Armada Hoffler Properties Inc (AHH) 2017 Q3 法說會逐字稿

Greetings, and welcome to the Armada Hoffler Properties Third Quarter 2017 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce Michael O'Hara, Chief Financial Officer. Thank you; please go ahead.

Good morning, and thank you for joining Armada Hoffler's Third Quarter 2017 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, were distributed this morning. A replay of this call will be available shortly after the conclusion of the call through November 30, 2017. 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, October 31, 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, 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 that we have filed with or furnished to the SEC.

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

I'm now turning the call over to our Chief Executive Officer, Lou Haddad. Lou?

Thanks, Mike. Good morning, everyone, and thank you for joining us today. This morning, we reported third quarter results of $0.25 of normalized FFO per share, which was slightly higher than our expectations. We have also raised our guidance for the full year, as Michael will detail later in the call. Amongst others, a meaningful factor behind the increase in guidance is the performance of our construction company, and that is a great place to start my commentary.

We have raised the top end of the guidance in this sector of the business to another all-time high of $7.5 million. We challenged that group at the beginning of the year with the reality that 2017 would be a year of prudent deleveraging of the balance sheet, without any concurrent rental income from new development deliveries. Therefore, additional third-party construction profit would be an important driver for earnings growth, with a caveat that the efficient execution of portfolio projects remain paramount. It was a tall order to eclipse the stellar year they had in 2016. To say that they answered the challenge would be an understatement.

It is important to note that while these results are largely due to the hard work of many committed professionals, the numbers for both 2016 and 2017 were aided significantly by outsized contract volume and a significant one-time savings from a $100-plus million contract. Our expectation is that the construction company will return to its historic third-party gross profit norms of $4.5 million to $5.5 million in the next year. Remember, the primary mission of this division is execution on our development projects, which do not contribute to construction profits, as well as helping to secure further portfolio business with public entities and joint venture partners.

A great example of the complementary nature of our various divisions is currently taking place within our footprint. Our construction group has a long history of third-party work in the industrial and distribution sector. This experience began back in the early 1990s and continues today, as we are currently working on a few significant engagements with brand-name companies. In these negotiations, we have offered a menu of fee construction and development, build-to-suit purchases, or long-term lease arrangements, thereby giving clients optionality not typically seen in the industrial sector. We anticipate having an announcement soon from this cross-selling platform.

Before Mike takes us through the quarterly results and updated 2017 guidance in detail, I'll comment on our retail portfolio and the many exciting office, multi-family, and student housing projects in our development pipeline. As a diversified REIT, we invest in, develop, and build several different product types: office, multi-family, student housing, retail, and mixed use; and we also generate additional revenue through our operating divisions. Due to our opportunistic, rather than formulaic, approach to development, over the course of our company's history, the segment mix in our portfolio has fluctuated, and will continue to do so. For example, just three years ago, office assets generated nearly half of our portfolio NOI, and retail assets made up less than 40%. Through constant proactive and strategic portfolio management, the retail portion of our portfolio today stands at over 60% of NOI, yet still significantly less when combined with the other income from our operating divisions.

While we expect this percentage to drop significantly upon stabilization of the multi-family, student housing, and office projects in our development pipeline, we remain confident and bullish about the retail assets in our portfolio. These properties continue to perform, with year-to-date same-store NOI up over last year. Given the current trepidation over all things retail, I will reiterate our philosophy on this sector of our business. As most of you know, we don't own malls, we don't own department stores, and we shy away from big-box centers. We own three types of retail properties: mixed use destination assets, grocery-anchored centers, and power centers anchored by best-in-class retailers.

For nearly 40 years, we have adhered to the basic tenets of real estate: Prime locations, proven operators, and diligent monitoring of sales traffic and demographics. The current retail environment has yielded a host of opportunities to acquire such properties, particularly in the grocery sector, and we are currently combing through these for centers that may meet our standards. We invest in superior locations in our geographical footprint, including high quality addresses in secondary and tertiary markets and most public REITs dismiss, featuring high quality anchors that we believe will continue to perform well in an increasingly competitive landscape. We are looking to add to this portfolio in the near future. Off-market opportunities that involve the issuance of OP units are especially attractive.

I will now spend a few minutes on our projects currently under development. Construction is underway on our two student housing projects on the historic Charleston Peninsula. These developments are located within one mile of the College of Charleston and in close proximity to five other schools in the area. We also continue to evaluate and explore further opportunities to grow our footprint in this market.

