Nov 4, 2011
Executives
Katrina Lenox – Investor Relations Don Wood – President, Chief Executive Officer Dawn Becker – Chief Operating Officer Andy Blocher – Chief Financial Officer Jeff Berkes – EVP, Western Region and President, Federal Realty West Coast Inc. Chris Weilminster – Senior Vice President, Leasing
Analysts
Craig Schmidt – Bank of America Paul Morgan – Morgan Stanley Jeffrey Donnelly – Wells Fargo RJ Milligan – Raymond James Nathan Isbee – Stifel Nicolaus Alexander Goldfarb – Sandler O’Neill Michael Mueller – J.P. Morgan Quentin Velleley – Citi Chris Lucas – Robert Baird Jeff Spector – Bank of America Cedrik Lachance – Green Street Advisors Rich Moore – RBC Capital Markets
Operator
Good morning. And welcome to the Third Quarter 2011 Federal Realty Investment Trust Earnings Conference Call.
All participants will be with a listen-only until the question-and-answer session of the call. This conference is being recorded.
If you have any objections, you may disconnect at this time. I would now like to introduce the conference leader, Ms.
[Katrina Lenox]. Ma’am, you may begin.
Katrina Lenox
Good morning. I’d like to thank everyone for joining us today for Federal Realty’s third quarter 2011 earnings conference call.
Joining me on the call today are Don Wood, Dawn Becker, Andy Blocher, Jeff Berkes and Chris Weilminster. These and other members of our management team are available to take your questions at the conclusion of our prepared remarks.
Our third quarter 2011 supplemental disclosure package provides a significant amount of valuable information with respect to the Trust’s operating and financial performance. This document is currently available on our website.
Certain matters discussed on this call may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any annualized or projected information, as well as statements referring to expected or anticipated events or results.
Although, Federal Realty believes the expectations reflected in such forward-looking statements are based on reasonable assumptions, Federal Realty’s future operations and its actual performance may differ materially from the information contained in our forward-looking statements and we can give no assurance that these expectations will be attained. Risks inherent in these assumptions include, but are not limited to, future economic conditions, including interest rates, real estate conditions and the risks and costs of construction.
The earnings release and supplemental reporting package that we issued yesterday, our Annual Report filed on Form 10-K and our other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial condition and results of operations. I’ll now turn the call over to Don Wood to begin the discussion of our third quarter results.
Don?
Don Wood
Thanks, [Katrina], and good morning, everyone. At $1.01 of FFO per share reported during the second quarter compared with $0.95 last year, 6% growth, we’re very pleased with our operating performance thus far in 2011.
In fact, when you look at the nine months ended September 30th compared with that same period last year, you’ll note FFO per share of 3.02 this year compared with 2.87 last year, 5.2% growth. That comes without any occupancy gains.
In fact, comes with occupancy declined because of the Board is in blockbuster liquidation’s and it comes with a weighted average interest rate largely fixed portfolio wide of 5.9%. That rate is above today’s long-term rates with a well added maturity schedule over the next decade providing strong cushion against rising rates when that eventually come someday but also some shorter term upside as we continue to find refinancing opportunities.
The other full growth that we’ve experienced this year is encouraging and suggests that we should hit or beat the $4 share mark for the full year in 2011 for the first time in our history. Let me say a few things about the three other key operating metrics in the portfolio.
Internal growth, lease rollovers, and occupancy. Not only was FFO per share strong, but so was our internal growth at 2.4% excluding development and 3.7% including it.
Continued and steady overall rent increases portfolio wide, supplemented by what we’ve seen as a continuing trend of favorable bad debt expenses year-over-year with the two biggest factors affecting the same-store growth. We particularly hope that the bad debt experience continues since to this point, we don’t see any overly worrisome signs and some debt ceiling debacle of 90 days ago.
Also benefiting the quarter’s internal growth, were 10 deliveries that property is formally underdevelopment at places like 300 Santana row, Hampden Lane in Bethesda, the village of Shirlington and Escondido Promenade. Lease rollover growth on comparable spaces was solid at 8% on a cash basis, 18% straight line.
In all, we signed 88 new or renewal leases for a total of 353,000 feet at an average first year cash rent of $31.62 compared with 29.24 for the last year of the expiring leases. A couple of CVS drugstore renewals at Gaithersburg Square and Laurel shopping center in Suburban Maryland and a strong leasing quarter Bethesda Row and Third Street Promenade in Santa Monica underpinned the leasing for the quarter.
On a year-over-year basis, we once again report a decrease in occupancy given the 130,000 square foot of borders and blockbuster closings that were inevitable. As I said in my remarks last quarter, the closing of all four borders locations in all of our remaining blockbuster video stores in the second and third quarters couldn’t help but bring down occupancy.
We came in at 93.3% leased, roughly the same as at the end of second quarter but down 60 basis points for the 92.9% leased that we reported in the comparable period last year virtually all due to those retailers. Our borders locations, Wisconsin Ave in Washington, DC, Santana Row, Old Town Los Gatos, California and Wynnewood Pennsylvania on Philadelphia Main lines are all A Plus locations and it won’t be hard to release them at strong rents.
Preferred on the road in tenant discussions on most of them, are other signs at this point. Physical occupancy trail percentage lease by 110 basis points, reflecting the significant tenant build out activity that we have underway, three new super markets are under construction, the fresh market at Congressional Plaza, Boston’s market at Rockville town square, and a new great grocery at Westgate mall, as of two new LA fitness gyms at Quince Orchard and Laurel Shopping Center.
Rent starts on these and other build outs will provide new strong rental income streams with residual benefits on the respective shopping centers beginning in 2012. All in all, portfolio is performing beautifully and we’ve got a lot going on trying to strengthen our merchandising by transitioning important spaces throughout the portfolio from the tenants of the past to those that will generate new and higher sales level for many years to come.
The Right grocer, the right health club, the right soft goods merchant has always meant a lot when it comes to shopping center performance and that’s truer today than it ever has been before. Okay.
A few minutes on where we are allocating capital these days. And let’s start with the three big development opportunities.
