Armada Hoffler Properties Inc (AHH) 2016 Q4 法說會逐字稿

Welcome to Armada Hoffler's fourth-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded today, Thursday, February 9, 2017. I will now turn the conference over to Michael O'Hara, Chief Financial Officer at Armada Hoffler. Please go ahead, sir.

Good morning. And thank you for joining Armada Hoffler's fourth-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 fourth-quarter earnings, along with our quarterly supplemental package and our 2017 guidance presentation, were distributed this morning. A replay of this call will be available shortly after the conclusion of the call through March 9, 2017. The numbers to access the replay are provided in the earnings press release. Those who listen to the rebroadcast of this presentation, we remind you that remarks made herein are as of today, February 9, 2017, 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, the 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 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 www.armadahoffler.com.

We will start the call today by discussing current events and year ended 2016, after which Lou and I will discuss are 2017 guidance. Now I'll turn the call over to our Chief Executive Officer, Lou Haddad. Lou?

Thanks, Mike. Good morning everyone. And thank you for joining us today.

Today we reported full-year 2016 results of $1.01 of normalized FFO per share, reaching the high end of our expected range. Our same-store portfolio produced another quarter of growth, while our overall portfolio remained leased in the mid-90s. Our construction business finished the year with profits well over $5 million and is carrying nearly $220 million of third-party backlog into 2017. While it's gratifying to report another year of solid financial results, I'm even more proud of what we've accomplished in the three-plus years since our IPO. Before I turn the call over to Mike, let's reflect on just how much our Company has achieved since the spring of 2013. Three years ago, we were a newly public Company with a market cap of some $350 million. Three years ago, we were talking about our identified development pipeline of projects, concentrated in the southeastern part of Virginia. And our expectation of $150 million to $175 million of new development every 18 to 24 months. And finally, three years ago, the management team and I talked about how the successful execution, delivery, and stabilization of the projects in our development pipeline would eventually lead to future growth, not only in NOI, but more importantly, in NAV.

Today, each of the projects in that original pipeline has been delivered. Many have stabilized. And the healthy wholesale and retail spreads that we've created have been recognized. Today, after successfully executing our business plan, our market cap has more than doubled, our earnings, NAV, dividends, and share price have all grown meaningfully, and total return to shareholders has outpaced the REIT index by a significant margin. Today, we have leases out for signature for nearly 40,000 square feet of new tenants at 4525 Main.

These commitments, when combined with the existing Town Center tenants, who relocated, upgraded, and expanded into the building will bring occupancy to well over 90%. We are very pleased that we are able to hold rents at this, the premier address in the region, and achieve our target returns. And with the relocations from lower price-point space, creating vacancy that appeals to a wider array of perspective tenants, we are poised to quickly bring occupancy at Town Center back to its historical levels in the mid to high 90%s. As you already know, our expansion of Town Center continues with the construction of basics currently underway, and the acquisition of the Columbus Village Shopping Center next door.

Today our predevelopment and development pipeline approaches $440 million and reaches as far north as the inner harbor of Baltimore, through the greater Washington, DC, Metro area, into Downtown Durham, to Midtown Charlotte, and some of the fastest-growing markets throughout the Carolinas. But not only the value, but the quality of locations and projects in our current pipeline have potential for value creation that has never been greater. So our message this morning is the same as it was three years ago, when we were promising successful execution of that original pipeline: efficient construction, delivery, and stabilization of our development projects [as] the primary path to future NOI and NAV growth.

Near-term per-share earnings growth will be largely offset by our continued ATM activity and asset dispositions, as we prepare our balance sheet for the delivery of several premier assets. But as we've said before, we've never managed our business on a quarterly or even yearly basis. Our goal has been and always will be, to build a portfolio of the highest quality real estate in order to create value over the long term and return that value to shareholders. Given our track record of success of nearly four decades, we have every reason to believe that the best is yet to come.