Design progress on our new build-to-suit office building for Huntington Ingalls at Brooks Crossing is on track for an early 2018 construction start and 2019 delivery. This state-of-the-art facility is expected to house nearly 600 employees and serve as a catalyst for further development in this public/private partnership with the city of Newport News.

Construction on our Harding Place project in downtown Charlotte is nearing its midpoint, and we remain pleased with the strong rental rates and absorption that this sub-market continues to display.

The construction of Phase 6 of the Town Center of Virginia Beach has topped out and is tracking for a delivery next summer. This [infield block] will have a variety of entertainment options, as well as exciting new retailers and loft-style apartments. We're pleased to announce that Williams Sonoma and Pottery Barn will be the anchor tenants of this development. These sought-after names in home furnishings will join their sister brand, West Elm, further solidifying Town Center as a prime destination for shopping, dining, and entertainment in coastal Virginia.

The initial units at Annapolis Junction have been delivered on schedule, and two months into the leasing effort, we have signed over 80 leases at pro forma rents. Needless to say, we are very pleased with the progress to date, but there is a long way to until stabilization.

The Point Street Apartments at Harbor Point in Baltimore are on track to begin deliveries early next year. Given the prime locations and compelling market dynamics of both of these off balance sheet projects, we fully expect to exercise our at-cost purchase options.

Last quarter, we entered into an LOI for a significant block of the remaining office space at One City Center in downtown Durham. Lease negotiations continue in earnest, and assuming lease execution, the office component will be 90% pre-leased in advance of our expected summer 2018 delivery. We have begun preliminary discussions with our joint venture partner and Duke University about the next development project in Durham.

With almost $440 million of development in our current pipeline and our target wholesale-to-retail spreads of around 20%, we expect that these projects alone will add well over $1 per share of NAV, once all projects are delivered and stabilized.

We continue to explore a number of exciting development opportunities in our target markets. As an example, you may recall that last quarter, we entered into an agreement with SJ Collins, a seasoned developer of high quality grocery-anchored retail centers, to deliver a Whole Foods center in Decatur, Georgia. We have now closed on a second Whole Foods engagement through this relationship, this one in Delray Beach, Florida. We are actively working on more opportunities with both this developer and exclusive retailer.

Assembly of our next development pipeline is well underway, and we look forward to discussing those projects with you early next year. At this time, I'll turn the call over Mike to discuss our third quarter results and updated 2017 guidance in detail. Mike?

Thanks, Lou. Before I discuss the quarter, I want to point out that we updated the company logo and branding, which you can see on the cover of our supplemental package. We also enhanced our website. If you get a chance, please visit the updated website and look at the new information we've added regarding our development pipeline and portfolio.

This morning, we reported FFO of $0.25 and normalized FFO of $0.25 per share, which is slightly above expectations. On the Construction front, we reported a segment gross profit in the third quarter of $1.8 million on revenue of $41 million. We increased the guidance on this segment of our business again this quarter. Construction company is having perhaps its best year ever. As Lou said, we do not expect this level of profit in 2018. At the end of the third quarter, the company had a third-party construction backlog of $77 million.

Now, turning to our balance sheet, we continue to take actions to enhance flexibility on our balance sheet and to work on loan maturities. As discussed last quarter, maintaining a strong balance sheet as a private company was instrumental in being successful for 34 years, prior to going public in 2013. With the management team being the largest shareholder at 17%, this approach has not changed.

In May, we completed an equity offering to raise $85 million to help fund our $440 million development pipeline. With this equity raised, we now have the capacity to complete and bring the current development projects on balance sheet. With our current leverage metrics well positioned, we do not issue any shares this quarter and do not intend on issuing any during the fourth quarter. We do not currently have an ATM program in place, but we expect to implement a new program early next year. As Lou discussed, we are seeing a lot of activity in predevelopment and acquisitions. With these opportunities, we want the availability of additional capital for accretive transactions.

We continue to work on loan maturities. Our 2015 credit facility was scheduled to mature in early 2019, and last week, we closed on a new credit facility to stay ahead of the maturity. The new facility is $300 million, with an (inaudible) of $450 million. This facility includes a $150 million revolver and a $150 million term loan. The revolver matures in four years, and the term loan matures in five years. During the quarter, we also closed on a new five-year, fixed-rate loan on the Hanbury Harris Teeter center and lowered the interest rate on the Cosmo.

