Armada Hoffler Properties Inc (AHH) 2016 Q3 法說會逐字稿

Welcome to Armada Hoffler's Third 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 call is being recorded today, Tuesday, November 1, 2016.

I will now turn the conference call 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 third 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 third 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 December 1, 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, November 1, 2016 will not be updated subsequent to this earnings call. During this call, we'll make forward-looking statements, including statements relating to the future performance of our portfolio, our development pipeline, potential redevelopment opportunities, the impact of acquisitions and dispositions, our construction business, our portfolio performance and financing activities as well as comments on our outlook and dividend. 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. The risks and uncertainties can cause actual results to differ materially from our current expectations and we advise listeners to review the risk factors disclosed in our press release this morning and in documents we have filed with or furnished to the SEC. We will 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.armadahoffler.com. I'd now like to turn the call over to our Chief Executive Officer, Lou Haddad. Lou.

Thanks, Mike. Good morning and thank you for joining us today. This morning, we once again reported quarterly results at the higher end of our expected range with normalized FFO of $0.26 per share. And once again, we've raised our guidance range for 2016 and expect to close the year between $0.99 and $1.01. Later in the call, Mike will discuss our quarter result and 2016 guidance in greater detail, but first I'll provide some comments on our overall corporate strategy as well as an update on our development pipeline. Since our founding nearly four decades ago, our goal has been consistent, to build a portfolio of the highest quality real estate through conservative selective development complemented by strategic acquisitions and dispositions.

As market dynamics change over time, our strategy to achieve this goal will continue to evolve. But our key advantage of being a diversified and vertically integrated organization is our ability to quickly assess, react and adapt to changing market conditions in order to capitalize on opportunities as they present themselves. A good example of this is what we are seeing on the development front. Over the past several months, we reserved a notable tightening in commercial construction lending with loan dollars decreasing and equity requirements on the rise, thus leading private developers in need of greater equity sources to our doorstep. For potential partners, we as the lead developer and controlling interest holder provide substantial advantages in addition to providing equity. The strength of our balance sheet and the ability to obtain construction financing, over 30 years of real estate development, construction, and asset management expertise, and our in-house general contracting company to provide tight control over both cost and schedule and partnering with high-quality private developers that have local market knowledge, who have already invested the time, energy and resources in teeing up a project, whether it would be through site selection and acquisition, zoning, permitting or architectural, we can significantly shorten the overall development process and therefore expand our development pipeline without significantly increasing our expenditure of internal resources.

As a result, we continue to see a robust level of deal flow for projects that meet all of our development criteria; Class A assets, high barrier to entry locations, secondary and tertiary markets in the mid-Atlantic and Southeastern United States, wholesale to retail profit margins of 20% or more. In addition to sourcing new development projects, we continue to evaluate several promising new joint venture opportunities across all product types, office, retail and multi-family in our target markets.

A perfect example of such is Harding Place, our 80/20 joint venture with Southern Apartment Group that we announced this past quarter. Harding Place is a Class A multifamily project in Midtown Charlotte. The site provides residents with convenient access to the Greenway as well as downtown Charlotte and is strategically located in close proximity to the Carolinas Medical Center, one of the largest employers in the city. The Charlotte MSA is a target market for our Company and we are pleased to have teamed with local partners that have more than 45 years of combined experience developing real estate in this market. With our construction company fully engaged, we expect to deliver Harding Place in 2018.

