Original Source: FD (FAIR DISCLOSURE) WIRE
OPERATOR: Good morning, and welcome to the first quarter 2005 Federal Realty Investment Trust earnings conference call. All participants are in a listen-only mode at this time, until we open for questions and answers, and at this time, this call is being recorded. If you have any objections, please disconnect.
And at this time, I would like to introduce the conference leader, Mr. Andrew Blocher. And thank you, sir. You may begin.
ANDREW BLOCHER, CAPITAL MARKETS AND IR, FEDERAL REALTY INVESTMENT TRUST: Thank you, Kathy. Good morning. I'd like to thank everybody for joining us this morning for Federal Realty's first quarter 2005 earnings conference call. Joining me on the call today are Don Wood, Federal Realty's President and Chief Executive Officer, Larry Finger, our Chief Financial Officer and Jeff Berkes, our Chief Investment Officer.
Before we get started, I just wanted to remind people that we are currently booking meetings for a NAREIT convention in early June. If you're interested in getting a meeting set up, by all means, feel free to give me a call.
Our first quarter supplemental disclosure package provides a significant amount of valuable information with respect to the Trust operating and financial performance. The supplement and our -- both the supplement and our 10Q are 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 statement. 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. Our earnings release and supplemental reporting package that we issued yesterday, our Form 8K filed with the SEC on March 2, 2005, our annual report filed on Form 10K and our other financial disclosure documents provide a more in-depth discussion of risk factors that may affect our financial condition or results of operation.
I'll now turn the call over to Larry to begin our discussion of first quarter, 2005 results.
LARRY FINGER, EVP, CFO AND TREASURER, FEDERAL REALTY INVESTMENT TRUST: Thanks, Andy. This was a great quarter, led by very strong same-center operating income growth. We earned $0.74 of FFO per share this quarter which, when compared to our reported $0.69 in Q1 of '04, would suggest growth of 7.2%. Excluding the $0.02 of Santana Row Insurance proceeds in Q1 of '04, our growth was 10.4%. Either way, we've really turned the corner.
As mentioned a moment ago, the main driver of our earnings growth was our strong same-center property operating income growth of 6.3%, including redevelopment. This is our highest same-center growth since Q1 of 2002. Our same-center growth, excluding redevelopments, was 4.7%. As I'll discuss shortly, we think the comparable number to our peer's reported results was our 6.3% growth.
Over the last several quarters, we've explained that our same-center and overall growth were temporarily dampened by increased vacancy. While our percentage of space leased was strong, much of the space had not yet been occupied. We projected that as these spaces became occupied, our growth would significantly improve. That is exactly what happened this quarter and we expect this to continue over the upcoming quarters. As a result, we expect to continue to deliver stronger same-center growth this year than you saw last year.
I need to ask your indulgence because I need to take a moment to talk about operating metrics. For some time now, we've been reporting 2 same-center NOI growth numbers. One excludes properties under redevelopment and the other includes these properties. We also report our lease rollover growth on both a cash and a straight-line basis. We don't provide this detail to be the white hat guys, but rather, because we know our numbers are so strong, that the more detail and transparency we provide, the more our performance versus our peers will be clear.
Same-center NOI growth and lease rollover growth are very important operating metrics in this industry and it's important that they be compared on an apples-to-apples basis. But it appears that our efforts to provide more detail are in some cases causing our results to be compared inappropriately. We target 100 to 200 basis point difference between the same-center, including and excluding redevelopments. The actual difference this quarter was 160 basis points, and as we typically report, a 10 percentage point difference between our straight-line and cash basis lease rollover numbers. Nobody would compare our cash basis rollover growth this quarter to our straight-line basis growth last quarter and report that it was down 10 percentage points because the 2 measures are very different. But this is very nearly what we see in some comparisons of our results to our peers.
Some of our peers only report one same-center NOI growth number and we've confirmed that this number includes redevelopment to the extent that they have them. Yet this number from our peers is often compared to our same-center growth, excluding redevelopment. Similarly, some of our peers, when speaking of their lease rollover growth, refer to their straight-line growth without identifying it, and this is then sometimes compared to our cash basis growth.
Clearly, this is comparing apples to oranges. The fact that our apples still look good when compared to their oranges probably prevents further inquiry into our numbers and our peers' numbers. But we would urge you to make inquiries as to the nature of all reported metrics that are not identified, rather than assume that they correspond to the more conservative of our 2 reported numbers.
For the few of you whose attention I still have, I'd like now to get back to our results. Santana Row's first quarter property operating income was $6.3m. This is up $1.2m over Q4 of 2004 and $1.6m over Q1 of 2004, reflecting the operating gains we are making at the property. However, as I'll discuss further in connection with our guidance, the loss of NOI from the anticipated condo sales will cause the Santana run-rate to fall starting next quarter.
Santana Row is many things today. Phases 1 through 3 are in operating property. Phase 4, the rebuild of the 256 Building 7 apartments is a development project; 3 residential buildings are anticipated to be sold as condos starting this summer and we have remaining entitlements of approximately 125,000 square feet of retail, 700 residential units and a 200 room hotel, any or all of which may be built out or sold. As the project evolves, so must our disclosure. Therefore, on Page 15 of our 8K, you'll find a new format for our Santana Row disclosure, which better reflects the current state of the property. I urge you to review it and provide us with your feedback. While the format of the disclosure has changed, you will see that Santana Row remains on schedule in terms of the financial targets reflected in our prior disclosures.
As mentioned above, and as Don will discuss in more detail, we anticipate being in a position to start selling the 100 units in Santana Row Building 4 as condos this summer, with the 119 units in Buildings 3 and 6 to follow. Under GAAP, when we sell the first unit in the building, the entire residential portion of the building is deemed to be held for sale. Thereafter, residential incomes generated in the building will not be recognized as income or FFO, but will instead reduce our basis in the property. This will increase our gain on sale and reduce our operating income in the FFO. As a result, we will lose as much as $.02 to $.03 of 2005 FFO per share from what we would have earned, had we continued to operate these units for rent. The ultimate amount of this foregone income will depend on the timing of the condo approvals and sales.
However, as discussed earlier, our same-center growth is expected to continue to be strong. Redevelopments are coming on line. Santana Row has performed very well and the new apartment units being built above Building 7 are starting to deliver. As a result, we have increased our FFO per share guidance to a range of $3.03 to $3.05 for 2005. This represents 9% growth over 2004, excluding the 2004 insurance proceeds. This growth is exceptionally strong, particularly given the accounting impact of the condos and the fact that our guidance for the balance of 2005 assumes no net acquisitions.
I'll now turn the call over to Don.
DONALD C. WOOD, PRESIDENT AND CEO, FEDERAL REALTY INVESTMENT TRUST: Thanks, Larry. Good morning, everyone. The operating momentum that's been building at Federal over the past few years has continued unabated in 2005, as Larry just …