybe able to get to the value that they need to get to. They are going in prices, certainly going to require them to get to that values, to make any sense. And when we kind of look at what has to happen to get their best kind of price it was too steeper, frankly.

Jeffrey Donnelly – Wells Fargo Securities

Okay, thanks guys.

Unidentified Management Representative

Yep.

Operator

Craig Schmidt from Bank of America is on line with a question.

Craig Schmidt – Bank of America

Well, good afternoon. I was just wondering that you know Pike & Rose, I mean we will be talking to for a while and now are starting to really be eponymous. I wonder, what has changed when you know you first started the mission what you’re going to do for that property versus what you’re doing today and what have you learnt given the no, you have some potential other large redevelopment efforts that are coming up after Pike & Rose.

Unidentified Management Representative

Well, Craig, when you sit back and you think about the pieces of land that federal has inherently land banks in its portfolio, there really isn’t a better one out there than Pike & Rose. And so one of the things that we set up early on, and I think it’s still the right thing to do, is the spacing of that project.

And so, you know, taking off biting off this first piece of that while keeping the rest of it operating makes a lot of sense in terms of balance and risk mitigation. I think as we get into the leasing of the residential piece particularly there, which was hard to we won’t know that for sometime. What we are finding is that the demand we’re getting for additional residential maybe even condo as that market starts to comeback in hotels is higher than we thought it was going to be at this stage.

And so, I don't have a good word on economics of those things yet, because we're in that those initial stages. But I think everything that we’ve learned have validated the quality of the real estate in the piece of land that that we have. I don’t like what we’re doing in the first phase. The tricky part for us is going to be how to grow it all out. Do we bring in a partner with us to get there over what period of time do we do that and what particular uses such as a hotel, such as for sale versus for rent in some of the sites; that still have to be vetted.

So in terms of where we thought we would be, we are. As you say, it’s upon us and in a way we go. But when you look at that piece of land coupled with the assembly piece of land, coupled with after the Plaza El Segund and the point, coupled with Santana and there is a large land bank here; that that has to be vetted in a very reasonable way and a company that it’s primarily an operating company and we’ll always be so.

So that balance is what you’ll be hearing more about and as we’ll decide about over the coming quarters and years.

Craig Schmidt – Bank of America

Okay, thank you.

Operator

Mike Mueller from J.P. Morgan is online with the question.

Michael W. Mueller – J.P. Morgan Securities Inc.

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

James Taylor

Yeah, Mike, thanks for clarifying that. There are no acquisitions and of course those materialize as we hope we’ll provide further guidance at that point.

Michael W. Mueller – J.P. Morgan Securities Inc.

Okay. And I know you mentioned tapping, or using the ATM to tap the equity markets, can you put any parameters around that at this point?

James Taylor

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

Michael W. Mueller – J.P. Morgan Securities Inc.

Okay and even…

Unidentified Company Representative

Mike, can I just add one thing to the acquisition comments that you asked about us.

Michael W. Mueller – J.P. Morgan Securities Inc.

Sure.

Unidentified Company Representative

This acquisition that we're making is going to be really good stuff and really good stuff expenses, so it is true the guidance does not include acquisitions, but it is not like we're going toward the type of product that is going to be extremely accretive from an FFO perspective if you will in the early years normally. I just want to make that point.

Michael W. Mueller – J.P. Morgan Securities Inc.

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

Unidentified Company Representative

No, we're not marking them yet, but we are looking at certain asset to think about that and basically that’s really about doing a lease thing and making sure that those properties aren't in best shape to be disposing. So, little may be more to say on that in future calls, but not right now.

Michael W. Mueller – J.P. Morgan Securities Inc.

Got it. And last question at assembly you rather offer couple of tenant needs at Brooks Brothers is on there maybe a restaurant or two. Is the Brooks Brothers is that in outlet and is the focus that which you're trying to lease on the retail side still outlet oriented?

Unidentified Company Representative

Absolutely, absolutely; thrilled with that frankly. This is combination, this is going to be new product, its outlet with restaurants, big theatre and people living above it. So well this is we can tell from the supply-demand characteristics that that we're doing, we never build in the right product, but this is pioneering to some extend in terms of that merchandising. So that’s where we're working through heavily right now that’s were Brooks is, that’s what Chicos is, that’s with the other conversations that we are having with tenants and negotiations are, so you should absolutely expect to see basically an outlet mall with the addition of resident, great restaurants some service and residents living above.

Michael W. Mueller – J.P. Morgan Securities Inc.

Got it. Okay, thank you.

Operator

Quentin Velleley from Citi is online with the question.

Quentin Velleley – Citigroup.

