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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good day, ladies and gentlemen, and welcome to Federal Realty Investment Trust's Fourth Quarter 2017 Earnings Conference Call. [Operator Instructions] And as a reminder, this conference is being recorded.
I'd now like to turn the conference over to Leah Andress. Please go ahead.
Good morning. I'd like to thank everyone for joining us today for Federal Realty's fourth 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.
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 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 be 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. 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 to begin our discussion of our fourth quarter and year-end 2017 results. Don?
Thanks, Leah. Good morning, everyone. A good quarter and, in fact, another good year for us, between meeting or beating estimates with fourth quarter FFO per share of $1.47 and $5.91 for the full year, 4.6% growth over 2016. To strong residential leasing progress with the new phases of both Pike & Rose and Assembly Row, not to mention Santana Row and Bethesda Row, further validating the relevance of our mixed-use product nationwide and our broader real estate capabilities.
To strong comparable lease rollover rates throughout the portfolio of 15% for the quarter and 13% for the year; to further fortification of one of the strongest balance sheets among any REIT; to another timely and opportunistic debt refinancing and small but carefully executed equity issuance, which, by the way, significantly derisked our development pipeline, this company continues to 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're not playing defense, we're on offense and we're moving the ball aggressively. Consider for a moment that by reporting FFO per share this year of $5.91, or even $5.74 when including the opportunistic cost of retiring our 5.9% notes due in 2020, we remain the only publicly traded shopping center company to grow FFO, by NAREIT's definition, each and every year since the beginning of this retail cycle in 2010, the only one.
In fact, we've grown NAREIT-defined FFO per share 48% over that period, even with last month's debt extinguishment charge. The consistency in which this company grows bottom line earnings truly sets us apart, no excuses, no exclusions, no reorganizations, no defensive dilutive asset repositionings, no recapitalizations, just consistent growth. And we don't expect that to change in 2018, as Dan G. will go over in a few minutes.
Hard for me to believe that history and track record don't matter in predicting the future. All right, back to the quarter. Leasing in the fourth quarter was again strong at 15% rollover growth and remarkably consistent all year. Consider that on over 1.6 million square feet in comparable deals done in 2017, which, by the way, was 10% more than we did in 2016.
Rollover growth was 11% in the first quarter, 13% in the second quarter, 14% in the third quarter and as I said, 15% in the fourth. And tenant improvement dollars stayed relatively stable and under control. Deals included TJX's HomeGoods concept at our Brick Plaza redevelopment, Marshalls' renewal at newly redeveloped Northeast shopping center and a new urban-format Target deal at Sam's Park & Shop in D.C.
Deals at redeveloped or remerchandised shopping centers clearly more than paved themselves in densely populated areas, and here again, our cost of capital advantage makes the underlying value creation even higher.
Occupancy gains in the fourth quarter continued that trend that we've seen all year. Our overall portfolio lease rate of 95.3% was higher than both our 94.7% lease rate at September 30 and 94.4% last year at this time. Of course, our total portfolio occupied rate at 93.9% suggests that there are 140 basis points of leasing that's been done, if not yet paying rent, certainly a positive for 2018.
Okay. On the development side, a couple of noteworthy advances. You might have seen in our press release last week that in the fourth quarter, we've signed a deal with Japanese apparel retailer, UNIQLO, with their first location in Maryland will be at Pike & Rose opening in the fall. That's significant because UNIQLO is international in scope and has largely selected productive malls as their real estate of choice.
Our mixed-use alternative was clearly more attractive to them and, to me, signals another hurdle that we've met in putting together an attractive and sustainable long-term neighborhood and place for shopping, living, working and playing. We still got more to do on the retail leasing side. We're 91% leased or under LOI, but getting deals over the finish line is arduous, but we're getting there.
And the residential leasing momentum at Henri, our latest apartment building at Pike & Rose, along with a 97% occupancy stability at PerSei and Pallas, make it pretty clear that the long-term growth prospects of neighborhood like these are very much intact. More than two thirds of the market-rate units are already under lease at Henri at rents that meet expectations with lease-up pace that exceeds expectations.
In addition, 54 of the 99 condominiums above the Canopy Hotel, which will open shortly, are under contract. Similarly, at Assembly Row, we've signed a very significant deal with Polo for a 10,000 square foot outlet store in the base of the hotel condo building in Phase 2. The deal was particularly significant because we couldn't get Polo to come into the project in the first phase because of the unproven nature of the urban outlet mixed-use model, product types that we pioneered. The success of the first phase at Assembly got them over the hump.
As with Pike & Rose, we still got more wood to chop on the retail leasing side. We're 77% leased or under LOI, but again, we're getting there and the environment and place are second to none. Residential lease-up of the 447-unit Montaje residential building is strong, with over 190 units already leased at rents which exceed expectations, and we expect to close on all 107 market-rate condominiums in just a few months, which will raise over $80 million.
