Armada Hoffler Properties Inc (AHH) 2016 Q2 法說會逐字稿

Welcome to the Armada Hoffler Second Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, you'll be invited to participate in a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded today, Tuesday, August 2, 2016.

I would now like to turn the conference over to Michael O'Hara, Chief Financial Officer of Armada Hoffler. Please go ahead, sir.

Good morning and thank you for joining Armada Hoffler's second quarter 2016 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 second quarter earnings, along with our quarterly supplemental package, was distributed this morning. A replay of this call will be available shortly after the conclusion of the call through September 2, 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 remarks made herein are as of today, August 2, 2016, and will not be updated subsequent to this earnings call.

During the 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 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 and we advise listeners to review the risk factors discussed in our press release this morning and in documents we have filed with or furnished to the SEC. We'll also 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 at our website at www.armadahofflercom.

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

Thanks, Mike. Good morning and thank you for joining us today. This morning we reported quarterly results with normalized FFO per share of $0.26, driven primarily by better than expected NOI growth. We are pleased with our results for the second quarter and continue to successfully execute on our strategy. Based on our year-to-date results and the outlook for the rest of the year, we've raised our 2016 normalized FFO guidance range.

Growing earnings and outpacing expectations are important, however, they are ancillary to our primary goal: creating value for our shareholders by adding quality real-estate to our portfolio through our development efforts and complementary strategic acquisitions. The result of this type of growth is not only size, but high-quality, stable NOI that demands lower cap rates.

Since our IPO in May of 2013, we've certainly grown in size. Our portfolio has grown by over 80%, NOI has grown by over 50%, normalized FFO has grown at a double-digit pace, and our market cap has more than doubled. Just as important, we've increased the overall quality of our portfolio through developing high-quality, well located projects at our target wholesale to retail profit of 20% or more; prudent asset recycling; opportunistic acquisitions; and making the right real-estate decisions for the long-term benefit of the Company and our shareholders.

As a result, we've created and delivered significant value and substantially increased our NAV over that past three years. By most any measure, we are making good on our promise to investors and there is still a lot more to come. With two large projects delivering this quarter; $200 million of new development underway in the Baltimore, Washington Corridor; a new flagship project under construction in downtown Durham; another new groundbreaking in Town Center later this year; and several interesting opportunities taking shape in our pre-development pipeline. We are poised to add significant value to our asset base and continue increasing NAV.

During the quarter, we surpassed $1 billion of the enterprise value. And as long as high-quality opportunities continue to present themselves, we have every reason to believe we will maintain our current growth trajectory toward $1 billion equity market cap. Mike will discuss our quarterly results in more detail after I briefly touch on a few of the highlights.

I'll start with the primary growth engine of the Company, our development pipeline. This quarter, we announced the planned expansion of the crown jewel of our portfolio, the Town Center of Virginia Beach. Phase VI of this public-private partnership is a new $35 million mixed use project that will include approximately 39,000 square feet of retail space, as well as a 120 luxury apartments. In addition, Zeiders American Dream Theater has committed to invest $8 million in a new 17,000 square foot performing arts theater, and the City of Virginia Beach will contribute $3 million in public infrastructure, including an open-air public plaza and pedestrian bridge connecting to the adjacent parking garage at the Cosmopolitan apartments.

18,000 square feet of retail space has already been pre-leased to national name-brand tenants that will complement and enhance an already impressive Town Center roster that includes, amongst others, Anthropologie, lululemon, West Elm, Brooks Brothers and Free People, further solidifying Town Center as an upscale retail destination in the region.

We expect to break ground on Phase VI of Town Center later this year. This represents just the latest chapter in our successful, ongoing, multi-decade, public-private partnership with the City of Virginia Beach, one that has created a vibrant downtown Central Business District in the largest city in Virginia.

For those who have recently begun to follow our Company, Town Center spans 25 acres across 17 blocks and is home to 110 commercial tenants, 412 hotel rooms and 804 residential units, including five high-rise buildings, one of which is the tallest building in the Commonwealth of Virginia.