Hi, good afternoon.

Donald Wood

Hi.

Quentin Velleley – Citigroup.

Just in terms of acquisitions it seems like the sort of more confidence and enthusiasm that you can sort of do more deals and the appointment of Jim and a new acquisition’s manager in the Northeast. However my understanding is that the pipeline of high quality assets is actually pretty small and yield firm and if not getting firmer outside of those two potential deals that you spoken about that you’re looking at the moment what can you sort of tell us about the acquisition pipeline for better quality assets?

Donald Wood

I think, I’m going to jump in, in front of you Jim or in front of your Jeff whoever going to say something about that in that. And first of all to completely agree with you Quen, I completely agree with you, with your characterization of limited supply and of the stuff that we would want and a firmer environment not a loser environment in terms of being able to get that, having said that this isn’t it’s not a business that should turn on in the public company in our business plan that’s a turn on and turn off at your leisure.

And so by the time things do turn this is about doing the hard work that undercover work the digging up work now it’s about making sure that we have the right team in place in a guy like Jim in a guy like Harold oh, boy I hope you do you do diligence on him because I think it’d be impressed with the guy that we got there. So that during that regular process we do want to over you will unlock an opportunity or two or three here but it’s not because of as you suggest and overall macro losing the environment and increasing supply that we see coming that made those moves obvious.

James Taylor

Yeah, and Quen, I would just add this is not a quantity game. This is a quality game, as you point out. And as Don alluded to there is a lot of prospecting work that we are doing to make sure that were in front of the opportunities as they arrive, but it’s difficult to predict what that will be. I just think we’re, what we’re really focused on is making sure were in a position to capitalize them as they come available.

Donald Wood

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

Jeff Berkes

Yeah, I don’t know there is any difference in what you guys have said in and how you started to Quen, I mean it is very difficult to find kind of assets we like where we can get comfortable and an ability to grow NOI over time. I do expect we’re having a number of conversions like Jim and Don both said we are always sort of scratching and clawing out here to find whatever we can find. And we’re having some good conversations right now, but nothing to talk specifically about at this point.

Quentin Velleley – Citigroup.

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

James Taylor

I don’t, I don’t, I think what’s really impressed me as I alluded in my remarks are really the mission of the company is very clear and it is embraced by all on the team. Our retail can’t be characterized by particular type of asset or class of assets, but there is a common underlying theme and that is that we like own location where we’re confident tenants to be there that’s the simple formula, and so whether that’s a three retail asset or a small grocery anchored community center or a super-regional power center or big box center, again that’s kind of the underlying theme and I think that the results kind of continually speak for themselves as you look at how the companies performed. Our performance is not only outperformed, we are consistent in that outperformance, so hard for me coming in as the new guy to suggest that the company ought to be doing anything differently Quentin.

From a development and redevelopment perspective again it all ties into the same theme, which is, these are locations, where we have good belief in terms of what the demand will be there. I think we are seeing it materialized in Assembly clearly, at Pike & Rose and obviously at Santana in terms of the future developments that we have ongoing there. So again my addition of the company is not been one to really change that focus at all, if anything I just try to extenuate what we are doing here in the eastern half.

Quentin Velleley – Citigroup.

Okay, thank you.

Operator

Nathan Isbee from Stifel Nicolaus is online with the question.

Nathan Isbee – Stifel Nicolaus & Company Inc.

Hi, good afternoon.

James Taylor

Hi.

Nathan Isbee – Stifel Nicolaus & Company Inc.

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

James Taylor

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

Nathan Isbee – Stifel Nicolaus & Company Inc.

Okay, thanks. And then as you look at the possible opportunity on the IKEA, can you talk a little bit about your potential competition there, is there anybody looking at that beyond the retail use and I guess do you see yourself given that you control rest of the property possibly being able to justify paying more given some synergy that we can see?

James Taylor

Am I negotiating with you now that was going on in this…

Nathan Isbee – Stifel Nicolaus & Company Inc.

Yes, I have a friend that are out there so.

Unidentified Company Representative

Are you from IKEA?

James Taylor

The…

Nathan Isbee – Stifel Nicolaus & Company Inc.

Actually, Jim Taylor he is still representing me…

James Taylor

Nice, Nathan, thank you.

Unidentified Company Representative

Then look I don’t personally have specific knowledge of who else is involved in the process per se, because it is a quite process that if you will with IKEA. What I expect that there is other demand for that site and other people with other uses absolutely I would, are there some real impediments to doing that from the standpoint of entitlement that would make that hard to do, sure, but those are just developments assumptions that have to be made and underwritten.

