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Federal Realty Investment Trust
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Greetings, and welcome to Federal Realty Investment Trust Fourth Quarter 2019 Earnings Conference Call.
At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator instructions] Please note this conference is being recorded.
I will now turn the conference over to your host, Ms. Leah Brady. Thank you. You may begin.
Good morning, everyone. Thank you for joining us today for Federal Realty’s fourth quarter 2019 earnings conference call. Joining me on the call are Don Wood, Dan G, Jeff Berkes, Wendy Seher, Dawn Becker, and Melissa Solis. They’ll be available to take your questions at conclusion of our prepared remarks.
A reminder that 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 that 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 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 are in a report filed on our Form 10-K and 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 the 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 the discussion of our fourth quarter results. Don?
Thank you, Leah, and good morning, everyone. So, for the 10th year in a row, FFO per share was higher than the previous year, excluding of course last quarter’s Kmart real estate acquisition charge to the income statement for accounting purposes. And barring some unforeseen collapse, 2020 will be the 11th year in a row, as Dan will talk about in a few minutes.
Please let that sink in. We've grown earnings, bottom line earnings, every single year over this past decade and expect to do so again next year. Yes, growth has slowed as the industry continues to morph into something different. But it's still growth and there's not a single other publicly traded strip here that can make that claim.
In fact, of nearly 200 US equity REITs in every sector, less than 5% were able to grow FFO per share each year. Not surprisingly those companies have a combined average multiple of nearly 21 times. One of the things that differentiated Federal a decade ago when growth slowed following the 2008 recession, with the way we relied on our balance sheet strength and broad skill sets to move forward with initiatives that would power us in the years that followed, but which were not helpful with generating immediate earnings.
We aggressively move forward with master plans for Pike & Rose, Assembly Row, other long-term initiatives despite the challenging environment. And as a result, we were able to outperform a sentiment change because we were that far ahead. This feels like that to me. This time, rather than dealing with a broader recession and planning large decade long mixed use projects, we're dealing with oversupply and changing consumer preferences.
But we're doing equally forward thinking things. Things like doubling down on already successful mixed use communities with less risky and mostly non-retail additional phases that capitalize on the communities we've already established. We'll construct a new midsized projects like CocoWalk in Miami and Darien Shopping Center at Connecticut and listening to what retailers, restaurants and the communities they serve tell us about what's important to them.
By the way, if you look at our year-end balance sheet, you'll note $760 million of construction and process, more than we've ever had in our long history. We're aggressively moving forward with solidifying our core portfolio by proactively acknowledging the haves and have nots among retailers and shopping center environments. We're beefing up incredibly well-located high quality centers for the next decade with better tenancy, with alternative and additional uses, and with attractive place making using sustainable methods and environments.
For recycling assets with little opportunity for future growth, nearly $300 million worth at that Plaza Pacoima, Free State Shopping Center, the office of our retail building in Hermosa Beach, California, and the Kohls portion of San Antonio Center. And we're reinvesting those proceeds in far better opportunities in Hoboken, New Jersey; Brooklyn, New York; Fairfax, Virginia. In other words, in a naturally cyclical business, we're always focused on growing long-term FFO per share no matter what the current environment looks like.
So, let's talk about the transactions that closed in the fourth quarter to demonstrate the point. We did what we said we would do. First, we received the full $155 million in December from the Los Altos, California School District for the 12-acre portion of San Antonio Center through the condemnation process we've been discussing for months now.
The elevated cash position on our year-end balance sheet reflects this. And while we have the obligation to use a portion of those proceeds to pay existing tenants on the site, the timing and amount of those payments is uncertain at this time, but the net value to us is more than a little impressive. We also closed on [indiscernible] anchored plaza deployment in Los Angeles in the quarter for $51 million.
When these fourth quarter dispositions are combined with the sales of Hermosa, Free State and a couple of smaller parcels earlier in the year, $300 million of capital was raised at a mid-4 cap rate based on expected 2020 cash flows. And when we recycle that capital into Hoboken, New Jersey where 37 of the 39 buildings we bought in our new partnership closed in the fourth quarter. The other two buildings have closed this month -- closed in the fourth quarter. The other two buildings are closed this month.
We also closed on Georgetowne Shopping Center in Brooklyn and in January, the retail strip adjacent to our previous holdings, in Fairfax, Virginia. Basically $300 million invested in properties, which generate a going in yield modestly in excess of the assets that were sold, with an IRR that's 200 basis points higher. And we expect to be able to expand further given that hope of a partnership and the opportunities we're seeing.
Transactionally, the fourth quarter was extremely active, operationally, it was two. We ended 2019 having signed 457 retail and office leases for nearly 1.9 million square feet and average rents of $41 a foot. And we signed more than 2,300 residential leases at average rents of $2.82 per foot, $34 per foot per year. Just the retail and office leases combined created $77 million of growing annual contractual rent obligations for the next seven-plus years.
Our rental stream comes from an incredibly diverse set of retail, office and residential tenants. On the development side, we’re incredibly active with 700 Santana Row complete and just turned over to Splunk last week. $210 million, which is on budget, and yielding 7.5%. This building is a homerun at the end of the street and including Santana Row and really something you should check out on your next trip to North – Northern California. It’s impressive.