Turning to the remaining projects in our development pipeline; this past quarter, we delivered both Lightfoot Marketplace and Johns Hopkins Village. The initial performance from both assets has been solid, and we expect to ride this momentum program to eventual full stabilization. Last week, we eventually broke ground on the next phase for the Town Center of Virginia Beach, representing the latest chapter in our successful multi-decade public-private partnership with the city. We expect to deliver this next phase of Town Center in 2018. As progress continues as expected on Point Street Apartments in Baltimore's Inner Harbor, one City Center in downtown Durham and The Residences at Annapolis Junction Town Center with construction well underway at each site. If you check page 17 of our supplemental, you'll see that our current development pipeline includes well over $300 million worth of projects. Given our historical profit spreads, we believe these projects when delivered and stabilized will yield significant value to our shareholders. This value creation may manifest itself in a combination of ways, including total and per share FFO growth, monetization through dispositions, NAV growth or multiple expansion. We believe the result is organic, profitable growth that could lead to a lower cost of equity for future opportunities.

Our expectation is that 2017 will be a year of significant value creation as we continue to build toward deliveries in 2018 and beyond. And we would expect a significant bottom line growth, that I just discussed, to naturally follow that timeline. While we have been able to grow per share earnings by nearly 10% annually over the last couple of years, the timing of these deliveries suggest a somewhat slower growth trajectory over the short- term. Moving from our development pipeline to acquisitions and dispositions; this quarter we completed our planned disposition of the Oyster Point office building in Newport News, Virginia. The Oyster Point building was one of the oldest assets in our portfolio and one that faces stiff competition in the sub market. We are currently under contract to redeploy our proceeds from this building into a stabilized grocery anchored retail center in the Charlotte market.

We except to close on that acquisition in the next few weeks and look forward to providing further details after closing. You may have also seen that last month, we issued 2 million shares of common stock in a off-market acquisition of a stabilized retail asset, our sixth transaction involving either stock or OP units. We acquired the property in an all-stock transaction from a seller who now holds a significant equity position in our company. We believe the acquired property is the logical and strategic addition to our portfolio with tremendous potential upside related to redevelopment opportunities and I look forward to sharing more details with you at the appropriate time.

Whether it's through selective development, redevelopment or strategic acquisitions and dispositions, the management team at Armada Hoffler remains committed to making the right real estate decisions in order to grow our portfolio, create value and return that value to our shareholders. To that end, our current payout ratio suggests that we have more than enough room to make thoughtful recommendations to our Board regarding our dividend. With that, I'll turn the call over to Mike for further 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 $0.25 per share and normalized FFO of $0.26 per share, which was at the high end of our expectations. Our core portfolio construction company and the two new development projects recently placed in service delivered excellent results. I also want to point out that our AFFO is exhibiting solid growth this year as well. Dividend pay-out ratio is 74% year-to-date even as the share count has grown significantly this year. This pay-out ratio is well within our corporate goal of 80% or less. We believe a well covered dividend gives us flexibility going forward.

Occupancy increased this quarter as did same-store NOI, which increased for the ninth consecutive quarter. Same-store NOI growth was positive 1.4% and 2.3% on a cash basis. However, we do not believe this to be a meaningful metric at this time. Due to the volumes of asset recycling and early delivery development projects, only 54% of the year to date and 59% of the current quarter total NOI are included in same store NOI calculation. At the end of the quarter, our core operating portfolio occupancy rose to 96.2% with office at 96.4%, retail 96.4% and multi-family at 95.8%.

On construction front, we reported segment gross profit in the third quarter of $1.3 million on revenue of $39 million. At the end of the quarter, Company had a third-party construction backlog of $246 million, which will sustain this part of our business for the foreseeable future and should translate into profits at the higher end of our historical range.

Now turning to the 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 continuing the use of our ATM program. We used ATM program last quarter to raise $20 million of gross proceeds at an average price of $13.93 per share. We believe the ATM program is the most efficient manner for us to fund our growth and development activities. If the stock continues to trade at recent levels, we will continue to be opportunistic with the ATM program. During the quarter, we sold Kroger Junction, the second of the five non-core properties from the January portfolio acquisition. Combined with the previous Willowbrook Commons sale, these two assets sold for $12.9 million. As previously discussed, these proceeds will be used for balance sheet purposes. We are evaluating the remaining assets for upside redevelopment potential and possible retention. At the end of the quarter, we had total outstanding debt of $519 million, including $102 million outstanding under the $150 million revolving credit facility.