At this time, I'll turn the call over to Mike to review our fourth-quarter and full-year 2016 results, after which I'll comment on our 2017 guidance. Mike?

Thanks, Lou.

Today I want to cover the highlights of the quarter, the full year, and thoughts on our balance sheet. This morning, we reported FFO of $0.27 per share and normalized FFO of $0.25 per share. For the full year, FFO was $0.96 per share and normalized FFO was $1.01 per share. This compares to FFO of $0.87 and normalized FFO of $0.93 in 2015. FFO excludes $30 million of gains on real estate sales, which equates to over $0.50 of earnings per share. Despite this treatment, as we have discussed in the past, asset sales and capital recycling will continue to be an element of future shareholder value creation. And we believe this past year's asset recycling can improve the quality of our portfolio and underlying cash flow. On a related note, because we structured these transactions as a 1031 tax-free exchange there are no taxable gains in 2016. Tax efficiency remains one of our corporate goals.

The fourth quarter represents the 10th consecutive quarter of same-store NOI growth. Same-store NOI was positive 1.3% and positive 1.8% on a cash basis as compared to the fourth quarter of 2015. For the full year, same store NOI was positive 1.2% and positive 1.7% on a cash basis as compared to 2015. At the end of the quarter, our core operating portfolio occupancy was 94%, with office at 90%, retail at 96%, and multifamily at 94%. The overall drop in portfolio occupancy was primarily due to a decline in office occupancy. As Lou discussed, two tenants are expanding and relocating into 4525 Main Street from other Town Center office buildings. Keep in mind that 4525 Main Street is not currently included in our core operating properties.

On the construction front, we reported a segment gross profit in the fourth quarter of $1.4 million on revenue of $50 million. For the full year, we reported segment gross profit of $5.7 million on revenue of $159 million. At the end of fourth quarter, the Company had a third-party construction backlog of $218 million.

To summarize our 2016 performance metrics, the Company excelled in all areas. Normalized FFO increased $0.08 per share or 9%, and AFFO increase $0.11 per share or 14%. The dividend was well covered with a 73% payout ratio in 2016. Additionally, total shareholder returns for AHH outperform the indexes. For 2016, total shareholder return was 47% versus 9% for the RMS and 21% for the Russell 2000. Since our IPO in May 2013 total shareholders return was 59% versus 27% for the RMS and 48% for the Russell 2000. We're obviously pleased with these returns and are grateful for the trust our shareholders have placed in the management team.

Now turning to our balance sheet. We continue to take actions to enhance flexibility and strengthen our balance sheet, including increasing the capacity of our credit facility, hedging our interest rate exposure, and continued use of our ATM program. We used the ATM program last quarter to raise $17.4 million of gross proceeds at an average price of $14.10 per share. For 2016, we raised $68 million of gross proceeds at an average price of $12.89 per share. In addition, we issued $46 million in stock and OP units as part of acquiring $75 million worth of property acquisitions in 2016. During the year, our equity market cap increased by $322 million to $805 million. Our total enterprise value increased by $472 million to $1.3 billion. At the end of the quarter, we had total outstanding debt of $527 million including $107 million outstanding under the $150 billion revolving credit facility.

In January of 2017, we added two properties to the credit facility [borrowing days] to increase the capacity by $25 million to a total $275 million. We continue to evaluate our exposure to higher interest rates and look for opportune times to enter into hedges. At year end 97% of our debt was fixed or hedged. Subsequent to year end, we purchased a two-year $50 million interest rate cap at 1.5% to replace the cap maturing on March 1. During 2017, we intend to continue to position the balance sheet for the development pipeline and associated growth through opportunistic asset sales. In the first quarter of 2017, we sold a single-tenant asset at a 5% cap for $4.6 million. The proceeds will be used for balance sheet purposes. We continue to evaluate our portfolio for opportunistic sale candidates. Continued use of the ATM program, which we believe is the most efficient manner for us to fund our growth and development activities and increase from the capacity of our credit facility by $25 million to $275 million.