So I was clearly belief there are other folks there. In terms of us, doesn’t make the most sense for us yeah, it probably does, but we own a lot of land there. We’ve got a lot of opportunities to continue to grow there. Without owning that 12 acres of land, so we got through and as you can imagine in the negotiations in any company within the company well do we need to do that to protect the existing assets, so should that be looked at separately, how should it be viewed, it’s something that we debate and argue very specifically around here. And we have come down to as a result of that process a pure belief that piece of land should stand on its own from a development perspective in terms of what we would be willing to do. If it goes to somebody else that would be okay and but if we think we can do it, do we think we can compete as well or better than somebody else, yes we do, because well, we know it, that you see (inaudible) process in which we've been, through before all those subject agreements.

Nathan Isbee – Stifel Nicolaus & Company Inc.

Am I correct in assuming that there is no sort of (inaudible) that would give you any say in terms of what somebody else could do that?

Unidentified Company Representative

I believe that you are correct in assuming that.

Nathan Isbee – Stifel Nicolaus & Company Inc.

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

Unidentified Company Representative

Yeah, I like that may its well put, very polite and said that, but the bottom line is in the days of 4, 5, 6, 7 the ability to raise rent significantly, what was something across the Board that really boosted every portfolio out there. Certainly, that’s harder to do, I can tell you what I'm really excited about is the value that we will be creating in the development pipeline as well as some of the acquisitions that we're doing. It's just, it can happen in the 2013, 2014, 2015 timeframe, because by the very nature of development, there is going to be dilution in the form of those four things that happens before there's accretion, and so if you sit and you model Federal out at 8% to 10% growth, if you will through 2014, 2015 and 2016, and it’s hard to do that.

Now, we aim for both cash flow investors and NAV investors. And we try as best we can to be a balance and to be able to make it work for everybody, but it is about NAV at the end of the day and trying to create that value. And when you choose development as a component of your business plan then you’ve got to look at a longer time pretty mature, so we’re going to create the value, but it won’t be that FFO growth in 2014 and 2015 almost can.

Nathan Isbee – Stifel Nicolaus & Company Inc.

And how about the growth of ahead of your existing portfolio, the congressional Bala Cynwyd et cetera.

Unidentified Company Representative

As good or better than ever and that stuff is just, I mean, it’s the rock. There is, we’re going to do $420 million or so of property level NOI this year and as Jimmy was saying despite the fact that there is dilution from the marketing and the development stuff we’re still growing at three, so strip that and have a four, and that’s freight on good math, that’s pretty good.

Nathan Isbee – Stifel Nicolaus & Company Inc.

Okay. And then just to finish off the question, I think you started answering before with Jeff, the Pike property that Weingarten acquired. Was that something that you had looked into?

Unidentified Company Representative

We did. It’s a half a mile of the street or less from our offices here as you know.

Nathan Isbee – Stifel Nicolaus & Company Inc.

Right.

Unidentified Company Representative

We are not shy about owning real estate on Rockville Pike. I think we’ve proven that more and more including 250 million more than we’re putting and Montrose Crossing. But that’s a small property. It’s got some, I think about a ground lease it’s only ground lease, it’s got some pads out in front that that our pan, big old numbers. And so, when we look that, we will see how we’re going to make more money here based on the value of going in and, I mean may be Weingarten can do it, we didn’t see a clear way to value creation.

Unidentified Company Representative

Even at 74% leased.

Unidentified Company Representative

Yeah.

Unidentified Company Representative

That's because you certainly have to pay for that. It's not like GBG with selling that saying, hey it’s free because, its not leased.

Nathan Isbee – Stifel Nicolaus & Company Inc.

All right.

Unidentified Company Representative

Believe me you have paid for that.

Nathan Isbee – Stifel Nicolaus & Company Inc.

Okay, all right. Thanks so much guys, have a great weekend.

Unidentified Company Representative

Same to you, Nathan.

Operator

Cedrik Lachance from Green Street Advisors, is online with the question.

Cedrik Lachance – Green Street Advisors

Hi.

Unidentified Company Representative

Hi, Cedrik.

Cedrik Lachance – Green Street Advisors

Just wanted to go back to the rent question a little bit, and thinking about your portfolio and two segments, anchors and small shops, if you were to mark-to-market all your leases to-date in each of those segment, so what will be increase in ramp on a percentage basis in each of these segments?

Unidentified Company Representative

Well I'd tell you on this call; I don't have the ability to do this in segments. I can sit there and tell you that we got about 23 bucks in place and I believe we are sitting, if you were to go through our system and you would understand all the market leases of all of the leases in total that you'd be looking at 8 bucks more or 9 bucks more something in those, that kind of line from adjustment to market.