In addition to 800,000 square feet of office space, Town Center boasts 23 restaurants, a 1,300 seat performing arts theater, and 30,000 square feet of conference space. With over half of the tenants in Town Center new to Virginia Beach and almost a third of them new to the Coastal Virginia MSA, this signature project continues to serve as an economic catalyst for both the city and the broader region.

In addition to drawing new businesses to the area, Town Center provides already established tenants the ability to either relocate to or expand within the most exclusive address in the market. For example, just last month, we agreed to lease 14,000 square feet of office space at 4525 Main to an existing Town Center tenant at One Columbus looking to expand their footprint by almost 40%.

For the additional capacity we designed and built at 4525 Main, we were able to accommodate this particular tenant's needs and are in discussions with a second long term tenant, looking at a similar relocation and expansion. As a result, not only will we increase occupancy at 4525 Main, but also create capacity and opportunity for tenants looking to relocate to Town Center at a lower entry point.

Moving beyond Town Center to the remaining projects we have slated for delivery this year, last month the anchor Harris Teeter store at Lightfoot Marketplace in Williamsburg, Virginia, opened for business. As of today, the project stands at over 70% leased and we expect the initial small shop tenants to take occupancy later this quarter. We remain on track to deliver Johns Hopkins Village later this month and open with approximately three-fourth of the residential units leased and approximately two-thirds of the retail space leased or under LOI. We look forward to building upon this solid opening and expect to reach full stabilization next year.

With respect to our 2017 and 2018 deliveries, our progress on Point Street Apartments in Baltimore's Inner Harbor, One City Center in downtown Durham and The Residences at Annapolis Junction Town Center continues as expected with construction well underway at each site. We expect to announce at least one more development project by the end of the current quarter.

Moving from our development pipeline to acquisitions and dispositions, this quarter we closed on our acquisition of Southgate Square, a retail center located in Colonial Heights, Virginia, just south of Richmond. This 220,000 square foot center is anchored by a brand new Burlington store, as well as Michaels and PetSmart. We acquired the asset for a combination of $21 million of debt and $1.6 million operating partnership units.

The opportunity to acquire Southgate Square arose from the same longstanding relationship that led to our acquisition of Dimmock Square two years ago and our pending acquisition of Southshore Shops, which we expect to close later this week. Southshore is a 40,000 square foot retail center also located in the Greater Richmond market. While this is a relatively small asset for us, approximately $9 million, it's significant in that it will be our third OP unit transaction with this particular partner and our fifth deal involving either stock or OP units. For those of you who follow our Company, it should come as no surprise that each of these new partners have been pleased with the significant returns they realized on their investment in us, leading to repeat business and further interest in our OP unit program.

Turning to dispositions, you'll remember that as part of the capital stack for our 11 asset portfolio acquisition that we completed in January, we had originally identified five non-core retail assets as disposition candidates. And as of today, we've completed the sale of two of those assets. We had been under contract to sell another two assets to a single OP market buyer. However, both fell out of contract on the last day of due diligence when the purchaser attempted to significantly re-trade the transaction. As these assets had not been fully marketed, we felt no pressure to negotiate the price. We are comfortable holding all three Kroger anchored centers for an extended period of time. Our intent is to fully market some combination of these assets later this year.

Shifting to the foundation of our Company, our core portfolio. At the end of the quarter, our occupancy stood at just over 95%. Occupancy across all product types at the end of the quarter remained in the mid 90s. Even with these consistently high occupancy levels, our core portfolio continues to deliver organic upside as demonstrated by our eighth consecutive quarter of same store NOI growth.

Turning to our third-party construction business. Year-to-date, we've added over $240 million to backlog and since the end of the quarter have been verbally awarded additional contracts of approximately $30 million. With over $0.25 billion of work in the pipeline, we expect our construction business to continue to generate profits towards the higher end of our historical range for the rest of the year and through 2017.

Before I turn the call over to Mike, I should mention our new $75 million ATM equity offering program that we entered into this quarter. As you might expect, we took advantage of favorable market conditions and accelerated our use of the additional capacity created by this program in order to strengthen our balance sheet in anticipation of the future growth I discussed earlier.

With that, I'll turn the call over to Mike for more details.