At this time, I would like to draw your attention to our 2017 guidance presentation that we published this morning. I'll now turn the call back to Lou to begin the discussion on our 2017 guidance. Lou?

Thanks, Mike.

Looking back over the last three years, you will see on page 3 of the 2017 guidance presentation, that we've successfully produced and delivered over $300 million of new real estate, creating over $50 million of equity in the process, some of which we've monetized, but all of which have manifested itself in healthy NOI and NAV growth. As I mentioned in my opening remarks, while we are pleased to report another quarter and year of bottom-line per-share growth, I'm much more excited about the opportunities in our development pipeline and the associated value creation and growth potential over the next few years. When we look at each of the development pipeline projects, and pre-development opportunities presented on page 4, you'll see that the quality of assets in our pipeline has never been higher. The locations and markets have never been better, and the potential value creation has never been greater.

All told, the total cost of the projects in our current pipeline approaches $440 million. Given our history of delivering healthy wholesale to retail spreads of around 20%, we expect that these projects alone will add some $90 million to NAV or well over $1.00 per share on a fully diluted basis over the next few years. As you can see, we are forecasting deliveries to begin in less than 12 months. Remember, this does not include many other exciting development opportunities that we continue to explore as far west as Nashville, throughout the Southeast, and along the East Coast. However, I believe it is important to note that we continue to decline the vast majority of opportunities presented to us. The standards we use to evaluate whether to deploy our precious capital on new projects remain and will continue to be exceedingly strict.

As Mike and I have reported to you on many occasions, we have various mechanisms to fund and appropriately lever the projects in our pipeline in order to meet our corporate goals. We will continue to use a combination of our credit facility, construction loans, and our ATM program as our primary capital sources. Alternatively, as we have demonstrated before, we may choose to monetize and recycle the healthy spreads on some of these assets. However, even if we choose to retain all of these properties, we believe that continued and prudent use of the ATM program will be more than sufficient to fund the necessary equity to maintain our target debt metrics. So while we continue to forecast absolute growth in NOI and FFO over the short-term, we expect growth on a per-share basis to be muted in favor of long-term value creation, just as it was as we executed on our previous pipeline. The growth in NOI since our IPO is illustrated on page 6. As you can see, the successful execution of our prior $260 million pipeline was the primary driver. When we extrapolate this past success to our current $440 million pipeline, you can understand why we're so optimistic about the growth potential of our Company.

At this time I will ask Mike to walk through the details and key assumptions underlining our 2017 guidance. Mike?

Thanks, Lou.

Today we introduce 2017 guidance of $0.99 to $1.03 per share. We believe that 2017 will be a year of execution and positioning the balance sheet to the development pipeline and future growth. In addition, with no NOI contribution from new development projects, the midpoint of the 2017 guidance is flat to 2016. This is similar to 2014 prior to the delivery of the IPO pipeline. Once the pipeline deliveries began in late 2014, normalized FFO per share increased by 23% over the subsequent 3 years.

I would like to go to the details of the 2017 guidance. Please turn to page 7 of the presentation. First, starting with our assumptions. Disposition of a single-tenant asset during the first quarter with proceeds being used for balance sheet purposes, raising $40 million through the ATM program or $10 million per quarter. Interest expense is calculated based on the [forward] LIBOR curve, which forecasts rates rising from 1.25% by year end, maintaining core debt and core EBITDA in mid 6-times range and no acquisitions in 2017.

This 2017 guidance of $0.99 to $1.03 per share is predicated on the following: total NOI in a $73.8 million to $74.5 million range; third-party construction gross profit in the $5 million to $5.5 million range; general administrative expenses in the $10.2 million to $10.5 million range; interest income from our mezzanine financing program the $5.7 million to $5.9 million range. As of year end, the [aggregate] loan balance of these mezzanine loans was $59.6 million, interest expense in the $17.9 to $18.5 million range, and 56.8 million weighted average shares outstanding.

Now I will turn the call back to Lou.

Thanks, Mike.

