Armada Hoffler Properties Inc (AHH) 2015 Q4 法說會逐字稿

Welcome to Armada Hoffler's Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, you will be invited to participate in a question-and-answer session.

(Operator Instructions) As a reminder, this conference call is being recorded today, Thursday, February 11, 2016.

I will now turn the conference call over to Michael O'Hara, Chief Financial Officer at Armada Hoffler. Please go ahead.

Good morning, and thank you for joining Armada Hoffler's fourth quarter 2015 earnings conference call and webcast. On the call this morning in addition to myself are Lou Haddad, CEO; and Eric Smith, our Chief Investment Officer who will be available for questions. The press release announcing our fourth quarter earnings along with our quarterly supplemental was distributed this morning. A replay of this call will be available shortly after the conclusion of the call through March 11, 2016. The numbers to access the replay are provided in the earnings press release. For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, February 11, 2016 and will not be updated subsequent to this initial earnings call.

During this call, we will make forward-looking statements including statements related to the future performance of our portfolio, our development pipeline, impact of acquisitions and dispositions, our construction business, our portfolio performance and financing activities, as well as comments on our outlook. Listeners are cautioned that these statements are subject to the certain risks and uncertainties, many of which are difficult to predict and generally beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations as we advise listeners to review the risk factors discussed in our press release this morning and in documents that we have filed with or furnished to the SEC.

We also will discuss certain non-GAAP financial measures including, but not limited to FFO and normalized FFO. Definitions of these non-GAAP measures as well as reconciliations to the most comparable GAAP measures are included in the quarterly supplemental package, which is available on our website at www.armadahoffler.com.

I would now like to turn the call over to our Chief Executive Officer, Lou Haddad. Lou?

Good morning, and thank you for joining us today. This morning, we posted our full year 2015 results with normalized FFO per share of $0.93. We achieved the high end of our increased guidance range. From our core portfolio to the execution of the projects in our development pipeline to our third-party construction business, we realized tremendous growth across all areas of our Company during this past year. Most importantly, we took proactive steps and made what we believe to be the right real estate decisions to position our Company for sustained future performance and long-term value creation.

I'll begin with highlights from this past quarter and year and close with comments on 2016. Mike will then provide details on the quarter, as well as our 2016 guidance, which we introduced this morning. At the beginning of the year, I reiterated our long-term growth strategy. We create value through new real estate development, organic growth in our core portfolio, our third-party construction business, strategic acquisitions and efficient capital recycling. This morning, I'm proud to report that we delivered on each of these fronts during 2015, resulting in significant year-over-year growth in NOI, same-store NOI, construction gross profits, FFO and normalized FFO. Mike will walk through each of these metrics in detail shortly.

While I'm pleased to report such great results, I'm more focused on the long-term value that our management team continues to create as a real estate producer and investor, not just as an investment vehicle. The fundamental and guiding principle of our real estate company for the past 37 years remains unchanged, to invest in and develop the highest quality real estate in our target markets. If there is one thing that our management team has learned over the 30-plus years we've been together, it's that high-quality real estate stands the test of time, appreciates over the long term and it's very difficult to duplicate. Our quarterly FFO growth is well received. Long-term asset value or NAV growth is our prime focus.

I'll start with the primary growth engine of our Company, our development pipeline. During 2015, we placed into service four new assets, two office buildings for the Commonwealth of Virginia, Sandbridge Commons Shopping Center and the Oceaneering International building, each on schedule and on budget. The Commonwealth buildings and Sandbridge Commons remain in our core portfolio. As we discussed on our last call, we sold the Oceaneering building at handsome 20% profit and reinvested the net proceeds into a portfolio of high quality retail assets that I'll discuss in a few moments.

We continue to make progress on the projects in our active development pipeline, both Johns Hopkins Village and Lightfoot Marketplace are on track for mid-2016 deliveries. Pre-leasing activity at both properties has been strong. As of today, 56% of the apartments at Johns Hopkins Village are pre-leased and over half the retail space is under negotiation. Lightfoot Marketplace currently stands at 71% pre-leased, including the addition of 22,000 square foot build-to-suit building for children's hospital.