A bit more than $100 million of residential development at Santana Row, roughly $150 million in retail development in the first phase of the assembly row, not including of course AvalonBay’s apartment investment and $250 million in mixed use development at Mid-Pike primarily residential, from here on in by the way, we’re calling Mid-Pike, Pike & Rose. All in, $500 million worth of capital can be expanded between today and 2015, earning a blended return of somewhere between 7 and 8 expected upon stabilization.
Refining continues on each specific property but these are the numbers we’re going to use for planning purposes at this point. At Santana Row, the first smaller building is completed, with the first tenants moving in last month.
At this point, 60 of the 108 unit are leased at average rent of $2.76 a foot and hopefully to be fully leased by the full quarter of 2012. Approximately at the same time that we’ll begin construction on the next and larger building, that building, known as 8B internally will cost $70 million and will include 215 units and a 350 stall parking garage.
At assembly row, we have a very real and improved project. It’s for the new tenant -- new transit station came in within the required funding range and the MBTA board approved the contract for construction of the assembly square key station.
Construction of both the station and the mixed-use product is expected to commence in a few months and deliver in late 2013 or more likely early 2014 with the T-Stop opening about a year later. Retail interest for our 315,000 square foot first phase from both outlet tenants and restaurants is particularly strong, and a great theater deal is well on its way.
We have very high hopes for the first of its kind mixed-use outlet and entertainment destination. And finally, at Mid-Pike, we expect to begin construction in the summer of 2012, on the first phase of mixed-use development.
First phase will transform a portion of the existing center into 156,000 square feet of retail, 87,000 square feet of office and 484 rental units in a rebrand and all be rebranded as Pike & Rose, signifying its well-known location at the corner of Rockville Pike and Montrose Parkway. Pike & Rose will be developed in at least four phases over the next 10 years and while we are likely to bring an office and perhaps residential partners for future phases, we intend to do the entire 250 million first phase without partners.
Let’s move on to acquisitions, but first, small but significant disposition. You might remember that we acquired three small buildings on Newbury Street in Boston within the last 18 months, in hopes of growing our presence there dramatically, by getting the opportunity to own a large portfolio there, controlled by Anglo-Irish Bank.
We had hoped to deal with Anglo-Irish Bank directly and avoid having the portfolio grow to a broad public marketing process. It didn’t work out that way.
The portfolio was marketed publicly and not surprisingly, found lots of interest. The portfolio was sold to a foreign back fund at a price we are unwilling to pay.
Accordingly we have little interest in maintaining our three small buildings on Newbury Street and sold them to the same buyer as the larger portfolio. Sales price was nearly double our cost 18 months ago.
And you’ll see the $12 million gain on sale in the future quarter. Cap rate paid was well below 4% on 2011 trailing NOI and barely 4% at 2012 forecasted NOI.
Is just another example of a growing number of investor’s view of the potential for great mixed use real estate in the country’s best markets. Let me spend my final minutes here on the Plaza El Segundo acquisition and an adjacent development site.
One of the most complicated and time consuming deals we’ve ever made, federal was able to agree to acquire a controlling interest in 381,000 square foot landmark retail property and a 100% interest in an adjacent development site at the corner of Sepulveda Boulevard and Rosecrans Avenue, in El Segundo, California just two miles south of LAX. Property serves the affluent communities of Manhattan Beach, El Segundo, and Hermosa Beach among others.
It’s a big deal for our west coast presence and for our leasing, which now includes such trophy properties as Santana Row, key assets on Third Street Promenade, Old town Los Gatos and now Plaza El Segundo. Those are high profile destinations our complimented by strong necessity based west coast properties like Escondido Promenade, Westgate Mall and the Galaxy Building in Hollywood among others.
Okay. Let’s start at Plaza El Segundo with the development site, since it’s easier to understand.
Eight acres on the hard corner of Rosecrans and Sepulveda, existing entitlements for 70,000 square feet of retail and restaurants are in place and make us optimistic that we can make a development deal $40 million or so, pencil on the site. We would expect to be in a position to get started on that development within the year from now.
Next door, on the 37 acres housing Plaza El Segundo there’s three distinct sections of this asset. A 273,000 square foot community center called the Plaza, anchored by Whole Foods, Best Buy, Home Goods and Dick’s, then there is a 53,000 square foot lifestyle center called the collection featuring Anthropology, H&M, JCrew and others and finally, a 55,000 square foot specialty center called the Edge, featuring small shops, restaurants, and other service users.
Together, this is the definition of a dominant retail district that will get all that much better with the redevelopment of the Adjacent Hard Corner. While the deal structure is complex and we’re not closed yet we expect to close by the end of the year, understand that we will be entitled to roughly 75% of the cash flow thrown off by Plaza El Segundo in exchange for the assumption of $175 million secured loan on the property, with an above average market rate of 6.4%, that matures in six years, along with our equity investment of $8 or $9 million.
The deal will be slightly accretive to earnings in 2012, it will be more so in 2013, we expect at least an 8% ten year unlevered IRR on this property. This is the kind of deal we’ve been looking for.
One where we can use the strength of our balance sheet and work out a deal structure that both works for the current owners and gives us control and true A+ real estate where we can really add value over time. As I said, the deal is expected to close by year end.
Now, we will open the line to your question, once we go through Andy’s remarks.
Andy Blocher
All right. Thanks, Don and good morning everyone.
First of all, I hope you all will welcome [Christina] to our team when see her in a couple of weeks over here. I’m going to put a little finer point on our third-quarter results, talk to you about how we are positioned to pay for all the acquisition and development activity that Don discussed, provide a few comments on our improved guidance for ‘11 and our initial guidance for ‘12 before we turning the call over to your questions.
But first, I want to point you to page 16 of our supplemental, where we once again expanded our future redevelopment pipeline disclosure. As one of the very few retail REITs with a significant near-term development pipeline, this disclosure should help you to better understand the scope, timing, cost, return and potential value creation for your models.