Thanks, Lou. Today, I want to cover the highlights of the quarter, thoughts on our balance sheet and additional details on our 2016 guidance. This morning, we reported FFO of $0.24 per share, and normalized FFO of $0.26 per share, which was at the high-end of our expectations. Our core portfolio continues to deliver excellent results. Both occupancy and same store NOI increased this quarter. Same-store NOI growth was positive 1.7% and 1.2% on a cash basis, which represents the eighth consecutive quarterly increase. At the end of the quarter, our core operating portfolio occupancy was 95.3% with office at 94.6%, retail at 96%, and multi-family at 94.3%.

On the construction front, we reported a segment gross profit in the second quarter of $1.2 million on revenue of $33 million. At the end of the second quarter, the Company had a third-party construction backlog of $252 million, which will sustain this part of our business for the foreseeable future and should translate into profit at the higher end of our historical range.

Now turning to our balance sheet. We continue to take actions to enhance flexibility and strengthen our balance sheet, including refinancing upcoming loan maturities, hedging our interest rate exposure and continued use of the ATM program. We used the ATM program last quarter to raise $21 million of gross proceeds at an average price of $12.32 per share. The amount raised was substantially higher than last quarter's guidance. The stock hit record highs on 16 occasions and was up 22% during the quarter, so we took advantage of this opportunity to strengthen the balance sheet. If the stock continues to trade at these levels, we will continue to be opportunistic with the program. Even with the increased use of the ATM program, we are raising our 2016 earnings guidance.

During the quarter, we sold one of the five non-core properties in the January portfolio acquisition and a second of these recently closed. Combined, these assets sold for $12.9 million. As previously discussed, these proceeds will be used for balance sheet purposes. At the end of the quarter, we had total outstanding debt of $513 million, including $107 million outstanding under our $150 million revolving credit facility. We continue to evaluate our exposure to higher interest rates and look for opportune times to enter into hedges.

During the quarter, we purchased a $70 million LIBOR interest rate cap at 1% for two years. As we have said before, we believe using interest rate caps is the most efficient way to hedge against the potential for increasing interest rates. With this new cap, 95% of our debt was fixed or hedged. We're also working on refinancing the 2016 and 2017 debt maturities. We have a commitment to refinance the Town Center 2016 maturities, bonus of five years, $35 million and floating at LIBOR plus 195. The new loan amount is $6 million more than the maturing loans. We also have a commitment to refinance 4525 Main Street in the Encore Apartments. The new loan is a five-year loan for $57 million and the rate was locked at 3.25%. Both loans are scheduled to close this month.

Now turning to development. During the quarter we closed on the Annapolis Junction project. This is structured similar to the Point Street Apartments project with our investment funded through a mezzanine loan. The project is non-consolidated and therefore does not stress our balance sheet during construction and lease-up. Projects of this size and duration require debt and equity for over two years with no return on our capital. With the mezzanine debt structure, we have paid a return on investment and a constructions fee during development and have the option to purchase a controlling interest in the property upon completion. Our current investment in Annapolis Junction is in the form of a $42 million mezzanine loan which bears interest at 10%.

Now let me walk you through our full 2016 guidance that we updated this morning. We expect 2016 normalized FFO in the range of $0.96 to $1 per share. This updated 2016 guidance is predicated on the following assumptions. Total NOI in the $65.8 million to $66.5 million range, third-party construction company gross profit in the $4.7 million to $5.2 million range, general and administrative expenses in the $9.1 million to $9.4 million range, interest income for our mezzanine financing program in the $3 million to $3.3 million range. As of June 30, the aggregate loan balance was $39 million. Interest expense in the $16 million and $16.5 million range. The sale of two of the five non-core retail properties totaling $12.9 million and the sale of the others at year-end, and 49.8 million weighted average shares in OP units outstanding, including the OP units expected to be issued as part of the Southshore acquisition. This guidance excludes any impact from future acquisitions other than Southshore, asset sales or the other capital markets activity with the exception of continuing the ATM program.

Now, I'd like to make a few comments about this updated guidance. The increase in guidance is due to a number of factors, the Southshore acquisition is accretive, increases in occupancy, and third-party construction gross profit. Another factor is the delay in selling three of the non-core retail assets that we purchased in January. As Lou discussed, the buyer attempted to renegotiate the sales amount and we decided not to sell these properties. The proceeds from these sales were to be used for balance sheet purposes, but due to the increased proceeds from the ATM program, we can hold these assets and stay within our target debt metrics. The updated average shares outstanding takes into account the OP units to be issued in the Southshore transaction, as well as increased use of the ATM program during the year as I mentioned earlier.