The dilutive impact during lease-up from these two residential projects totaled about $0.02 per share in the fourth quarter as expected. The value created above cost at those two buildings alone in the next two years is estimated at nearly $100 million. At both Pike & Rose and Assembly Row, we're evaluating and working through the next phases as we speak.
Our mixed-use development capability, particularly when paired with our demonstrated cost of capital, is a true competitive advantage. Now on the West Coast, the fourth quarter was the first full quarter in which we operated on an integrated basis with Primestor, a Los Angeles partner specializing in shopping destinations serving the Latino customer.
It's an important additional arrow in our quiver going forward, and actual results in the fourth quarter exceeded our acquisition underwriting, a good start. That start continued into the first quarter this year when we signed a lease for the only vacant box in the Primestor portfolio months ahead of our expectation, a vacant Walmart grocer replaced by Bob's Furniture at more than double the Walmart rent.
We had underwritten a much smaller bump in rent. It's hard not to see the Primestor joint venture as a competitive advantage for us. The end of the street at Santana Row looks a lot different these days as our office development is fully out of the ground, remaining on budget and on time for delivery in 2019.
Now we've got to get it leased, and initial interest has been encouraging as we fully engage the community and capitalize on the attractive amenity-rich environment that office users in Silicon Valley and nationally are demanding. The initial positive experience at Santana Row that Splunk employees and Splunk management have been sharing in the community is particularly encouraging and helpful to our process.
And finally, I'd like to hammer home the philosophy in which we're making real estate decisions these days because it puts our entire business plan in context. The retail real estate-based companies, who will not only survive but thrive in the years to come, were 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 a narrow, limiting business plan but a broader, wider funnel in select markets.
It seems to us that in order to best position ourselves for that outcome, there are three important considerations. First, location matters more today than it ever has, it seems obvious to us. Two, assets need to be in flexible formats that can be improved 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 will be generated after redevelopment just aren't enough to justify that investment.
And third, truly enhancing the experience. The placemaking, the tenant lineup and the customer services at those places is both critical and harder than it sounds. Creating that environment is a lot more than just going down a cool things to do checklist. So that's it. Everything that this company is doing today, even if it moderates growth in the short term, is meant to be able to act on this necessary long-term philosophy.
The fact that we're doing it while still growing current earnings and cash flow at the same time, as we have throughout this entire cycle starting in 2010, is a true testament to the quality of our real estate and our team's vision and the execution competencies of that vision.
Now let me turn it over to Dan to talk about the year before opening up the line to your questions.
Thank you, Don and Leah, and hello, everyone. We are really pleased with our results of FFO per share of $1.47 and $5.91 for the fourth quarter and full year, respectively, slightly ahead of our expectations on both measures and ahead of consensus for the quarter. The numbers in the fourth were driven by higher NOI, primarily due to higher percentage rent and less impact from tailing tenants, offset by higher G&A due to year-end compensation adjustments and costs associated with our planned accounting and IT platform upgrade.
On the same storefront, our quarter came in at 2.6% for same-store with redev. Our new comparable POI metric came in at 1.7%. These results were impacted by a negative comp on term fees as well as the negative short-term impact of value-creating, proactive re-leasing initiatives, which produced a combined drag of 60 basis points.
For the year, our same-store with redev metric came in ahead of guidance at 3.4%. Calculating this metric using a simple average of all four quarters, a more representative measure of the year, same-store growth was 3.8%.
Don touched upon our progress in the leasing front, but let me provide some additional color. Our lease percentage at year-end is 95.3%, up a full 90 basis points over year-end 2016. And our occupied rate increased to 93.9%, 60 basis points over year-end 2016.
The gains over the course of 2017 can largely be attributed to the significant progress we've made on the anchor leasing front where our anchor lease percentage is back to a more normalized level of 98%. With respect to 2018 FFO guidance, we are formally providing an estimate range of $6.08 to $6.24 per share, affirming our preliminary guidance midpoint of $6.16.
This 4%-plus FFO per share growth positions us at the upper end of our peer group again. This guidance assumes the following: first, capital spend on development and redevelopment of $250 million to $300 million for the year, which effectively has been prefunded; closing on the sale of up to $150 million of condos at Assembly and Pike & Rose, the gains associated here will not impact FFO.
We forecast to refinance our $275 million term loan in the fourth quarter of 2018, although please note, we have the flexibility to extend this loan to November of 2019. We will continue our value-creating, proactive re-leasing activity in 2018, with leases already executed such as Anthropologie replacing Barnes & Noble at Bethesda Row; Target replacing Petco at Sam's Park & Shop in D.C.; and Muji on Third Street Promenade replacing Abercrombie, along with a few others.
This activity will weigh on results in 2018, creating $0.03 to $0.04 dilution on FFO and roughly 50 basis points of drag from a comparable POI perspective. But it will also drive growth and value creation of $50 million to $60 million once stabilized. Please note, this activity will put some pressure on occupancy during the year due to downtime, although not leased percentages as the leases are already executed.