Across the street, at Santana West, construction is well underway, roughly $100 million of spend in 2020, $150 million of spend in 2021 with no income until 2022. Strong interest in the building at this very early stage was encouraging. Full blown construction at Assembly, on both the residential and the office building, continues unabated. Both projects are on schedule and on budget, roughly $200 million of spending 2020, $100 million in 2021 with no significant income contribution until late 2021.
This is one big development phase that will really change the feel of Assembly Row. PUMA’s North American headquarters as the office anchor there. Construction of 909 Rose, the flagship office building at Pike & Rose that will house Federal’s new headquarters in August of this year is on budget, is on schedule with roughly $50 million in spend expected in 2020.
We're currently trading paper with other tenants for more than 40,000 square feet in line with our underwriting. CocoWalk is moving along beautifully with 87% of the retail space and 57% of the office space spoken for under signed lease or fully executed LOI. Another $30 million of capital is programmed there for 2020, and they will begin to be generated here later this year.
And finally, we can now say that demolition and construction are underway at Darien where we will completely change the character of the grocery anchored shopping center where we will add 75,000 square feet of new lifestyle oriented retail space to complement our strong equinox asset banker, 122 apartments and 720 parking spaces directly adjacent to the Noroton train station in Darien.
$120 million and an incremental 6% yield with $25 million spend in 2020 and most of the balance beyond that. No incremental income here this year or next. I’d go to the status of just those large development projects for obvious reasons. Our balance sheet at year-end shows $760 million of construction in progress. And while the Splunk building at Santana delivers this year and will reduce that number, an additional $400 million or so will be added in 2020 and $300 million in 2021 before these projects are turned over to rent-paying tenants after that.
Back to the remarks I made initially, we're doing a ton of investing in leading edge real estate projects in markets as we look toward a very bright but different future with changing consumer demands and retailer business plans. We expect to be at the forefront of that change, all while continuing to grow FFO per share, albeit, more slowly in the near term.
So, that's about it from my prepared remarks. All the focus on short-term occupancy, current earnings, and list of expectations at this uncertain time is understandable and it's certainly important. But the company's clear path to growth and mid- and long-term relevancy of its real estate long after the current vacancies have been leased up is in our view far more important.
Let me turn it over to Dan before addressing the questions. Dan?
Thank you, Don, and good morning, everyone. Another record year of FFO per share as we posted $1.58 for the fourth quarter with the full year for 2019 at $6.33, as adjusted for the acquisition of the Kmart Assembly. An uptick in FFO versus the same period in 2018, and remember, in 2019, we faced an increase in G&A of roughly $0.02 per quarter from the new lease accounting standard.
The numbers in the fourth quarter were driven primarily due to higher term fees and higher rental income than last year offset by a shift in timing on property level expenses, both from real estate taxes were a meaningful forecasted tax refund was pushed into 2020 and non-recoverable property level expenses which were pulled forward from 2020.
Both of these are primarily timing issues that should come back to us positively in 2020, but represented roughly $0.02 of drag in the quarter versus forecast. While this quarterly FFO results may seem muted, this was driven primarily by timing and we had a really successful quarter in terms of all the positive activity Don highlighted in his comments. Our comparable POI metric came it at 2.4% for the fourth quarter and 2.9% for the year basically in line with our previously increased annual guidance.
With respect to retail space rollover, the 99% comparable retail leases during the fourth quarter were 462,000 square feet were written at an average rent of $37.87 per foot, 7% higher than the prior rent. Those results closely track the 379 full year 2019 comparable deals which were written at $40.48 on average or 8% higher than the deals they replaced.
Our portfolio remains well leased at 94.2% though we do expect that to move lower than the first half of 2020. While we don’t typically provide guidance on our occupancy metrics, given the aggressive level of proactively leasing and some of the recent retailer fall out, we expect our occupancy metrics will trough in the first half of 2020 to the mid 93% level for least and the mid 91% range for occupied. However, we should see a steady rebound back up to historic levels over the latter half of 2020 and into 2021 given our strong pipeline of leasing activity.
A few additional comments I'd like to highlight in our disclosure this quarter that further demonstrate the strength in our business that is not directly reflected in the quarter numbers. On our development schedules in the Form 8-K, please note on page 17, we closed out another $50 million in projects and four of them on time and on budget. And on page 18, we raised our projected yield on $0.01 NOS to 7% reflecting continued strength in rental growth that add sub-market for the amenitized office product we offer there.
Now why do I mention this? It’s because the redevelopment and mixed use development we do is challenging and it's really difficult to execute effectively through Federal’s experience and 20-year track record, we have meaningfully de-risked these parts of our business model.
Now, we'll turn to 2020 guidance. We have formally provided a range of $6.40 cents to $6.58 per share. This formal guidance takes into consideration some of the projected tenant failures that have occurred since late October 3Q call; A.C. Moore, Pier 1 and Fairway the most prominent. We felt it prudent to take a more conservative posture as these restructurings play out. This range represents 2.5% growth in 2020 FFO at the midpoint.
While this guidance range reflects some discrete headwinds facing us in 2020, which I will get to shortly, our diversified platform is executing on all cylinders, as evidenced by delivering 700 Santana Row to Splunk last week get returned in the mid 70s.
The stabilization of the phase 2s at assembly in Pike & Rose, delivery of smaller projects over the course of 2020 including the Primestor JVs Freedom Plaza, aka Jordan Downs, beginning delivery to start this year. Bala Cynwyd Residential opening in Q2 and a newly renovated CocoWalk expected to start delivering to tenants in the second half of the year.