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, Baird.

Good morning, guys. Nice quarter, obviously. Just wanted to, I guess, quickly touch on a couple of different things. I guess the first would be on the office side, particularly around Town Center, I guess where the remaining portion of your office is. Not a lot of leasing activity in the quarter, but it seemed like your commentary in the prepared comments was a little bit more positive in terms of maybe moving people over to the Main Street Tower and seeing some backfill activity at One and Two Columbus. So can you extrapolate on that a little bit?

Sure, Dave. You'll recall that, one of the main reasons to build 4525 Main and the size that we built it, was to allow just this type of activity. And so it really does this -- it's really pleasant to see that we're starting to get that organic growth that traditionally has been a big driver for us here at Town Center, in the last couple of years has kind of flattened out. So, it's good to see that moving out again. The two firms that we're talking about are long-term tenants, one being a brokerage firm, the other being an engineering firm.

Okay, good, that's helpful. And then interest in the Town Center from kind of outside of the Town Center and kind of the timing around that. I know that there are some bigger expirations coming. How do you feel about those still in the current market?

I'm feeling very positive about it, Dave. We're seeing an increase in activity, a lot more tours coming through and people looking for offers. So, I feel really good about that for the first time in a while. So hopefully that's a trend that's going to continue.

Great. On the new development, you said you'd announce a new development this quarter. Can you kind of just talk about what kind of those conversations look like, and whether that might be office or multi-family and how you're looking at the major positive development opportunities for you guys going forward?

Sure. As we alluded to on the last call, actually the last couple of calls, we're really focusing our development efforts in that Baltimore-Washington Corridor, as well as in the Raleigh-Durham area as well as Charlotte. I think most probably these new announcements will come from there. It really hits -- it's kind of a horse race. In the pipeline right now, we have office opportunities, multi-family opportunities, as well as retail opportunities. I wouldn't handicap what wins, but I can tell you that they are really exciting opportunities I think our Group's going to be very happy to perform.

And I guess should we expect that these would be more traditional equity owned developments or will we expect to see continued the -- the mezz program expands a little further as you think about multi-family maybe?

Yes, I don't believe you'll see that taking the form of the mezz program. I appreciate you bringing that up, I want to make sure we reiterate. We are a traditional developer, we like doing joint ventures and we also obviously go it alone. The mezz program was created specifically for large volume multi-year commitments of multi-family. It's typically because these things take a couple years to build and then some amount of time after that to lease-up. And the kind of size that we are talking with the two that are underway, basically being $100 million projects. The stress on our balance sheet just isn't tenable and hence the mezz program, but that's not a natural way of doing business for us.

Okay, that's fair. Last question from me and I can jump back in. But you did the ATM in the quarter, about $20 million, I think at $12.30 or so per share. With the stock up closer to $15, it doesn't seem like you have a large amount of equity issuance built into your guidance in terms of the underlying share count, but I guess, talk about these large projects in relation to the ability to go get equity at a much more attractive price now and how you think about that?

Good morning, Dave. So obviously with the stock trading at $15, our cost of capital has gotten low, which is terrific. So it just helps our returns on our development spreads versus the retail and return on cost versus our cost of equity. And I think or maybe just like to spend a couple minutes on the development pipeline and just kind of go through the requirements and just kind of tell you how our balance sheet is set up. So on page 17 of supplemental kind of lays out our development pipeline. And what's been -- what's under developed right now -- under development and not delivered, we've got about $55 million to fund out the remaining part of that pipeline, of which $33 million of that is the Town Center Phase VI, which will not begin until this fall. So, a majority of that funding is going to be in 2017 and 2018.

And of the remaining $14 million that's finishing out at JHU and Lightfoot, of we have construction loans to fund those out. 4525 Main Street, we have about -- approximately we're estimating $6 million to complete that, which is TI and leasing commissions, and that will get obviously spent out as we lease the space.