We continue to work on refinancing the 2016 and 2017 debt maturities. During the quarter, we closed on the refinance of the Town Center 2016 maturities. This new loan is for five years, $35 million and floating at LIBOR plus 1.95%, a new loan amount of $6 million more than the prior loans. We also closed on the refinance of 4525 Main Street and Encore Apartments. The new loan is a five year loan in the amount of $57 million with a fixed rate of 3.25%. After these refinancings, there are four remaining 2017 debt maturities totaling $30 million.

The largest of these is a $21 million CMBS loan secured by the Hanbury Village Center that matures in October 2017. The Center has high occupancy and is anchored (inaudible) with strong sales. Thus we've had strong competition among lenders. As we continue to evaluate our exposure to potentially higher interest rates, we have put in place the strategies that includes a mix of fixed rate debt and interest rate caps with the combination of the refinancing this quarter and interest rate cap we bought last quarter, 99% of our debt was fixed or hedged.

Now let me walk you through the full 2016 guidance that we updated this morning. We expect 2016 normalized FFO in the range of $0.99 to about $1.01 per share. This updated 2016 guidance is predicated on the following assumptions. Total NOI in the $67.3 million to $68 million range, third-party construction company gross profit in the $5.1 million to the $5.3 million range, general administrative expenses in the $9.2 million to $9.4 million range, interest income for our mezzanine financing program in the $3.1 million to $3.3 million range. At September 30, the aggregate loan balance of these mezzanine loans was $50 million. Interest rate expense in the $16.2 million to $16.6 million range and 50.2 million weighted average shares and OP units outstanding, which includes the stock issued as part of the October retail acquisition. This guidance excludes any impact of future acquisitions, asset sales and other capital markets activity with the exception of continuing opportunistic sales under the ATM program. The increasing guidance is attributable to several positive factors; construction is having another strong year, portfolio occupancy is increasing and the two recently delivered development projects are exceeding expectations. I'll now turn the call back to Lou.

Thank you, Mike. Thank you for your time this morning and your interest on Armada Hoffler. Operator, we would like to begin the question-and-answer session.

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

Wanted to ask, I guess, quickly about the acquisition that you referred to for October and you issued - I think it was the [S34], it doesn't sound like you are ready to fully talk about it, but it sounds like given that you've already issued the shares and talked about the acquisition having closed in October that maybe we can get a little bit more detail on that before you are fully ready to announce it.

Dave, thanks for the question. There is not much detail that we want to talk about at this time, it's a [stable] center, and I believe that the NOI is in our projections for 2016. We've got some very sensitive negotiations going on right now with regard to redevelopment opportunities there. I look forward to sharing more detail as soon as possible but can't do it quite yet.

Okay. Well, thanks for that detail at least. I would say maybe Lou another question on the development side, **time we get more joint venture opportunities, how is the 100% equity owned pipeline look, it sounds like you're maybe leaning more to joint ventures but I guess, correct me if I'm wrong, how are you thinking about putting capital to work here through new development?

Well, as I said on the call, activity is extremely robust right now both from our own sourcing as well as JVs. We are basically blind to the source at this point in time, we're basically cherry picking the opportunities whether they come from outside with developers that we know or we source them internally.

Okay. In terms of maybe the financing plan, Mike, you are going to reference paying off some of the secured debt that you have, it didn't sound like you have a plan of financing those assets until those maybe just go into an unencumbered pool, is that correct? Is that how you're thinking about it?

Yeah, we still have time to come up with that but right now, we are thinking of just keeping the credit facility in its current place right now, it's $250 million with $150 million on the revolver. And kind of been doing what we've been doing here in the past, maybe will look at that one as a floating rate debt on that one. So at some point in time, we want to monetize again and sell it, we'll pay it off and add it to the borrowing base pool for the credit facility, we could do that.