Before I open the call up for questions, I'm excited to reiterate that the Board of Directors has declared a cash dividend of $0.19 per share for the first quarter or $0.76 on an annualized basis. This represents a 5.6% increase over the prior quarters' dividend and the third increase in three years, totaling nearly 19% dividend growth during that period. This reflects the Board's confidence in our long-term strategy and our ability to execute, as well as the Board's commitment to returning value to our shareholders.

Thank you for your time this morning and your interest in Armada Hoffler. Operator, let's begin the question-and-answer session.

Thank you.

(Operator instructions)

Our first question comes line of Dave Rodgers with Robert W. Baird. Please proceed with your question.

Hey good morning guys.

Morning David.

Hey Lou just want to start with a big picture question. Trump seemingly is a little bit more pro-defense that may or not have helped with the Brooks Crossing transaction. But we really haven't seen a lot of government services job growth as of yet.

Maybe you can talk about how the region feels? Particularly given that historically people would view your region definitely government centric?

Sure. Thanks Dave. Well as you know we really don't have any tenants that are directly involved with DOD.

However obviously several of our tenants benefit by job growth in the area. Whether it's related to the port or to tourism or general business or the military. There is a huge amount of optimism in the region regarding potential Trump policy.

Obviously strengthened defense leads to more military spending. Which helps everything in this local economy. And perhaps more importantly, for us, is the infrastructure spending that they are talking about. You may know that our greatest concentration office tenant-wise is in architects and engineers. And I can tell you a lot of the leasing pressure -- upward pressure that we have seen over the last few months is related to those expanding which is great to see.

So everything been talked about is positive for this region. We will see how much actually materializes. But I tell you, it really started the last six months of 2016. There's been a tremendous amount of wins in the region. ADP is locating a huge office here, hiring 1500 people. Job growth in the area is over 3000 jobs for the latter part of the year.

New convention center hotel is opening up in Norfolk and a new entertainment district. The Beach is talking about a new arena and a convention center hotel as well. So there's a lot of happening that we're excited about. And of course Town Center sits in the middle of all of it.

Good segue into the Town Center. So obviously the Columbus office building saw a dip in occupancy. It looked like maybe some of that was in your renewal leasing schedule.

But it didn't seem to be explained the entirety of the drop in occupancy there. So could you maybe dive a little deeper in some of your legacy assets of the Town Center to 4525 Main Street.

Sure. I appreciate the question. We're very excited about all these developments.

The drop in occupancy is essentially 30,000 feet of tenants expanding into 40,000 square feet in 4525 Main. When you take that 30,000 feet out of the core portfolio it's a drop in and of itself of around 5% on the office occupancy. A better place to go -- as to why we are so excited, is, soon, when we sign these leases that are out for signature now on 4525 Main, that building's occupancy comes to 94% when you add that square footage to the Town Center office portfolio, we now have an office portfolio around 840,000 square feet.

That has about 75,000 feet of vacancy. And the good news is the vast majority that vacancy has a lower price point base that appeals to a much broader section of tenants. So as I said earlier, we're expecting to very quickly get back into the [mid-90%s] overall on a much bigger portfolio.

And lastly just the same topic. You said about 3,000 square feet is out for signature at 4525. Are all those new entrants into the Town Center market for you guys with the sub market there?

Correct, they are new.

Okay great thanks.

Our next question comes line of Rob Stevenson with Janney Montgomery Scott. Please proceed with your question.

Morning guys. Can you talk a little bit about what the occupancy and same-store NOI growth expectations are embedded in your 2017 guidance?

Sure. Rob as we have talked before, Mike and I and the Management team, we are thrilled that we have got 10 consecutive quarters of same store NOI growth. We've been running this portfolio in these markets for well into our fourth decade.

We look at things more on a, things can be lumpy on a year-to-year basis. We had some quarters where we were growing at 4% and 5%. But ultimately this thing resolved itself into the 1.5% to 2.5% range on a long-term basis. So once again, within the 2017 guidance is in the neighborhood 1.5% to 2%.