We have a half $1 billion of projects in process that we expect to stabilize between now and 2015 at Pike & Rose, Santana Row and Assembly Row, including expanded first phase scope for Assembly Row from what we disclosed last quarter. Entitlements at these properties will allow for additional investments beyond the current scope we outlined in our disclosure, which together with our bread and butter redevelopment and core operations are all key components for future value creation for the trust.
Turning to results, FFO was up 8.6% on an absolute basis and 6.3% on a per-share basis. Same center property operating income came in at 2.4% excluding redevelopments and 3.7 including redevelopment, one of the highest levels of internal growth we have experienced since the start of the downturn, despite the occupancy declines that Don mentioned.
We have been able to post strong same center and FFO per share growth as a result of solid leasing execution of our redevelopment projects an appropriate focus on collections and expense control, on a straightforward quarter with no adjustments or accounting invoice. Getting into few of the details, rental income increased 3.5% from last year’s third quarter.
Similar to last quarter, rental income increases came from the core same center portfolio, from our redevelopment properties and also from our acquisitions of Huntington Square and Tower Shops offset somewhat by the sale of Feasterville. Other property income declined about $0.5 million versus third quarter 2010 from continued lower lease term fees.
On a year-to-date basis, other property income was off over $4 million, largely from the significant lease term fee from Home Depot with Flourtown recognized in the first quarter 2010. I promise next quarter’s is last time I will bring up the Home Depot lease term fee.
Rental expense is again benefited from better year-over-year bad debt expenses, to the tune of about $0.01 per share this quarter, as well as from the buyout of the ground leases under Bethesda Row and Pentagon in late 2010. A portion of this ground benefit is offset by higher interest expense when you get to FFO.
Interest expense declined $1.5 million versus third quarter ‘10, benefiting from a 35 basis point year-over-year decline in weighted average rate, partially offset by higher weighted average balances. G&A was up 1.3 million, versus third quarter ‘10, coming from personnel costs, including new leasing and acquisitions hires, as well as expensed acquisition and development costs.
Our solid year-to-date results and positive fourth quarter outlook allowed us to increase our 2011 FFO per share guidance to a range of four or two to four. Turning to balance sheet for a moment, we issued another $49.2 million of equity under the ATM at a net price of 85.35 per share in the third quarter, bringing our total for the year to $139.3 million.
We remain in very solid shape to fund appropriate acquisition, redevelopment and development activities through the fixed income, bank and equity markets at attractive pricing levels. We’ve recently agreed on terms for a new $200 million seven year unsecured term loan with P&C and Capital One as lead banks that we hope to close in late November.
We expect the rate in the 3.5% range on this financing. Proceeds will be utilized to term out our current line of credit exposure and to support development and acquisition spend.
We hope to bring in additional lenders through this indication to potentially upsize the deal, but have secured commitments for the full $200 million from our leads which really limits our execution risk. This term loan execution provides an attractive alternative to the seven year unsecured notes market with a better rate to the tune of about 75 to 100 basis points.
Greater prepayment flexible and also the ability to fill a hole in our current debt maturity schedule for 2018. Upon closing, we do anticipate swapping our LIBOR exposure on this deal to fixed rates, eliminating our interest rate raise risk on the transaction.
While we currently have the deal sized to $200 million to the extent we can grow that size, we’d expect to upsized to take advantage of this very attractively priced capital. After executing the term loan, we’ll have full availability on our $400 million revolver with great access to other forms of capital and no debt no debt maturities until mid-2012.
This type of financing combined with our steady use of equity proceeds provides an appropriate balance of long-term capital to fund the right long-term assets at appealing loan rates. We’re keeping our balance sheet metrics at conservative levels, providing the capacity to take on additional leverage to support the right future acquisition opportunities, just like we’re doing with Plaza El Segundo.
And allowing us to be opportunistic with respect to the timing and form of future capital raising. Some key points to note in our increased ‘11 guidance include.
We’re revising our full-year same-store property operating income guidance up to 1.5% previously we had been at one to 1.5%. We’re assuming a December 2011 close on Plaza El Segundo and have already expensed about 800,000 in closing costs throughout the year through the third quarter.
Remaining closing costs to be recognized in the fourth quarter are included in our ‘11 guidance range. With the exception of the new term loan to pay down the revolver, all of our previous assumptions remain generally unchanged.
We do have another big acquisition opportunity, that isn’t quite tied up yet, that has some potential to close before year end. Any acquisitions costs which could be material could absolute cause us to miss our estimate if that was to happen, but once again, a great long-term deal.
As for 2012, we feel pretty good that we can give you some decent visibility based on the quality of our portfolio and the stability of our business. As a result, we established 2012 FFO per share guidance at 416 to 422, representing a solid 4% FFO per diluted share growth at the midpoint.
Here are couple things to consider when updating your models. Major contributors to the 2012 same center growth include, stabilization of the 108 unit residential development at Santana Row, 60 and the impact from lease up at 300 Santana Row.
The three new grocers and two new health clubs that Don discussed, these positives are somewhat offset by portion of Mid-Pike being taken out of service to make way for the Pike & Rose development, as well as some vacancy in [Denver] and Huntington Square Shopping Center, I’m sorry, at the Huntington Shopping Center associated with strong return earning opportunity. These major drivers combined with occupancy in the flat to up 50 basis point range, as well as our bread and butter rollover provides the basis for our expectation of same center growth in the 3% range for 2012.
Plaza El Segundo adds about a penny or two a benefit to 2012 FFO per share result. Lease up have some vacancy at Plaza El Segundo will provide additional accretion in 2013 as will the future development of the adjacent parcel further in the future.
G&A should be relatively flat in ‘12 compared to ‘11. Interest expense will reflect the $175 million of debt assumed in the PDS acquisition as well as a new $200 million term loan at a rate in the 3.5% range as I said earlier.
To the extent that we’re able to upsize the term loan, the increased interest expense is not contemplated in our guidance, nor is additional usage of the ATM throughout the year. Interest expense increases to be somewhat offset by increased capitalize interest, as we progress at Santana Row, Assembly Row and Pike & Rose.