As is our custom, this guidance assumes no acquisitions. With respect to G&A, we forecast roughly $36 million in 2018 or about $9 million per quarter. This reflects the additional costs associated with the upgrade of our accounting and IT platform. And with respect to same-store, our estimate of comparable POI growth, our new metric introduced in the third quarter, it is affirmed at 2% to 3%. And as a result, we project total property operating income will grow in the 5% to 7% range in 2018 relative to 2017.
Now on to the balance sheet. We continued to be opportunistic during the fourth quarter, further derisking our best-in-class balance sheet. First, with a $175 million reopening of our benchmark 10-year notes due 2027. This decision came in advance of the expected mid-December Fed rate hike and the anticipated passage of tax reform, where there a lock-in, a 3.32% rate at a record 10-year spread for Federal, of 97 basis points.
We used the proceeds to redeem our 5.9% notes due in early 2020. And note, we did take the $12.3 million charge due to the early redemption, which was recognized in the fourth quarter. With the 10-year treasury up roughly 50 basis points in the last 60 days, this decision looks like a prudent one, at least so far.
Second, we were also able to tap our ATM program during the quarter to efficiently issue $66 million of common equity at a weighted average price of $132 per share. This opportunistic activity has set off our A minus rated balance sheet to be extremely well positioned heading into 2018.
As we have prefunded our capital plan over the course of 2016 and 2017 at an extremely attractive cost, we effectively have no need to raise incremental capital in 2018. Our net debt-to-EBITDA ratio stands at a modestly elevated 5.8 times and is poised to decrease into the 5 to 5.5 times range over the course of the year as executed leases commence and as we reduce leverage through condo sales, 75% of which are under contract.
Our fixed-charge coverage ratio had a four times run rate for 2017, and we expect that four times coverage to remain there for 2018. Our weighted average debt maturity has been extended to a sector-leading 11-plus years. And we reduced our weighted average interest rate to 3.8%, with 99% of that balance sheet fixed.
Despite the disruption in the equity markets and the rising interest rates, the strength of our best-in-class capital structure positions us to continue to significantly differentiate Federal as we move forward in a challenging retail and capital market landscape. And with that, operator, you can turn the line over for questions.
Thank you. [Operator Instructions] Our first question comes from Craig Schmidt with Bank of America. Your line is now open.
Yeah, thank you. I was wondering how much reserve is being attributed to Ascena. I know you have 33 stores, and I guess we're expecting them to not spook the restructureds and the store closings to spring. So if you could comment what you see the bad debt might be from Ascena.
With regards to Ascena, we factored in, we have 33 locations. We, in our conversations with them, expect to rationally kind of shrink our store footprint with them over the next 12 to 24 months. I don't think we can kind of specify a specific number with regards to how much bad debt or cushion we have. We've kind of looked at space by space, but I don't have that number for you.
The only thing I would say to you, Craig, the only thing I would add to that is we got pretty comfortable with – when we laid out the guidance that we laid out, making sure that we were not overly conservative at all but certainly looking at tenants like Ascena and making sure that other than something much more catastrophic than we expect that we're covered.
Okay. Great. And then I just wondered if same-store NOI and FFO growth by quarter will be back-end loaded as you start to bring on some of the Assembly and Pike & Rose stuff.
Yes, no. Certainly, with FFO, in 2018, it should be back-end loaded towards the third and fourth quarter as we accelerate FFO in bringing online the benefits of Assembly and Pike & Rose. It's a little tougher to say whether or not we'll see that cadence with regards to same-store. Obviously, Assembly and Pike & Rose Phase 2s are not in the same-store portfolio, so it's a little tougher to kind of describe that cadence over the course of the year.
Don't get too carried away with the back-loaded stuff, though. There's a lot of things we're doing for the future, et cetera, that will go both ways. So a little bit back loaded, but don't overweigh too much.
Okay, thank you.
Thank you. Our next question comes from Alexander Goldfarb with Sandler O'Neill. Your line is now open.
Good morning. So just two questions here. First, Dan, you said that the G&A guidance for this year is $36 million, which is – yes, yes, for 2018, which is flat with this past year. On other REITs, we've heard a lot about payroll pressure, increased wages. And just sort of curious, how are you guys able to maintain sort of flat G&A? And obviously, I'm not sure what you've embedded for growth in payroll at the property level, but how are you guys tackling this because it seems to be a growing issue across the different REITs as they reported this season?
Alex, it's a great question. I mean, there's no question that we're in a period of time that is less predictable than it's been in the past. And so we're certainly more conservative on G&A. You'll certainly see it within the officers. There were basically no ratings given to Vice Presidents and above with only a couple of exceptions. This year, we're very conscious of it. We run a tight ship just like we did in 2008 and 2009 because you don't know.
And times where we're not putting up the growth that I'd like us to put up, we're going to get tight on that. And the average executive at this company has been here something like 15 or 17 years, something like that. And so we understand their cycles. And sometimes you're tight, sometimes you're less tight. And that's just part of the DNA in this company. The real estate business in total, it's nothing more than that but straight out honesty.