Like I said, it's not going to vary a whole lot from that, over any type of a meaningful horizon. We don't have a tremendous amount of space to lease as you know, when you're occupancy is in the mid-90%s. So we're not going to see any significant variance from the mean.

Okay. And then call while we're on Town Center, with the construction of the new phase, you talked to people about expecting apartment occupancy to dip. It looks like, at least sequentially, that there still not really been any change in occupancy. Or any material change in occupancy in either the two apartment buildings at Town Center.

Is that still to come? Or are you basically expecting that this is going to be it? And how are you guys thinking about that these days?

It's great question Rob. And I want to make sure we don't throw a head fake out there. When we had construction on 4525 Main, we were forecasting a meaningful dip in occupancy at the Cosmo.

That ended up not being the case. As part of the reason why that year, 2015, did as well as it did occupancy wise. This year we're forecasting that dip is yet to come.

We've been pummeling those people with pile drivers for the last several months. Pile driving is over now construction pours start with backup alarms and everything else starting around 3 AM or 4 AM. So the prudent side of us is forecasting that dip is going to occur.

In fact to date we've seen a 1% 1.5% decrease from those year end numbers at Cosmo occupancy. So a long answer to a short question. We are forecasting a 3% or 4% dip in occupancy in those properties.

Okay. Mike, what is the thought around the adoption of the now being able to capitalize acquisition costs? You guys adopting that effective January 1. Is that a future adoption for you?

Good morning Rob. No we actually adopted it during the fourth quarter.

Okay and then so, when you look forward, that's historically been a big chunk of the gap between NAREIT and normalized FFO. What's really out there in 2017 to bridge that gap?

The other big driver that really been pushing, you'll see this past quarter that FFO was higher than normalized, it's because of the mark to market adjustments. On our interest rate swap blocks.

So I think we picked up about $1.3 million in income in the fourth quarter. So that will continue to fluctuate and be the big difference between the two in 2017.

Okay and then just lastly, Lou in terms of adding large-scale projects to the development pipeline. Where are you these days? Is the shadow pipeline the stuff that you're not yet able to announce? Is that backing up and piling up? And we're likely to see some stuff over the next couple of quarters? How is that trending versus the last three or four years when you think about stuff that's highly likely to be green lit but not yet announced?

Yes. So, what you see in our guidance presentation, we have a $98 million of unannounced projects. Those are getting close. So our expectations prior to the call for the next quarter, that those announcements will come out.

The shadow pipeline beyond that, in a sense it's massive. I want to reiterate what I said earlier. The vast majority of what we see we reject. So out of every dozen or so that come our way that we investigate there might be one or two that merits going a little further and spending a little seed capital.

Some of you might've seen the report that came out on the Nashville project. That's a great example. We really like the project, we really like the local partner.

We really like the market. And we will see if it comes together. The proof is in the pudding.

If the market is as good as advertised then we will not have any trouble getting leasing commitments. And then you'll see that move forward.

But Rob, in addition to that, we're already looking at the next projects with Duke and Downtown Durham. We're looking at the next projects here at Town Center with the City. And we're looking at the next projects at the inner harbor.

So, we just need to be careful, and not get out over our skis. We've been able to keep this ship in the middle the channel and chugging forward for well into our fourth decade. We're not going to vary from our principles. The pipeline gets bigger.

When we first became public we talked about that $150 million $175 million run rate that's now eeking up into the $200 millions -- every 18 months or so. So that's fine, that comfortable for us. Comfortable for our construction company, but we want to be really careful.

Development is a science. And a lot of people talk about the art, there's no art to it, it's science. It's getting in and doing the hard work, the heavy lifting. And unless you do that and do it for an extended period of time, you're not to create value.

All you will do is [crack]. So we want to be really careful about loosening any of those standards going forward.

Okay. All right thanks guys.

Thank you. Our next question comes from the line of John Guinee with Stifel. Please proceed with your question.

