Federal Realty Investment Trust's (FRT) CEO Don Wood on Q3 2017 Results - Earnings Call Transcript

Federal Realty Investment Trust (NYSE:FRT) Q3 2017 Earnings Conference Call November 2, 2017 11:00 AM ET

Executives

Leah Andress - Investor Relations

Don Wood - President and Chief Executive Officer

Daniel Guglielmone - Chief Financial Officer

Jeff Berkes - President, West Coast

Christopher Weilminster - Executive Vice President and President, Mixed-Use Division

Analysts

Michael Mueller - JPMorgan

Craig Schmidt - Bank of America

Christy McElroy - Citi

Jeff Donnelly - Wells Fargo

Jeremy Metz - BMO Capital Markets

Haendel St. Juste - Mizuho

Collin Mings - Raymond James

Alexander Goldfarb - Sandler O’Neill

Michael Bilerman - Citi

Operator

Good day, ladies and gentlemen and welcome to the Third Quarter 2017 Federal Realty Investment Trust’s Earnings Conference Call. At this time, all participants are in listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today’s conference, Ms. Leah Andress. Ma’am?

Leah Andress

Good morning. I would like to thank everyone for joining us today for Federal Realty’s third quarter 2017 earnings conference call. Joining me on the call are Don Wood, Dan G., Dawn Becker, Jeff Berkes, Chris Weilminster and Melissa Solis. They will be available to take your questions at the conclusion of our prepared remarks.

I would like to remind everyone that certain matters discussed on this call maybe 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 these 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 in our forward-looking statements and we can give no assurance that these expectations can be attained. The earnings release and supplemental reporting package that we issued yesterday, our annual report filed on Form 10-K and our other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial condition and results of operations. These documents are available on our website.

Given the number of participants on the call, we kindly ask that you limit your questions to one or two per person during the Q&A portion of our call. And if you have additional questions, please feel free to jump back in the queue.

And with that, I will turn the call over to Don Wood. Don?

Don Wood

Thanks, Leah. Good morning, everybody. Really good quarter for us folks between another earnings beat this year at $1.50 a share of FFO to strong initial residential leasing progress at the new phases of both Pike & Rose and Assembly Row to the successful integration of our Primestor joint venture in California, to an oversubscribed preferred stock capital raise that one of the lowest coupons ever offered in our space, this company continues to address and face head on the challenges to retail-based real estate, with more arrows in our quiver than most and a clear vision for the future. We are not playing defense, we are on offense and we are moving the ball aggressively.

At $1.50 a share of FFO this quarter, which is 6.4% higher than last year’s comparable quarter and our newly raised dividend rate of $1 a share per quarter, we are generating more into net cash from operations than ever before, some $75 million annually and the most efficient capital source and deploying it into value-creative repositionings and developments on both coasts. Our leasing was strong this quarter, 82 comparable deals, 400,000 square feet at rents that were 14% higher than the previous leases, 23% higher on deals with new tenants, 8% higher on renewals. In addition, we did 25,000 feet of new and non-comparable deals at Pike & Rose, at Assembly, and in other places at an average rent of more than $55 a foot and by the way, tenant improvement dollars were down overall in the quarter.

Japanese retailer, Muji, with more than a dozen locations in New York and California, was a big contributor with a lease signed on Third Street Promenade n Santa Monica, replacing Abercrombie & Fitch, as was Target in Parsippany, New Jersey with their brand new smaller format replacing the bankrupt, Pathmark supermarket at Troy Shopping Center. Rent from both of those deals will commence later in 2018.

Lease termination fees were also up during the quarter by about $2.8 million, attributable primarily to two tenants, the reorganization of the La Madeleine restaurant chain, along with the withdrawal of all U.S. Kit and Ace stores. I talk a lot about the strength of our leases from a landlord perspective and what an important part of our business plan they are. And these are two tenant failures that are great examples of what I am talking about. On average, we received the equivalent of about 2 years of full rent through about as fast and efficient a negotiation as you can have and fully expect to backfill those highly desirable spaces long before that. The ability to do that had everything to do with the non-financial parts of the lease. This was a very strong leasing quarter. Also in the quarter, you will note that overall occupancy improved to 93.8% compared to 93.0% at the end of the second quarter and 93.1% a year ago.

Turning space over at Target at Troy Shopping Center and BroadSoft and Amazon at Santana for their build network there were the largest contributors. Assets and results of the Primestor joint venture are included in the quarter as of August 2, the closing date, and our teams are working closely together. With respect to Primestor, we are actively pursuing an additional smaller acquisition together with them in Southern California and also are actively marketing one of the assets that we bought in the joint venture for sale. Our entire team remains extremely bullish about the productivity of this relationship, serving the underserved Latino population.

On the development front, residential leasing and occupancy kicked in full force this quarter at both Pike & Rose and Assembly Row, the Henri & the Montaje, respectively and initial demand is impressive. At the Henri at Pike & Rose, 140 units of the 272 total have already been leased at an average of $2.35 per foot, well above budget in terms of pace, slightly above expectations in terms of rent. And by the way, the 493 Phase 1 Apartments remain 95% leased despite the new supply coming on the project, that’s important. In addition, 44 of the 99 for-sale condominiums are under contract at/or above budgeted pricing with closings beginning in the middle of 2018.