Okay. And then the second question, Don, is you guys are – have sold off basically in line with peers despite your track record. Obviously, the year-to-date doesn't disrupt against them that you would have. But at what point would your depressed stock prices start to affect how you plan new projects or view in terms of make you reconsider what you think is the best way to create value at Federal?
Yes, Alex, there's no question, I'd be straight out lying to you if I didn't say a dip down to the values that we're in – at right now. If they're sustainable, it doesn't have an impact on our capital allocation. I would hope you would want us to become more disciplined, and basically, it raises the bar on those type of capital allocation decisions. So the cool thing about the business plan, I'm really just thrilled by this, is that as we're finishing Phase 2s of both Pike & Rose and Assembly, as we're underground with the construction of 700 Santana Row, we have funded those capital needs before, as Dan had said. That's really important.
And coupled with mostly sold condominiums or under contract condominiums that will be sold this year, as Dan said, we have very little capital needs in 2018 and 2019. Now that's important because as we look at incremental phases, as we're doing really hard now with existing projects or new things that we want to do, they're being put through a lens of this current capital on environment, they should be put through a lens of that.
Now the good news is the – what is – what seems to me very clear is that we're creating a lot of value with the mixed-use portfolio, but in particular, the redevelopment portfolio within the basic shopping centers. And you can see that leasing and you can see where occupancy is and all that. So those levels of clear value creation, they're not going to be impacted by where we are in a significant way. But sit back, put that through the microscope of cost of capital and every incremental phase, and yes, we're going to be tighter on it.
Okay, thank you, Don.
Thank you. Our next question comes from Christy McElroy with Citi.
Hey, good morning. Just to quickly follow-up on Alex's question. Just beyond the current capital plan, you've used your balance sheet in the past to be opportunistic on acquisitions as well. I'm just thinking of the Primestor deal last year. In sort of this higher cost of equity capital world, how do you approach any potential acquisition opportunities that might come your way?
Christy, with a sharper eye. Now I don't know whether this will – we'll see what happens with cap rates out there in terms of all properties. We know what's going to happen with those cap rates on lessor properties. It feels a little bit like when we looked at what was happening the last time in this location that there would be some great buys for us to find, and we didn't find a lot because the good stuff just doesn't back up in terms of cap rate or very much at all. And so I don't know that we're going see much of it. We'll see. We're on it all day long.
The Primestor quiver, I do – I know you, in particular, had been through the property, so you kind of know what it is that we're doing there. And now seeing the results effectively exceed what we had hoped, and as I think I mentioned last time, there's a potential small development that is still being worked its way through the funnel there. We're hopeful that, that is – that will be an important part of the next 10 years of growth for the company.
Okay. And then just at Bethesda Row, it looks like in the K, it looks like in late December, you sold a land parcel. Just wondering that was really the two. And then with Anthropologie replacing Barnes & Noble there, just give maybe your thoughts around this new larger concept for them, how something like this fits with urban and other retailers and sort of how they are thinking about brick-and-mortar concepts going forward.
Yes. Let's – I'm going to let Chris do the – let him to do the Anthropologie conversation. The small parcel was what we call the [indiscernible] parcel. It's across the street, was very small. We really couldn't figure out how to make a value-accretive deal on that parcel. And so we were able to sell it effectively back to the county, right? On that, to the county at what was a very – in our point of view, a very fair number. So that's all that was. And with Anthro?
And with Anthropologie, Christy, what got us excited about the concept is that in this new large format, Anthropologie is putting many of their brands and other things under the same roof. So if you think about taking three people to frame, the Anthropologie product, the whole furniture line, cosmetics, a large shoe department that brings in other produce shoes, so they're not all vertically branded by urban, all of those things under one roof, to us, very much became a department store of the future.
We thought that, that really resonated with all the soft goods that we've added over the years on the business ads. So we were thrilled to have that opportunity and also thrilled with the backfill of bringing the bookstore back into the project.
The other thing that – just to mention to that, Christy, is it's one of the biggest reasons that proactively – I mean, we took Barnes out of there, Barnes & Noble in that corner, and we stood in front of that with you a lot of times over the years. It's iconic there, but the three-storey Barnes & Noble is not the future, and it's pretty clear. And so we proactively – not kicked them out, but they left, and they would have been happy to stay. In order to get this new concept theme for Anthro, that's going to be a ton of downtime and a ton of loss rent in 2018. But so what? The value being created by the new lease is significant.
Great, thanks so much.
Thank you. Our next question comes from Jeremy Metz with BMO Capital Markets. Your line is now open.
Hey good morning. Don, you mentioned the challenges getting some of the leases over the finish line. As you look to bring in tenants for some of these larger boxes you've taken back or even the bigger mixed-use projects, wondering if you could talk about how tenants are evolving and thinking about profitability differently, and therefore, what sort of rents they can pay versus the old occupancy cost model?