Okay, great thank you. Just a few questions. First, flat FFO but continuing to increase the dividend $0.01 a quarter or $0.04 a year, do you think you need to be raising the dividend as much as you are when your value creation is via development and external growth versus internal growth?

Thanks John I appreciate that. Good morning. We've been telling our shareholders, both retail as well as unit holders, as well as institutions, that we're going to keep that dividend in the 70% to 80% range. So we're very comfortable with the raise. We think it's conservative and we promise to stay conservative with it and keep that below the 80% mark.

So we're trying to serve all of our masters. One thing you have to remember, we've acquired tremendous amount of property with stock. And we intend on acquiring more property with stock and OP units.

But near and dear to those people is dividend growth. And while were not going to be slaves to that by any stretch of the imagination, we're going to continue to responsibly increase it when our metrics allow. Mike.

Yes good morning John one of things to add. Consider our payout ratio for 2016 was below 75%, the other thing that is happening in 2017 is our AFFO is going up. Even though at the midpoint, our normalized FFO is flat.

We're hitting some straight line run adjustments, and the GAAP adjustments that are going the other way in 2017. And we're modeling to get that payout ratio still well below 80%.

And then for the second question, is that if I'm looking at your same-store NOI page, basically you're about 57% retail, 23% multi family, 21% office. And I remember Lou you talking a couple years ago is you really liked food/drug anchored retail centers. You thought those had a lot of downside protection.

But maybe not a lot of upside potential. How do you feel about that product in today's ever-changing retail environment?

Another great question, John. The grocery sector is changing. More and more players are coming into it.

Both at the high end and at the low-end. We feel just as strongly as we always have. But the moderator to that is being cautious and cautious relates to location. It's no longer, and it never really was, all about just the credit behind the actual store.

As I said on and discussed on numerous occasions, we really look at sales. Sales potential and actual sales of these grocery stores. Because that tells you that location is strong.

One thing that we've seen again over a long period of time. Is if you have the strong location, even if it turns out that your grocer may end up not being one of the winners that location is leasable to the grocer who is a winner. So, we haven't seen anything that would change our opinion on that retail. I still disagree with your connotation of commodity retail.

But it certainly has some of those characteristics that you exactly pointed out -- is a lot of downside protection there, upside is slower comp. But when you have a lot of development in your pipeline, I go to sleep at night a lot easier knowing that the vast majority of our metrics and dividend coverage and all the rest is related to people selling food and diapers and the like.

Great. Thank you.

Thank you.

Have a good day.

You too.

Our next question comes from line of Laura Engel was Stonegate Capital Partners. Please proceed with your question.

Good morning. Thanks for taking my questions. First, I want to see if you could give us help a little bit about the Greentree disposition?

And alongside that, give us an update on any the remaining properties from that initial 11 retail purchase that are out there. And your thoughts on timing on those.

Sure, I'm going to turn over to Eric Smith, our CIO for that conversation. Eric.

Thank you Lou. Good morning. First I will all your Greentree question. As you can see from the materials, we were able to sell that asset at a [5%] cap rate.

And obviously I think it speaks for itself, when we have the opportunity to monetize an asset at that cap rate and use those proceeds on the balance sheet. As opposed to issuing equity, we believe that to be a prudent disposition. And so that was the driving force behind that decision.

On the Cavalier portfolio, as you know, we've sold a few those assets. As we have said in previous calls, we were assessing a few other assets. That if we found the value in the market place could be potential disposition candidates.

Not because we were concerned about the quality of those remaining candidates. But because they were just somewhat outside our geographical footprint. With that said, not outside our historical footprint of our multi-decade ownership. And so we continue to ping the market.

We have not seen the opportunity to monetize those at a level that we think is appropriate. And so we're happy to hold that real estate again. The diligence we did during the acquisition of that portfolio got us comfortable with the real estate.

And so we were happy with the optionality the back pattern has led us to decide to hold onto those. At least through this year and we will continue to look at those as time goes on.