At the end of the quarter, we had total outstanding debt of $494 million, including $58 million outstanding under the $150 million revolving credit facility. We continue to evaluate our exposure to higher interest rates and look for opportune times to hedge our interest rate exposure. At quarter-end, 100% of our debt was either fixed or hedged. Again this quarter, we purchased a two-year, $50 million interest rate cap at 1.5%.

During the quarter, we continued with asset recycling. We sold the two Commonwealth of Virginia single-tenant office buildings at a 6.8 cap rate, with a gain of 38% over our development costs. The proceeds from this sale were used in a 1031 tax-free exchange to purchase the (inaudible) parcels at Wendover Center.

This quarter, we signed a term sheet with SJ Collins, solidifying the relationship on their grocery-anchored development business. We expect to be their capital source on development projects that have signed anchor leases and strong small shop preleasing. In addition, we have the option to purchase these centers upon completion. As we mentioned, we closed on a second mezz loan with SJ Collins for a Whole Foods-anchored center in Delray Beach, Florida. The loan is for $6 million at 15%. This center is 85% leased (inaudible) LOI in a strong market.

Now I want to discuss our same-store NOI results. Last quarter, we discussed this metric, which has been positive for 11 consecutive quarters, decrease as expected. It is being impacted from the drop in occupancy at the Cosmo, as a result of the construction of Town Center Phase 6 across the street, and by the relocation expansion of two significant office tenants to 4525 Main Street, which is not in our same-store NOI calculation. We believe this activity is a positive for the company, not negative, and adds true value, despite the interim financial optics. We expect this anomaly to reverse around mid-2018, once 4525 Main Street is in the same-store NOI calculation and the Cosmo occupancy rebounds concurrently, with Phase 6 opening for business as expected.

To truly illustrate what is happening with our portfolio, look at our occupancy and releasing spreads. Our core operating portfolio occupancy this quarter is 95%, with office at 89%, retail at 97%, and multi-family at 94%, and our releasing spreads have been strong for 2017, with GAAP positive 5.7% and cash positive 3.9%.

Now for an update on our full-year 2017 guidance that we issued this morning. We expect 2017 normalized FFO in the range of $0.98 to $1 per share, which is an increase from last quarter. The updated 2017 guidance is predicated on the following: Total NOI in the $72.6 million to $73 million range; third-party construction gross profit in the $7.2 million to $7.5 million range; general administrative expenses in the $10.4 million to $10.6 million range; interest income from our mezzanine finance program in the $6.9 million to $7.1 million range. At the end of the quarter, the aggregate balance of these mezzanine loans was $75 million. This updated guidance includes the Delray Beach loan. Interest expense in the $17.2 million to $17.5 million range, and 60.2 million in weighted average shares outstanding.

Now I'll turn the call back to Lou.

Thanks, Mike. As you may have surmised by now, we remain extremely bullish on the performance of our company. With an accretive pipeline nearing delivery, positive re-leasing spreads, and a solid balance sheet, we believe we are poised for significant growth over the next few years. When combining these factors with a well-covered dividend that has increased annually, now yielding in excess of 5%, we feel that we are delivering exceptional value to our shareholders.

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

Thank you. The floor is now open for questions. (Operator Instructions) Our first question comes from the line of Dave Rodgers of Robert W. Baird. Please go ahead.

Hey, good morning guys. Lou, wanted to start with --

Dave.

Yeah, thanks. Wanted to start with the retail discussions that you were having at Phase 6 at Town Center, obviously two great signings since the last time we all spoke. But maybe just more about the discussion; did West Elm help that commitment, or are you just really seeing no slow-down in the demand for that kind of retail in the portfolio?

Thanks, Dave; good question. Certainly, West Elm being here for the last couple years has helped, and obviously, they're all members of the same parent company as Williams Sonoma. And so, obviously they liked their experience here with West Elm and decided to bring the other two brands into the development, as well.

The environment for the mixed-use retail remains strong, but I would tell you that it's shifting. There's a lot more -- we all term it as retail, and it's what's at the bottom of these high-rise buildings, but it's not pure retail. Where it used to be a lot of soft goods, it's now more services, fast casual eateries, professional office space, and the like. But you still need to have a number of these top shelf tenants to add to that mix, and that's why we're really pleased with the two new signings.

And maybe [to begin] with the Town Center, I know that you have some office leases that have not yet commenced that you've executed on, but I'm just curious, because you do have some holes to fill I think in the some of the older assets.

Yes, we're feeling really good about what's going on right now in office. We've got some -- we've almost rolled through all of the initial Town Center leases. We've got a few more to go, and we're already well into renewing those, as well. So as far as our retention rate, it remains at pretty darn close to 100%, and as Mike mentioned, releasing spreads are pretty strong.