Yes, and it's a very good question, Jeremy. I mean, first of all, you have to see – I think it's evident in the numbers, certainly evident in the occupancy stats, we have done a ton of anchor leasing over the past 18, 27 months. And you can see it, some of it's paying already, some of it will be paying in 2018, more in 2019 along the way. If you were to ask me, one thing is different about February where we are here in 2018 versus February 2017, it would seem to me that more – that in February 2017, last year, at this time, fewer retailers really had their idea of how they were going to handle the future, and today, much more – many more of them do, and that's what's been happening over the last 12 months.
Within that notion, and we're seeing it everywhere, they will – absolutely we can get good deals, good economic deals that add value to both the property and to the rest of the tenancy in the center on filling those boxes for most of them. You just saw what we're talking about in Bethesda. Now some of the challenges in the future will be those second-floor boxes that made sense – Burlington is a good example. Those boxes that made sense in the olden days that make no sense today.
And we had a couple of those, not a lot, but we have a couple of those. Those are the things that will be challenging to effectively be able to accretively add value to the shopping center. So there really is a tale of two cities in terms of the ability to do that. I think if you look at the amount of leasing that's been done and where it's been done, it kind of gives you – where it's been done accretively, the value kind of gives you the answer. Is there capital that goes into those deals? Absolutely. Is there so much capital that the deal doesn't make sense? No. And so we can still make good deals, not as easy as they were, that's for sure, but still good deals.
Great. And then a question for Dan. You mentioned Q4 came in slightly ahead of expectations. So in terms of the guidance, is it just some of the additional re-leasing you talked about in your opening remarks that's changed since the last call that you kind of took the top end of the preliminary range? You previously provided the 6.26% off. And then, Don, you talked about capital allocation decisions and those possibly changing given where the stock is. I think guidance you were doing called for, call it, $50 million in noncore sales. So is there any thinking about increasing asset sales at all? Or is it just too early to make that kind of decision?
Let me get to the last piece, and then – since I remember it, then Dan can take the first piece. Yes, we absolutely look at increasing asset sales to the extent it makes sense. One of the things I wonder about, I don't know, it's not worry but it's wonder, is everybody is talking about asset sales. So is there enough capital out there? Who is buying that stuff? How are they financing it, et cetera? How much is too much on the marketplace? So it's nice to be in a position where we don't have to, but if we have an opportunistic way to move a couple or a few of the assets that we own, we will do that. Remember, we have a tax issue, and on almost every asset here, we have a tax basis that is lower, in most cases significantly lower than the value. So we have to figure that in. But yes, we would open up our bag of tricks, if you will, to consider incremental dispositions.
And then with respect to the fourth quarter coming in better than we had expected, clearly, we felt very, very good about the 4.4% kind of exceeded our expectations for the year. And that was because the 2.6% came in ahead of kind of where we expected going into the quarter. As we head into 2018 in guidance, I would not look into – too much in terms of us tightening the range in any way.
We just felt as though – coming through a very rigorous budgeting and forecasting process through the fourth quarter, we felt as though we owe you guys a little bit more precision with regards to our range of FFO. We kept the midpoint and the 4.2% number in terms of growth constant and just tightened the range a little bit on the upper band and lower band, wouldn't read too much into kind of that – those moves.
Thanks.
Thank you. Our next question comes from Mike Mueller with JPMorgan. Your line is now open.
Hi. Just curious with the 10-year backing up and changes in the REIT environment. Can you talk a little bit about what you're seeing in terms of market pricing for different types of assets?
On the acquisition side, Mike?
Yes.
Yes, I'll let Jeff chime in as well. But put the best assets that we're looking to acquire, we still have not seen kind of a backup in cap rates, as Don has alluded to. Maybe we will, but it still has not filtered its way into the market yet with comps. Jeff, I don't know what you're seeing on the West Coast and other parts of the country.
Yes, hey Mike. There's a round of deals out here, high-quality deals that close towards the end of the year, beginning of 2018 that were all in that forecast by our range, which is great pricing, very, very aggressive pricing for the kind of assets we're talking about. I think there's still a lot of capital that wants the best of the best, so I'm not sure the treasury has come up enough yet to really affect the pricing on those assets. But like Dan said, we'll see.
And we really haven't seen anything that's Class A institutional quality price since the treasury has popped out, but there is a ton of capital chasing those deals. So I wouldn't expect for the best of the best huge change in pricing. You fall off from the best of the best quicker now than you have in the last few years, so like Don alluded to earlier in the call, the lower-quality assets is a different story.
Okay, thank you.
Thank you. Our next question comes from Jeff Donnelly with Wells Fargo. Your line is now open.
Good morning, guys. Don, there seems to be like an increasing burden on landlords out there to not only understand the value of their space to retailers but to communicate it or sell that to retailers. Malls arguably have sort of an imperfect metric of sales productivity, but shopping centers don't have such a yardstick. Do you see retail landlords, I guess, malls and shopping centers, leaning to invest more in big data and analytics to improve operational excellence with merchandising, choosing tenants or working more collaboratively with their retailers?