Okay great and one more question. The article in the National Business Journal. The SoBro Skyscraper, it's tagged. Is that strictly a development job? Or can you clarify your role in that initiative?

As I said that still way down the road in predevelopment. If the leasing comes together the entitlements come together, and it's certainly an asset that we would like to own.

But there's a lot of wood to chop there. We're excited about it, and we're excited about that market and hopefully we can report on it further. But it would be disingenuous of us to describe that as anything other than an opportunity that we're looking at.

Okay great, well I appreciate it congrats on the quarter and I will get back in the queue. Thank you.

Thanks very much.

Our next question comes from the line of Craig Kucera with Wunderlich Securities. Please proceed with your question.

Hey good morning guys. Mike I wanted to circle back with you on a comment I wanted to clarify. Did you say the NOI guidance was exclusive of any development in the wire or did I hear you incorrectly?

No, what we're saying is there is no -- we're not putting in place any development project during 2017 that will generate any meaningful NOI. So in the past couple of years we have been bring on development projects that have been meaningful in increasing NOI.

But that will not be the case in 2017. Certainly we will have more ramp up with Lightfoot and [Jay] during 2017.

Got it and so I know you've got a chunk that is 4525 that is expected to stabilize in the second quarter. I guess you're saying of the three that are stabilized in midyear there's not going to be meaningful impact to NOI this year?

So first on 4525. The leasing activity that's happening certainly some of that will come online during the year. The new leases that Lou is talking about, those tenants will occupy until the end of 2017 best case.

We've got a lot of design and construction to go. So the impact from that building stabilizing is not going to be material in 2017. We are forecasting, and are really pleased with what's going on at Johns Hopkins, the retail is, if it's not 100% is getting really close. And we feel it will stabilize with students in August this coming year.

The other thing on the stabilization of 4525, Craig. That's going to going to the same store NOI pool come the third quarter. Because of the timing when that building develops not because it's going to be 80%-plus occupied at that point in time.

Got it. And as we think about when the impact of those projects does become meaningful in 2018, what kind of yield should we be thinking about relative to what you developed?

I am trying to think of the best way to answer that. So, 4525 Main has been leased up essentially at our pro forma rent. Pro forma rent would've had us creating well over 20% spread between our cost and where that ends up. So I think the way you need to think of it, is in terms of value creation.

You've got 240,000 square foot high-rise that's stabilized in the high 20%s rental rate wise. And in a market where, as we said before, there's not a whole lot of comps, I can not imagine what someone would need to pay us to get us off of those buildings.

Okay. With the acquisition of Columbus Village II, I know that the cap rate is little bit low. And it so going to be a big of a drag on earnings for a while. Is that a component of Town Center Phase VI?

Or is that a separate component? I know you mentioned that along with another project that is adjacent to Town Center you could eventually redevelop.

Craig I'm really glad you brought that up because it brings up another point. When we look at our flat guidance for the year, and somewhat similar to when we traded a bunch of NOI in [rich year] assets for a bit more stable NOI, which cost us a few cents.

That property in and of itself is a significant drag on earnings. We purchased in low [$5 millions] and for all stock, 2 million shares. And so the impact to 2017 earnings is somewhere in the $0.03 or $0.04 range.

But it is absolutely the right move for us. It gives us all the flexibility in the world. It's not part of Phase VI. That's on the other side.

Phase VI is the last piece of the core of Town Center. Is something were very excited about. What that represents, along with the Columbus Village I that we purchased earlier in the year, earlier I guess that was in 2015. Gives us 12 acres of developable property to expand Town Center and we get paid handsomely to wait.

Even if we were to do nothing but renew the tenants that are in those two shopping centers, the results in NOI puts us back into the 7% range on a cap rate basis. And trust me, that is plan C.

That is the worst that we will ever do there. So, we're positioning Town Center for the next decade, and that's going to be a big part of it.

I got it. All right that's it for me thank you.