While none of these smaller projects will meaningfully add to 2020, they will be additive in 2021. We also have the stabilization of the $50 million of redevelopment at a blended incremental yield averaging 9%, and we also have a core portfolio excluding headwinds caused by term fees, repositioning and recent tenant failures which otherwise would deliver comparable growth in the 2.5% to 3% range.
Also note that we executed on roughly $300 million of new investments and over $300 million of non-core asset dispositions during 2019 which will be a couple cents accretive in 2020. But provide more meaningful value creation and growth over the longer-term.
Whether other retail REIT can tell an asset recycling program that's accretive to FFO in year one. These items together would drive FFO per share growth into the 6% to 7% range if not for some discrete but somewhat disproportionate headwinds. Let me give some additional color.
First, term fees, we had a record year in 2019, earning over $14 million in gross fees. Whether it provides headwinds or tailwinds, we include term fees in our metrics because it is part of our business and the overall strength of our lease contracts provide us with a competitive advantage we can leverage over time. While we expect a strong year again in 2020, we do not forecast getting back to 2019’s levels and therefore forecast a meaningful drag here.
A second headwind. Late last year, we identified several attractive, proactive remerchandising and repositioning opportunities across our portfolio. And continue to evaluate additional opportunities, which will drive significant longer-term value creation, but at the expense of 2020 FFO. Changing out struggling retailers, we have limited runway in terms of long-term relevancy and replacing them with tenants who we project to be thriving in 2030 and beyond will be another source of 2020 drag.
Add in the forecast that impact the more recently announced retail failures on top of those previously identified such as Dress Barn. And collectively these items get us to a range of 1% to 4% FFO growth in 2020. With respect to other assumptions behind our guidance, comparable POI growth is expected to be at 0% to 2%, which reflects the headwinds we just highlighted. The first and second quarters of 2020 will be the weakest and may even be negative due to term fee drag.
We assume roughly 100 basis points of credit reserve comprised the bad debt expense, unexpected vacancy, and rent relief. This is roughly in line with past years’ projected reserves and actuals. Please note that projected lost revenues from the recently announced tenant failures previously mentioned have been incorporated into our guidance and are not part of this reserve.
With respect to G&A, we forecast roughly $11 million per quarter, up modestly from 2019’s run rate. On the capital side, we project spend on development and redevelopment of roughly $450 million to $500 million. As is our custom, this guidance assumes no acquisitions or dispositions over the course of the year. We will adjust guidance for those as we go. And finally, we’re projecting roughly $60 million to $80 million of free cash flow generation after dividends and maintenance capital.
Now, onto the balance sheet, as is become a Federal Realty custom, we have positioned our capital structure exceptionally well to handle the current wave of value creating development or redevelopment activity at the company. We finished the year with over $100 million of excess cash and nothing outstanding on our newly expanded and extended $1 billion credit facility.
As a result, our net debt to EBITDA now runs at 5.5 times, our fixed charge coverage ratio hold steady at 4.2 times, our weighted average debt maturity remains near the top of the sector at 10-plus years, and the weighted average interest rate on our debt stands at 3.8%, with all of it effectively fixed.
Our A-rated balance sheet equipped with a diversity of low cost funding sources allows us to execute our diversified business plan with a meaningful – meaningfully lower cost of capital than anyone in the sector which is another way we derisk the development activities we have underway. Our game plan for 2020 has all the components in place to position Federal for sustainable outperformance in both FFO and NAV growth over the next decade.
That's all I have for my prepared remarks and we look forward to seeing many of you in Florida in a few weeks. Operator, please open the line for questions.
Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from Nick Yulico with Scotiabank. Please proceed with your question.
Thanks. Just first question on the guidance. If you look at the FFO range you put out versus the goal post you talk about on the last call, you mentioned that you see more fairway and some others, I think, affected things. Was there also a decision to start more redevelopment? Is that also causing any additional drag versus what you expected last quarter?
No. No. I think -- by the way. Good morning. Yeah. We – the re – additional redevelopments really didn't come into, it was really just taking a more conservative posture as we look at some of the news that has come out since late October 3.5 months ago. Really that's – that was the primary driver.
Okay. That's helpful, Dan. And then I guess just the second question is as we think about this year and you talked about the earnings growth being affected by a few significant move outs that are unrelated to tenant bankruptcies. You’ve always been, sort of, ahead of the curve in terms of remerchandising boxes, but this year is clearly a more impacted year than most.
So, what I'm wondering is, is this a function of the retail environment and is it going to be a new theme in the federal portfolio? How should we think about our risk of there being a similar type of downturn – downtime vacancy impact in 2021?
Yeah, Nick. Well, let me start on that. We've taken a very holistic approach to all of our centers and really trying to take a look at where we believe these things will be more powerful in 2025 and 2026. And that means the notion of place and place making is a much – it's always been an important part of what we do but it's a – it's a more important – it's a bigger focus in terms of what we're creating including the type of co-tenancy that is happening there.
Clearly, less clothing, if you will, more experiential type of stuff including health and beauty; including food and different food sources. So, we look at this holistically as a major change in how retail and centers including mixed use Centers serve their communities over the next 10 years. And as you know, our staff is not in the middle of the country generally. It's sitting in the coast and in populated areas with lots of money and lots of people around.