I do, Jeff. It's a great question. I do, but the question is how. For somebody who's always skeptical of consultants because a consultant wants to take whatever issue there is in the marketplace and make a career out of it, there's a billion people out there saying, I just got the greatest data information for you. And maybe somebody does, but the reality is you're talking about a data transformation in terms of its importance to retailers, to others within – studying the consumer that I think is critically important.
How – we are looking strongly right now of how to go about that, how to participate effectively in that part of the world. I don't have any answer for you yet, but I can tell you, if I look over the next decade, there will clearly be not only investments but careful investments in the right data, the important data that retailers are using to make their decisions.
Now they're investing, too, obviously. And the biggest issue is every four months, whatever was important four months ago is now obsolete. And so sticking with that process or figuring out the best way to participate in that process is a key goal for Federal over the next couple of years.
Just as a follow-up. I mean, do you see that as something that's more about helping identify tenants, tenant selection? Or do you think this is more about helping in-place tenants generate more sales?
I think it's both, but – I think it's both. I mean, when you sit – as I was saying before, even in the last year, as more and more retailers kind of figure out how they're going to approach, not sure if they're going to be successful or not, but how they're going to approach this new economy and the new consumer, there's all kinds of information that they are grasping for as part of that plan. This – what you're describing is not an either or, it is a combination of both, and it will evolve month-by-month over the next few years.
And just one last question is, I'm not sure if you can speak to it, but just there's certainly been a lot of attention on Amazon second headquarters. Can you speak whether or not Federal has a direct involvement in any of the remaining bids or proposals? Or you guys just sort of located in the vicinity? I'm just curious as to how we should be thinking about that and maybe to the extent you have any color on the decision process.
Yes. Well, there's a bomb that's around it, right? First of all, it is an honor to be a shopping center company that is in the conversation as to where the second headquarters for Amazon is going to be. The end of itself, that's kind of cool. You bet you, we're in the vicinity. You know we're in the vicinity at both Assembly and at Pike & Rose, two of the 20 funnelists.
In terms of getting deeper into that conversation of direct or indirect, I can't talk too much about that yet. I think you should be thinking of our impact as indirect there. But there are still negotiations to go through on their side, the county government, state government, et cetera. We'll see where it ends out. But in two of those locations, it's very possible that we have a benefit, I would assume an indirect benefit.
Okay, thank you.
Thank you. Our next question comes from Nick Yulico with UBS. Your line is now open.
Thanks. Just going back to the same-store NOI guidance for this year. Can you give us a feeling for what rent spread assumptions are in that guidance along with how to think about occupancy? You mentioned there would be some pressure on occupancy because of downtime, but maybe a little more detail there would be helpful.
Sure, sure. I would say with regards to rent spreads, I mean, one of the things, if you look at over the last kind of eight quarters, remarkably consistent in terms of kind of low double digits to mid-teens, quarter in, quarter out. From where we sit today, I would expect through 2018 that kind of comparable. You may see a little volatility, but on the average, over the course of the year, you'll see generally comparable leasing spreads reflected in that 2% to 3% comparable POI growth.
With regards to that number, though, I mean, as I mentioned, that proactive re-leasing, which will put some pressure on occupancy and put some pressure on that same-store number, roughly about 50 basis points is reflected there with regards to some of the downtime. And obviously, it will be dilutive, because cash flow won't be there, by probably in the range of about $0.03 to $0.04.
Okay, that’s helpful. And then just going back to tough box sizes to fill. I guess as we think about 30,000 to 40,000 square foot boxes, feel like they are some of the tougher ones to backfill because maybe you're competing with power center, et cetera. Don, you talked about this a little bit earlier, but I just want to get a little bit more detail on your exposure to what is those tougher box sizes.
Well, it’s not – certainly, the size is important, but you have to look at it in the context of where it is. So the reason – I gave two examples before, and one is a second floor-only, accessible second floor-only big box in a – even a high-quality shopping center, certainly tough in a low-quality shopping center. But in a high-quality shopping center, whose business plans really look to that going forward? And I don't see name. So it's that second-floor, older space that I do worry about that we're working through. It will be – in many cases, because we have other arrows in our quiver, including other uses, whether that be office or azure, whatever else needs to happen in that space, we're looking at all kinds of stuff.
So for example, at Pentagon Row, a second-floor health club, which has gone – we converted to office space, with a very strong office market just over the river from D.C. and Arlington, Virginia, and we're going to really well associated with that. So it's not just – it's hard, Nick. Don't just look at the box size. Look at the real estate location and the alternatives and what the company is able to do with them. Look at that stuff, and you got it.