We are off to Boston here – to Somerville. At Montaje, at Assembly, 97 units of the 447 total rental units have been leased at an average of $3.40 a foot, well above budget in terms of rent, slightly above budget in terms of expectations and in terms of pace. And most impressively, 106 of the 107 market rate for-sale condominiums are under contract at over $850 per square foot and are scheduled for closing in the first half of 2018. It’s noteworthy to mention that this building sold out without any of the purchasers physically walking through their units as the building is still under construction. The location and amenity-rich environment was enough. The expected proceeds are more than $10 million higher than we anticipated. Both of these projects are coming into their own very nicely and of course the lease up of the apartments will create dilution in earnings drag of a few cents per quarter, particularly larger in the fourth quarter than the third. There is no surprise there, I hope. The retail leasing on both projects are also progressing though not as fast as we would have liked. Seems like every deal these days takes longer than it should, but the anchor systems at both projects are all set, but there is still some wood to chop in the shop space. 88% of property operating income at Pike & Rose and 74% at Assembly are under signed leased or fully executed LOIs and tenant openings at both projects have begun this quarter and will continue throughout 2018. Construction at 700 Santana Row continues in earnest and on budget and on schedule.

Two other points I want to make on this call and the first relates to same-center growth. Computing same-center growth with and without redevelopment consistent with the way that we have for years reflects growth of 4.4% and 2.6% respectively. But as you know and as Dan will discuss further, we believe that the same-center metrics, historically used in our industry, are of limited use for companies whose business plan is based not on triple-net lease properties or commodity type asset management, but on a wide variety of value creative strategies deployed on an even wider variety of real estate types and sizes. And accordingly, we have been considering a metric that might better reflect our portfolios period-over-period income contribution that might be more germane to our firm’s approach to operations and investment.

In that regard, we are also disclosing, what we call, comparable property growth, a measure that starts with GAAP, operating income before depreciation, before G&A, of course, taken directly from our income statement and then adjusted for those assets that’s historic comparability between periods in two categories, either newly acquired or sold properties or those that are under development or being positioned for significant redevelopment and investment. On that basis, which we call comparable property results, those assets grew 3% during the quarter. You will note additional disclosure in our Form 8-K that reconciles comparable property results with the primary income statement and provides capital spent at those properties during the period. Of course, there is not a direct correlation between capital spent in the current period and the current period’s results as there is obviously a lag of 12 to 36 months or more between capital deployment and a return on that capital.

And finally, if there is one takeaway from my prepared remarks today that I would love investors to thoughtfully consider. I hope it’s the understanding that in these days of dramatically changing consumer behavior and technological change, the idea of measuring this business every 90 days is really tough to do. We thoroughly and completely believe that the retail real estate-based companies will not only survive, but thrive in the quarters, years and decades to come, will be those who have positioned themselves to this point for their assets to be the real estate of choice for the widest possible selection of tenants, not any particular tenant, the widest possible selection of tenants, not a narrow, limiting business plan, but a broader, wider funnel in selected markets. It seems to us that in order to best positioning ourselves for that outcome, location matters more today than it ever has and assets need to be in flexible formats that can be approved upon through profitable reinvestment. And that’s a big one, because on many retail based properties in the United States, the new revenue numbers that we generated after redevelopment just aren’t enough to justify the investment. And lastly, that’s truly enhancing the experience, the place making, the tenant line up and the customer service at those places is both critical and harder than it sounds. Creating the environment is a lot more than just going down at cool things to-do checklist. So, that’s it. Everything that this company is doing today even if modestly short-term earnings dilutive is meant to be able to act on this necessary long-term philosophy. The fact that we are doing it while still growing current earnings and still growing current cash flow at the same time is a true testament to quality of our real estate and our team’s vision and execution competencies of that vision.

Now, let me turn it over to Dan to talk about the quarter before opening up the lines to your questions.

Daniel Guglielmone

Thank you, Don and Leah and hello everyone. Our team feels really good about another record quarter in the face of the challenging retailing landscape. Our third quarter FFO per share of $1.50 beat our internal projections by a full $0.02. This outperformance was primarily driven by stronger than expected NOI growth as well as getting some term fees earlier than we had forecasted. Don told you about the strong leasing we had in the third quarter, but let me tell you that the momentum continues into the fourth quarter with HomeGoods signing on at Brick Plaza to join a lineup of Ulta, DSW and Michaels and the former A&P, Dollar Tree and Tuesday Morning spaces, and a new anchor who we can’t disclose just yet, signing on as part of a repositioning of an infill Washington, D.C. asset of ours. This latter lease being another example of our proactive releasing activity, creating short-term vacancy and dilution in order to achieve significant upside from a value creation, growth and merchandising perspective.

Our same-center growth with redevelopment was a solid 4.4%, again beating our internal forecast. Same-center NOI without redevelopment rebounded with a solid 2.6% increase. While these metrics were helped by a positive term fee comp of 70 basis points and 50 basis points, respectively, note that these same-center results were achieved in the face of roughly 70 basis points of drag from our value-creating, proactive re-leasing efforts, which as I mentioned, position our portfolio to outperform for the long-term but create short-term drag on our growth rate.

As Don highlighted in his remarks, we have introduced a new metric, comparable property POI growth, which was 3% for the quarter. We believe this metric best reflects our core portfolio level performance and is more applicable to our business strategy and our capital allocation approach. Please note that we intend to provide all three same-center metrics over the coming quarters in order to provide comparability and continuity before ultimately transitioning to a comparable POI metric.