Consistent with prior years, we’re not including any acquisition activity, other than Plaza El Segundo in guidance, though as I said earlier, we have other potential opportunities in the pipeline, based on the timing of these acquisitions and the magnitude of the closing costs, these acquisitions could benefit or hurt our 2012 guidance. Another strong quarter, great opportunities for both internal and external growth and an outlook for another year of record FFO per share in 2012.
Operator, we’ll now take questions.
Operator
Thank you. (Operator Instructions) Our first question comes from line of Craig Schmidt of Bank of America.
You may proceed.
Craig Schmidt – Bank of America
Thank you. I mean, it looks like -- likely that landlords are going to be exempt from the accounting standard changes, they require companies to capitalize real estate on their balance sheet.
But I’m wondering are you, do you have any concern that the retailers may change their lease term? Or you know, the renewals regarding this balance sheet issue?
Andy Blocher
In conversations that we’ve had, we don’t see anything at this point which would indicate any predict or changes. Obviously the lease accounting stuff is still subject to change.
We’ve been watching it, but we don’t have anything permanent at this point.
Don Wood
Yeah. I don’t think so, Craig.
You know, its -- the one thing on the rule changes that is always, there’s lobbies on both sides and there’s probably three or four sides in terms of some specifics in there that should be -- that are being contested. Nobody really knows exactly where it’s going to fall out.
And I just had an update on this last week. And so kind of feel like, I understand why nobody is changing their way of thinking yet.
They could and so with uncertainty, it always makes me worry about it a little bit, but I don’t think there will be anything significant.
Craig Schmidt – Bank of America
So the thought here being, the retailers will do what’s right for their business and not worry about the accounting implications?
Don Wood
That’s the thought, yeah.
Craig Schmidt – Bank of America
Okay. Thanks a lot.
Don Wood
Yeah.
Operator
Our next question comes from line of Paul Morgan of Morgan Stanley. You may proceed.
Paul Morgan – Morgan Stanley
Hi, good morning. I appreciate the extra disclosure on the mixed use project.
So I just want to ask kind of about one other one, which I know has gone back and forth of being a potential big project of yours, at Tyson’s. There has been a lot of talk about kind of the densification around the metro and I mean -- and I know I think you’ve sort of extended some leases there.
But I mean, have you given more thought about that as kind of adding to the pipeline of mixed use projects over this horizon that you’ve provided or...?
Don Wood
That’s a great question, Paul. I mean, it is an amazing piece of land.
You’re right in referring back to -- I think it was actually the TJ Maxx deal, that we extended -- that we did a 10 year deal on, we couldn’t give them uncertainty. They were thinking about leaving the property to get that kind of certain.
There certainly was a lack of certainty in terms of what would happen in Tyson’s over the next period of time. And so we were able to lock them down very financially lucratively to us.
And we did that to kind of watch and see what happens over there. Paul, and you know the area, it’s amazing that with all the construction that’s going on over there, with all the different plans that are coming in, with our center kind of sitting right at one of the stops on that line.
Even with entrances close and everything else, our -- that center continues to perform amazingly well. We want to see what else happens though.
There’s a lot on the dockets for potential project, but how many of them really make and what they really turn out to be, I want more visibility. That’s why it’s not on any of the next two or three year -- in the next two or three year timeframe in terms of development opportunities.
Absolutely long-term, there is a lot of money to be made on that piece of land that we have there. But nothing I can -- in any way get you to give me any credit for in the next few years.
Paul Morgan – Morgan Stanley
Okay. Great.
Thanks. And then just a follow-up on the term loan, Andy, you said it was 75, did I get this right, 75 to 100 basis point inside of what you would do on the unsecured?
Is that -- if that’s right, I mean, is your thoughts taking on that change given the execution from the deal last night, any unsecured market.
Andy Blocher
Yeah. In the Boston properties deal, actually, I think it made me feel better about our executions.
Certainly Boston properties did a big deal. I mean, we’d be talking about probably a non-index eligible size and it goes just beyond rate.
It goes to the prepayment flexibility associated with the term loan. And I’ve got and executed term sheet, so the only thing I’m really subject to at this point is ultimate size and the current swap market.
So I still think that we’re probably in the 75 basis point better rate at this point.
Paul Morgan – Morgan Stanley
Okay. Great.
Thanks.
Operator
Our next question comes from line of Jeffrey Donnelly of Wells Fargo. You may proceed.
Jeffrey Donnelly – Wells Fargo
Good morning, guys. And I’ll echo the appreciation for the improved disclosure.
Just more of a on the macro question first, Don, how do you think right now about just net absorption of the industry over the next few years? Because there’s a real churn going on with retailers rationalizing not only store counts, but store size.
And that’s coming among this or amidst this backdrop of the risk of roll-down in rents and leases are executed really during the peak periods, the five to seven-year leases that were signed say between ‘05 and ‘07. How do you think about it, I’ll call it industry wide revenue growth out there and...?
Don Wood
Yeah. It’s challenge, Jeff.
I mean, look you’re right onto it. The positives that go along with that is that there is so little development of new product that’s going on in the country that that naturally puts a constraint on, if you will, on retailers that do want to head into new markets and do stuff like that.
I do think it’s kind of funny that we’re talking about $500 million worth of development, between -- albeit much of it residential at Santana, Mid-Pike and Assembly over the next few years because there’s just not very much new product being developed in the country that’s a positive. That’s one of the positives.
The other positive is the selective -- is very selective and that is we continue to see there’s real distinction between, great quality real estate and other. Is it good for federal because of the selection of our properties that gives us more leverage than others?
Sure. Is it good for the country?
No, it’s not. They are really, this haves and have-nots delineation is a bit troublesome for me, in this --to the extent that we’re seeing it.
I mean, Andy, the capital we’re talking about raising you in the term loan, the lease deals that we’re doing, and the roles, even the development, some of the markets that we’re in, is so completely 180 degrees from what’s happening broadly, as you put it in the macro market, for all the good reasons of, you know, online sales, online store sales, smaller footprints, smarter business operations. And so on balance, I mean, I don’t think there is -- you really got to be careful where you are investing.
And I’m very thankful that we’re on the positive end of that. That’s what I say, I’m with you.
There are concerns.