When – you take a look at a Bethesda, I mean, almost anywhere else, lots – not anywhere else, but lots of other places, a three-storey Barnes & Noble, basement, main floor, upper floor, of 45,000 feet or something like that, how else would you – who else would have gotten a whole space user in the form of this Anthropologie concept today? You would almost – any real estate guy would say, well, you're going to have to break that up. There'll be lost basement space, good space on the ground floor, but because at that corner in Bethesda, Maryland, we had choices. So I'm not going to be able to give you a generic 30 to 40 is bad, 15 to 25 is good. You got to get local on this analysis. I know it’s harder, but you do.
Appreciate it. Thanks.
Thank you. Our next question comes from George Hoglund with Jefferies. Your line is now open.
Hi, good morning. Most of my questions have been answered. But just wanted to get your sense on, based on your discussions kind of year-to-date with retailers and grocers, is there anything that's surprising you in terms of changes in sentiment with regards to additional store openings or sort of closing plans or kind of retailers that have maybe been deteriorating faster than you expected?
Yes…
Well, not in particular but – Chris, go ahead. I mean, obviously, we've been looking forward, we've been monitoring tightly coming out of the holiday season. Seeing where January and February had been, it feels more stable than I had anticipated at this point, which is good news. It's a settling. And I think that settling is part of that – each of them or more of them, if you will, not all, that's for sure, but more of them figuring out their business plans. I'm sorry, Chris, go ahead.
No, I was going to reiterate that, Don, because you made that point earlier that the market – these retailers just need to have a firmer handle on their business plan and what they're trying to execute. And those are high-quality real estate. They're looking for lots of foothold and traffic from consumers, and a lot of our properties resonate with that. So in general, we're finding a firmer environment with regard to having these conversations with the retailers. But that's – it's organized as Don said just in his last comment, it's all about location, it really is. It's not an equal opportunity proposition for everyone.
Okay, thanks.
Thank you. Our next question comes from Collin Mings with Raymond James. Your line is now open.
Thanks, good morning. Just wanted to go back to some of the prepared remarks. Can you maybe just expand on what you're seeing on the multifamily side to start 2018 as it specifically relates to the impact of incremental supply in some of your key markets?
Yes. Let me do the two, the biggest and – actually, we'll do three. Santana Row, Silicon Valley, I mean, there's like one Silicon Valley. Housing, clearly, is limited there. Jeff can certainly talk more about that, I'll go through the three of them quickly. But we still have – we've done remarkably well on our residential rents, on our ability to keep vacancy out on each new product that we add at Santana. That – in the marketplace, there's certainly additional development, but that market certainly seems to be able to handle it.
And by the way, the amenitized environment part of that, you cannot underestimate. It truly is – has become – we've been talking about it for decades, but it is here, man. In places where your lifestyle is able to be supplemented with all these amenities, it's really important.
Come across the East Coast and go up to Boston, I mean, you can see it in the results at Assembly. And Assembly, remember, is in Somerville, outside of Boston. And Boston rents on the residential side are through the roof. And some numbers like $4.50, $5 a foot per month. We are getting mid-3s at Assembly Row. And that's really strong. And by the way, I mean, we did 190 of them already in this building, which is – it's strong. There's more competition downtown, absolutely, but what it is that we're doing is really unique.
Move down to Pike & Rose. When we did the first phase, we had tons of competition or new product, if you will, being built. That has subsided in large measure certainly in Montgomery County. And the development of Pike & Rose as a place is solidified. So nothing suggests – nothing, to me, proves it more than $2.40 rents, which I wish were higher, but that's where they are, $2.40 rents, still profitable rents, but – where we're adding new supply and keeping the existing 500 units completely filled, that's a hard thing to do.
We thought there would be more dilution from Pallas and PerSei, the first two products that we've built, when we opened up Henri. There's not. It sets the time. And of course, it's location-driven, but the amenitized environment, the pieces of the mixed-use communities, clearly, and we see it in every survey we take, are an important consideration for why people are choosing to live there.
Got you. So it sounds like, again, kind of the amenitized environment is helping insulate you guys to some degree from the supply pressures out there. Is that the overall message?
I think I'm crystal clear, and I think you've seen it on the office, too. It's amazing that the office portfolio of this company is like 100% leased or nearly 100% leased. When you take a look at that building that we built at Assembly in Phase 1, that was not originally going to be built at that time. But we saw what we were doing with demand on the retail side, what was happening with AvalonBay up top, and we added a 100,000 square foot office building, completely leased up very quickly with people on the waiting list, and that will roll up as those tenants go.
And so partners, the recent partners are there at the Assembly environment. The recent Merrill Lynch is at Pike & Rose at the amenitized environment. It's both office and resi.
Thanks for the color there. And then just one kind of housekeeping question for me. Just as far as the size of the active development – active redevelopment pipeline, looks like that's down here to start 2018 relative to how you started the last few years. Is this just a function of timing? Or are you being maybe a little bit more selective going back to some of the comments about allocating capital given some of the pressures in the environment?
No. You don't see that yet. I mean, that's just timing. We delivered – we deliver ahead of that.
Well, we also have stabilized products that's kind of rolled into the stabilized pool and add up kind of the end process. The point is like a point.