Now, let’s turn to the balance sheet. We closed on our Primestor 90:10 joint venture in August for $340 million, which includes the assumption of $79 million of debt. I would like to take the next couple of minutes to lay out how we positioned our balance sheet to comfortably absorb this acquisition. Let’s first look at our disposition activity. During the quarter, we closed on the sale of 150 Post Street, our boutique office and street retail building in downtown San Francisco for $69 million as well as the sale of North Lake Shopping Center in suburban Chicago for $16 million. That brings our gross disposition proceeds to the year-to-date up to $138 million. The blended cap rate for these dispositions is in the mid-4s, representing a meaningfully accretive form of capital and also a testament to the quality of Federal’s portfolio, even our non-core assets.

With respect to our disposition pipeline going forward, we have an additional $200 plus million of assets under contract or being marketed, which we expect to close over the course of 2018. These include the condos at Assembly Row and Pike & Rose, which have zero income dilution associated with them and two other non-core assets, which should sell for a blended 5% cap rate. Our ability to sell non-core but high-quality assets accretively is another competitive advantage in Federal’s capital markets arsenal.

To further enhance the positioning of our balance sheet, we opportunistically turned to the preferred market, where in late September we issued $150 million of perpetual preferred stock at a 5% dividend rate. That’s the lowest preferred rate for a REIT so far in 2017 and the second lowest rate ever achieved by a REIT. Perpetual equity, with a fixed 5% cost and a one-way call option for Federal after 5 years, is extremely attractive permanent equity capital and further illustrative of us taking advantage of our A- rating and fortress balance sheet to opportunistically and attractively fund our capital needs.

At quarter ends, we had strong liquidity, with just $42 million outstanding on our $800 million credit facility. While our net debt to EBITDA ratio edged up to 5.8x, note that with $200 plus million, a $200 plus million disposition pipeline in 2018, combined with the significant levels of EBITDA, a high proportion of which is contractual, coming online from the second phases at Assembly and Pike & Rose, we fully expect our net debt to EBITDA ratio will come back down into the 5x to 5.5x range over the course of 2018. Our first charge coverage sits at an extremely healthy 4.14x and is forecast to improve as well over the course of ‘18. Additionally, we will generate, as Don mentioned, free cash flow after dividends and maintenance capital of roughly $75 million in 2017 and forecast similar levels or more in 2018. As we move forward, we will continue to manage our balance sheet conservatively, looking to operate over the long-term with leverage metrics in line with our A- rating.

Now, on to guidance, we are pleased with our continued outperformance this quarter, beating our internal projections and consensus by a couple of cents. This outperformance was fairly broad-based with property NOI coming in higher than expected, less impact than forecasted from failing tenants and higher term fees than originally expected in the quarter. However, we do expect to get some of that back in the fourth quarter. We have modest short-term dilution from our preferred issuance relative to our original forecast. We will also incur some costs associated with the upgrading of our accounting and IT platforms, in addition to the dilution that Don mentioned earlier from our commencing on the delivery of our residential units at The Henri, the Montaje and Towson, in total, 825 units that will be delivered into 2018. As a result, we are tightening the range of our 2017 FFO guidance to $5.89 to $5.92 per share, essentially affirming guidance with a slight uptick. As it relates to same-center growth with redevelopment for 2017, given another strong quarter, we affirm our estimate of 3% or better for the year.

Now on to 2018, as most of you know Federal successfully reorganized its operating structure into a more decentralized model back in 2015. As a result, this year we took on the task of restructuring our budgeting process with the goal of providing a more robust forecast of future performance given this decentralized approach. As a result, our budgets will not be completed until mid-December. Therefore, we are providing just a preliminary estimate of 2018 FFO per share of $6.06 to $6.26. We expect to refine this outlook and provide official guidance during our fourth quarter call in February. At that time, we will also provide an estimate of our comparable property POI metric.

And with that, we look forward to seeing many of you in Dallas in a couple of weeks. Don, Jeff, Melissa, Leah and I will all be there. And with that, operator, you can turn the line over to questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question is from Michael Mueller of JPMorgan. Your line is open.

Michael Mueller

Yes, hi. A couple of questions. You mentioned the lease termination income did you mention what the specific number was during the quarter?

Don Wood

I know we are 2.8 incremental, I don’t know if we have a number. Do you have that?

Daniel Guglielmone

Yes. Now, for the quarter, we had about $3.25 million of term fees, a large proportion of that was in our budget. We did exceed that – our forecast slightly and that’s part of the reason for the $0.02 to $0.03 beat. A lot of that was not in the same-store pool, but those are roughly the numbers.

Michael Mueller

Got it. And then I guess, if we think about 2018, you mentioned a couple hundred million of asset sales that are underway to retain cash flow. As you look out there, does it feel like 2018 could be a year where you don’t tap the equity markets to continue funding the growth?

Daniel Guglielmone

I think we will look to kind of take advantage of the breadth of our balance sheet and our capital market’s capabilities. I think we will be tactical and opportunistic when equity is attractively priced. As I mentioned in my remarks, our disposition pipeline is strong and looks good. That could grow, but we will be nimble and opportunistic as it relates to issuing capital going forward.

Don Wood

Mike, the only thing I want to add to that is and it ties into the question, because of the asset sale piece, remember, we are talking about a lot of that coming from the sale of condos. And what effectively that does is obviously de-risk and de-lever the big properties at both Pike & Rose and Assembly and so especially with the Assembly results that we have seen, that’s better stuff than we anticipated.