And maybe last question, I think the only area that you really have any meaningful amount of speculative development underway would be Town Center and then a couple of different Maryland Apartment buildings, but all kind of on the residential side, can you talk about kind of the demand in each of those markets and kind of how you're feeling today about each one of those projects; even though they are just getting underway but how you kind of see the underlying fundamentals for those assets?

Great question, Dave. I don't want to take all of our time. I can't tell you how excited we are about the Maryland properties. Every scrap of news that comes in of what's going on in those markets is more and more positive. At the Inner Harbor with apartments in lesser locations than our Point Street Apartments, we are seeing unbelievable rates and unbelievable speed, so we just can't wait to get that up and the same is happening at Fort Meade. We feel really good about the choices that we've made and look forward to getting those completed and leased up as soon as possible.

John Guinee, Stifel.

A couple comments. I can't remember at the IPO, what the status was of your Virginia Beach Town Center high-rise but it is sitting at about 64% leased. Is there just no demand for that location any more or is there a favored submarket that is more in vogue in your part of the world? That's one question. And then the second question is you're buying a bunch of commodity grocery anchored retail, remind us again what you like about those assets.

Fist on your first question, I was hoping that someone would ask that question with regard to the Town Center at Virginia Beach. First let me say, as I said before on previous conference calls, that new high-rise that we put up was designed to give us some flexibility and some vacant space due to the fact that for nearly a decade, we essentially had zero space at Town Center, so we programmed there an extra 100,000 square feet in order to soak up that demand. Secondly, as I've said before, rent at Town Center are a solid 20% above the surrounding markets, perhaps 20% above the entire MSA and as such a vast majority of companies are not going to pay the freight to come here. So it takes a special user to want to pay for that address.

Thirdly, what I'm happiest about and glad that you asked the question for, is that we've seen a noticeable uptick in activity over the last quarter. In fact, there's probably more activity on the office side than we've seen in the last couple years. I hope that's indicative of what might be coming, what might be brewing in the economy, but I know it's indicative of what's happening here. We look forward - we're in lease negotiations on four different tenants are that would substantially take up the remaining space in Town Center and, of course, not done till it's done. We look forward to updating you on that soon.

With regard to your second question, I'm not sure that I would refer to our acquisitions as commodity-based retail and, of course, it depends on your definition of that, if all that we were looking at was the credit of the anchors and the term of the leases, then I might agree with you that those could be characterized as run-of-the-mill centers. What we look for is well located stores with high volume sales, again as I've said in the past over nearly 40 years now, we've seen that while there isn't any real estate that's completely bulletproof, grocery anchored centers with high sales stay full. Where it's been a strategy for a long, long time, is going to continue to be a strategy that will resolve itself even further in the coming years.

As you know, John, we are not a fan of holding on to suburban office, we're not a fan of [Barden] variety multi-family, those things have their ups and downs and that's why you see us weed them out of the portfolio and at opportune times, but grocery anchored high sales volume stores stand that test of time.

Rob Stevenson, Janney Montgomery Scott LLC.

Well, when you look at the development page I guess it's 17 of the supplemental on the stuff that's either delivered not stabilized or still under development or in the mezz and the JVs and everything, what's the sort of blended stabilized yield that you're expecting on that capital deployment today.

Thanks, Rob, that's a good question. As you know there is a couple of different product types in there. So I'm not quite sure of the mix. But whereas as the quality of the products increases, obviously the returns decrease. What we are focusing on is the significant spread we told you that we aim for 20% between wholesale and retail. Right now, that pipeline is weighed towards multifamily, which obviously drags you into the lower end of the scale. For instance, on Harbor Point, we're seeing cap rates there in Baltimore transactions believe it not in the low fives, and even saw one couple months ago in high fours and we're well north of 20% over that.