On the Durham City Center joint venture, we've funded a 100% of our equity requirement. Our equity requirement of $10 million has been funded. The remaining of that will be funded through the construction loan that the joint venture has. And then upon completion in the second quarter of 2018 we will bring it on to our balance sheet at that point in time. And the last piece of the mezz loans, we've got $26 million to fund under our mezzanine program and that will go out over the next six months. You can see that what's happening with the ATM program or what's in our development pipeline right now, we're situated real well to fund these out.

Okay, great, thanks for the color.

Rob Stevenson, Janney.

Good morning, guys. Lou, can you talk a little bit about -- like, when you take a look at the portfolio today, other than the Kroger assets, what -- and obviously was your point. I mean, what else from your standpoint or how sizable -- if you don't want identify projects specifically -- how sizable is the pool of properties that beyond that that you think about likely gets recycled over the next 12 months to 18 months in the portfolio?

Thanks Rob, good question. As you had mentioned, we've got the three Krogers that we intend to market later on this fall and the SunTrust building is already under contract, and I believe that closes at the beginning of the fourth quarter.

With regard to the rest of the portfolio, we don't have the obvious candidates that we did a couple of years ago. We've told you that we don't like to hold on to suburban office space and we don't like single-tenant buildings. We've pretty much gotten rid of those in the portfolio. That being said, we're constantly evaluating what's going on within the portfolio and really looking hard at what the tenant make-up is, as well as the sales of those tenants in the case of the retail. So it's hard to put a number on it. We're going to continue to be opportunistic with recycling capital, but there aren't any obvious candidates at this minute.

Actually, Lou, we have the two coming up in the Virginia buildings, at combined rates kind of [$12 million] -- which we were waiting to hold until we got to the -- past the two year holding point on those, which will be coming up next spring.

And then within the retail portfolio, I mean, what's the opportunity set for you guys in the near term to get occupancy up in a couple of the Kroger assets and at the Harper Hill Harris Teeter location, to [boist] occupancy in a couple of assets that are sort of sub optimally occupied in the retail portfolio today?

Steve, this is Eric, I appreciate the question. As you may recall from our conversation last quarter, there has been some meaningful lease-up activity across the core portion of that 11 asset portfolio we purchased. When we talked about kind of going in cap rates, you may recall that, due to the efforts of our asset management team, we had increased that going in cap rate from the high sixes to the low sevens with some near-term lease-up activity post acquisition. And so we are pleased that there were some near term wins there.

There still are some challenges. The center you mentioned, particularly has a little bit of challenging space, given the layout of the center, the changes in elevations, and some other challenges that we're working through. We continue to have a positive outlook on being able to lease up that particular center beyond, I think it's in the high 60s right now, with some prospects we're talking to, but that is a center we're particularly focused on either in finding the lease-up opportunity or looking at some other creative ways to think about that center and the way to create some value-add opportunities. So we are mindful of that particular center and working hard, but overall on that core portfolio throughout the Carolinas, we're pleased with some of the leasing activity we've had to-date.

Okay. Thanks guys.

Bill Crow, Raymond James.

Good morning guys. A question, just if you could give us a 30,000 foot picture of the local economy in Virginia Beach. Any progress towards light-rail that might be helpful for you guys? And in particular, kind of what is the -- what are the fundamentals like on the multi-family side since you've decided to go ahead with another development project in that sector?

Okay. I'll take the first question or the first part of your question. Things are progressing well here in Virginia Beach on a number of fronts. The city has several initiatives that are well underway. They look to crystallize a deal for a new 17,000 seat arena here at the Oceanfront, here in I think this quarter. They're also making all of the necessary pre-development expenditures towards the light-rail expansion to Town Center. I don't think it will be crystallized till after the November election. There will be a -- there is a referendum -- a non-binding referendum, but a referendum nonetheless on the issue that's going to be on the ballot.

As far as the local economy, we are continuing to see some fairly robust growth. There has been a number of announcements here recently, particularly in downtown Norfolk that has backfilled some of those older office buildings, that's going to help the entire region. The port continues to grow by leaps and bounds. Its data says the only Panamax-ready port on the East Coast, is bearing dividends. So we're very optimistic about what's going on here, and hence launching another phase of Town Center, as well as the acquisition next door that we had last year.