Michael Mueller

Got it. And is that actually ties to the last question, which was of the $200 million that you talked about for next year throughout there, you mentioned the condos at 0%. What portion of that $200 million is 0 cap stuff versus the 5 cap?

Daniel Guglielmone

Yes, probably kind of $140 million to $150 million of condo and call it $50 million to $60 million of other, non-core.

Michael Mueller

Got it. Got it. Okay, thank you.

Operator

Thank you. Our next question is from Craig Schmidt of Bank of America. Your line is open.

Craig Schmidt

Thank you. I wanted maybe a little discussion in how you keep up-to-date and stay focused on that, why the selection of tenants or put in other way, how do you source these unique tenants? And then just maybe one follow on, how much of a pioneer do you want to be versus leasing to the better funded established players?

Don Wood

Craig, first of all, it’s a great conversation, it’s what we spend an awful lot of time doing. It is all about balance, you are exactly right, but one of the things that frankly, the entire open air sector has over malls is more flexibility in the product type or in terms of what you can do with spaces, whether that be combining for smaller spaces with the right depths that make some sense or in some places going the other way. The idea of making sure that – and I think there is wide funnel notion. It sounds obvious, but you have got to be thinking about it as you are locating your properties, where you are obviously and what format they are under. I think one of the best things we have is not all grocery anchored centers, not all mixed-use properties, not all any one thing, but it’s much more real estate based in terms of it. And so the balance between the great tenants that we think are the great tenants today that we don’t know, because they are all trying to figure out what their 5 and 10 and longer models will be and those tenants that are a bit pioneering, you need the right kind of balance. I hate the word duration, because it’s overused so much, but there is something to it. And as you know, Craig, we have talked about it for years, it is what we do. So, I can’t tell you 40%, 60%, 50%-50%, whatever, it very much depends on the piece of real estate, it very much depends on how wide that market is drawing from. But I can tell you in every decision we make, with respect to what tenants to put next to get and how to be relevant for the future, those considerations are made. Sorry, to get wordy on this, but it’s such an important part and thinking about the future of our business. If you take Brick Shopping Center in Brick, New Jersey, this was a shopping center that had an A&P, a sports authority, a Bon-Ton in it, Dollar stores, etcetera and that is now HomeGoods, DSW, Ulta, gymnast deals that’s just about done, that should like a lot. It’s a completely different environment and it didn’t just happen with the tenants, it happened with the physical place, with the outdoor seating, the place making, etcetera. It’s the consolidator in the market. And that you will have to be thinking about as you go forward. Who were the consolidators, where is the real estate that can act in it, in a country that’s got too much retail as the consolidator? We think we are really well positioned for that.

Craig Schmidt

Thank you. And then just quickly, do you think there will be any difficulty in keeping the construction workers working on stuff like a project at CocoWalk or has the disaster made that prove to pull them away on other stuff?

Don Wood

Well, I will tell you this, I am glad particularly with respect to Coco, you know that the project is priced out that it’s effectively what had gotten to the point it did before the hurricane struck. There was no damage to the property. I do not believe from everything we are hearing that we will have issues with respect to the construction execution. Now when you look going forward on projects, there is no doubt, construction cost in this country is something we are – everybody is thinking about with respect to maybe number of workers cost wise, just why can’t you make big rents to be able to pay for it. So, physical damage absolutely not, great shape on our line of the assets. With respect to what construction cost due to make numbers work in the future, we are going to have to see. They are up right now, that’s for sure.

Craig Schmidt

Thanks a lot.

Operator

Thank you. Our next question is from Christy McElroy of Citi. Your line is open.

Christy McElroy

Just in thinking about guidance, Dan, just following up on some of your comments and thinking about getting from that. It’s a 144 to 147 range in fourth quarter on an FFO basis. I realize that you are not providing same-store NOI guidance at this point. But just as we think about some of the moving parts there, maybe if you can kind of walk us through what you expect through the guide sort of the 70 basis point drag that you talked about presumably that’s reversing into next year from the re-tenanting. You have got the CocoWalk and Sunset drag from starting those projects. On the other hand, you have got Assembly and Pike & Rose, the retails coming online, but then you have got the apartment leasing drag. And then presumably, you are budgeting something for further tenant fallout into next year. How do we think about all that?

Daniel Guglielmone

Yes, all good questions. I think kind of given where we are in our process, it’s a little premature to get into kind of some of those detailed assumptions behind ‘18 and we will definitely cover that in February. But to give you maybe something in terms of where we see maybe same-store next year, it’s preliminary, but maybe 2% to 3% is a good placeholder on the basis of our new metric comparable property POI, but I think at this point, it’s too premature to provide detailed assumptions.

Christy McElroy

And then just on the IT and accounting cost that you mentioned in Q4, is that sort of one-timeish and how much is that – how much is that impacting?

Daniel Guglielmone

I think for the fourth quarter, we could – maybe it’s $0.01, but I think that will continue. This is upgrading and really improving our accounting and IT platform, it’s investment we feel is going to improve the productivity of our company on a go-forward basis. The bulk of that spend will be in 2018 and some of that will be reflected in our guidance in 2018, but again a little preliminary to kind of be detailed and give a detailed estimate of that number at this point.

Christy McElroy

Okay. And then just really quickly, in terms of the asset sales, the $200 million, I got the breakout, but in terms of the timing of that occurring between the condo sales and the two non-core assets, how should we think about that?