Jeffrey Donnelly – Wells Fargo
Specific to your portfolio, do you have an estimate, or are you able to estimate maybe how pervasive some of those thoughts could be for your portfolio? Meaning anchors, downsizing, their prototype, might leave you with some awkward spaces?
Or conversely, some of your shop space that’s going to be rolling in ‘12 or ‘13, do you -- are you concerned at certain points in the cycle where you say -- we might have some issue here in ahead or?
Don Wood
Nothing specific nothing, you know, particularly -- nothing particularly pervasive. One of the things that I think Andy talked about and I mentioned in the results, this reduction in bad debt expense really is an interesting -- it’s an interesting phenomenon.
I think the tenants that are in there now who have survived through the ‘09 and ‘10 period of time are okay. I do worry that in certain markets to the extent -- that’s what I’ve been looking for changes, to the extent, the economy really stays as average, as it is right now, I think we’ll be okay.
But to the extent we had to head south from here yeah, I absolutely worry about small shop failings and having anchor space that’s not prime anchor space being at stronger rents. I mean, it all gets down to relative.
The cool thing about Federal is that you really do see all different kinds of retail within this portfolio. And we can clearly see, in our secondary markets, markets that are secondary to us, a much different set of prospects for the future than in the great stuff.
And I can only imagine if the portfolio was more, was not as high quality a portfolio, what those challenges are day-in and day-out.
Jeffrey Donnelly – Wells Fargo
Just another a question or two, I recognize this is a complete lay-up question, but many of your competitors have changed their reporting metric where they exclude spaces vacant over one year from their calculations in same-store. For comparability purposes, if you were to do the same, do you have a sense of what your same-store leasing spreads would look like?
Or is that…?
Don Wood
I don’t, maybe -- Andy may. But let me just say something about that, because I think that’s smart.
I think for an analyst to understand the companies that they’re looking at, I think it’s very useful to see -- to not make sure the whole portfolio is tainted by a few places that are very tough to lease. So I think that’s good analytical information that’s given.
What I think it says though, is because there is a need to do that -- it’s got to be valued differently, obviously. But it’s not that it’s a bad thing to exclude those spaces that have been vacant for over 12 months.
I mean it’s important analytical information. I think if we were to do it, the impact would probably be a lot smaller.
Andy, you do have?
Don Wood
Jeff, I pulled it. It’s about, I mean, on a cash basis, its 300 basis points, so it brings up from 8 to 11 and 400 basis point on a straight line.
Jeffrey Donnelly – Wells Fargo
That’s helpful. Just last topic, it’s actually on the Newberry Street, I know that that portfolio ended up trading hands.
Can you just talk about maybe where pricing sort out on that? And I think you guys are out of Newberry Street now, just maybe talk about what your total return was on your investment?
Don Wood
It’s a big old number. I mean, listen, I don’t want to -- the buyer of that portfolio can talk much better than we can talk in terms of what their rationale is, what their thoughts were with respect to the portfolio.
I can tell you for our small three buildings that we had a basis of $24 million that we paid, literally in the last 18 months and they sold for $44 million. Do the math.
It’s pretty strong.
Jeffrey Donnelly – Wells Fargo
Thanks, guys.
Operator
Next question comes from line of RJ Milligan of Raymond James. You may proceed.
RJ Milligan – Raymond James
Thank you, guys. My question has been answered.
Don Wood
Thanks, RJ.
Operator
Next question comes from Nathan Isbee of Stifel Nicolaus. You may proceed.
Nathan Isbee – Stifel Nicolaus
Hi, good morning.
Don Wood
Hi, Nat.
Nathan Isbee – Stifel Nicolaus
In addition to the adjacent land part at the Plaza, can you talk about maybe some of the opportunities at the property itself, perhaps in the parking field, et cetera?
Don Wood
Yeah. Well, a couple things.
First of all, the opportunities I think are more leasing driven. In the other three pieces.
And Jeff is on the phone, he’s going to reply to this. I’m setting up, Jeff, because your next on this.
I believe that the opportunities are far more on the releasing side there than they are with additional development. I can tell you though, if you been to the site, there is lots going on directly around it, not only our adjacent piece, but some additional pieces even going forward.
It is the most -- it is the true definition of an A+ location though. And so I’m hopeful that you will see an upside in the rents over the years as the primary benefit.
Jeff, you got have anything else to say?
Jeff Berkes
No Don, I think you hit it. Nat, there’s no plans additional GLA on the Plaza El Segundo side.
Certainly as Don mentioned in his opening remarks, were getting development title along with it and you know, through some leasing on the existing improvements and development -- on the development side, that’s where we see the growth going forward.
Nathan Isbee – Stifel Nicolaus
Okay. But just focusing on the rent for a second, where would you peg rents relative to market?
Jeff Berkes
Don, do want to answer that you always take that question.
Don Wood
I thought you had it. I’m sorry, man.
Jeff Berkes
Yeah. I mean, we’re -- there’s not a huge margin to market, Nat, but long-term, that’s an area where there’s going to be income growth and sales growth and we see upside in the rent, medium to long-term.
But there is -- the property came online in 2006, 2007, so there is not 2005, 2006 was not a huge in place mark-to-market on the inflation.
Nathan Isbee – Stifel Nicolaus
Jeff, can you talk about the replacement for the Borders space?
Jeff Berkes
Yeah. Borders, when we looked at the deal, initially Borders was in occupancy, actually doing pretty well, paying up decent rent.
And since we tied it up, we’ve been able to release that space. The tenant will take occupancy in 2012 and the rent they paid was very aggressive and very close to what Borders was paying.
So I think that validates the location and validates our ability to grow rents over the long-term.
Nathan Isbee – Stifel Nicolaus
Okay. Great.
Thanks. And then just one follow-up, arguably, if you had a Mom-and-Pop retailer today who was looking to open a business, they want to come to a high quality center like a Federal Center, would you -- have you seen any firming up or any signs that the small business is looking to open new concepts, new stores?
Don Wood
Yeah. I think so.