Brooks Crossing, our joint venture with the City of Newport News, continues to evolve and grow. Just last month, we completed and sold to the City a new $7 million police precinct. For the next phase of the project, we're currently projecting 50,000 square feet of mixed-use space and are in negotiations with a Fortune 500 office tenant to anchor the project. Brooks Crossing represents yet another public-private partnership on the heels of a two dozen other such transactions that have been our hallmark over the past four decades.

We ended 2015 with the announcement of our investment in the new $93 million Point Street Apartments project. As I discussed on our last call, Point Street is located on the waterfront in the highly desirable Inner Harbor East of Baltimore and is expected to feature 289 luxury apartment units and 18,000 square feet of retail. The opportunity to invest in the project arose from our long association with Beatty Development Group, a relationship grounded in the $1 billion plus of projects that we've completed in the Inner Harbor over the past two decades. As both the mezzanine lender and the project's general contractor, we realized market rate interest income and fees during the lengthy development and construction process while at the same time, avoiding the stress on our balance sheet during development and initial lease up. With our option to purchase 88% interest in the project at cost upon completion, we preserve a healthy wholesale to retail spread. Most importantly, Point Street Apartments represents our next step in building a portfolio of the highest quality real estate.

Our broad-based capabilities and track record allow us to selectively invest in some of the best projects in our target markets. We are confident that, over time the quality of our assets and the lower cap rates they command will translate into higher NAV.

We continue to explore a number of similarly structured opportunities with other experienced developers who are seeking a strong development, construction and financial partner with all the capabilities that we bring to the table. While it would be premature to discuss specifics at this time, I can reiterate the attributes that we are targeting in new product for our pipeline; Class A assets with high barrier to entry locations, diversification, primarily targeting the Raleigh-Durham, Charlotte and Baltimore markets, strategic expansion at Town Center, a healthy development spread of approximately 20% created through premier site selection, cost and timing controls at our operating companies, and leveraging public-private partnerships when appropriate, joint venture opportunities, utilizing our unique ability to co-develop and construct. We have enough confidence in a number of these potential projects to include their impact on our 2016 guidance range and look forward to executing agreements to making official announcements in the coming weeks.

Shifting to the foundation of our Company, our core portfolio, our stabilized assets continue to outperform. During 2015, we grew cash same-store NOI by 5.5%. The fourth quarter of 2015 marked our sixth consecutive quarter of significant same-store NOI growth. The organic growth in our portfolio was driven largely by strong retail and multifamily leasing at the Town Center of Virginia Beach, providing further proof of the quality and growth potential of our flagship assets.

At the end of the year, our core portfolio occupancy stood at a solid 95%. Occupancy across all product sites at the end of the year stood in the mid-90s and during the third quarter, we successfully managed both Encore and Liberty Apartments to stabilization.

Turning to our third-party construction business, our general contracting segment finished the year in line with increased expectations reporting $5.9 million of gross profit, an increase of almost 30% over 2014 and well above our historical run rate. Our progress on $170 million Exelon Tower in Baltimore's Harbor Point continues on schedule towards completion this spring. Just next door to the Exelon site, our team has already begun construction on Point Street Apartments. Here in Virginia Beach, our work on a new Oceanfront hotel is underway as well. With over $83 million in backlog and several promising opportunities in the pipeline, we expect this segment of our business to continue to generate profits above our historical average.

On the acquisitions and dispositions front, 2015 and the initial weeks of 2016 were busy. During the year, we sold the Sentara Williamsburg Medical Office building and the newly delivered Whetstone Apartments and utilized the net proceeds to acquire Stone House Square, Socastee Commons and Providence Plaza. As a result, we successfully monetized the wholesale to retail spread created by our development process and expanded our geographic reach into Maryland as well as North and South Carolina. Furthermore, our development and construction expertise lends itself to potential development opportunities at both at Providence Plaza and Socastee Commons.

In April, we acquired Perry Hall Marketplace in a common stock transaction, further solidifying our Maryland portfolio. In July, we completed the acquisition of Columbus Village, a transaction in which the seller took back over [$14 million] of value in OP units. This five acre parcel adjacent Town Center, Virginia Beach is a prime target for redevelopment and fits squarely within our investment philosophy and long-term strategy. In October, we completed the sale of the Oceaneering International Building for $30 million and just after the turn of the year, we completed the sale of the Richmond Tower office building for $78 million. We used the proceeds from these sales to partially fund the acquisition of $170.5 million retail portfolio totaling 1.1 million square feet across 11 assets. The core of the acquired portfolio consists of six retail centers, well positioned along the I-85 corridor between Raleigh-Durham and Greenville.