Don Wood

Throughout 2018, Christy, I would – to model it around the middle of the year, some will start before in terms of the condo closings, end or later in the year, all of the Assembly will be done next year. You can basically put that around in the middle of the year. Pike & Rose, obviously, we are halfway done. And so we have got another half to do and that timing of those sales will determine what the timing is on that.

Daniel Guglielmone

Probably I would say the asset, the non-core asset dispositions are probably towards the first half of the year, maybe this should be done by then, but that’s – it’s a modest kind of $50 million to $60 million number.

Christy McElroy

Okay. Thanks so much for the sense.

Operator

Thank you. Next question is from Jeff Donnelly of Wells Fargo. Your line is open.

Jeff Donnelly

Good morning, guys. Maybe just building off Christy’s question, Dan, I know specifics are unavailable. But can you talk directionally about how you are thinking about things like renewal probabilities or downtime on leases. Are you on just capital investment on any vacancies in your budget for next year versus maybe what you are assuming this year?

Daniel Guglielmone

I would generally say that we have shown consistency in our operating metrics over the last several quarters, I think heading into 2018, I think it will be consistent. I think again, it’s a little too premature kind of given where we are. We still got another 45 days of going through our budgeting process before we are able to provide that level of detail, but again we will talk about that in more detail in February.

Jeff Donnelly

And just are there factors that would maybe put your earnings at the low end of that range, the $6.06 a share. Are those, I guess I will say were they within your control or do you see that as more of a reflection of your view on the economy, the industry to kind of bringing you down at that level?

Daniel Guglielmone

I think that we are sitting here and looking at 2018, it is an uncertain retailing environment and I think that our range kind of reflects some caution and some conservatism at that low end of the range.

Don Wood

But Jeff, it’s something bigger than that. I mean, the reason even we gave such a wide range to start. Think about the things that we are doing, the timing and the pacing of the lease up of the residential properties, that matters, it matters a lot. The timing of when we demolish the biggest piece of CocoWalk and do we get the entitlements on Sunset and can we get started with that? When you think about some of the other projects, like Darien that we are making really good progress on, but aren’t sure when we’ll be starting. This company does a lot. So the notion of – it’s hard to kind of invest or not invest in a company based on 90 days in the real estate business, this isn’t the retail business, it’s the real estate business. I am not trying to be detour of you, but when you think about the components of this, it is more complex than a commodity-based company and there is more upside than a commodity-based company.

Jeff Donnelly

Don, how do you feel about just the negotiating environment? I guess, right now on the leasing front, I mean, do you think the accumulation of vacancies that will happen in the industry, I know the far-reaching suburbs are very different than maybe some of your submarkets. But I am just curious I mean, have you sort of perceived that or have you felt that in your business or do you think it’s relatively the same as it was maybe a year ago?

Don Wood

Well, it’s interesting. And I think I have commented over the past year or the past 2 years that I did feel like the leasing leverage, the de-leverage and you just – in general on everything was tipping more to the retail and that’s particularly given that uncertainty, kind of feeling like that’s found the bottom, if you will, or piece of stability. And we are seeing it in a number of places. What I’d love to give you our specific examples, I don’t want to do that for obvious negotiating reasons. But there have been tenants that have come back to us and said, hey, look, we’d like to exercise that option, but you are going to have to renegotiate that down and sometimes we have to do that. But what our policy is, is no, there is a contract in place this is the contract, that’s the way it’s going to be. And I can give you, I’d love to give you, but I will not on this call, three specific examples of three specific tenants that you would know very well, that basically have to then ask, simply exercise their option at the higher rent and moved forward. And so the notion of taking this, this dislocation in our business and trying to use it to the best advantage, that’s what we all do. That’s what the landlord side does it’s what the retailer side does. But I feel like there is no doubt property by property, the leverage that the conversations that we are having feel more settled to me than they have been over the past few months.

Jeff Donnelly

And just one last one, I suspect you guys are a party to 1 or 2 bids for Amazon’s new headquarters, I think Amazon has said that they are looking to take delivery of some of that the initial office space as early as 2019. I am just curious given how fast moving that process is? Have you guys heard anything further or do you have any expectations on when you might hear more?

Don Wood

We don’t. Obviously, what we do for living and when you think about where Assembly is located, what we have entitled, what’s there, we obviously think there is a great case to be made there. We feel the same way in and around Pike & Rose in that Montgomery County area. And having said that, we know nothing more than that and every city that I go to, things, they are getting Amazon’s second headquarters, no matter who you talk to, their city will make that and it will go somewhere. And in some ways, the best place to be is just on the periphery of it, because who knows what those deals will look like, right, as it happens, but the fact that we are having this conversation in a what is plain, old shopping center companies suggest this isn’t a plain old shopping center company. As we are getting something different when I don’t know how many calls you have had with the shopping center guys where you are asking about Amazon’s second headquarters and the real estate that you own to get there. So no, I don’t know anymore now, but I sure know that if you look through the type of things that, that company and many other companies like them are or smaller obviously, but like them are looking for in their workforce. We are set up with those type of locations in the markets that we are in. That’s the big takeaway.

Jeff Donnelly

Okay, thank you.

Operator

Thank you. Our next question is from Jeremy Metz of BMO Capital Markets. Your line is open.

Jeremy Metz

Hey, guys. Don, I think you may have just actually hit on this, but for 2018 obviously, there is a lot of moving pieces and continued repositioning going on here. But broadly, it sounds like we should be thinking about growth accelerating in the back half of the year and into 2019. There is a lot of the development operations open and stabilized. At a broad level, is that a fair way to think about the cadence of earnings in next year?