Now, that again is very bifurcated. So when I think about Bethesda or when I think about Santana, I can tell you, our list of interested small shops, some national small shops and some regional, not so much the first store kind of stuff that you see in a really growing economy, Nat, but where you’ve got two or three or four stores and you would like to expand, they want to get into Santana, they want to get into Bethesda, that kind of thing.
We have seen that and we’re continuing to see that with our new leasing team on the West Coast with Jeff Kreshek, I talked about last time, I mean the list he has of particular tenants that we are going after specifically, who have the desire and the ability to make a move like that is stronger than it’s been in the last couple of years. Now, part of it is because Silicon Valley is strong.
And in that particular market, there’s a lot going on but I see the same thing -- same type of thing in Bethesda. It’s just not everywhere.
And that’s -- that’s a whole -- there is one message here. Its not -- there’s nothing I’m saying that is consistent across United States of America, it’s really very bifurcated.
Nathan Isbee – Stifel Nicolaus
And I think we had discussed this probably six months ago and at that point, you had replied to negative. So I guess there is definitely has been an improvement in that sense.
Don Wood
I think that’s right. And maybe just because I just came from a board meeting in San Jose over the last two days, I felt so, so damn good about what’s happening in northern California with our properties there.
Maybe it is a little halo over me.
Nathan Isbee – Stifel Nicolaus
Got you. All right.
Thanks.
Operator
Next question comes from the line of Alexander Goldfarb of Sandler O’Neill. You many proceed.
Alexander Goldfarb – Sandler O’Neill
Good morning. Thank you.
Don Wood
Hey, Alex.
Alexander Goldfarb – Sandler O’Neill
Just in general and this is a leasing question, clearly, a few of the tenant who is sort of -- it’s clear that they’re about to go under, I’m sure the leasing guys are out busy talking to back sell tenants, but in broader speaking, how much of a wait list do you guys maintaining in general for the portfolio? Is it just people who are on your watch list?
Or do you sort of keep sort of a wait list for each space?
Don Wood
Hey, Chris. Do you want to go through leasing with him?
Chris Weilminster
Sure. I mean, I would say, Alex, that it varies from property to property, as Alex was mentioning, we have got properties like the Bethesda and Santana Row where there is maybe there’s a wait list of certain tenant that want to be into those and then there is some of the growth ranker centers, more traditional locations where we are very specific category that we are going out after and pursuing those tenant.
So we’re creating the wait list. And so my answer is that there’s not -- it really varies from asset to asset.
Alexander Goldfarb – Sandler O’Neill
But in general, when some of these bankruptcies come up and make the news headlines, by the time we read about it in the press. I’m assuming that you guys have sort of already caught wind or are any of these like legitimately a surprise where suddenly you have to go out and figure out, put together a back fill list?
Chris Weilminster
No. We have a watch -- we, I was just going to say that we are very diligent about watching the performance of our retailers.
And I think we’ve got great leads on the ones that we see as being weak and we’ve got a long hit list and are very disciplined in how we’re approaching the retailers that we think would improve our tenant mix to back all those spaces, so we’re very proactive about it. Don, I don’t know, if you want to add.
Don Wood
And that’s the case of most of the time, Alex, I got to tell you we absolutely gets surprised. I mean the most recent one that just comes to mind is Priscilla of Boston, which is a piece of David’s Bridal and they have decided as a company to not go forward after frankly having just signed a lease with us and a few more across the country.
In Board meetings, things happen sometimes that are not out in the -- just not out in the street and that was an example. That’s rare, and Chris is exactly right.
By the time -- it’s no surprise that Filene’s Basement is closing up. And in the two locations that we have for Filene’s, one at Mid-Pike, which is all about the redevelopment, so no problem, no issue, no -- nothing.
That’s going to be rebuilt as the new project. And the other one in Fresh Meadows Queens, we do have very strong interest and we’ve been talking about that space.
Now, we couldn’t do anything until something happens but now some things happening there. So we’ll, way down the road, which is your implication because we anticipate.
Alexander Goldfarb – Sandler O’Neill
Okay. And then the second question is, Nat, I jumped on late, so I apologize if Andy already went over this.
But you guys have now boosted guidance this year twice, clearly done it was your comp package that affected this year, there were some vacancies that affected this year. But still, you guys have now boosted guidance twice this year?
So is that either one, just Andy being conservative to make sure it hit numbers or two, it’s just the folks in the field, just working extra hard that the portfolio has outperformed?
Andy Blocher
No. It’s neither.
It’s neither, Alex. I think the single biggest thing that changed that, there is no doubt in my mind that the economy was getting better.
In the first part of 2011 into the middle of 2011. And, when you set up budgets and when you set up guidance, basically November, this time of year, for the ensuing year, you use what you think about the time the indications that you see.
I think things actually got significantly better from the latter part of 2010 into the first half of 2011. What I was curious -- and that -- there’s a lag.
So that finds its way into guidance when those things start being real and not just a gut feeling. And that’s what happened in 2011.
It’s why when we started with the whole debt ceiling debate, federally in July, August and September, the way things we’re pulling through, I mean, I’m worried or at least, worry is not right -- I’m looking hard at whether any of those – any of that time period is going to affect anybody future plans. And so far we don’t see signs of that.
It still seems pretty good, pretty strong. Now, but that’s the stuff that changes quarter-to-quarter in terms of outlook.
So I don’t want you to look at that and say man, we just sandbag all the time. I mean, we don’t intentionally sandbag, sometimes it turns out that we sandbag, but certainly in ‘11 it was because of our better economy than we thought it would be.
Alexander Goldfarb – Sandler O’Neill
And so bottom line this is the late summer pause didn’t affect you guys?
Andy Blocher
No. Not to this point.
Alexander Goldfarb – Sandler O’Neill
Okay. Thank you.
Operator
The next question comes from line of Michael Mueller of J.P. Morgan.
You may proceed.
Michael Mueller – J.P. Morgan
Hi. Is there any contractual option where you can get the other 25% of Plaza El Segundo?
Andy Blocher
No. There’s not.
And there’s, we’ll be closed, as I said, before the end of the year and we’ll be able to go into some more detail at the time with respect to the deal structure. But no, you should model and figure on the 75%.
