Federal Realty Drives Value With Development At Santana, Westgate
Submitted November 8, 2011, 8:55 AM
Federal Realty Investment Trust plans to begin ground-up development of a five-story, 216-unit apartment building at San Jose’s Santana Row at the beginning of next year.
Executives with the Maryland-based real estate investment trust told analysts on the company’s third-quarter conference call that it is achieving rents of $2.76 a square foot in a comparable apartment building with 108 units that it has recently completed at Santana and that is now being leased.
The company expects to invest at least $102 million in the two apartment buildings. That represents a fifth of Federal’s proposed major capital expenditures between now and 2015, said Andrew Blocher, a senior vice president and chief financial officer for FRIT.
Federal is raising cash and minimizing debt to position itself for acquisitions, executives said. In the third quarter, it reported a new $200 million, seven-year unsecured term loan at a rate in the range of 3.5 percent. In July, it replaced an existing $300 million revolving credit line with a $400 million unsecured credit facility. It also reported the sale of stock and has in the first nine months of the year raised $139.3 million from the disposition of 1.67 million shares. Wood said Federal is in negotiations to make a $150 million acquisition—a large buy for the company—but he declined to give further detail, citing the lack of a contract.
In June, Federal promoted Jeff Berkes, its then-chief investment officer, to president of Federal Realty West Coast, the headquarters for which are at Santana Row. The promotion reflects the state’s rising importance for Federal and gave Berkes “access to the corporate capital and resources necessary to expand [in California] through acquisitions and development,” according to a company statement issued at the time.
Federal owns or has a majority interest in 85 primarily retail real estate projects with 18.6 million square feet. Its properties are situated in the Northeast and Mid-Atlantic regions and the state of California. It reported net income of $48.3 million in the three months ended Sept. 30, up form $31 million in the same period last year.
Since 1996, Federal has invested more than $1 billion in California real estate, almost $600 million of it at Santana Row, where it has 625,000 square feet of leasable space. Most of it is shop and restaurant space, but the company recently completed an 80,000 square-foot, five-story office building with 65,000 square feet of offices and the rest retail. It expects to achieve an occupancy above 90 percent at the building this year and a return of 6 percent on the $45 million project. The top floor is occupied by the Silicon Valley office of brokerage Cassidy Turley Northern California.
Besides Santana Row, Federal has a grocery store under development at Westgate Mall, a 642,000 square-foot open-air center also in San Jose, which it bought in 2004 for $118 million. It also owns the nearly 250,000 square-foot Crow Canyon shopping center in San Ramon.
The company has lost Borders book stores at both Santana Row and its Los Gatos center, Old Town, in the last six months. Wood told analysts that the company is in negotiations with tenants to lease some of the four now-empty Borders locations that it has and the five Blockbuster video locations that have gone dark. He did not give specifics.
Under questioning from analyst Jeffrey Donnelly of Wells Fargo Securities LLC about the “macro” trends in retail real estate and the prognosis for industry-wide revenue growth, including retailers who are rethinking not only store counts but store sizes, Wood said these and other factors “are concerns.”
He noted that at his own company the bulk of the new development is residential, as it is at Santana Row, despite Federal’s clear position as a retail landlord with a focus on necessity retail. Its largest tenant is Bed, Bath & Beyond Inc. Its second- and sixth-largest tenants are grocers, Ahold USA Inc. and Safeway Inc. Its fifth largest tenant is drugstore company CVS Corp.
If the economy remains on its current path, he does not expect to lose additional tenants beyond those that failed last year and the year before, Wood said. But, he said, “to the extent that we head south from here, yeah, I absolutely worry about small-shop failings and having anchor space that’s not prime anchor space being leasable at stronger rents.”
“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,” he said.
Federal expects to top $4 a share in funds from operations this year for the first time in its history, executives said. FFO is a common measure of operating performance used by REITs that takes into account net income and depreciation but excludes extraordinary gains and losses associated with the sale of properties.