That leaves us -- if you look at Town Center on the whole, forgetting what's in the same-store pool and what's not, we've got about 800,000 square feet of office space, and about 10% of that is vacant. That's across the entire portfolio. A lot of that is in the older assets, and it's all in -- a lot of it's in small pieces. So re-leasing, although somewhat tedious, is pretty robust and we expect, as I've mentioned on the last couple calls, that the Town Center office will get back into its 95% range in fairly short order.

And then, maybe last one for me, on SJ Collins and the recent loan that you put out this quarter, the $6 million, can you kind of remind us on how big that you'd be willing to kind of go with that program in terms of kind of, maybe the impact that it would have on earnings, et cetera?

It's going to be interesting. I mean, the relationship, although we've known those guys for quite a while, the relationship is fairly new. And obviously, the relationship between Amazon and Whole Foods is fairly new as well, so we're not sure how fast that run rate's going to be. But our companies continue to get tighter and tighter. Our construction company has been introduced into the mix, and I think, with very few exceptions, you'll see that whatever those engagements are, they'll involve our construction company, as well as Mike said, our option to purchase. We're obviously very excited about the whole prospect of what could be coming down the pike in that arena.

Okay, great; thank you.

Thank you. Our next question is coming from John Guinee of Stifel. Please go ahead.

Great. Thank you very much. Lou, not to put you on the spot a little bit, but could you expand on the conversation we had previously, which I think would be very helpful to everyone on the call? Talk about how your major grocery anchors are thinking right now about the threat from the top end in terms of e-commerce and the bottom end in terms of Lidl and Aldi, and those deep discount grocers.

Sure. Thanks, John; it's a good question. I'll try and be concise. As we've said before, we have nearly a 40-year history in the grocery space. We believe that groceries are going to continue to be a stalwart in the retail game, but it's going to be changing, just like it's changed several times over the past 40 years, with category killers coming and going and shifting demographics and the like.

The basic tenets are still there, both for the proven operators, as well as the real estate professional, in that good locations, with proven operators, with the right demographics, are going to continue to perform. We play primarily in what would be termed probably the high middle of the road grocer, the Harris Teeter, the Kroegers, the Publix, Lowes Foods, Food City, really good national and regional names. If we stick with those names and we stick into the right locations, we feel very, very good about what's going to continue to happen in that space.

I think if you were to interview professionals in that space, they'd tell you that yes, there is going to be some bleed from the internet top end, and yes, there's going to be some bleed from the Europeans at the bottom end. But the middle, while affected, is still going to be a great place to play. You've just got to really be careful about locations, as well as your whole distribution strategy.

So we continue to believe in those names. We're going to continue to invest in those names, again, in the right locations, and we're going to continue to trim around the edges where we don't see that value. We think that the bottom end is going to be challenged greatly, particularly from the Europeans, and so if you look at the names that play in that space on the grocery business, there's going to be some winners and loser. There is certainly going to be some consolidation, long term, but we've faced consolidation in every sector of our business, be it office, retail, or multi-family. And again, that's why they pay us to be real estate professionals and come up with the right locations.

Thanks, and then second question, Williams Sonoma and Pottery Barn, can you talk a little bit about two things? One, what kind of deal do you have to cut in terms of base rent, net and gross, as well as tenant concessions, TI dollars, to get them in the space? And also, are they new to the trade area, and are they moving from a different location, and if so, from where are they moving?

Okay, great question, John. You're exposing all of our secrets here. As I alluded to earlier, with this mixed-use retail, it's really a mixed bag of operators. And what I said about professional space and fast casual restaurant space, and even education space for for-profit colleges, those are predominantly the high payers. I would tell you that, in these mixed-use, open-air centers, particularly in a secondary market like Virginia Beach, you are not doing those deals to get rich. You want to have a good roster of those kinds of names so that you can drive traffic to your restaurants, to your office space, and to your multi-family. But for us, that takes a good amount of incentive, and very often, a percentage rent deal that as a microcosm, is not a great deal for us. When we put it into the mix, it adds. Where we might have to give some concessions to get a Williams Sonoma, you would then get a high-volume restaurant next door paying $50, $60 a square foot, and that's where we have to continue to play. The mix is incredibly important in these mixed-use centers. You've got to stick with the one-of-a-kind retailers as well as restaurants, because you've got to bring the highest volume -- I'm sorry; the highest income traffic to the center.