Michael Mueller – J.P. Morgan
Got it. Okay.
And then, Andy, you were talking about acquisition costs. Can you tell us what was embedded in Q3 and what the Q4 expectation is?
Andy Blocher
Yeah. I mean, I think that in Q3, we had call it 2 or 300 and I think that to close out PS, we’re looking at another 2 or 300.
And once again to the extent there other acquisition opportunities that we make a lot progress on that would be added to that.
Michael Mueller – J.P. Morgan
Got it. Okay.
Okay. Thank you.
Andy Blocher
Thanks, Michael.
Operator
Our next question comes from line of Quentin Velleley with Citi. You may proceed.
Quentin Velleley – Citi
Yeah. Good morning.
Just in terms of, Andy, I think you mentioned that there was another, you reasonably sized acquisition that you are looking at. I’m just not sure if you can provide a little bit of detail as to what that might be and whether or not that’s something similar to El Segundo where you have a development upside with it as well?
Andy Blocher
I don’t feel comfortable doing that yet Quen, I’m sorry. The only thing I would say is it is – it’s large.
It’s -- we’re talking about – we would be talking about something in the $150 million range for that kind of thing. So it’s a big one.
But again that’s either going to be zero or everything and without being on the contract, we can’t talk any more about it.
Quentin Velleley – Citi
Okay. That’s great.
Thank you.
Andy Blocher
Great.
Operator
Next question comes from the line of Chris Lucas of Robert Baird. You may proceed.
Chris Lucas – Robert Baird
Good morning, guys. Andy, I do appreciate the improved disclosure and it has generated a question for you.
As it relates to the apartment projects in San Jose, there is essentially same cost, but there’s a yield differential relative to the project that’s delivering next year versus the one that’s delivering in ‘14? I guess if you could sort of provide some context over around why both the cost will be the same for the -- even though the second project is larger and why the yields would be expected to be lower?
Andy Blocher
Construction, this is what, Chris. Construction costs are assumed to be higher in there.
They, I mean, we bought out this first one at the perfect time and that’s the single biggest thing. In addition, just some of the nuances with respect to the parking and the other ancillary benefits that have to happen in that product, anything else Dawn?
Dawn Becker
Some of it is units mix too in terms of the types of units are getting in pricing for them?
Chris Lucas – Robert Baird
So, you’re looking at smaller units in the second project or?
Don Wood
There is…
Dawn Becker
Yeah.
Don Wood
Yeah. There are generally smaller units, basically what we’re trying to do, I don’t know that when the last time you been out of Santana.
But you owe yourself a trip if you want feel good about kind of where we’re going with it. Because the residential at Santana gets such a premium over the residential in the marketplace out there.
We’re really making a focused effort on being able to have different price ranges for and different product available to all types of people who want to be in Santana. Today, you can’t get into Santana for rent that’s under 2,400, 2,500 a month.
Something like that, as you’re starting spot. This new building will be aiming for rent somewhere around 2,000, 2,100 to start.
Now, on a per square foot basis, it’s actually more profitable stuff. But the whole point is being able to choose where you want to live in Santana in a number of different types, product types, all premium, but within the premium range different and more one bedrooms things like that.
Chris Lucas – Robert Baird
Perfect. Thanks a lot, Don.
Don Wood
You bet.
Operator
Our next question comes from line of Craig Schmidt of Bank of America. You may proceed.
Jeff Spector – Bank of America
Hi, guys. It’s actually Jeff Spector.
Just had a follow-up on Jeff Donnelly’s question before about the statistic that some companies are now reporting. I guess, excluding stores that haven’t been open for a year, just thinking about that a little bit, Don, I guess, thinking more important, I guess, how you’re focusing on the business versus necessarily the analysts looking at statistic?
Meaning from a business standpoint, I guess when you look at the same-center NOI or same-store NOI, store opening a year or not a year. I mean, from a business standpoint really at the end of the day what’s the most important thing to you and to Federal?
Don Wood
There is one thing that drives everything and its tenant sales. And so literally, everyday -- what we try to put through everybody, is to create the tenant mix that is going to create highest level of sales.
It’s really the only thing you have to push rent. And so, Jeff’s question really about big box space that for which there is very little demand on is an analytical question basically.
Your question on the business is, how do you do it and what are you running and I’ve got to tell you, we’re trying as you know to create an income stream that continues to grow each and every year. And things that fall out of that are rent rollovers and same-store growth and that kind of stuff but those are derivative.
They come from the overall plan that we have to fill space with the best merchandise and it creates the highest tenant sales. It’s all we’ve got to be able to continue to push rents.
So, that’s the driver first and foremost.
Jeff Spector – Bank of America
Okay. Thank you.
Don Wood
You bet.
Operator
Our next question comes from line of Cedrik Lachance of Green Street Advisors. You may proceed.
Cedrik Lachance – Green Street Advisors
Thank you. In the rush to assembly and the T-Stop, I think there still little of uncertainty in terms of the potential cost to the T and what your share of it would be.
Would you be able to give us some numbers there?
Don Wood
Yeah. There is not -- there’s not -- we’re in our piece of $15?
Dawn Becker
$15.
Don Wood
Yeah. No.
We unlocked at $15 million, that is our piece of the T-Stop, Cedrik. My worry was that if the overall bid to do the T was significantly more than $15 million in total, that that additional funding would not be available because we were going to put in any more.
And that didn’t happen, they did come in within the funding that they had set up, including our $15 million and now just need the closing was AvalonBay, which we have scheduled for mid-December to happen before construction starts.
Cedrik Lachance – Green Street Advisors
Okay. And if there were any cost overruns, you’re not responsible for anything above $15?
Don Wood
No. That’s not true.
If there are -- there is enough room in there to be able to absorb any conceivable costs overruns that have, to the extent it is dramatically, if it overruns dramatically, it will be an issue. And there’ll be, I’m sure we’ll be back in that conversation about what we’ll have to pay but I don’t expect that to happen.