These core assets feature major anchor tenants including Harris Teeter, PetSmart, T.J. Maxx, Bed, Bath & Beyond, Ross Dress for Less, Hobby Lobby and Petco. The remaining five assets are disposition candidates. We recognize that the weighted average exit cap rate for Richmond Tower and Oceaneering exceeds the going in cap rate for the portfolio acquisition, resulting in a sacrifice of some short-term FFO. With our current cost of capital, we would typically refrain from purchasing 6.5 cap assets. However, the opportunity to redeploy our equity from predominantly single-tenant office assets in the Richmond and Hampton Roads markets into a portfolio of high quality retail assets in the Carolinas each anchored by solid credit brand name tenants was the right real estate decision. In our evaluation, increasing our presence in the major Carolina markets and diversifying our overall risk profile were well worth the cap rate trade off. Furthermore, this transaction allowed us to defer taxes on the significant gains realized on the sales of both Richmond Tower and Oceaneering.

Our management team, collectively, the largest owner of the Company, remains committed to making the right real estate decisions in order to create long-term value for all shareholders. We believe that Armada Hoffler is the only RIET that provides investors the opportunity to benefit from three profit centers in real estate; the ownership of income producing properties, which is where most REITs focus, the profitable development of institutional grade properties at wholesale cost for either portfolio placement or for sale to recycle the capital added gain; and in-house construction, which not only generates substantial profits from third party business but also controls costs and schedule in our development projects. We believe that this third factor is unique to Armada Hoffler across the entire REIT universe. We will continue to execute across these profit centers to maximize the investment returns of our shareholders.

As we look ahead to 2016, I continue to be optimistic about our Company and the opportunities presenting themselves in our pre-development pipeline and despite the number of asset dispositions that we've executed in the last 15 months, we continue to project growth in the coming year. But once again, I'll emphasize that our focus is not on next quarters or even next year's growth in FFO. Our attention is on growing our portfolio with the highest quality real estate in the best locations in order to maximize value creation and return it to our shareholders.

Along those lines, I'm excited that the Board of Directors has declared a cash dividend of $0.18 per share for the first quarter or $0.72 on an annualized basis. This represents 5.9% increase over the prior quarter's dividend. We believe this reflects the Board's confidence in our long-term strategy, the successful execution and delivery of the projects in our pre-development and in active development pipeline and the Board's commitment to enhancing value and returning it to our shareholders.

It was made possible not only by all the successes that I've outlined from 2015, but the growth we anticipate in 2016. As everyone is seeing, we provided our 2016 guidance this morning of $0.93 to $0.97 of normalized FFO per share. With a development pipeline where delivery of new projects can be somewhat lumpy from year-to-year and the conclusion of a number of recent dispositions, we believe that the anticipated year-over-year growth we expect in 2016 on top of the 13% growth we experienced in 2015, is emblematic of a strong management team focused on quality real estate decisions and a diversified real estate company and business model.

With that, I will turn the call over to Mike who can provide some additional details and figures around our 2015 activity and 2016 guidance. Mike?

Thanks, Lou and good morning. I want to cover the highlights of the quarter, the full year, thoughts on our balance sheet and additional details on our 2016 guidance. This morning, we reported FFO of $0.22 per share, normalized FFO of $0.24 per share, which was at the high end of our expectations. For the full-year, FFO was $0.87 per share and normalized FFO was $0.93 per share. This compares to FFO of $0.80 and normalized FFO of $0.82 in 2014.

As a reminder, FFO excludes gains on real estate, which was $5 million for the quarter and $18 million for the full year. In spite this treatment, as we've discussed in the past, asset sales and capital recycling will continue to be an element of future value creation. On a related note, because we structure these transactions as 1031 tax-free exchange, there are no taxable gains in 2015. Tax efficiency remains one of our corporate goals.

Please see page 10 of the supplemental for the normalized FFO calculation. Excluded items this quarter consist of debt extinguishment costs, losses, property acquisition costs, development and other pursuit costs, and mark-to-market adjustments for interest rate derivatives. The most notable of these adjustments was [$885,000] in acquisition development and other pursuit costs, which is largely due to the January portfolio acquisition.