Don Wood

I am going turn it over to Dan, as much close on the numbers, I will tell you, Jeremy. I mean, there is no question we are doing a boatload of leasing. And so – and we are doing leasing as I have said in the past, in places that are under redevelopment, are being repositioned. I think we do a lot of it. It’s not a little bit on the edges. And so most of that leasing is coming in, I think we’ve stretched on the schedule for a number of quarters, for sure, in terms of how that income stream comes on. And yes, it comes on throughout into 2018 and ‘19 and it builds. Now as question was implied earlier, how much of the lease in the bottom of the bucket, what’s going to come out after the holiday season and all that, we don’t know. We don’t know. But what we know is we are, we go hard to our tenant base. And when we have weakness or when we see tenants, we are worried – weakness in those locations. We are looking really hard right now to how to backfill it. So the big question, Jeremy, as you go through on the basic business side is the bottom of the bucket, how much of a leak there will be for that and that’s not known yet. When you look at the other value-enhancing things that we are doing, whether we are talking about Coco, whether we are talking about Pike & Rose or Assembly, there is no doubt in those big projects that there is dilution before there is accretion and 2018 will be dilutive from the standpoint of leasing up 800 and some odd units, but that’s okay. So, it’s complicated, it’s harder to look at and just apply the same metrics that you use. But generally, with respect to the business part that you are talking about growing throughout 2018 toward the latter part is a fair assumption.

Jeremy Metz

Appreciate that. And then sorry if I missed this earlier, but at Pike & Rose, can you talk about the residential leasing there, how rents are trending, but also how that initial leasing has been in Phase 2?

Don Wood

Yes, no, no, I did, I went through that in all my prepared remarks, but just quickly, on the residential side in particular, strong stuff, much faster and a little bit more money, I wish the money were higher. We are getting 235 a foot or so, which is better than our budget, but the most important thing about that is the existing product in Phase 1 still 95% leased. We haven’t diluted the first half, because demand is growing, because the place is finding its way there. The number of people on this call have been there lately. Everybody who is left there lately has been blown away, I loved it, I would love to show it. On the retail leasing side, as I said in my comments, slower than I wanted to be, not in the anchor system, but in the shop space that fills in around the anchor state system, where still 88% of the NOI is under lease or negotiated NOI. So, the work – there is a word slower and the word slower applies to our business in terms of navigating through this environment.

Jeremy Metz

Thanks, Don.

Operator

Thank you. Our next question is from Haendel St. Juste of Mizuho. Your line is open.

Haendel St. Juste

Hey, good morning.

Don Wood

Good morning.

Haendel St. Juste

Don, I was wondering if you could perhaps extrapolate on your comments about the higher construction cost in Miami. I am wondering if that’s changing your thoughts, plans, timing, return expectations for Sunset, still in the shadow pipeline. And I think we saw in the recent article that you submitted your plan to the city planning board in late October, I am curious how that was received?

Don Wood

Yes. So with respect to Sunset, I mean, absolutely, the issue, the first issue there is we have to have the right to go north, to go north in the air. The ability to make money at Sunset is proportionately directly correlated to being able to build up in the air, and we’re now through the entitlement process there. And the entitlement process in South Miami as it is, there’s an awful lot of communities like that in the country is tough. So I don’t know that we’re going to get it there. So we’re not yet at the point of what the construction cost would be to make a bigger project work. We’re still at the point of, can we get the right to be able to expand that yet. And as you would imagine, the hurricane has slowed that process down from the standpoint of there is just other things that people are worried about these days. But we are expecting to hear something soon before the end of the year? If it’s not finalized, we will be out to February for the next way to look at it. So, we can talk more about Sunset as we go forward. But as I say, the entitlements are the same the biggest thing that the single biggest hurdle that has to be overcome. And if it’s not, it’s going to be just the basic it’s going to be what it is as opposed to something a whole lot better, which will be a shame for the community.

Haendel St. Juste

Okay, okay. I appreciate the thoughts there. And then one more for me, I guess, the imitation is the serious form of flattery they say, right. So, I guess, I am curious what you make of a lot of your retail peers talking more of and introducing more a mixed use into their portfolios. Maybe perhaps what advice you provide, some of the key lessons you learned? And are you concerned of maybe mixed use could swing too far, maybe perhaps presenting a bit of a risk down the road?

Don Wood

Sure. Well, Haendel, first of all, that question is, I mean, we got to sit over a few beers and talk that one through, because it’s complicated and the conversation is not for this conference call. With respect to, am I worried that there is – sure I am worried. I mean, in our business, there is no magic elixir of the type of product, there is no magic elixir into the tenants who is the greatest tenant that’s going to fix everything. I mean none of that – none of it happens. So, the idea of being balanced, the idea of having – being a real estate company more than just having a narrow business plan is very important to us. And as you would imagine, just deciding to do mixed use, whatever that means and the definition of that is so darn light to so many different people’s points of view. People don’t think that, that’s the magic elixir, but they know that creating environments and places that serve the consumer not only this year, but over the next 10 years and 15 years, that there is an awful lot to this trend toward organization in the country, towards this need for higher services, it’s hard to ignore it. I mean, it’s frankly it’s as obvious as it can be. Will there be too much done in terms of poorly executed projects and things that don’t work? Sure, there will, just like there are in other sectors. So yes, I mean, it’s proceeded at your own risk.

Haendel St. Juste

Appreciate the thoughts. We will have to grab that.