Cedrik Lachance – Green Street Advisors
Okay. And in terms of pre-leasing for your retail component, you mentioned that you have some interest from outlets, the theater and restaurants.
Do you have a firm number in terms of where you’re at in terms of perhaps Letter of Intent or anything like that?
Don Wood
Yeah. I’m not ready to start giving you the LOI stuff.
We will lay all that out if there’s not one signed lease today nor do we expect there to be until 2012. But over the next -- now that we’ve got it, I know I’ve been very conservative about whether we want to do this thing or not whether we want to, whether we can make it work or whatever in the past.
We’re at the point now where we are going and so there’s a lot happening in terms of, laying out the schedules, laying out the merchandising plan, we had conversations with tenants. And so in future quarters, I’ll start doing it for you, just like we would -- just like we will with Mid-Pike and Pike & Rose and every where else as we do a development we’ll get to that.
But I’m not ready to that here in November of ‘11.
Cedrik Lachance – Green Street Advisors
Okay. And just last question and you were talking earlier about sales productivity being the key driver of rent.
And I’m intrigued by the addition of health clubs as well as some of your centers. Where do you fit in terms of desirability as a tenant versus perhaps other more traditional tenants that sell goods and are perhaps more in line with some of your tenants and the stores in the center in terms of commonality in the goods being sold?
Don Wood
Well, I don’t know. I mean, it is part of, health clubs are an important part of our tenant mix, particularly at our mixed-use project, because they’re real, because it’s part of the neighbor, they’re an integral part of the neighborhood in which we’re operating.
If you go to Santana, Club One has now been operating there, since 2002, when we open. There an important piece of the activity that happens throughout the day at Santana.
When you go to Bethesda, the Equinox that was opened up last year is an important part to generating activity in the restaurants, that’s being to serving the community. And so, that doesn’t mean all health club operators are considered equal because they’re not.
And the strong companies, the companies that have demonstrated the ability to be profitable within their spaces and fit in the neighborhoods that we’re in, are -- it’s as important as any soft goods user or any other type of user in terms of its fit.
Chris Weilminster
It – not are concern.
Cedrik Lachance – Green Street Advisors
And as far as the rents are concerned, are they rents comparable with what a soft goods user of a similar sized space would pay or is there a different?
Don Wood
That’s all over the board too. But, Chris, go ahead.
I know you want to say something.
Chris Weilminster
Yeah. I was just going to add on couple what Don was saying that when we look at our centers, it’s all about creating the best mousetrap.
How can you say consumers to do what Don said, drive additional sales? Grocery stores bring in daily traffic, we see that category bringing in daily traffic.
We clearly believe for all the things that Don just said, that it brings in daily trip count into your center and if there is daily customers are coming in, they get more familiar with the small start tenant and the mix that’s there. So when your glasses break, you realize, oh, yeah, right next to the health clubs that optical store that I want to go, get my glasses fixed that generate more sales.
So we see them as an integral part to creating more footfall on our centers and creating that daily traffic that makes it more the location that those consumers choose to go to over other centers in the same shopping district.
Cedrik Lachance – Green Street Advisors
Great. That’s helpful.
Thank you.
Don Wood
Okay.
Operator
And our last question comes from Rich Moore of RBC Capital Markets. You may begin.
Rich Moore – RBC Capital Markets
Yeah. Hi.
Good morning, guys.
Don Wood
Hi.
Rich Moore – RBC Capital Markets
Do you have any thoughts on Third Street Promenade now we’ve had Santa Monica Place open for some time and I’m curious, what you guys are thinking in terms of traffic and what’s going on in that whole space there? But also you have an Old Navy in that group and I’m wondering what you’re thinking about that as well?
Don Wood
Third Street Promenade is the gift that keeps giving for us and I’m so happy Santa Monica Place is redone and up and operating. It has not hurt the street.
It is not hurt our tenants on the street at all. You bring of Old Navy, there is a lease that is way under market.
J. Crew, which we also own way under market, we’ll have – we start the top end of the street at Wilshire, with Banana Republic there that, I think, we’re going to make some money there.
I think every time we think we’re done and there is, how could rents go higher on Third Street Promenade, they do. And when you look at our in-place rents compared to what’s there, the future looks extremely bright.
I think having Santa Monica Place done is a absolute positive to the entire neighborhood and I couldn’t say anything more positive about it. I really couldn’t.
Rich Moore – RBC Capital Markets
Okay. Very good.
Thank you, Don. And then, Andy, I’m curious on the term loan, would – I’m wondering about the possible expansion of that.
Is it possible you could have say, some cash drag maybe $100 million of cash drag if you go high enough or will you only do the expansion of the loan beyond $200 million if you have some of these assets, some of these acquisitions closing that kind of thing?
Andy Blocher
Yeah. I mean, Rich, look, especially in the current environment, there’s a tremendous amount of volatility in the market.
We’ve recently started syndication of the loans, so we’ll see what is that we get. It is, it’s a balance.
Its, what is it that we’re seeing with respect to the ability to kind of create this loan from the syndicate group versus some of the other thing that we have in the pipeline that may have less certainty. But it is a real possibility that there could be a cash drag, which is why within the guidance numbers that I laid out, I said to the extent that we were over the 200 million, it could create a drag on 2012 earnings.
Don Wood
Yeah. Its great financing, Rich.
And obviously, timing, capital allocation with refinancing is a tricky thing, particularly in a company like ours where it’s important that we continue to grow earnings and we show that continued stability and growth. But I can tell you, I have a bias to take a little more of that money, if it’s available even if it does put some cash on the balance sheet for a few months depending upon how many demand we have.
But we will balance, you won’t see a – we’re not going to trash earnings because we’re sitting with, a lot of cash on the balance sheet. But there may be some real hit.
Rich Moore – RBC Capital Markets
Okay. All right.
Very good. Thank you, Don.
I appreciate it, guys.
Operator
At this time, there are no further questions. You may proceed.
Katrina Lenox
Great. Thank you, everyone.
We look forward to talking to you next quarter and seeing that -- there.
Operator
Ladies and gentlemen that concludes today’s conference. Thank you so much for your participation.
You may now disconnect. Have great day.