We had another strong quarter of same-store NOI growth. Same-store NOI growth was positive 2% on a GAAP basis, positive 4.5% on a cash basis compared to the fourth quarter of 2014. For the year, same-store NOI growth was positive 3.2% on a GAAP basis and positive 5.5% on a cash basis compared to 2014. At the end of the quarter, our core operating portfolio occupancy was 95.3%, with office at 95.8%, retail at 95.5% and multi-family at 94.2%.

On the construction front, we reported a segment gross profit in the fourth quarter of $1.1 million on revenue of $41 million. For the year, we reported a segment gross profit of $5.9 million on revenue of $171 million. This compares to a segment gross profit of $4.6 million on revenue of $103 million for 2014. At the end of the fourth quarter, the Company had a third-party construction backlog of $83 million.

To summarize our 2015 performance metrics, the Company excelled in all areas. Normalized FFO increased $0.11 per share or 13%. Construction gross profit increased $1.3 million or 28%. AFFO increased $0.19 per share or 31% and same-store cash NOI increased by 5.5%. In addition, we believe this past year's asset recycling improved the quality of our portfolio and underlying cash flow.

Now, turning to the balance sheet. We continue to take actions to enhance flexibility and strengthen our balance sheet, including increasing the capacity of the credit facility, hedging our interest rate exposure and completing a modest equity raise. In December, we issued 3.5 million shares of common stock, which net of issuance cost raised $35.1 million. In addition, we continue to use ATM program last quarter as expected raising $3.7 million on gross proceeds at an average price for $10.21 per share. Proceeds from these transactions were used to repay a portion of the credit facility, which was used to fund our development activities and a portion of the 11 property portfolio acquisition. These equity raises as well as our plan to sell five of the non-core assets from the recent portfolio acquisition are intended to achieve two main objectives; delever the Company to keep our debt metrics and leverage ratios in line with our corporate goals and position the Company to take advantage of new investment opportunities.

At the end of the quarter, we had total outstanding debt of $382 million including $74 million outstanding under the $150 million revolving credit facility. In January, we added three properties to the credit facility borrowing base, increased the capacity by $25 million to $225 million. We continue to evaluate our exposure to higher interest rates and look for opportune times to enter hedges. During the quarter, we purchased $75 million LIBOR interest rate cap at 1.25%. With this new cap, as of December 31, all of our debt was fixed or hedged.

Now turning to development. As we discussed last quarter, the Points Street Apartments project is not consolidated and therefore does not stress our balance sheet during construction lease-up. Projects of this size and duration require debt and equity for over two years with no return on that capital. With the mezzanine debt structure, we have paid a return on investment, earned a construction fee during development and have an option to purchase a controlling interest in the property upon completion. Our current investment in Point Street is in the form of $23 million mezzanine loan, which bears interest at 8%. As any development project, it takes time for construction ramp up. So from a timing standpoint, we need not expect $23 million loan to be fully funded until late second quarter. The construction contract is expected to be approximately $67 million with a fee of 3%.

Earlier, Lou discussed additional pipeline projects that are close to being finalized. Two of these projects have an impact on future earnings. One of these is a multifamily project that is similar in size to the Harbor Point Apartments and is expected to utilize the same mezzanine debt structure. The other is a joint venture of which we are the minority partner. Our construction company will be the general contractor of both these projects, and we're earning third party construction fees. While these two projects are included in our 2016 guidance, the construction contracts are not yet signed and thus not included in our year-end backlog of $83 million.

On the asset recycling front, we closed on the sale of the Oceaneering building in October and the Richmond Tower last month. Combined the sales proceeds were $108 million, which represents 7.6% cash cap rate. These proceeds were reinvested in mid-January to fund a portion of the purchase of the 11 retail properties which at total cost of $170.5 million. Based on our 2016 budgets, which include recent leasing activity, the going in cap rate would be 7% for the entire portfolio. However, for the six core assets that remained after selling the five non-core properties, going in cap rate would be closer to 6.5%. Inclusive of the equity raise in selling the five non-core properties, this transaction will be dilutive by $0.05 per share on a cash basis.