But as a blended average, the more multi-family that we're going to have in the pipeline, the more we are going to skew down into the sevens as opposed to when we have more office and retail in that pipeline to just skew into the eights, so there is a fairly tight range and again what we have to be mindful of is our cost of capital and so what you may see as we've alluded to a number of times is that some of those might be monetized rather than brought on board in order to reap that benefit that we may not get paid for in the stock price, as everybody on the phone knows, as the largest shareholder we have to look through that lens before we could add things to our portfolio because we like them.

Okay and then where are you guys in terms of current occupancy at Hopkins Village, I think it was basically 78% or so at September 30. Has that moved up since then and then how should we be thinking about this as going forward, is this more like the student housing asset where if you miss the semester you're stuck with a lower occupancy for a period of time or is this just typical market rate apartments where you can continue to build even once the semester starts?

Yeah, again great question, appreciate, that gives us an opportunity to make sure everybody has a good understanding on the phone. That project is a venture with Johns Hopkins University and its purpose is for junior and senior housing. The occupancy is hanging right around that - it hasn't grown appreciably after the start of the semester. We wouldn't expect that it is going to grow appreciably other than the retail rents all coming online until we'll have a pickup in January, but I wouldn't expect as we said on our last call, wouldn't expect full stabilization until late next summer.

And then just lastly, how should we be thinking about dispositions over the next 6 months to a year, call it, meaning there's not much left in the office portfolio to harvest. I know that some of the stuff was recently delivered, so you got REIT rules around that. Is there stuff in the portfolio at this point where you're looking at it and saying, the time to monetize it is next 6 to 9 months or a year or are we basically looking at equity funding for 2017 largely coming through the ATM?

Again, another great question, there are a few things in our portfolio we're looking at strongly as we've alluded to before, which we have two state office buildings in the portfolio that frankly will be monetized at the appropriate time. Some of our centers, kind of, going back to John's question, some of our older centers are performing well. But what we're seeing out in the marketplace still is a compression on cap rates in what we consider to be maybe not commodity retail, but not the all-stars in our portfolio. So you could see us recycle some of those older centers in the coming year.

Bill Crow, Raymond James Financial.

First of all, maybe the opposite end of Guinee's question earlier, you're selling office to buy the retail, just to bullet point it, why is it that you want to get out of suburban office? We're reading a lot more reports about Suburban B office starting to outperform, so just kind of your thesis on that?

I appreciate that. Again it really kind of comes from the school of hard knocks. Remember our markets, we're dealing in secondary markets, secondary markets land is not at a premium, when you have suburban office, you really essentially have - and, of course, I'm speaking in broad generalities here, what we've seen over 3.5 decades is that you don't have much of a barrier to entry. And while we're really pleased with the 10-year and 15-year leases that we get at the outset, we've seen that once those things roll over, it's very difficult to maintain the rents and even if you can maintain the rents, you've got a huge outlay of TI in order to attract that new tenant. And you are at risk because it's barely easy again in secondary markets for someone that throw up a building next door and draw your tenants. So it's been our experience over a long, long period of time that those things have their greatest value essentially the day that you deliver. That's worked for us for a very long time. I would not want to get caught up in believing that there is significant upside in B assets in suburban markets.

Appreciate the answer. One final question from me, you talked about the construction lending environment tightening, I think we may be touched on that last quarter as well. Is there any difference between your three asset classes or regionally as far as the availability and cost of money?

I will let Mike answer that.

So recently, [he was] gone out on the multi-family. So we haven't gone out anything here recently on the retail and office but the feedback I'm getting is that it's tightening up across all of the product types. These new [HPCR REIT] ranks that are coming through are really changing the capital requirements of the banks, so the change in our pricing and loan to cost development.

Craig Kucera, Wunderlich Securities.

Just a follow-up on the last question, I know you mentioned that you see it tightening up across the board, but are you seeing any difference in the type of projects that are coming to market. You know maybe a little bit more pure play, multi-family or retail but maybe mixed use because it's just more moving parts, a little tougher for a bank to maybe underwrite.