With regard to Williams Sonoma and Pottery Barn, they have had presence in the market. They were both, I believe, in a major mall, regionally. I do not know if they have decided whether or not to consolidate or simply to open these new locations, and that's really more for them to say.

Great. Thank you.

Thank you.

Thank you, our next question is (inaudible) Scott (inaudible) from Bank of America. Go ahead.

Hey, guys; good morning.

Hey, Scott.

I noticed you sold two office assets in the quarter. I was wondering if you could just update us on the non-core that may look to sell, and also maybe just an update on your food line assets.

Non-core assets, we've cycled through what we typically sell as a matter of course. As we've said in the past, we don't like to hold on to single-tenant office space, particularly suburban office space, and that pretty much is it as far as the portfolio. I'd mentioned last quarter, if not two quarters ago, that we have three food lines still in the portfolio. They're fairly old. We developed them in the late 1990s. They've served us well. We don't believe that there's really further growth to be had there. One has since renewed. They're coming to the end of their 20-year leases. One has since renewed; we expect to renew the other two. And I would say, over the next 12 to 18 months, that they won't be in our portfolio.

But we are also not in any hurry to dump any real estate. These are really fine locations with really good performance on the small shop side. But again, as a matter of course, we don't believe that they belong long term in the portfolio.

Okay, and then on your expiration schedule for next year, I noticed you have about 8.5% of your office rent expiring and a similar number for retail, just your expectation to renew, and then also, if there are any known move-outs in those numbers.

Yes, that's -- and again, thanks for this question, Scott. We don't expect anybody to move out. Again, I want to get back to the strengths here at Town Center. We're home to about 115 commercial tenants on the office and mixed-use side. We've been operating this development for going on 15, 16 years. I believe -- I don't think anybody will correct me on this -- I believe you can count on one hand the number of tenants that have actually left. I don't expect anybody in that 8.5% to leave -- or I shouldn't say anybody, because I don't know how many real small guys there. But I'm thinking of the top four or five that make up that percentage, and re-leasing negotiations are well underway.

And is it the same thing on the retail side?

On the retail side, the most significant thing, there's a large Kroeger at North Point that is going -- it's a very high-volume Kroeger, and it's going to renew just fine, either before the end of the year or shortly thereafter. There also is an expiration in late 2018 of the small Kroeger that we talked about last quarter or two in Waynesboro, Virginia. It's a 30,000-foot Kroeger. It was a throw-in to the portfolio that we bought, and our expectation is that they will not renew there, and we're working on a redevelopment plan on that space.

Great; thank you for taking my question.

Sure.

Thank you. Our next question is coming from Rob Stevenson from (inaudible). Please go ahead.

Hi, good morning guys. Mike, just wanted to dive more into the guidance here. Was there anything in third quarter FFO that's not recurring moving forward? I mean, you guys have done $0.76 of FFO year-to-date; midpoint of the guidance is $0.99, which would be a $0.23 fourth quarter, which is a $0.02 quarter-over-quarter decline. Is that just the construction company? Is there something else that's potentially pushing earnings down sequentially?

Yes, good morning, Rob. A couple things in the third quarter that affected NOI, one was the occupancy at (inaudible) dropped during the summertime, and that occupancy dropped lower than we were expecting. That dropped down into the 25% range, and certainly, that's going to bounce back. Now we're 100% leased for the full -- for the fourth quarter. We also had some miscellaneous items and some bad debt from some small tenants that hit in the third quarter we don't expect to repeat in the fourth quarter, so certainly, we're looking for the NOI to rebound. We had a one-time item during the third quarter; we had sold an outparcel, (inaudible) outparcel. I think we talked about it in the first or second quarter that that closed during the quarter, and that gain was around $500,000.

Okay, so the $500,000 is the only sort of negative to earnings going forward.

Correct.

Which shouldn't -- I mean, given the shares outstanding, I mean, shouldn't be, you know, more than sort of a penny. Because I'm just trying to figure out at the midpoint if you're looking at a $0.02 quarter-over-quarter decline in earnings and what else would sort of make up for that, or whether or not you guys are more likely to come in at the higher end of that guidance range.

Yes, the other area is the construction company. If you take a look at the gross profit year-to-date in our guidance on there, you'll see that the fourth quarter is not going to be like the previous quarter.

Okay. All right, perfect. And then also, did I hear you correctly to say that the -- all the development pipeline, plus the JV and mezz project take-outs, are now funded at this point?

Yes, we did that $85 million equity raise in May, and determining the size of that equity raise was able to complete these projects, bring them online and keep our debt-to-EBITDA in the mid-6x range.

