Federal Realty Investment Trust Earnings Call Insights: East Bay Bridge Acquisition and Market Rent Growth Prospects

Federal Realty Investment Trust (NYSE:FRT) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

East Bay Bridge Acquisition

Craig Schmidt – Bank of America: This is Craig Schmidt. I’m here with Jeff. I guess a question kind of focuses on East Bay Bridge acquisition. I know a lot of the leases you’ve mentioned are nearly 20 years old, so opportunity to push rents, but is there also an opportunity to do some re-tenanting?

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Don Wood – President and CEO: This is actually one of the first acquisitions that we’ve seen in a bunch of years where I mean literally every (penny) is under market and then a number of them are doing extremely strong sales. A number of them are not and that’s really where the opportunity lies. Let me — Jeff is on the call now from California and (to deal), so let me have him address that.

Jeff Berkes – President, West Coast: We’ve got a couple of tenants in the lineup and it’s pretty obvious if you look at the lineup and see that the tenants are who that might be that – we either have an ability to really move their rent when their base term comes up because they have fair market value options or potentially recapture and improve the lineup so we’ll definitely be looking at doing that. The great thing about this asset and the reason we got so excited about buying I should probably mention to it’s something we’ve been working on as you might expect for a number of years. We’ve been talking to Catellus, first one there owned by ProLogis and then, again obviously after they were acquired by TPG about buying this asset and they are on our radar screen for a while. I’m very happy that we’re able to make a deal because its unique and that not only are the in-place leases well below market, but there is a significant shortage of box space in this trade area and when we look at our buoyed analysis for the trade area there is a long list of tenants that aren’t represented and who would want to be represented in this trade area. So, we’re pretty confident that we’re going to be able to take advantage of that and there are defiantly a couple of re-tenanting opportunities in the box lineup.

Craig Schmidt – Bank of America: It sounds like there is going to be some expansion, what can you take FAR too at this site?

Jeff Berkes – President, West Coast: That’s a big number, the city – the bulk of the property sits in the City of Emeryville. Emeryville is the very progressive business-oriented community they are very much in favor of increasing density on the site. Obviously we have in-place tenants with leases that don’t necessarily allow that and that’s something that we will have to work through. And I want to say that sky is a limit but it’s closed. We just need to work with the existing tenant base and then manage that as we are able to replace tenants and that kind of thing, but clearly that’s in our wheelhouse, that’s what we did it, Mid-Pike which is now becoming Pike & Rose we have done that throughout our recent history and throughout our portfolios. So, we will definitely have an eye towards that as we work the asset.

Jim Taylor – EVP, CFO and Treasurer: For anything good to happen at projects like that you need a city or county whatever jurisdiction it’s in to be helpful and both Jeff and I, we kind of look when this was done within a couple of weeks we had a letter from Emeryville welcoming us as the new owners and saying that we should sit down and talk about the future of the property which we just view as such a positive thing, and I wish more sitting frankly would take that kind of approach. So, this one started out very well.

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Craig Schmidt – Bank of America: Yes, it seems like an exciting project, I little – I had checked the done – through the numbers twice just to make sure we are always coming out with the right numbers there?

Jim Taylor – EVP, CFO and Treasurer: Get your comment in the right places.

Market Rent Growth Prospects

Jeffrey Donnelly – Wells Fargo Securities: Don just more general question, I mean with your portfolio occupancy at 95% and I think it’s pretty much in line often times with your sub market vacancy. And I think it’s certainly relatively lower than your peers, what’s been the recent trend in asking rents for small shop space and how you think we should be thinking about market rent growth prospects in the next two to three years.

Don Wood – President and CEO: I will tell you Jeff, we went back and looked at kind of small shops over the last 10 years to kind of get an idea of where occupancy really kind of goes and what kind of pricing leverage we have and often in periods of time of economic distress in our portfolio, the small shops get down to 89% and 90% occupied. That I think that was the case here again in terms of over the last couple of years, that is changing and so with that changing obviously comes some pricing pressure and it is hard for me to not feel an undercurrent probably supported by the housing foundation in the country that is getting better and to the extent that housing foundation continues to grow and it does — it is more likely to happen as they continue to happen in the markets, I think in which we operate. You’d expect more to be able to add more leverage that way. Now, in any particular quarter or any three months or six months period kind of that’s not necessarily the case, but I do think we have some more pricing leverage than we’ve had in the past and I would expect that to continue into 2013.

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Jeffrey Donnelly – Wells Fargo Securities: Then just if I could a question on the Assembly Row office your opening remarks were helpful, but I guess maybe a two-part question, was that decision shift influence at all maybe in a change in appetite from Avalon now that they are kind of get their hands full of (hard stone) and I guess this is a follow-up if I could I mean I was just curious like what sort of flavor of office your building there, if you will because you have the biotech of building obviously just in East Cambridge and are you looking for a single user or just a multitenant, how you are thinking about it?

Don Wood – President and CEO: Very fair question, and let me address the first part. No, it does not any — it’s got nothing to do with Avalon actually at all. When we first did this deal, we did the two buildings with Avalon 1 and 3 and then we were in active negotiations with that Avalon for Building 2. Building 2 has from a residential perspective there, the question is the best way to park it in stuff adds cost as we look at that and had that conversation that conversation was being dragged out. The negotiation was being dragged out, it was taking to a second time. At the same time, that was happening Jeff those office users we’ve just gotten a lot not in terms of the big campus type of office users but the full floor 30,000 square foot users of and it’s broader based it’s not just biotech, it’s broader based because Cambridge is filling up, filling up very quickly, the Bay is filling up very quickly. In terms of where it’s going, we think demand that hasn’t been there in the past few years. So, to be able to control the timing of opening the first phase of the project and not have a construction site effectively impacting that first phase and also to take advantage of that – of those increase and demand on the 30,000 foot users, I mean three full floor users would be great, one for the whole 90 would be great, and we’ve had enquiries in both those categories. So, it seems very obvious particularly with when we put the numbers together, the numbers certainly look acceptable and effectively accretive to where we were, so that’s why the decision happened the way it did. I mean any way you look at it over the full build out of Assembly over 10 years or 12 years whatever it’s going to be an office component is certainly part of the plan in any of our mixed use project, it’s really important to have that day time population base there. So, the ability to do that in the first phase in a very measured and small incremental way may all the sense of world to us.

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Jeffrey Donnelly – Wells Fargo Securities: Just one last question I guess, on Assembly, maybe two parts. One, I had seen some talk that you guys are looking at finding way to get those early change there. It get to accommodate from a big box grocers, does that imply it’s a Walmart or Target or even like a Wegmans has been sort of looking around this market and…

Don Wood – President and CEO: Are you talking about (Indiscernible).

Jeffrey Donnelly – Wells Fargo Securities: Yes.

Don Wood – President and CEO: It does imply I don’t know, it’s simply a matter of flexibility and us trying to look at all options to be able to – I don’t want to land bank 12 acres next to what we have for the next 10 years, I want to get damn good idea of what the opportunities are for value creation and so we want to do that we want excellent flexibility that’s what that’s all about.

Jeffrey Donnelly – Wells Fargo Securities: Is there any update on the Kraft family’s interest in joining soccer stadium I have seen some talk about that in the press?

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Don Wood – President and CEO: Yes, we have seen a lot of talk about in the press as far as we – as far as we know there is continued demand and maybe even stronger demand than we thought, but who knows in terms of the execution or something of that size.

A Closer Look: Federal Realty Investment Trust Earnings Cheat Sheet>>