Operator

Thank you. Our next question is from Collin Mings of Raymond James. Your line is open.

Collin Mings

Thanks. Good morning. First question for me, just earlier this year, Don, you noted that relatively more attractive acquisition opportunities were before becoming more plentiful and can you maybe just update us on what you are seeing now and maybe how that has evolved throughout the year from your perspective?

Don Wood

Yes. Well, look, first of all, it’s not business as usual when you have cost of equity of not only our public company, a lot of public companies down to where it is. You better be more disciplined in terms of the allocation of that capital, and you better look at things with the light of today’s environment rather than previous environment in terms of the left side and right side of the balance sheet. Most important thing, do I think that there is a disconnect between public valuations and private valuations? Yes, I do. And Jeff can probably talk more about this. When we went into Primestor, what we loved about Primestor was the notion of an underserved community in terms of GLA per capita. And it’s so crystal clear to us that, that’s such an important metric in terms of – way more than same-center growth is the other things that wind up on some of the schedules or truly how do you compete, how do you create demanded that exceeds supply. On the acquisition side with our cost of money to get in there and buy things in the fore is hard to do. It doesn’t make a lot of sense for us today. Whereas it could have in the past to the extent the IRRs are in the growth. So Jeff, why don’t you add specifics about what you’re seeing?

Jeff Berkes

Yes. Sure, Don. It’s interesting. We are seeing more deals come to the market than maybe a year or 18 months or so ago. It’s really interesting how the investor community is looking at those deals. A couple of years ago, there wasn’t a big difference in price between what we call a great deal. And by great we mean how we define great, which is an imbalance between supply and demand and a lot of population density and ability to grow NOI and all that kind of stuff and kind of so-so deal, which may look good on paper. But when you start to peel back the onion, it doesn’t make a lot of sense. What’s happened over last year or so has become very clear that if it’s an institutional quality deal, it’s going to get crazy pricing and we have seen a couple of deals out in California that get marketed and priced since all the headlines started appearing in March or April. And the pricing of those deals, quite frankly, was just amazing, it’s low for cap rates, the way we underwrite deals, I know how to operate a shopping center, kind of 5ish IRRs. Honestly, that doesn’t interest us much. On the other end of the equation, you get moved out a little bit from that and pricing really gaps out. And there might not even be better choice now for certain properties. So, our challenge is kind of defining the middle and making sure we are buying a future real estate and making sure buying something where we can grow NOI. Those opportunities will come around we think in ‘18, but there is not a plethora of those around right now, quite frankly. You guys don’t know we are selective and disciplined and tend to get stuff done over time and we expect that to be the case going into the next year.

Collin Mings

Okay. I appreciate the color there. Maybe just following up on that just as it related to the prepared remarks, as it relates to the Primestor, can you expand upon the comments regarding possibly selling one asset and maybe acquiring additional property in terms of that partnership?

Jeff Berkes

Yes, it’s further, I mean. Go ahead, Collin.

Don Wood

Yes, that’s funny Jeff. I was going to say, no.

Jeff Berkes

Yes, there is not much to add.

Don Wood

Well, I don’t want to get into the sale process of an asset. I don’t want to impede with that, that’s not done yet. And the same on the acquisition side, the only thing I would say on the acquisition side, which is very cool, is that it’s a deal that includes development. It’s a very simple grocery anchored format, not a hard thing, but it’s something that has been in the works by that company for 7 years, in terms of where it is, the returns, the subsidy from the city and other agencies, etcetera, when you spend that much time, that’s for us to come in and to be able to jump on that effectively, that’s something that we wouldn’t be able to do on our own in some of these markets. And so this partnership is we are really positive about this as an engine in this sector of our business plan going forward.

Collin Mings

Alright. Thanks, guys.

Operator

Thank you. Our next question is from Alexander Goldfarb of Sandler O’Neill. Your line is open.

Alexander Goldfarb

Thank you and good morning down there.

Don Wood

Good morning.

Alexander Goldfarb

Good morning. Two questions. First, can you just talk about up at Assembly Row, the apartments that you have leasing up. It’s a rather large project and if you assume 30 a month, it seemed to take you into the second year before stabilizing. So, can you just give us thoughts on how you are approaching that to try and minimize the year-over-year lease up while it’s still leasing against yourself? If there are ways to mitigate that or if the view is that you are going sort of as full speed as it can if you have to deal with it at that point?

Don Wood

I just don’t understand the question with respect to leasing against ourselves there, Alex, because Avalon owns the review of the product at this site. So it’s not us, first of all. Second of all, it’s a big project, it’s 447 units. And to be 100 done at this point, this is really good and this building is not done yet. With respect to the supply and demand characteristics, we are not managing that to the dilution or accretion of any particular quarter next year. We are running a real estate company and therefore, we are trying to create the right balance between rate and volume in a big project where we have an awful lot of money invested already creating the environment. So sure, it’s going to take all of 2018 to lease it up and we will create – I forget what the number is in terms of value as it’s finished in ‘19 and ‘20 and ‘21 and ‘22. And that’s what we are running it to, not to the 90-day pieces of 2018.

Alexander Goldfarb

That’s helpful, Don. I was referring to if you assume 30 units a month that would be sort of 14, 15 months, but if you said you are already 100 underway leased up, then that’s good to hear. The second question is on the comparable NOI or comparable property disclosure that you provided, can you just go back and just help us understand. This excludes acquisitions and redevelopment. But how else does this improve or help us understand better versus the same-store NOI metric ex redevelopment? So, what are the nuances that we will get out of this versus the traditional metric?