That's the point. The point is done. And so that jumped off. But so, no, you'll see that – I mean, not always being a little lumpy, but – no, I think what we're seeing on the redevelopment side within the portfolio is as active as ever and delivering good yields despite what's happened. Look, the capital allocation conversation really applies more to the bigger next phases of the big mixed-use portfolios.
Yes, we got a pipeline on the redevelopment side, and you'll see that get replenished over the course of the year.
Great, I appreciate the color. Thanks.
Thank you. Our next question comes from Vincent Chao of Deutsche Bank. Your line is now open.
Hey, good morning, everyone. Just a quick question. Tax Reform Act, I guess, has been talked about generally positively for retailers, which makes a lot of sense. But I was just curious, for the guys that are struggling already that maybe don't benefit from tax reform even they don't have any profits, I mean, do you think this potentially could accelerate their demise as the better retailers have a little bit more firepower?
Oh boy, I don't really have a good answer to you – for you on that one. I don't really know. I mean, the – I think it's a footnote to the bigger conversation as to whether that retailer or those retailers have a viable business plan in the new world. And those that do, I do think will benefit from tax reform. Those that don't, whatever.
So I just don't think it's a – I don't know enough about those particular business plans, most particularly financial situations, which is what that comes down to. But it's hard for me to imagine that's the final thing that puts them over. I think there's bigger reasons they'll go.
Right. That makes sense. Okay. And just one other question. You mentioned the sort of TIs and those kinds of costs staying relatively stable, but we have been hearing consistently about wage inflation and labor costs and material cost increases. So just curious, as you think about 2018, do you expect that number to stay stable in the face of some inflation here?
Yes. Your point is dead on. I mean, there is certainly more pressure, continued pressure, but this has been the past five, seven years of more pressure to move risk from tenant to landlord. I like that we've kind of found some level of equilibrium overall. That doesn't mean there's not going to be a deal that we'll do with a big TI that has other benefits to the shopping center that happens occasionally, but basically, I see it stabilizing. I think that's a good thing. Look, that's again a property-by-property decision, the better properties are more leveraged.
Okay, thank you.
Thank you. Our next question comes from Floris van Dijkum with Boenning. Your line is now open.
Great, thanks. Hey, guys. As we’re looking at a screen of thread again today and Federal's implied cap rate is in excess of 5.5%, what point do you start to consider share buybacks? And maybe if you could also, Don, maybe touch upon giving some cap rate guidance to the market perhaps.
Floris, let me handle the buyback question because it's a good one. Look, we've been asked about buybacks over the past year at one point. And I've always said and I will still say with respect to this point that it's obviously not our preferred alternative. We absolutely prefer to allocate capital to projects that are long-term business plans, and that short-term variations in the marketplace are no reason to disrupt that business plan. I still believe that. But at some point, Floris, your point is not unheard at all, particularly in a year where we basically don't have the significant capital needs that we've had over the past few years. It can be on the table.
Now how to execute that within our A rating, how to execute that within our overall business plan, probably requires asset sales to fund that. So the question earlier as to whether there could be increase in asset sales, I mean, that's part of the things that we're considering because markets are markets, there's not so much we can do about that, that's for sure. But we're getting close. We start talking about $100 here, that's $100 a share and 6% yield and better than 6% yield on this company, and it's – it will not be something that's ignored. And let me just leave it at that.
Thanks.
Thank you. Our next question comes from Samir Khanal with Evercore. Your line is now open.
Good morning. Dan, I know you've talked a little bit about this, but can you walk us through sort of your sources and uses? Just remind us, please, how much you generate in terms of free cash flow sort of annually and how much funding you'll need for sort of ground-up in developments over the next sort of two years to three years maybe after you generate – after what you generate from the condo sales at Pike & Rose and Assembly Row. You talked about being prefunded for 2018, but I'm trying to get a sense of what the picture looks like over sort of the next two years to three years.
Yes. I think the $250 million to $300 million we had in guidance is kind of a general number. Maybe it's in the $200 million to $300 million range as we put a tighter lens on capital allocation over the course. And I think that the asset sales that we've kind of alluded to will be potentially a source of funding kind of going forward. Certainly, the condos in 2018 give us that prefunding.
We also generate pretty significant, call it, $70 million to $75 million, in that range, of free cash flow after dividends and maintenance capital that we use are very efficient form of capital, very low cost form of capital that we can reinvest into our business. That's a meaningful piece of it as well. And our balance sheet is positioned to – is positioned very well with very little drawn on our line of credit to start the year, and that we feel very, very good in terms of where our – not only for 2018 but even into 2019, where we stand from a capital plan perspective.
Okay. Perfect. Thank you.
Thank you. I’m showing no further questions in queue, so I'd like to turn the conference back over to Leah Andress.
Thanks, everyone. We look forward to seeing many of you in the next couple of weeks. Have a good day.
Ladies and gentlemen, that does conclude today's conference. Thank you very much for your participation. You may all disconnect. Have a wonderful day.