As Lou discussed, we feel this was the right decision for the Company as we manage the long-term to make decisions based upon asset quality, tenant risk and cash flow in our quarterly earnings. We also believe this transaction of treating from a predominantly single non-credit office tenant into six retail centers anchored by a solid credit brand name tenant improves the Company's overall cap rate and risk profile. Starting on page 27 of the supplemental are details on this acquisition, including pro forma December 31st data. This pro forma information includes only the six core assets caged along the I-85 corridor in the Carolinas.

Now let me walk you through the full year 2016 guidance that we introduced this morning. We expect 2016 normalized FFO in a range of $0.93 to $0.97 per share. Our 2016 estimates are predicated on the following assumptions: GAAP NOI in the $62.3 million to $63.0 million range, third-party construction company gross profit in the $4.7 million to $5.2 million range, general and administrative expenses in the $8.8 million to $9.1 million range, interest income from our mezzanine financing program in the $2.9 million to $3.1 million range, interest expense in the $16.3 million to $16.9 million range, the sale of the five non-core retail properties by June 30 and 47.2 million weighted average shares and OP units outstanding. This guidance does include the impact of the two pending pipeline projects I discussed earlier.

However, this guidance excludes any impact from future acquisitions, asset sales other than the five retail assets or other capital markets activity with the exception of continuing the ATM program.

Before, we turn to Q&A, I'd like to make a comment about first quarter 2016. In the past, earnings in the first quarter of the year had been lowered than subsequent quarters. However, we do not see that being the case this year.

I'll now turn the call back to Lou.

Thank you, Mike and thank you for your time this morning and your interest in Armada Hoffler.

Operator, we would like to begin the question-and-answer session.

(Operator Instructions) Dave Rodgers, Robert W. Baird.

Just wanted to follow up quickly on what the activity looks like in the office leasing, obviously, with the dovetail into Main Street office but a little bit more color on just kind of what the type of activity you're seeing across the portfolio where you do have some availability, Lou?

Dave, it's been pretty slow over the last quarter in office leasing. We're not seeing a lot of velocity of tenants. We've got a couple of things working that will add some occupancy to 4525 specifically, but right now, people are not doing as much looking as we would prefer. But ultimately we feel very comfortable with where we sit both at 4525, of course, the rest of portfolio is essentially leased.

Okay. That's helpful. Maybe a similar question on the apartments side, just trying to get a gauge of activity in your markets, what type of activity you're seeing. Obviously, occupancy is high, but just kind of curious about the available of lease as you look forward a little bit and the overall demand and ability to keep rates high in the assets that you do own?

We're not seeing any blips out there at all. We always experienced in the fourth quarter and in the first couple of months of the year, things seem to slow down. This year isn't any exception, but we're seeing a lot of activity and we feel really good about where this is going to end up for this year.

Mike, a little bit on just maybe simplifying down the sources and the uses for this year between the asset sales, between some of the development spending that you have as you could run through its sources and uses for the year that would be helpful. Thank you.

So over the past couple of months, we've certainly worked hard on getting the balance sheet set up for this coming year. We did the equity raise in December. We increased the capacity on our credit facility in January and we'll continue to use the ATM. We're also working with lending group on the credit facility to add more properties that we just purchased into the borrowing base and get more capacity from that standpoint.

So we're working hard to get the balance sheet set up again. We believe we've done that.

Rob Stevenson, Janney Montgomery Scott.

Lou, how should we be thinking about the disposition of these five non-core retail assets? Is this a situation where they're out for bid now, and you take the proceeds when you get them? Are you sort of waiting until you have need to fund some development or you find another acquisition, just sort of use it as a tit for tat type of thing? How should we be thinking about this as it flows through 2016?

We're anticipating selling all those assets in the first half of the year. We wanted to take our time. We did the evaluation as to whether we want to hold on to any of them, what kind of opportunities that there may be. And of course, it's always subject to change this new information but generally we've concluded that our capital is best employed elsewhere.

I'll now turn it over to Eric Smith and he'll tell you what kind of process is going through in order to get rid of those.

It's a balance, obviously, between wanting to glean the most value out of the assets and obviously as Lou said, we're looking at the first half of the year as part of the balance sheet strategy that Mike articulated earlier. Having had this portfolio out in the market recently, there was obviously an opportunity to go back somewhat quickly after we closed on the portfolio at mid-January to see if any of those buyers who had been interested at a sub-portfolio or asset-specific level and already done due diligence were out there and we certainly took advantage of that and we'll glean here shortly the results of that.