Don Wood

I am not sure it does help you. What I know it does is reflect the way we run our business and how is that’s more important. What I mean by that is the first thing it does is it starts with the audited annual financial statements. And I think it’s really important that – I wish other people did this, that you start with the P&L of the company and make sure that you’re reconciling down to what it is that you’re calling same-store. The fallacy to me is that, same-store, with and without development in a company that again, is not a commodity-based company, does not have capital in it in terms of the same-store is wrong. I mean, there should be capital and there is many of the assets that we own as possible, because if you believe in us as capital allocators, that’s the way you create value in real estate. And so for us, what we are trying to say is start with the whole company. Back out of the company obviously, things that are bought and sold in one period of time. And then also if we are doing our job right, we are impacting both positively and negatively the income stream of significant amount of assets. I wish it were more and we are working on being more that, that may have dislocations in income streams that are caused by development plans to add value to these things, that should be taken out to leave what is effectively the part of the portfolio that is not under that active major redevelopment or development piece of the business. That’s how we run the place. And so whether it’s helpful to you or not, I don’t know. We are still going through the charade of the other metrics that we have been doing for years. So, you will still see that and you can use whatever you want. It can’t hurt if we are adding it, right. And hopefully, we can get there too, have more people understand the way we make investment decisions in our properties to create value and not just how many more quarter pounders of cheese we are selling out of this unit this quarter versus the quarter before.

Alexander Goldfarb

Well, given your dividend track record, I think you can – that’s probably the most tangible way to see the value creation that you guys have done is the dividends over time and the cash flow that Dan G. referred to earlier. So, thank you for that, Don.

Don Wood

Thanks, Alex.

Operator

Thank you. Our next question is a follow-up from Christy McElroy of Citi. Your line is open.

Michael Bilerman

Hey, it’s Michael Bilerman here with Christy. Don, I am just curious whether institutional investors are coming to you to sort of look at the acquisition market, bring in an operator like yourself and be able to take advantage of some of the uncertainty that’s in the marketplace. Clearly, overall transaction volumes have declined given a lot of what’s happening within the retail sector. And I just don’t know whether that has stimulated any larger institutions who may have redlined the sector, whether they start coming to you and saying, you know what, let’s figure out if there is some opportunities where we can go out and take advantage of a potential of some of the carnage out there?

Don Wood

Mike, the direct answer to your questions, no, not yet at this point, but it’s a really good question. What you are really saying is look, there is a real disconnect in terms of this industry, I mean – and it can’t stay the way it is that there has to be it seems to me, because of a disconnect too between private and public values, there needs to be with an amount of time, certain people are going to try to exploit those differences. So we are not particularly interested in diverting the attention that we have on our specific business plan today in any meaningful way. There is lots of conversations we have. The specific ones you are talking about, no, not in my notch at this point. We will ask Jeff that same question on the West Coast to make sure I am responding accurately, but whether it’s that or whether it’s other ways to exploit effectively public and private valuation differences, got to believe that over the next year, 18 months, 2 years that you are going to see some creative solutions.

Michael Bilerman

What are you hearing from the institutional investors that you are talking to on the private side that have a lot of retail holdings, I guess how are they reacting? I would assume, if anything, if they are performing well in their asset base, however, as best as they can within the environment, they are the first most likely to say, why don’t we increase more versus someone who doesn’t have exposure that in their mind would want to be to contrarian to start buying in this environment?

Don Wood

Yes. I don’t have a lot to add to that, Mike. I haven’t heard much about it yet at this point, but it’s an interesting fourth quarter coming in when you think about NAREIT and the conversations that will be happening at NAREIT in just a couple of weeks, when you think about all of that focus as it turns to 2018 and ‘19 and the shape of some of the balance sheets that are out there, which are fine. But how long does the equity value stay where it is, there has to be some of those conversations, I just doesn’t have them yet.

Christy McElroy

Hey, Don. It’s Christy again here. And just looking at your comp property POI disclosure and thinking about sort of this new way of thinking about it and I totally get you in terms of incorporating the cost associated with driving that growth. You also provided the CapEx disclosure associated with the comp property pool. Should we be adjusting for that as well in thinking about the costs that are driving this growth?

Don Wood

Yes. What I think you need to do and we are going really try to help with this is build a database on this company, any company that you are thinking about investing and look quarter-after-quarter, because it’s – look, there is no correlation, there is hardly any correlation between the numbers on the bottom of that sheet in terms of capital and the numbers on top of that sheet in terms of the income it produces, that’s obvious, right. We are not selling, which it’s real estate investment. But after next quarter and the quarter after that and the quarter after that, you are going to be developing a database here. And then we are going to be able to talk about some trends and what’s causing X to Y. So to me, this is just the first step in trying to make sure we are not having conversations that the sell side in particular, but also buyers, the buy side are trying to fit into boxes that we don’t feel really represents the way we run our business. We are looking for real estate investors that can gather this information over a period of time and make the biggest assessment of all. Are we making any money on the capital investments that we are making? And to me, if you don’t start by tying into the base of audited financial statements, it’s really hard to do that.

Christy McElroy

Thanks.

Operator

Thank you. At this time, there is no other questions in queue. I will turn it back for closing remarks.

Leah Andress

Thanks, everyone. We have a couple more slots left at NAREIT. Please reach out to me with any last minute requests and we will see you there. Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude your program. You may now disconnect. Everyone, have a great day.