And so, we are forward thinking, if you will, in terms of that. And it's not just about backfill and space. So, does this continue? Yeah, I do think it continues because I think this is a major change in how people are going about their lives when it comes to interacting with retail.
But we do it on a balanced basis and there's nothing more important than that to us to know that as a public company we can't tell you, well, our earnings are going down but it's going to be great in the future. We need to balance both of those things, current earnings along with the sustainability of great real estate. And that's the needle that we thread.
All right, Don, that make makes sense. Just last question is on the re-leasing progress on the spaces that are a drag on 2020, NOI, for example, Kmart, Assembly, Stop & Shop, Darien, and Banana Republic at Third Street in Santa Monica.
Yeah. Let me go through those because those are big ones. The Kmart at Assembly we may temporary lease up the space. But the purpose of that was that’s an acquisition to be developed and that will be a continuation of Assembly Row. Now, we've got entitlements to do. That takes couple of years.
The timing and the planning is necessary so we'll certainly look for some kind of mitigation, if you will, of the lost Kmart rent. But it's not the driver. The driver is the value that will be created on that 6 acres which is why I still don't understand the accounting that has to go through the P&L, frankly. That is an acquisition all day long.
Come up to Darien, we are now under construction. That Stop & Shop is not going away. And so as a result that will be a completely different use on that parcel. And so you won't see income contributed there. We're not trying to backfill the Stop & Shop. We'll knock it down. And so the whole notion there is how to create a whole bunch of value on a piece of land that was obsolete.
That shopping center wasn't needed as another grocery and acreage shopping center with that train station. So, look forward to that in the coming years. In terms of Banana, Jeff, I don't know how much you want to say at this point, but we're making some real progress on backfilling that at an incremental rate.
Yeah. Thanks, Don. And, Nick, we can tell you more hopefully next quarter. We're down the road but not to the point where we can really give a lot of detail on the leasing part of us there because we're in negotiations. So, more to come on that one, but trending in the right direction.
Okay. Thanks, everyone.
Our next question comes from Christy McElroy with Citi. Please proceed with your question.
Hey. Good morning, guys, and thanks for the call out on our conference for promoting it. In terms of – Don, you talked about $400 million of additional spend in 2020, $300 million in 2021. I know you have many options for capital raising to fund that, but just sort of generally how should we think about the mix. Dan, you said free cash flow this year is $60 million to $80 million, you've also got equity issuance as an option, but how should we think about the potential for additional dispositions as well?
You know that will always be part of our plan, Christy. So, first of all, let's start with the balance sheet that you're looking at which adds over $120 million of cash on it. So, starting out with a balance sheet that, as you know, is about as strong as can be, including a completely unutilized billion-dollar credit line. So, that's not a bad start. On top of that, there's no doubt we will continue to recycle the portfolio that you should still assume and I can’t – I'd love to say $150 million or $200 million of dispositions, but the reality is that's very opportunistic and it depends.
We just did $300 million last year. We did much less than that the year before. I don't know exactly where that will be is 2020, but it's part of the program, it's part of the capitalization if you will of the company, and we're comfortable in doing that because of the uses of capital that we have to reinvest. So, between the existing balance sheet capability along with asset sales, along with cash flow generated by the business, we're more than covered I think as kind of we've shown you in the past 10 years.
Okay. And then Dan thanks for all the color on sort of the drivers behind the comp POI range. I'm wondering if there's any properties that are sort of entering the pool in 2020 that have sort of an impact there. And then in regard to the term fees, it sounds like they'll be relatively backend loaded through the year. I'm wondering if you could say how the 2020 absolute amount is supposed to come out in FFO relative to the $14 million in 2019.
Okay. Well, maybe I'll start with the term fee question. $14 million is significantly in excess of our 20-year average which typically is about $5 million per year, per annum, and over the last 10 years, it's been about $6 million per annum. Maybe a better way to look at it because we've grown over time is it's roughly 80, 90 basis points of total revenues. So that creates a bookend of maybe $5 million to $8 million of term fees which is kind of what we have currently in the range. We don't expect to get back to the $14 million level.
I wouldn't say necessarily it's backend weighted. We'll probably have a little bit of a tougher headwind in the first quarter from term fees because we had such a big one in the first quarter of 2019…
Got it, Dan.
…with the lowest term fee at supply. And then with regard to your first question, could you just repeat it?
Yes, sir. Just what’s entering the pool in 2020 that might have an impact there?
There will be some things moving around. I mean, I think that we're – but there won't be materially kind of moving things. We are going to move the residential assembly at Assembly Row into the pool. We're going to be moving phase one of Pike & Rose roads as well as the residential and phase two into the comparable pool, and we'll probably also be moving Towson Residential.
But all of those have stabilized. And so, there won't be a material boost that you'll see from those entering the pool. They've stabilized in kind of one year seasoning we do as part of that methodology for comparable. But you won't see a big boost there.
Our next question comes from Samir Khanal with Evercore. Please proceed with your question.
Hey. Good morning, guys. I guess just shifting subjects a little bit here on the acquisition front. You guys were pretty active in 2019 kind of wondering what's in the pipeline at this time.