That being said, if it makes sense to do a more fully marketed campaign to either reap value at the individual asset level, retire then, then what that quicker process may have created or to see if there is a portfolio buyer out there for these five non-core assets, we will certainly do that if we don't see the value we would like to see in the near term.

So, it's a bit of a balancing act on value as well as against that backdrop of the balance sheet strategy.

Okay. And do you have any acquisitions that are in the pipeline right now that sort of lined up to close against these or Mike, is there is some level of dilution in the guidance from the first half sale of these properties without a corresponding redeployment of the proceeds?

So Rob, the first thing we're looking at now is to get some capital back in the house. So we're going to look at the extent we can raise cash by selling these and then based upon where that is, what's coming out of other opportunities and where our balance sheet is we'll look at other acquisitions.

Yes, to dovetail off that, it won't surprise, I think this is consistent with what we've said in the past about our acquisition strategy. Obviously, our primary focus is doing acquisitions that look similar to the ones in the past 12 to 18 months, which were off market relationship based activity that can utilize operating partnership units with assets that fit well into our portfolio and not necessarily chasing marketed deals unless they may make countersense and check your box of leverages, leverage at one of our capability being on the development side or otherwise that's our acquisition strategy as we sit here today.

Okay, but any corresponding dilution from the first half sale of these assets is already included in the guidance range?

Yes, we've included the sale of those five non-core in the guidance.

Okay. And then what is Mike -- what's the incremental positive impact from any of the two projects that you talked about that you didn't into the pipeline yet because contracts haven't been closed, but they are in the guidance. Is it a couple of pennies, is it a penny, is it material?

So it's broken down into two areas, Rob. One is in the interest income, so one of them is structured as a mezzanine debt. We have new guidance this year with interest income and the other piece, yes, in the backlog, I don't want to get into breaking down the pieces and parts at this time, but it's all included in our guidance.

Rob, another comment. Lou again, you brought up the question of dilution and we've concluded that dilution in our guidance for 2015. We've also included the dilution from selling the higher cap asset and slipping into lower cap assets. And I just want to stress to everybody the significance of that move, I mean essentially, while it will be really nice to have FFO over dollars here, which we would had we not done that transaction, what we did is we took over $100 million worth of facilities that were anchored by a regional law firm and an oil exploration equipment company and turned that into buildings that are anchored by people that sell food, dog food, sheets and towels and we feel really good about making that shift.

You guys are still having positive earnings growth despite that, right?

Correct.

Is the midpoint of the guidance range basically is about 9% earnings growth even with that dilution in there?

Yes, we are expecting growth again this year. Like I said, it could have been substantially higher had we been managing for the short-term, but thanks very much.

John Guinee, Stifel.

So essentially you guys you build office, you sell office, you acquire retail. Looks to us like you're basically just selling the Kroger portfolio, looks to us like two of them are just pretty much stand-alone, 50% of the -- maybe 65% of the 406,000 square feet or it's just all Kroger credit. What does that $3.1 million income stream of primarily Kroger credit sell for?

It's obviously, John, based on this -- or I guess despite the Kroger credit, you have a mix of assets here. You have some stronger assets in the South and Nashville locations based on those particular markets. That's why they are larger centers, higher quality assets overall. And then you have three smaller assets, more rural in nature, etcetera.

So, when you think about the Kroger credit, but also the mix and location of the assets themselves, they are obviously going to trade higher than the going in cap rate on the whole portfolio, whether that's [a mid-8s or somewhere] slightly higher or lower, the market will bear out as we go through the process I articulated earlier, but that's our thought process right now.

So, if I look at page, there a lot numbers are floating around, I think Lou had said earlier, we generally don't acquire 6.5% cap real estate. Is it safe to say that if I'm looking at page 17 at $170 million at 7.2% cash cap rate and then you sell off these five Kroger anchored, does that mean the net cap rate on the balance of the 675,000 square foot Harris Teeter power center assets is a mid-6 cap rate? Is that what we're looking at?

That's correct, John.

That's it, John. You've got it backwards.

Bill Crow, Raymond James.

Couple of questions for you. First question is if you go back to the time that you initially underwrote the acquisition of the retail portfolio, how have the cap rates on the five assets you're looking to sell, how has that changed? What are the brokers telling you about the increase in cap rates, if any, over the last four months, five months?

