Q4 2005 Federal Realty Investment Trust Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good morning and welcome to the fourth-quarter 2005 Federal Realty Investment Trust earnings conference call. All participants will be able to listen only until the question-and-answer session of today's call. This conference is also being recorded. If you have any objections, you must disconnect at this time.

I'd now like to introduce the conference leader, Mr. Andrew Blocher. Sir, you may begin when ready.

ANDREW BLOCHER, VP IR, FEDERAL REALTY INVESTMENT TRUST: Good morning everybody. I'd like to thank our analysts, investors and employees for joining us this morning for Federal Realty's fourth-quarter and year-end 2005 earnings conference call.

Joining me on the call today are Don Wood, Federal Realty's President and CEO, Larry Finger, our Chief Financial Officer, and Jeff Berkes, our Chief Investment officer.

Our fourth-quarter supplemental disclosure package provides a significant amount of valuable information with respect to the Trust's operating and financial performance. The supplement is currently available on our Web site and we expect to file our 10-K late next week.

Finally, for those buy-siders that are attending Citigroup's REIT CEO conference March 6 through 8, our schedule is booking quickly, so if you have any difficulties in booking one-on-one meetings, please contact us directly so we can accommodate your request.

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 against 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. 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 8-K filed with the SEC on March 2, 2005, 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 will now turn the call over to Don to begin our discussion of fourth-quarter and year-end results.

DON WOOD, PRESIDENT, CEO, FEDERAL REALTY INVESTMENT TRUST: Thanks, Andy. Good morning, everybody.

Now that 2005 is in the record books, I can tell you that the entire team at Federal is extremely proud of the year that we had and we look forward to more of the same in 2006.

FFO of $3.06 a share set the new high watermark for us and represents better than 7% year-over-year growth as reported and over 9% year-over-year growth when adjusting for the last remnants of insurance proceeds from the 2002 Santana Row fire.

With the acquisition of Crow Canyon Shopping Center that we announced last month, with redevelopments that are coming online, with continued strong releasing spreads, we expect another strong earnings year in 2006 despite the new accounting that requires the expensing of stock options, which will trim growth by a few cents a share for us.

Let's stick with 2005 for a bit and let me recap some of the key factors that made the year so eventful. Let's start with leasing. The overall portfolio is 96.3% leased at December 31, 2005, compared with 95.1% leased a year earlier. That 120 point increase in lease percentage directly relates to the 344 deals, both new deals and renewals, that were done in 2005, representing 1.5 million square feet. The percentage leased statistics are a measure, along with the lease rollover percentage, of future earnings growth, while the percentage of physical occupancy better explains the prior-period performance.

From a physical occupancy standpoint, the overall portfolio was 93.9% occupied at December 31, 2005, compared with 92.4% occupied a year earlier. This 150 basis point increase represents the start of rent at such high-profile redevelopment projects Rutgers Plaza, Leesburg Plaza, a bit at Mount Vernon and Houston Street. You'll notice that there remains, at year end, a sizable difference between the overall lease percentage and the overall occupied percentage. It is in fact a 240 basis point difference, 96.3 versus 93.9. That difference represents about 400,000 square feet of space at average rent somewhere in the mid 20s for which we have signed deals and simply need to deliver the space. That all equates to about $0.19 per share of embedded NOI growth coming online throughout 2006 and 2007 that's already locked up internally as we deliver on redeveloped properties like Mount Vernon Plaza, like Assembly Square, Loehmann's Plaza, Willow Lawn, and others.

You should also feel good about our continued success in increasing rents on a same-store basis as the new rent on leases signed for comparable space increased 19% for the fourth quarter and 22% for the year on 453,000 and 1.3 million square feet respectively. Those are cash basis numbers. Any capital required which is in any way tied to some of these deals is reflected in our redevelopment returns and/or as a tenant improvement, both of which were disclosed in the Form 8-K. We apply the same strict capital allocation discipline to a TI or redevelopment decision that we do for any acquisition or for a new development.

So as we close down 2005 and move into 2006, leasing momentum portfolio-wide remains very strong as does asset management and development.

On the construction side, we're clearly feeling the pinch of higher material costs as we look at future projects. While pricing seems to be stabilizing a bit for the time being, we really don't see any signs of these cost pressures subsiding in the near future. Having said that, we seem to be beating our revenue projections on many projects due to the strong demand for product in the markets that we are redeveloping. So we are confident that the rent assumptions that we can underwrite today will largely if not completely offset the higher construction cost in future projects. …