I don't know how to do that Cedrik for you; I don’t have the ability to do. I’m looking across and people saying, have not, in terms of how much of that is segmented the way you like that to be segmented that, I’m sorry but there is certain point from my perspective at least is that there is still a very significant amount of market upside in the portfolio.

Cedrik Lachance – Green Street Advisors

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

Unidentified Company Representative

Cedrik it’s been happening for an awful long time around here. And one thing I will tell you about this portfolio, one of the great things about this company is there is not much of a mystery to it and so when you look at that, you can grab every 10-Q or 8-K basically for the last 10 years or 15 years and all that information is there, it will show you the following thing almost always, we recapture more than it’s contractually coming to because stop, and I think the greatest example just happened this quarter as it relates to that the Genuardi’s sale and what that did at our shopping centers so that there is a brand new, there is a recaptured boxes effectively that are out there long before those leases were up, it happens all the time.

So I’m not trying to dust the question, I don’t know the specific answer beyond the contractual aspirations that we disclosed but when you go back and look at what actually happened compared to the contractual aspirations, it’s almost always more. So we have the ability to get to it because we’ve proven, we’ve had the ability to get to it.

Cedrik Lachance – Green Street Advisors

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

James Taylor

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

Jeff Berkes

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

Cedrik Lachance – Green Street Advisors

Okay.

James Taylor

Cedrik let me answer and just add one thing to what Jeff said as I completely agree with. But every single building that we build there is not just on obviously standalone. It’s integrated into the entire district, which is now at Santana Row. And so there’s different property tax. We’re aiming for different type of people when we’re building eight Misora building that we’re building right now for example. It’s we’re looking for we will have lower price points. There will be some smaller units in there, to get people into Santana and the Santana experience, maybe some younger people at a lower price points because we already have product that they can move to into a higher price point. Some of this stuff leads itself or lends itself to being condo to be sold if you will as condos down the road, some of it does. So it really is a master planning exercise, which as Jeff said is in part impacted by the timing if you will, of the markets, but it's also impacted by the product. It is that we’re building to always be able to create the ability to own or to rent at a lower level or rent at a higher level within the property.

Cedrik Lachance – Green Street Advisors

Okay, great. Thank you.

Operator

(Operator Instructions) We have a question come from Michael Bilerman from Citi.

Michael Jason Bilerman – Citigroup Global Markets Inc.

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

James Taylor

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

Michael Jason Bilerman – Citigroup Global Markets Inc.

So and then this year will end up, I don't know what’s the impact of the fourth quarter you've been running about $2.5 million a quarter, so is that a decent number for 4Q?

James Taylor

Yeah that’s a decent assumption Michael for the fourth quarter.

Michael Jason Bilerman – Citigroup Global Markets Inc.

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

James Taylor

That’s related to cap interest and again we are incurring capital to fund that development, so it’s really the spread, if you will, between the rate at which we are tapping it for GAAP purposes and where we're raising that capital to little bit less than that, but that's about right.

Michael Jason Bilerman – Citigroup Global Markets Inc.

Okay.

James Taylor

But when we talk about, that’s obviously going FFO, but I was covering before, Michael was more of the impact on our NOI line.

Michael Jason Bilerman – Citigroup Global Markets Inc.

Right, but I’m just thinking that people were sort of take in the queue, that the guidance is a little bit lighter certainly as below where the street is today, that people were coming to the conclusion that there is just drag from redevelopment not thinking about that there is actually a positive impact from spending capital, when you’re spending it at your line of credit rate and capping it at your weighted average interest rate at lease from an FSL perspective.

Donald Wood

Yeah, but again it’s just a couple of cents, Mike.

Michael Jason Bilerman – Citigroup Global Markets Inc.

Right, but it indicates the drag that we’re talking about. Are you…

Donald Wood

The drag is higher than that net benefit, but yeah, I understand your point.

Michael Jason Bilerman – Citigroup Global Markets Inc.

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

Donald Wood

No.

Michael Jason Bilerman – Citigroup Global Markets Inc.

Okay, and then Don, I apologize, I missed. You talked about two deals during your opening comments, where they each of a $150 million size or that was an aggregate?

Donald Wood

No, Michael that was in the aggregate.

Michael Jason Bilerman – Citigroup Global Markets Inc.

And those two deals that you’re talking about that would be a $150 million going in. How much incremental capital if you’re able to get those deals would those have associated with it?

Donald Wood

You was looking very little and actually at least for a couple of years.

Michael Jason Bilerman – Citigroup Global Markets Inc.

Okay. Thank you.

Donald Wood

Thanks.

Operator

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

Kristina Lennox

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

Operator

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

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