I wouldn't say that Craig, we've seen lenders are significantly wary of multi-family across the board. As you all know, there's been a huge boom in multi-family construction and so a lot of these guys regardless of how good the project is, simply have full portfolios of construction loans on other projects in a particular market. I think that combined with the high-risk loans that the regulators are basically foisting on the banks with regard to real estate lending has led them to bring loan dollars into the 60% range where, a couple of years ago, if we said multi-family, then you were looking at a 75% loan. Overall, I think that's really good for the market and the economy for the I guess the right thing for the wrong reasons, if you will, and because it will cause things to slowdown in some of these projects that really shouldn't get built perhaps won't, but in the meantime we're the beneficiary, have a lot of people bringing their projects our way.

Craig, let me just also add, when we are talking this, we're talking about construction loans and not the stabilized assets, it's a different lending environment that's stabilized versus construction.

I would add one more comment to that to dovetail into a topic from another question, that another benefit that we're enjoying from having these local, what I'll label, are site-specific developers bringing us development opportunities on the JV development platform side is that as Lou mentioned, we can cherry pick the best of those opportunities throughout the Mid-Atlantic and Southeast and sort of the extent that construction lenders only have room for one or a few remaining projects in a particular submarket, we're able to take advantage of this in some cases two plus years of work that our development partner has done locally and see that opportunity in that marketplace, which allows us in what is an increasingly competitive construction loan environment to be able to secure those construction loans albeit in maybe a our LTC than we have been seeing in the past, we still are finding access to those construction dollars because of those attractive opportunities.

And following up on that, are you - if someone has put in two, three years into a project, are you seeing any opportunities where there may be some distress, maybe developers have been caught midstream and are little bit surprised and now have maybe over extended themselves and maybe you can get even a better deal than you might normally be able to get?

That's definitely happening out there. If we think about, if we started working in 2014 to bring a project to bear in 2016, then you definitely had a different expectation when you started, so yeah. And again, where we want to be opportunistic without being piggish, if you will, this Company was built on relationships, we get first shot and a lot of these projects because of our longevity and the fairness with which we treat people, so you're not going to see us rake a partner over the coal, but at the same time, obviously that puts us in a very good position to make a very good deal.

Laura Engel, Stonegate Capital Partners.

Wondered if on the Town Center next phase, it's under development, if you could tell us I know it's just anchored tenants, not yet announced, if you could tell us a little bit about how that mix of tenants compares to what is already there, how the preleasing compares to what you've seen historically and then maybe I guess any kind of lessons learned, having been there for a while and really done the majority of the development, what's going bring them the most success in getting that property online and what you think as far as anything of the stabilization rates compared to historical rates? Thanks.

Sure. And thanks for the question. When you guys want to start talking about Town Center, these guys keep nudging me that when will you shut up because I get really excited about what we're doing there, the anchors that we have been reticent to make announcements yet, basically want to be much closer to their store opening before they unveil. But I can tell you it's the same type of lifestyle center tenants that we've endeavored to attract, the anthropologies in West Elms, Brooks Brothers of the world. So you'll see that it's in that same ilk, well known international names. I tell you, it's brought - this whole project has brought a tremendous amount of excitement at Town Center from the standpoint of how quickly it is going to stabilize. It's right in the - for those of you who are somewhat familiar with Town Center, it's right in the centre of Town Center as opposed on the periphery. It's right next to the public plaza that's become the gathering place for the townspeople.