Multi-family specifically is doing extremely well here at Town Center. As of today, the Encore Apartments are approaching 97% leased; Cosmo, it continues to be strong. We are forecasting, once we start construction, much like happened a couple years ago when we were building 4525 Main, we are forecasting a little bit of a swoon at Cosmo when that construction starts on that face of the building, but again just a temporary blip.

Okay, that's helpful. A follow-up, you did mention the Panamax and the ports, are they actually -- is the port actually experiencing heavier traffic now that the canal is open?

We have actually welcomed the first two 12,000 unit -- you are testing my knowledge -- ships that have come through and they were greeted with much fanfare here a couple weeks ago.

Okay. And then finally from me, Turner Construction Cost Index, which we look at, is showing that the construction costs are up almost 5% year-over-year. Is that consistent with what you guys are seeing?

Yes, we are seeing some fairly healthy increases, mainly on the labor side. As you know, commodities remain pretty cheap and of course the oil swoon has helped out as well, but labor wise, prices are going up, particularly in large complex and really when you get into high rises. It's harder and harder to find subcontractors.

Great, that's it for me. Thank you.

John Guinee, Stifel.

Great. Okay. Just a few easy ones. You guys love developing all types of product, particularly the complicated deals. I was in Durham -- by the way, that's a ginormous hole you have in the ground there.

Thank you.

And by the way, it looks like you have a lot of work to do to get Hopkins open in the third quarter. Are they really going to make it for the students coming back in a few weeks?

They will make it. Yes.

It seems like you -- but you like to own retail and candidly you're buying a lot of commodity retail: Kroger's, Burlington Coat Factory, PetSmarts, Michaels, is that the sweet spot right now when you're looking at all types of products in the Mid-Atlantic, that you like this commodity retail the best and why?

John, I'm going to turn that over to Eric to answer more specifically, but I can answer it from a 33-year perspective. Over those decades, we've been through four recessions, we've been through booms, we've been through busts in the Mid-Atlantic and I can tell you consistently what always survives and thrives is commodity retail, particularly well-located, grocery anchored high-volume retail. Those are lessons that were hard-won over a long period of time. And so we are sticking with that axiom. Eric?

Thank Lou. Yes, John, just a little more color, because I think your comment is a fair one. Some color into our process and the number of opportunities that we're looking at relative to the transaction volume. The folks on the investment team here I would suggest are seeing almost all, if not a very close to all of the opportunities, certainly the on-market opportunities in the Mid-Atlantic within our geographical footprint, and per our history, a number of market opportunities as well.

And most of those that we're looking at on the retail side, after we utilized our relationships and contacts and sources to check on the activity at the center, have the conversation behind the scene with the tenants themselves on how the stores are doing and how those particular stores at the various centers we're looking at fit into the long-term strategy of that particular retailer. We're turning down many, many of those retail opportunities.

So the ones that actually make it through the filter and on to this call and our disclosure and into our portfolio are the ones that made it through a fairly thorough and robust analysis of that tenant quality at that particular center in that particular submarket. So I think that's an important point that while on the surface these centers may look a little bit more commoditized, a great deal of diligence has gone into the strength of those particular tenants, those particular centers within the overall plan of the retailers in question.

And then let me just ask, I think Dave Rodgers asked a question, but let me just rephrase the same question. You've been up and complete at, I think at 4265 at Virginia Beach Town Center for two years now, sort of sitting in the mid 60%s. Is it because the economy is just a very defense oriented economy really a far suburb of Washington, DC? Two, Virginia Beach Town Center is just too pricey relative to alternatives or is it because -- whether it's Virginia Beach prop or downtown Norfolk or some office park, there are now more competitive, more attractive office alternatives in your part of the world?

It's no, yes and no. So, John, we start by reiterating for --.

That's good, those are good, I got the answer, thanks. Thanks a lot.

I appreciate the question, John. I want to make sure that we reiterate this properly. For the first 11 years of the existence of Town Center, we effectively had -- did not have any space to lease. We had been at 99% occupancy on the office side for going on a decade and basically had to say no to every 5,000 foot tenant or expansion opportunity that came along. When we built 4525 Main, the idea was to oversize it and have some flexibility for some time to come. We frankly had expected that some time to come would have come a little faster than it has, but we're very comfortable having that space to lease.