Samir, you don't want me to give you the LOIs that we’ve got, right? I mean at the end of the day, the – our pipeline for acquisitions does change all the time. There is no question that we were heavily focused on the New York Metropolitan Area in 2019 and that will stay.
So, we will continue to try to increase our holdings in those in those markets where we've just entered. But that doesn't mean that that – and by the way, the same thing for the Northern Virginia market. That doesn't mean something else won't pop up. One of the things that we are noticing right now are clearly more sellers who are who are looking to get out for all the reasons you would assume.
The trick for us is making sure that we're picking up assets that we believe in the long term for. That could even be a box center in the appropriate place – in a place or two, but it's it really depends on the metrics. So there isn't anything that is imminent at this point but you should see us active, if you will, throughout 2020 particularly in the areas that we targeted for future growth.
And what about on the disposition side? I know you guys you kind of had the strategy to sort of dispose someone non-core assets. Yeah. You were a little bit active last year. I mean what we – how should we be thinking about that sort of disposition volume possibly in 2020 from the modeling perspective?
Yeah I don't know how to say too much more than I did on the first question, Nick. Weather – I don't know the number is $150 million or $200 million or what it should be. I will tell you we've identified assets that we would like to dispose of because we have things to spend that capital on. But in the preparation for the – those packages and figuring out what the market – what makes sense in the marketplace, we do that very opportunistically.
And so there is not a budgeted number, if you will, that you can just put in the model of how much dispositions we would have. You should assume that anywhere from 0 to $200 million or $250 million dollars is what we have historically done and will approach it the same way in 2020 as we have over that period of time.
Okay. Thanks.
Our next question comes from Derek Johnston with Deutsche Bank. Please proceed with your question.
Hi. Good morning, everyone. So, we're going urban. So, Hoboken and now Brooklyn. Can you go through the near-term opportunity at Georgetowne Shopping Center? Mark-to-market opportunities, merchandising improvements, your planning, I mean, they have a Fairway, they had a Dress Barn and a GameStop, a buffet, to be fair, some stronger retailers, Starbucks, Carter's, Five Below, Chipotle.
So, the question is, what's the near term plan? And where are you actually going with this longer-term? It's a 9-acre parcel and there’s 575 parking spaces.
So, Derek, let me just start something and then I’ll ask Wendy to jump in there after that. But, we’re going urban, I mean we build around the density and the population centers. So, I don't think there’s any change in Brooklyn, New York then there is of – or Bethesda, Maryland or Santa Monica, California or Fairfax County, Virginia. That is what we are, we’re those close in suburbs, if you will, of major CBDs.
And so, I think, frankly, a grocery-anchored shopping center with the density that Brooklyn has at the price that we got at that was hard to pass up, to tell you the truth. And, obviously, we underwrote the weakness in Fairway as the – as part of that underwriting process, didn't know and still don't know, the timing, in particular, of what we can do there.
But we know that demand for grocery there is ridiculously strong. And so, you should assume that that will be a grocery-anchored shopping center in the middle of a very densely populated area, with rate upside based on how it was previously managed and run compared with how we will prospectively run that shopping center. So, you shouldn't expect it to be torn down and something else happening there. You should expect that they are really in my view, hopefully better run, higher rent, better acre park, open parking lot in the middle of Brooklyn.
Okay. And then San Antonio Center. Certainly, you've seems to have worked out fine. I think you guys paid around $62 million in 2015. So, it was sold under a combination for the $155 million. When will you have to pay out the tenant award portion from the proceeds? And can you share how that's determined and how that works?
Jeff, you want to take it carefully?
Yeah. It's going to play out over the next couple of years. And we've been able to work things out with most of the tenants but not all the tenants, so still on that. The process is relatively straightforward and mechanical but going to start- not going to start for a couple of years. So, Don, I don’t know if there's much more than that that we would want to add.
Well, the only thing I would point you to – maybe point you to is financial statements where there is a recorded gain and obviously, inherent in that gain is an estimation of the expenses that are that have to be paid out, so I hope that’s helpful. And you should know that that is by design very conservative.
Thank you, everyone.
It's very conservative but it's actually in excess of what we expected. And we had kind of guided folks to kind of net proceeds after those payments of $90 million to $100 million. And net-net, we're closer to $110 million. So – and that’s where the conservative estimate. So, obviously, a good result and better than we had we had hoped.
Thanks, Dan.
Our next question comes from Craig Schmidt with Bank of America. Please proceed with your question.
Thank you. On page 17, you break out the delivered projects which are recurring at 9% and then the active redevelopment projects which are delivering at 6%. I wonder if the 6% is the new norm or is this just a temporary mix issue.
Yeah. Well, a little bit of both, Craig. I think it's a great question. The result is – the reality is the construction costs are high, and they are significantly higher than they were a couple of years ago as we started these other projects. So there are steps that certainly part of it. Call it, I don't know whether it's half of the difference or whatever else. The other half is certainly mix, certainly mix. And you can see that Darien has a disproportionate piece in that. That's a complete redevelopment of a shopping center.
And one of the reasons we're willing to do at Darien or something like that at an incremental 6% is because of the nature of the project and where we believe the future in that asset goes. This is the same as putting a pad out on a – out in front of a shopping center where the new income is the new income, and that’s where it will be for 10 years.
At something like Darien with a big residential component, too, you should say, Darien too, and we’ll do Darien at 6% because of the incremental rent increases we expect to get, not on the residential side but in terms of the lifestyle part of the center as it gains traction. So you’ve got a big mix component in that but also, as I’ve said, construction costs are up.