And so it's going to be highly visible, highly desirable and we've had some great absorption rates on our retail and our apartments to-date. The Encore apartments are already in the high-90s and I expect that there's a waiting list for the type of apartments that we're building on this block. So I expect that's going to stabilize very quickly. While we have a couple of leases with the people I just mentioned, we're in LOI negotiations essentially for the rest of the space. There's going to be some rework involved. I guess is something else we want to get out there. We're going to have to move some tenants around in the retail under the Cosmopolitan Apartments to make room for some other co-tenants that we really want. We're going to be moving a couple of the local shops. And when we put together our 2017 guidance, our expectation is much like when we built 4525 that we're going to see some loss of occupancy in the Cosmopolitan while that construction is going on, at least while it's in full swing. But again, temporary blip for much greater good.

My other questions have been answered, so I will hop back in the queue but appreciate all the good information and congrats on the successful quarter.

Paul Puryear, Raymond James Financial.

Would really like to get some more color on your construction company. The profitability there and I would assume you're getting cost pressure, if you could comment on that and are you able just to pass that through?

Yes. Great question, Paul. I appreciate it. May I tell you, you guys will make me talk forever here. Some of you know I came up through that, that company is still near and dear to my heart. Paul, we're not seeing any pressure on the profitability on that company essentially because of the way we do business. This is much different than traditional construction. Our guys are not out there trying to be the low bid on a project. Our people get hired to help an owner develop a project when he hires an architect, then he hires a contractor and watch those two together to ultimately come up with the best product he can for a reasonable price in a very short timeframe. Therefore, it's not incumbent upon us to put a hard number on the project until essentially we have the entire thing subcontracted. So, long answer to a short question, essentially everything is pass through. Now, it's still the construction business and there's still some risk, obviously, you can have subcontractors go out on here in the middle of a project. So we have a extremely well oiled wedding machine to keep that to a minimum. As Mike mentioned, that backlog is well over a couple of hundred million dollars. For the third or fourth year in a row, our expectation as of 2017 is going to once again be at the higher end of the range. And it also it begs the question why not expand it? Well, it's not really expandable. We really like the idea of that company bringing in $4 million, $5 million every year. The kind of work that it gets, it gets from a couple of handfuls of clients that understand the value of hiring a contractor upfront because that's where the money is saved through the design process. But it doesn't scale up well and frankly, we have as much benefit in having those guys work for us in controlling our costs and schedules as well as involved in these joint ventures. As we've said before, this mezzanine lending program that we have, we wouldn't have it if we didn't have our construction company on site basically monitoring the process and prosecuting the construction. So it's a multi-headed monster for us that happens to be very lucrative on [the side].

Thanks for that and then the cost pressure?

We're seeing a lot of cost pressure across the board in a number of different markets. I tell you it's kind of interesting to look at as you wonder why in a flat economy and where commodity prices have essentially gone down for the last several years, why are we getting the cost pressure. And the biggest reason that we see is that there is a dearth of subcontractors out there to do complex high rise type work. A lot of them went away in the great recession and they largely have not come back. You've seen a few articles in the Wall Street Journal talking about how difficult it is to get glass on high rise these days. That's really a manpower thing and so not sure when that resolves itself. So for our third party clients, they know what's going on and can react accordingly. For our development business, it's kind of interesting, again as you guys know, we don't throw up buildings and help to lease them, we do projects with cities and with well-heeled anchor tenants and basically it becomes back to a pass through. And when we're doing a public-private partnership, we do our forecasting on what costs are going to be? That basically just means there needs to be more participation from the city or the university or whoever our public partner is. The same thing when we get a or when we get an engagement from one of our grocery anchors who ask us to go somewhere and build a building for them, they understand what that price is going to be. So while we'd rather not see rising prices but we're well equipped to take care of them.

Paul, this is Eric. I would add one thing to Lou's comments. The other thing that we, obviously, don't know the answer to but we're discussing and keeping an eye on is how that cost pressure out there on the construction cost side might manifest itself in the context of the construction lender pull back we're seeing and that impact on your number of deals that get done. So we're keeping an eye on that and, obviously, a very interested party.

Yep, sounds like somebody needs to raise the rents.

Exactly.