The second part of John's question, is it too pricey for the market? That's a nuanced question. It is intended to be the most expensive address in the region, a region of 1.8 million people. And so therefore naturally some 80%, 85% of the tenants in the market are not coming to Town Center. It takes those tenants that are willing to pay that premium in order to have that address, be it for recruitment, or clients or what have you. So it's by design not going to be filled with the natural growth in the market.

And thirdly, the other no to that piece of the puzzle is that there is not a competing product in the region. There are products that offer 20%, 30% cheaper rent. We can't compete with that, nor are we interested in. But that's about it.

Great. Thank you.

Craig Kucera, Wunderlich.

Good morning guys. Appreciate the guidance update that I noted that the NOI guidance was up about $1.3 million on both the bottom and the top. Is that purely a function of hanging onto the three extra Krogers or is there some other moving parts?

Yes, good morning, Craig, it's a combination of a couple items. One is, yes, holding on to those three properties through year-end. The other is the addition of the Southshores acquisition.

Got it.

And on top of that with you know, our NOI has performed -- or I'm saying, our properties have performed really well in the first six months, has added to that as well.

And we've also upped guidance on the construction company as well.

Right, right. Getting to the same store, You know, I think last year, the cash same-store was running at maybe 5.5%, first quarter was just inside 4%, this quarter things slowed down a bit. Do you think that you are going to see a pickup back to maybe the 4% to 5% range in the back half of this year, or do you feel like, to a large extent, the portfolio is settling down to 2%, which I think it's maybe closer to your longer-term average?

Yes, we had some nice cash pickups last year. Part of it had to do with the re-tenanting here at Town Center. We had the big law firm there, if you remember, that took to 15 year space and all that we had some free rent and moving periods and all that had the straight-line rent adjustment. So we really started picking up some cash there in the retail re-tenanting that we did here. We are not out giving guidance on same-store NOI, but we certainly hope to see it back at that level.

Again, for those of you on the phone, Mike and I have been telling people for a very long time, again, having that 33-year window of what goes on in our portfolio. Our long-term, same-store growth is in the 2% range. We've enjoyed significantly higher gains than that over the last couple of years. But we would expect that that would return to the center line over the long haul. Now again, of course, what's been added to that is, there are lease-up opportunities now within the portfolio that would augment that, but that's traditionally what happens in our markets.

Got it. In the past you've had some success pricing OP unit deals actually above the stock price, but maybe to discount to NAV. Here we stand today with you guys trading in the $15 range. Can you comment on where this next tranche of Southshore is pricing?

This is Eric, I appreciate the question. That trend is intact and going strong. If it weren't for the robust movement of the stock in a very short time period. So a little bit of history with -- maybe with the group that we're buying Southshores from is appropriate for a second. You'll recall we [can have engaged] acquiring Dimmock Square from this group. And that OP unit deal, if my memory serves me correctly, was priced at a high $9 handle. The stock quickly traded down thereafter to the low $9s. And those folks obviously questioned it, which they no longer question anymore obviously.

Only to return and do the next deal with us, Southgate, and I believe we did that one at a low $11 handle. When we actually came to closing that deal at a low $11 handle, the stock had traded up into the high $11s, approaching $12. And so, when we negotiated the Southshores deal, we not only went out with an offer cap rate that we weren't going to budge off of, but we definitively said that those shares needed to be -- those OP units need to be priced at $12.50, a good $0.60 at the time, $0.60 or $0.65 above the current trading share price. Only to negotiate the deal and see the stock price take off to the $15 range.

Given the relationship with this seller and the success that they had experienced over the first two deals, we actually came out and were able to negotiate a pricing of those OP units at $13 at the end of the day, which was I think a fair negotiation on both sides, given the success of that relationship in the previous deals for both parties. But certainly any deals we are now discussing are certainly that the $15 handle is where the conversation is beginning.

Got it. One last one for me. Lou, with the cost of equity capital so much lower today than it's been in the past, are you more inclined to maybe push harder on looking at acquisitions, maybe more so in the retail space today than you were maybe six months to nine months ago, or is development still in the near term probably the way to go?