Great. And then in terms of re-leasing like A.C. Moore or Pier 1, can any of that occur before the end of 2020 or is that all a 2021 event?
There's nothing better than me looking at Wendy Seher right now and because I love that you asked that question. Wendy?
Thank you, Craig. I do think that we will be able to do some other re-leasing and get those documents signed in 2020. In terms of them opening, I think you'll see that more in 2021, but we do have some strong activity in the pipeline right now which gives me encouragement that we will get a fair amount of it done in 2020.
Great. Thank you.
Our next question comes from Jeremy Metz with BMO Capital. Please proceed with your question.
Hey. Good morning. Don, Dan, I just want to go back to the growth topic again. You guys mentioned growth this year, growth next year, and obviously appreciating you're in this for the long game also specifically detailed a number of projects in your opening remarks which is clearly helpful. But sounds like income will be a little more phased and possibly backend loaded through 2021.
So, just broadly thinking about a bridge, is it a fair for us to be thinking we should have some temporary expectations at this point for any sort of big reacceleration or any reacceleration of growth next year? Obviously, recognizing those number of the moving pieces in the pipeline and the repositioning as you guys have talked about?
Yeah. Jeremy, you understand it well and you’ve kind of laid it out really well there. There's a lot – there's clearly uncertainty in our business. I’d love what we’re doing in terms of what we’re – what the capital that we’re putting to work, its contribution as you said will be later in 2021.
The big question and answer to your question is how many holds are there at the bottom of the bucket. And that’s what is for anybody in this space – in retail space the big unknown. And so, it does make us – it does make it harder to predict. It does make it harder to say, okay, growth will go back to this number on May 6, 2022 or something like that. But all we think we should be able – should be doing is looking toward making sure this stuff, all of this portfolio is extremely relevant and as good as it's ever been and better as we go through the 2020s.
And so balancing it to keep that growth – to keep growth in place but not knowing when we're able to really accelerate to another level is just the facts today and I would tell you it’s the facts with everybody no matter what they tell you. The difference is we got $1 billion of incremental capital that will create that incremental growth going forward. But what’s the negative coming out of the bottom end of the bucket definitely unknown.
Yeah, that’s fair. Dan, just a quick one. You mentioned that 100 basis points of credit reserve. You also mentioned the AC Moore. Just wondering are those baked into that 100 basis points that you're giving yourself or are those on top of the 100 basis points and that’s separate? Thanks.
Yeah. Our guidance reflects a projection of what lost revenue we should achieve or what we’ll be hit with in 2020. So that’s reflected in our guidance. If we deviate and it gets more negative then that’s covered in the reserve. But kind of an expectation of how things will play out with regards to those recently announced retail failures is reflected in the guidance and then a reserve on top of that if it’s worse than we project.
Our next question comes from Alexander Goldfarb with Piper Sandler. Please proceed with your question.
Hey. Good morning. Just got two questions from our end. First, Dawn, you’ve spoken before that you guys are First, Don, you’ve spoken before that you guys are a retail company, you do office, you do apartments but at your core you're a retail company.
That said, office has definitely been a bright spot this cycle. So, as you guys think about where you're going to spend on development pipeline or the assets that you're looking at. Are you having your team focus more on assets or opportunities that could involve more office or your view is look we’re a retail company focused on retail, if it has office, if it has residential great, but retail is our core.
I guess, Alex, the best way for me to say is we are real estate people. And the best thing that we can do with real estate is huge retail to be able to get people to come to that piece of property that we have. So, there is always a how do we get people to come to our real estate as the primary driver. Now, what can we do with it? Absolutely involves other real estate uses.
I think we've proven that. I think what you've seen in the past number of years for us is actually just the natural evolution of mixed use properties where you create that retail environment and then add residential or office or hotel or incremental uses that play off that retail. That will continue.
And so when you when you -- it doesn't mean we won't do a pure retail play like and answer to the previous question, we did in Brooklyn when we have our bread and butter and we know how to create value from increasing rents in a not tense environment.
But when you have other uses that include Hoboken which has a large residential component to it or as you see what it is that we're doing obviously Friend Center or Darien or CocoWalk, we're going take – we're going to look at it with a broader view I think, than other folks in the shopping center world. And we don't do that for just one or two projects. We do that with every possible piece of real estate that we own or are looking at, but it's certainly back for a long time with us.
I realize that it's just – it's funny this cycle office seems to be the golden child. So, you have the positive yield revision at 1 Santana. So, I don't know if that was leading you to try and push your team more to office. But the second question is…
Let me say one thing to you there, Alex. It's important that we don't do this for cycles. We don't invest to time cycles. This is – there will be a time when office is no good and retail is back better, and we are building long-term sustainable real estate destinations. And so, no, we don't move along with – you're not going to see us buying industrial properties because it's hot right now, for example. And I just always want to make sure we are a long-term focused company and we act that way.
Okay. And then the second question is with all the retailer closings that are announced, some are obviously full liquidations but some are retailers parent stores, in general, as I’ve looked at your portfolio and troubled retailers, are you generally pretty good about calling which of your tenants is going to close, or do you feel like some of these retail closings are sort of haphazard, or wouldn't necessarily follow productivity logic that you would otherwise could take meaning?