Going back to the discussion on leasing at Virginia Beach Office, last quarter I think you commented that B rents - B space in Norfolk was filling. Could you just give us some more color on that, the rate that it's filling, how much lease rates are going up and how that affects the leasing at Virginia Beach. And I guess as part of that, are you holding rate at Virginia Beach?

Great question, Paul. We're seeing some great success in downtown Norfolk because of late [Axis] very recently reported that with the companies that have chosen to relocate in some of those older buildings that we talked about, they have brought in over 2,000 jobs over the last 18 months. As a matter of fact, they're setting up training stations so that a lot of these people, a lot of the locals will be able to get those jobs as opposed to the people coming in from the area and, of course, there will be some of that as well.

So it's a great benefit for the region to have those buildings full. There's also been one of the major high rises in downtown that is (inaudible) it's like 40 years old is now being converted into multi-family. So it's another few 100,000 of square feet that's taken off the market. So again, we applaud their success. We're hopeful that there are going to be one end of the light rail lines that's going to come to Town Center. But in any respect, it's good for the region. In terms of what it does in for our rent, it's not much one way or another. We are holding rates, the lease that we did we talked about last quarter in 4525 was a [$2,750] rent. The four tenants that we're talking with now, that I mentioned, are all going to be in the high-20s. So we're not budging. If you think about it, it would not be wise for us to try and dive and fill these buildings not when you have another 700,000 square feet that ultimately is going to roll over. And then [squeeze a hug] with you, the 110 tenants here enjoy the exclusivity that we've been able to maintain. So we're going to stay there with that, like I said activity has been robust and I look forward to having significant increases in occupancy over the next couple of quarters. Long answer to a short question, I hope I caught it all. Does that get you?

Yes, you did, except for the rate of increase in B rents, if you have a number that would be helpful.

Yes. I don't have the number. I would tell you that those B rents are still B low. For instance, one of the prizes that they got was a big commitment from ADP, which I think is around 800 jobs, 150 some odd thousand square feet. The city had to kick in significant money to help, that was a huge economic development department list where they competed with a number of competing cities in order to get that. So I wouldn't think and, gosh, now I am speculating, and I shouldn't but I wouldn't think that there was any material increase in what happened. Now you would imagine with the successes that they've had were all supply and demand, the remaining space that's in downtown Norfolk, you would imagine you'd be able to start getting a bit of a premium and those rents will start to creep up.

Yes. I'm sure we can drag it down. Thank you. Good color.

John Guinee, Stifel.

Great. A quick follow-up. Refresh on memory as to when you raised the dividend last and by how much? And then the second question is if you look at your guidance, it implies a $0.22 to $0.24 fourth quarter FFO, I think. And that seems like a little [stint] if you raise your dividend a penny about the same time your FFO is only $0.22 or $0.24. Can you walk us through those two issues?

Yes. I'll start it now and then turn it over to Mike. So for the last two years, we raised the dividend by coincidently $0.04 in the first quarter of the subsequent year. So that was in I want to say February of 2015 as well as February of 2014. Mike.

Yes, John. On the guidance, so, year-to-date we are at $0.77 at normalized and our range goes up to $1.01. So surely we're not showing the same run rate as we've had this past quarter. But part of that is the effect of using the ATM this past year, as it was talked about, we've ramped that up quite a bit and raised $50 million on the ATM, that all things being equal the share count going up, it's going to bring down the fourth quarter earnings a little bit.

Remember that in the past quarter, we had $20 million on the ATM and you have 2 million shares go out the door as well for this property that we're looking forward to talking to you about. So that obviously had a bit of delusion. But as Mike said, we've had strong AFFO growth this year. We expect that to continue and so we feel real good about that dividend coverage.

There are no further question at this time. I would like to turn the call back over to Mr. Haddad for any closing comments.

Guys, thanks for all your attention and the great questions. Look forward to updating you soon on some of the things that we talked about. And have a great day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.