Bill, we're not seeing that happening. That may be something that's going to happen in the not too distant future given what's going on in the marketplace, but so far, the sales that we're seeing are holding up right with what the cap rates have been over the last six months.

So to make sure you guys understand, these five have -- we took the opportunity to see what kinds of possibilities there may be and what we're seeing is the same reason why they are going trade in the 8% to 9% range versus what the overall portfolio was. A couple of these are redevelopment opportunities, which we might have taken had they been more located in our markets or more of the larger size. Couple of them are older Krogers with much smaller than what their current footprint wants to be. So we're looking at the potentiality of a fully redevelopment on that and we decided that the returns just wouldn't there to occupy.

Eric, anything to add to that?

No, I would only add maybe the perspective that again your comment is yet third consideration as we think about this process over the first two quarters and what offers to accept and how quickly to close them. Obviously, if the near-term process doesn't yield the results and we're contemplating going with a fuller process that would take the full two quarters that risk of possible cap rate movement that you mentioned obviously has to be a consideration there as we think about that timing tradeoff.

The other question I had really was on development pipeline and more the shadow pipeline if you, you guys know, gosh, the vast majority of developers in the Mid-Atlantic region, you're known them for a long time, what are they telling you about the their thought process given the economic data points, the stock market changes, anything dropping out of the shadow pipeline that surprises you, any just change in trend that you're seeing?

Bill, I have to say no, and you've got to understand our perspective. If in fact we're headed for a recession, which we all hope is not the case, it would be our fifth recession that we will counter. And so they all have the same characteristics. There is a tremendous amount of deal flow out there right now. But whether it's in boom times or recessionary times, you can tell the project that should stay away from. And we stick to that [natty] and with a company of our size, it's not markets that you look at, it's sub-markets and within those markets, it's locations. And what we're looking at, we're cherry-picking is the strength that's driven by high drivers and credit tenants and that always a much smaller subset of what's out there.

So, my guess is, with credit tightening, you're going to see a lot less of these [spring projects getting off the ground, which is just buying] by us, and you'll continue to see really strong projects, they are well under written move forward. And so, we're not seeing anything.

If it makes into our pre-development group, that means it was one out of 15 or 18 projects that we were evaluating and so once it makes it there, I don't want to say it's both group, but it's pretty down in close.

Anything you're seeing on the retail side in reaction to the consumer or anything that's going on in the retail side that makes you concerned, more tenants on the watch list or anything like that?

Again, it's a great question, it's a broad one. In growth anchored retail, we're not seeing any direction at all. Our small shops are doing well, we're essentially 100% leased for crossing that subset of the portfolio. On the larger projects and like a Town Center, where you're looking at the fashion and specialty, there's some nervous speaking out there and if you've seen the results that came out of Urban Outfitters or even Lululemon, they are nervous, their sales are doing fine right now. There's still a lot of lead off from the Internet. But we're seeing a lot of activity. In fact, we hope in the next month or so, to make a couple more announcements in that regard.

I would add one other recent data point. As we went through the diligence process on the portfolio, we obviously talked to tenants recently in our role as our asset management group and their role of managing our stabilized assets, but we obviously excellent those touch points with those tenants as we're going through that due diligence process. And so it's a fairly recent data point of having all those conversations and what we found was that there were certainly, as we've already spoken to I think in the last call, a handful of a larger box tenants who had some comments about some downsizing in the 3,000 square feet to 5,000 square feet range. We obviously looked at that closely to make sure we can really set space that was in good locations in the shopping centers. But we didn't hear anybody holistically moving out of markets or trying to close such stores and refocus on others in the marketplace. So there were some things on the margins from that experience but nothing wholesale that gave us a thought for concern.

I think I'll hold off on asking you if you are in discussions with Amazon and their brick and mortar efforts.

Craig Kucera, Wunderlich.

Lou, I appreciate your comments on the recession scenario and would like to revisit that. Really in regards to how municipalities react as they start to see their local economy slowdown, does that change the way they look at the public-private partnerships? Do they look too more or do they look too less, what has been your experience?

Craig, it's been our experience over three decades that they ramp up activity in those scenarios. If you think about it, a basic tenant of municipal governments is that expenses are going to grow faster than income and so in periods like this, where that disparity is even wider, they're even more looking to disproportionately affect the tax rate.