Our next question comes from the line of Bill Crow with Raymond James. Please proceed with your question.

Good morning guys.

Good morning Bill.

Lou could you discuss the pressures on development and construction costs? And whether we're getting to the point where rental rate growth, as you projected going forward is not sufficient to justify the increasing costs of construction?

Yes. Thanks, Bill. Unfortunately that's not a really short answer.

We've seen this cycle This will be the fourth time where we're looking at increasing rest, increasing interest rate environment, along with hopefully some decently robust growth in the economy. A couple other things happen when that becomes a scenario.

Replacement cost goes up on our assets and that is good for real estate, in terms of resale. Tenants expand, that obviously is good for commercial real estate. Household formation goes up, and that's good for real estate as well.

So when you take the whole basket, the whole question is whether you can mute the downside of higher rates and higher costs and take advantage of the upside, of the expansions going on in the economy. For that manifests itself in a couple of different ways. One is, we get even more selective about where we deploy our capital.

You hear all the time it's location, location, location. Secondly, when we do this public-private partnerships -- many of which we're looking at now. We put more pressure on the entity, the public entity -- with being an institution or a city or state or large-scale company.

So, in order for us to keep our metrics where we need them to be, we basically have to sell off the [REIT] side and take advantage of the upside. It's an exciting market for us. I would tell you this is exactly in our wheelhouse -- let's hope it all materializes.

There's a lot of talk and a lot of noise now about all the great things that are yet to come. But if it does come, we're in a great position to take advantage of it. For the factors I just mentioned.

The second piece of that is, there is a related note. There is a lot of pressure right now on construction costs. Both from a commodity standpoint as far as labor standpoint.

And never recover from the 2008 recession in terms of the labor workforce of people entering the trade. So, subsequently subcontractors have much more pricing power than they did. Which again is healthy for the overall environment, but it's going to present challenges for us.

The good news is having a 40 year old construction company that has seen this -- our President has been here for, it's his 26th year I believe. He has seen all this before. We just work harder.

I can tell you, it is a situation that we're well-versed in handling. And it makes us even more excited about what's going on in our pipeline.

Okay, and then the other question I had. If I missed your answer in this earlier I apologize. But the 30,000 square move out into your new project, how close are you to backfilling the 30,000 feet? And is that new tenants or is that expansion or existing tenants?

Thanks Bill, there's a lot of moving parts. As I mentioned on our last call, last quarter. We saw a significant uptake in leasing activity.

We're seeing more prospects now then we've seen in quite a while. Probably since the great recession. So those 30,000 feet of tenant that moved in 40,000 square feet. By the way, not only expanded and relocated but significantly upgraded rent-wise.

Like I said, we held rent in that building. It created vacancy in four of the Town Center buildings. Which again is great news for us.

So we've got some vacancy in the two high-rises. Although not much. We got some vacancy in the two mid-rises.

Which is a little bit more. But those price points are in the low [$20s]. I'd say right now we have a half-dozen prospects looking at those spaces.

All of which are new to Town Center. But we're not done juggling. We're actually talking to people about the expansion of other tenants. Talking about expanding, and so, we have some pieces moving around.

2017 is a transition year for us here at Town Center. We have got construction the middle of it. We have got new tenants coming in.

A lot of stuff going on. And I think it's really going to manifested itself very well in 2018. The effects on 2017, and a lot of people talk to us about being too conservative on what we throw out there.

That's where we play. We want to set proper expectations and then work like hell to come up with the upside. And that's exactly where we're positioned now.

Great. Thanks guys.

Our next question is a follow-up from the line of John Guinee with Stifel. Please proceed with your question.

Good morning guys, [Aaron Alderson] here. I think our question has been answered.

Thanks. Thanks Aaron.

Thank you. Mr. Haddad, there no further questions. I will turn the floor back to you for final remarks.

Great, guys thanks again for your support and listening this morning. We look forward to updating you on some great stuff in the not too distant future. Take care.

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