Are you caught offside by some of these closing announcements, or all the ones that have happened pretty much apart from a full liquidation you're pretty much like, yeah, we had a feeling they were going to close this one or that one.
Well, that's a good question, and I would – I'm putting a percentage on this not for exactness, but to be illustrative. I would say 75% or 80% of the deal, so we need kind of have a real good idea as to what's going on and why logically a tenant would close the store or to renegotiate a store or do whatever obviously.
But there is, to your point here, 8 percentage, 20%, some percentage, if you will, of decisions that are being made today that are not as obvious as they used to be and some of that is because there are broader market decisions that are being made, so what good performing stores can be closing too because they don't fit in a business plan of a company going forward.
There are other reasons that that sure, they do take us by surprise occasionally. You see it certainly in some of the categories you know like restaurants for example where you can have a decent performing restaurant but because of that ownership structure, we get surprised with a closed door. But, overall, the point here is really to make sure whether surprised or not, we've got backfills and we've got alternatives to be able to fill that. And I don't know how you better mitigate that risk more than with great real estate.
Our next question comes from Ki Bin Kim with SunTrust. Please proceed with your question.
Thanks. to go back to the kind of bigger picture and the growth rate that we can expect from Federal. So, maybe you can – is there any way you can give to some color on how much NOI you expect from redevelopment and development from the just from the known projects that you have on the ground today that we should expect in 2020 and how that looks like in 2021?
Well, I mean let's do it – let's do it this way. When you go to page 17 and 18 of our 8-K that does a pretty good job, I think, of laying out capital and laying out the returns. You can get a pretty good idea of what ultimately those projects and new ones coming up are going to contribute.
Now, on the timing there's no doubt that that much of the big numbers on those two pages will not be producing income until starting later in 2021 and then forward. They’re big projects. And by the way, that construction does have certainly in the case of Pike & Rose or in Assembly, it does have an impact slight but it's got an impact on the rest of the project because there's more stuff happening with dump trucks and that kind of stuff.
So, you should assume later in 2021 is when you're going to – is when the big stuff on pages 17 and 18 starts producing. And as Dan went through, you'll get some of that in 2020 including, by the way, a big one in 700 Santana Row in Splunk, but there's a lot more coming. So, you'll have to back-weigh that. So, we're still growing, Ki Bin, we're still growing.
Yeah. I mean the reason I asked that is that we've had a couple of years of low growth and I know you're investing for the future and it's all the right decisions, but at least in the near or medium term, the market is trying to figure out when we get back to that 4% or 5% FFO growth on trajectory. That's why I asked those questions.
No. And as…
And just…
Go ahead.
And are you working on anything to perhaps try to decrease that downtime when you already have a leaf on hand and when you have a tenant moving out which I’m trying to know that gap of that downtime?
Absolutely yes. In fact, if you could read our goals and objectives for the company, it is the single biggest thing, not from the first leasing person’s discussion with a tenant to the first dollar of rent that gets recorded in the P&L all along that process, major initiative to reduce that time.
And it includes some things that you would assume, like a simpler lease, it assumes some things you might not assume, like how tenant coordination happens and who does the work and how it gets priced out and things like that. It assume some changes in terms of the marketing materials that leasing agents use and how they use them. And all the way through, it is a primary focus of this and I would suspect most companies in this space in 2020.
All right. Thanks, Don.
Our next question comes from Michael Mueller with JPMorgan. Please proceed with your question.
Yeah. Hi. A few things. First, I was wondering, can you talk about the timing and the magnitude of the recently that were – the recent unanticipated bankruptcies that you've been talking about?
Yeah. I think we've taken a, kind of, an holistic and – a view of – look, there’s uncertainty in these restructuring processes. And we've taken an estimate of how we anticipate getting potential stores back, what stores will stay in place and so forth and we made that estimate. I don't think that there's a, like a, kind of, a good answer for you in terms of helping you with your – with kind of specificity like Pier 1.
I mean I think we're in pretty good shape at Pier 1, where we're, basically, released on one of them. Another one is going to stay because it's one of their top performing stores in the region and the remaining two out of three were trading paper and should have them leased up probably by end of the year. But it's tough to, kind of, go through each one of them and the bankruptcy process is an unpredictable and so we'll see how it plays out.
Got it. And maybe a couple other numbers questions here. What was the lease term come in the fourth quarter?
Lease term income was gross fees of about $3.8 million in the quarter and that was roughly in line with kind of what we had expected.
Got it.
Got it. Okay. Thanks. And last question, with no dispositions in the guidance and 450 – I think it was $400 million to $450 million of spend, of investment spend. What's the equity assumption baked into 2020 FFO guidance?
Yeah. Over the course of the year, what’s reflected in our guidance is about $125 million of incremental equity, consistent with what we have done over the years in that range and it would be kind of played out over the year in terms of your models. But we've got the balance sheet that we don't have to use that.
We've got other sources that will fill the gap whether it be incremental leverage, leverage neutral, leverage asset sales, cash on hand, free cash flow. We've got a lot of tools in the tool box in addition to kind of the opportunistic equity insurance that we've been fortunate to be able to issue over the years.
Got it. Okay. That was it. Thank you.
Our next question comes from Vince Tibone with Green Street Advisors. Please proceed with your question.