So for relatively small amount of money and of course stronger amounts of value, you can essentially money at 0% right now, where fairly small amount of money they can incentivize by something. Our issue, and again as it has been in the last four recessions is no matter how much money someone might be throwing at, you still got to decide whether or not it's going to be a good long-term project.

Some of these things need municipal help because they really shouldn't be built, and so what we pride ourselves here three decades later in doing is separating that wheat from the chaff into something that's going to stand the test of time and very much like Tower Center. Town Center was born right on the heels of 9/11. It went through 2007 and 2008 and it had not had any issues throughout.

So you've got to make sure that you really cherry-pick the best opportunity. But long answer to a short question. It's part of our formula for recessions, construction ramps up, not commercial construction but institutional construction, medical construction and government construction because they want to take advantage of lower prices and public-private partnerships ramp up. What suffered is obviously is your garden variety retail office development.

I appreciate the color. How forward looking are these municipalities? Are they looking 12 months in the rearview mirror, are they thinking ahead as far as what may or may not be leased?

Again, it's really interesting question and I could go on for an hour on that one. Most municipalities don't have the fortitude to see past the next election cycle, and so a lot of them are looking for that quick hit and we stay away from those guys. There are few and coincidentally, it seems to go along with really high credit rating, there are few that have 10 and 15 and 20 year horizon. And those are the people that we grab attention.

My last question is just on the balance sheet. Given that the futures market now doesn't seem to be seeing an interest rate hike until possibly till 2018, you guys have heavily used floating rate debt with swaps. Do you anticipate changing that in this environment? I would have guessed you probably are going to stick with what seems to be working as long as the interest rates are remaining low and expected to remain low?

Yes. Craig, we're going to consider and look at -- continue to look at hedges. We find that we've been doing more caps actually than [swaps. I'd define caps as] a really economical way to hedge interest rates and Lou and I've been talking here over the last couple of days where we're getting into a real point right now as well buy some more caps that's really, really cheap insurance.

Laura Engel, Stonegate Capital.

Wanted to see if we could touch back on the guidance just a little bit. One thing that was a bit higher than I expected was the acquisition development and other costs and I wondered if that was -- what was recorded for the year, if that was a level we should expect for next year and if that includes I guess some of these disposition costs related to the transactions this past year as well?

So we certainly had a lot of that cost in the fourth quarter and a lot of it had to do with this acquisition of the $170 million portfolio. From a GAAP standpoint, we're going to be expensing those costs as they take place and most of the due diligence and legal work was all done in the fourth quarter since we closed right after the first to hear on that.

Looking out to 2016, it's tough for me to give you a number where it's going to be, it certainly depends on what kind of acquisition activity we have out there but I'd be surprised if we acquired $170 million portfolio and spend that kind of money.

We don't see that in the card and that's one of the primary reasons why we report normalized FFO because we're opportunistic in acquisitions and dispositions and don't have a specific plan.

And then also related to the guidance, on the construction company guidance, you mentioned some of the contracts. Can you just review one more time that I guess the timing on that and you did say there is I guess significant potential upside to that guidance number because I think unlike the gentleman earlier, I have numbers all over the sheet but is that guidance actually shows a bit of a decrease over the full year for 2015 as it stands but it doesn't factor in this contract, is it correct?

Correct. It is a decrease from last year. 2015 was a really strong year for the construction company. One of the highest that I can remember, generating those kinds of profits. So yes we see it going down a little. It does include a couple of contracts that are not signed. We expect to get firmed up here in the next couple of weeks to months. For instance, on Harbor Point, we've started the construction, so we'll be getting a notice to proceed. I think we're operating under a couple of million dollar proceed contract, we do some site work well, we negotiate out the GMP here which is M&A.

And all of my other questions have been addressed. Again, sounds like 2016 is going be just a great year. So I'm looking forward to seeing how it progresses.

Yes, to reiterate that we're very excited about 2016. The Company is set up well. We've got really good projects in the pipeline. We think it has been strong across the retail and multi-family front and hopefully we'll see a little bit more in the office, but we look forward to having another great year.

Operator, are there any more questions?

We have no further questions.

Great. Well, thanks everybody for your time this morning. We look forward, like we said that we anticipate having a few announcements in the next several weeks [that changes out this] pipeline. So stay tuned and thanks again.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.