It's an interesting questions. It does open up more opportunities to acquire higher quality products. But we are really reticent to change our strategy for a short-term -- what could be short-term. The development pipeline is going to continue to be our main engine. I think where you would see what you're speaking of manifest itself more, as Mike alluded to, was using that ATM even more robustly to allow for further development opportunities.

Okay, great. Thanks, guys.

Laura Engel, Stonegate Capital.

Good morning and thanks for all the information, as always, and a good quarter. A lot of my questions have obviously been answered, but I wondered that if you could just give us -- you talked a lot about the sale of the non-core centers, especially the Kroger centers. What's the kind of the best or worst case scenario going forward for those properties and at what point will you all reconsider pricing given performance?

This is Eric, I appreciate the question. So just for a refresher of a couple of stats on the three centers in question. The center in South Bend has a Kroger lease going out to 2020 and is in the mid 90% occupancy. The center in the Memphis MSA has a Kroger till 2028 with 96% occupancy. And then the one in Waynesboro, Virginia, has a shorter term on Kroger till 2018. But again, there is only about 15,000 square feet of small shops that that Kroger dominates that rural portion of the Memphis MSA, that's a 100% occupied. And so we feel good about the centers, we feel good about the Kroger anchors and we feel good about the term left and the likelihood for renewal.

So, I guess the worst reasonable case is for reasons we are unaware of as we sit here on this call that pricing doesn't come in where we need -- where we'd like it to be during our marketing effort later this year and we opt to hold these. I guess that's worst reasonable case. That's certainly not our plan. And best case, I really don't want to get into pricing here on the call of the individual centers and our asking prices and to negotiate against ourselves publicly, but obviously best case is we hit pricing that puts the all-in sale of all these at a 7 handle collectively across these non-core assets that we would have sold and we would dispose of the remaining -- some subset of those remaining three by the end of the year, as we have mentioned.

Right. Okay. And then, we talked a lot about the development pipeline, but just with three significant projects seeing initial occupancy coming up. These estimates for stabilization and I'm -- haven't ever tracked it historically, estimated versus the final. Would you say these are conservative as we factor these into estimates within the next 12 months to 24 months? How would you characterize these estimates as far as stabilization for several of them coming online mid-2017?

I'd say they're reasonably conservative. It is certainly not worst case, but we try and err on being a little bit more conservative than our goals.

Well, I appreciate it and I'll get back in the queue. Thank you.

Paul Puryear, Raymond James Financial.

Good morning, thanks. Lou, just one more question from us on the apartment side. We're seeing a lot of new supply at the A level in the apartment space. Are you not seeing that in that region? Are you still getting rent increases there at Town Center?

We're still getting rent increases, but we are seeing a lot more supply come on. And that's not just at Town Center, as you suggested Paul, we're seeing it in our markets in the Carolinas, as well as that Baltimore-Washington Corridor, so obviously location becomes more and more important. So we're still eking up here.

Again, just to reiterate, the A locations are going to stand the test of time and weather any storms that might be coming. The rate of increase might slow, but I feel that they will -- and this is for here, for the Baltimore's Inner Harbor, for the Fort Meade area in Washington where we are, I think they are going to continue to grow albeit at a slower pace until that new supply gets absorbed.

But at Town Center, again, just this morning coming in to work listening on the radio, heard an advertisement for yet another apartment project that is one mile east of Town Center. And my guess is it's a couple hundred bucks a month cheaper than being in Town Center. That's going to continue to happen and probably accelerate, but we don't really feel a whole lot of that pressure.

So are you expecting different yields in your apartments versus your retail and office in the expansion?

Yes, on the retail side, again, we look for that 20% spread between wholesale and retail. And obviously that's different for retail than it is for apartments and that's continuing -- it's going to continue to hold true here.

All right, thank you.

Thank you. At this time, I would like to turn the call back over to management for closing comments.

Thank you for your time this morning. And thank you for your interest in Armada Hoffler. We look forward to updating you again soon. Have a good day.

Thank you. This concludes today's teleconference. Thank you for your participation and you may disconnect your lines at this time.