Hi. Good morning. I'm just curious, when you lose a grocer such as Fairway, how does it impact the adjacent small shop tenants? Are there other typically co-tenancy clauses that allow them to immediately pay lower rent once the grocer closes?
No, there are not, Vince, particularly in any strong located place like that. It wouldn't be – certainly wouldn't be in our lease. And while we didn't write that lease that was before that there is no such impact there.
So, just the grocery, just that box.
But on the other side of that, can you imagine putting a better grocer in that box and what the impact that would have in terms of traffic to the balance of the – the balance of the space, something that we're counting on.
Right. Makes sense. Let me just kind of [indiscernible] that, just how surprised were you by the Fairway bankruptcy? And just in general, like how worried are you about some of the smaller regional grocers out there? Are you expecting more bankruptcies to occur over the next five years, let's say as the grocery industry is kind of evolving here?
Well, let me answer that question in two ways. One, not surprised at all with respect to Fairway bankruptcy. Frankly, it was one of the most – one of the most important parts of our due diligence on buying the asset, and if you knew what we did for due diligence, much of our time was spent figuring out how much demand there was for that space and at what rent they would pay. So no, no surprise there at all.
In terms of the bigger question, I don't – new grocery is very different than any other category, and this kind of goes back to the two – the beginning part of what we were talking about here. I – we’re not just about filling boxes up. We really are about bringing these retail products to places, shopping centers, and mix of these properties to places that will be the best five years from now.
And so, to the extent, more groceries go out, smaller grocers – less well-capitalized grocers, which if they don't have a particular niche, sure. They're under margin pressure all the way through. Completely agree with that. But again, so what to the extent you've got backfill opportunities that are more sustainable to what that shopping center should be in any particular neighborhood or community.
And our stuff as you know\ is a lot bigger on average and a lot more regional on average than a traditional grocery anchored shopping center in a lot of markets. It's more than doubled the size on average in GLA, for example, and land. So, it's all about from a landlord’s perspective, options, alternatives and it's hard to imagine there isn't more disruption in the grocery business. Of course, there will be. Just as there will be in every other sector as we move forward. But I think we're well prepared to use that to create better retail destinations.
Thanks, Don. Very interesting color.
Our next question comes from Linda Tsai with Jefferies. Please proceed with your question.
Hi. In terms of occupancy troughing to mid-93% leased and mid-91% occupied. But then getting stronger in the second half of 2020 and to 2021, where are you hoping to end the year in terms for occupancy or 2020?
I would say that kind of back at kind of current levels. We expect kind of a dip over the course of the year and targeting getting back to kind of what our year-end levels were in 2019. But over the course of that, obviously, we'll work our way through kind of that trough…
And then…
…and still grow bottom line.
Thanks. And then do reimbursement see more of an impact this year given lower occupancy?
Sure. I mean, absolutely with – and we don't talk about that enough right. With triple-net leases effectively losing any tenant in that space, somebody’s got to pay those bills. And it’s us. So, there's no doubt that hurts earnings, too. I think the point that's really important understand here though is with reduced occupancy as expected, we are projecting FFO growth. That's pretty, pretty incredible actually. And that speaks to the balance of the project – the balance of the portfolio, I think.
Agree. And then do you have any Lucky's or Earth Fare to some topic of grocers?
No. We have neither.
Okay. Thanks.
Our next question comes from Floris van Dijkum with Compass Point. Please proceed you’re your question.
Great. Thanks, guys. A quick question. The 1% credit reserve percent credit reserve that you have baked in, how does that compare to your five-year historical realized credit losses?
It's actually very much in line with our five-year history and actually where we come out in terms of actual. There's not a material difference but 100 basis points has been pretty consistent at least since I've been here. And the actual results are kind of in line roughly with the – with those reserves.
Okay. And then maybe a quick question on the residential rents. What has your experience been on the rental increases after the first year’s rents on newly-developed departments? What kind of increases have you seen at Assembly or at Santana? And how should we think about Pike & Rose in terms of increases for residential? Or do you think that market is different than you think is going to be a little softer than Boston and San Jose?
Yeah. Floris, it's a great question. I mean, obviously, our best population from which to get that information is Santana because we’ve been open as long as we have and I can tell you that the annual CAGR for those residential rents has been about 3.8%, almost 4% over that period of time, not every year during it but strong.
Now, come over to Assembly, Assembly is really interesting because it – if you remember, we started out with AvalonBay during the first phases of residential. We then added [indiscernible] which is a big good 500-unit building. And now, we are adding more supply. And even with all that happening, we've seen rental growth that's – and again, it's only a couple of years in excess of 4%. So that's real strong.
In terms of Montgomery County, it’s clearly been weaker. Montgomery County and therefore for Pike & Rose on the residential rents side over the past three or four – the first three or four years was essentially flat. We are now in the last 12 to 15 months seeing the first signs of real strength from that perspective. And by the way, not surprisingly, that is very much in line with the strength that we're seeing on traffic counts and sales on the retail piece.
So as these communities become more mature, there is no doubt that that ignores to the residential up top. So, very hopeful to see sustainable, call it, 3% at these properties over the long term.
Great. Thanks, Dan.
You bet.
Thank you. At this time, I would like to turn the call back over to Leah Brady for closing comments.
Thanks for joining us today. We look forward to seeing many of you in the next couple of weeks. Thank you.
This concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.