Okay, so the next time you really need capital is when you kick off anything substantial from a development standpoint and/or decide to make a stand-alone acquisition without a corresponding disposition.

Correct, and as I was just saying in here earlier, that we do not have an ATM in place right now, so we are not planning on issuing any equity in the fourth quarter, and we'll look to file that early next year, as hopefully we'll see some more development acquisition activity pick up.

Okay, and then, Lou, in terms of the construction company, I mean, is there any -- did somebody come out of the blue and give you a one-off project that makes you think that the current level, or somewhere in that neighborhood, is not sustainable going forward? Did the other hotel in Virginia Beach with one of the related parties kick off, or something like that, that wound up driving the sort of outsized year in construction?

No, it's -- let's see if I can get this a little bit more clear for everybody. The predominant drive over there was a $140 million high rise construction project in Baltimore at the Inner Harbor there. In that $140 million -- and that was done over a very short period of time, relatively, to the size of that contract -- so contract volume during that 18 months or so was certainly outsized. And the second feature of that was a significant savings split that we had with the owner that yielded a seven-figure check back to us. And as much as I'd like to think that there's another one of those around the corner, I'm not seeing it right now. So that's really it.

Remember, this construction company is a balancing act. The most -- it's really nice to make these third-party fees, and it's always augmented our business, and it really keeps the name out there, and it helps attract tenants to the portfolio. But we really need those guys focusing -- when we talk about these 20% and 30% spreads -- for instance the two office buildings that we sold last quarter were nearly a 40% spread between what we built it at and what we sold them at -- the key component of that is our construction company, and so that's got to be job one. So, we've got a full slate of development projects that they're working on that we need to stay focused on, and therefore, our expectation is that it's going to go back to the norm. Remember, we've been in this business for going on 40 years, so it typically reverts back to the norm.

And again, I stress -- I don't want to go on and on here -- we are not looking to expand this company or its backlog, or its personnel, beyond just a little bit. The kind of work that we do is negotiated, third-party work with well-heeled clients that see the value of hiring a construction company up front and working with their architect to bring about the best result. We are not going to go out and bid for contracts and slug it out for nickels and that sort of thing, and that's why it has consistent earnings. Those types of engagements take a long time to develop. Those relationships take a long time to develop, and it's a fairly finite passel of people. And so, it's going to stay consistently in that $200 million to $300 million range, with a solid mix of our work versus third-party work.

Okay, thanks guys.

Thank you. Our next question is coming from Craig Kucera of Wunderlich Securities. Please go ahead.

Hey, good morning guys. Want to circle back on the operating expense. Mike, you gave a little bit of color, but there was a pretty big increase sequentially, and was that all bad debt and sort of miscellaneous, or was there anything else in the rise in operating expense this quarter?

Yes, (inaudible) Craig. Yes, it's a lot of, I'm going to say, miscellaneous expenses across all the different properties. And then, the other piece was the bad debt write-offs this quarter.

Got it, so should we assume -- you know, obviously the bad debt is not necessarily recurring, but the other pieces, are any of those recurring, or more likely nonrecurring?

We hopefully don't expect the bad debt to keep recurring. No, I think the -- you know, some of it was ramping up some expenses on a couple of properties and doing some maintenance and et cetera, but we expect it to pretty much stay in line going forward.

Okay, and it looks like you had some pretty good success at Annapolis Junction here in October, you know, on the leasing front. Is there any chance that if that continues, you would close on that asset in 2018, or is that still likely a 2019 event?

Our hope is to close on it in 2018. It's 400 units, so we're trying not to get overly excited, but we're real happy with the start. Of course, we're heading into what would be a slow lease-up time here, heading into the holidays. But we want to close on that thing as close to stabilization as possible.

We've got a great partner up there who is active daily in the leasing efforts, and that's -- you know, I can't stress enough, we do a lot of these JV, joint venture arrangements, picking the right partners is so critical, because that's your boots on and ground in all these various markets. You know, we're sitting here in Virginia Beach; we've got an office in Baltimore. So when we're talking about Annapolis Junction or Charleston or Raleigh or wherever, our partner with boots on the ground is extremely important to our success, and Annapolis Junction is proving to be exactly what we had hoped.

Okay, thanks guys.

Thank you. Our next question is coming from Laura Engel of Stonegate Capital Partners. Please go ahead.

Good morning, and thanks for taking my questions, and I did notice the website, new logo; everything looks great. Wanted to know, the investment in Florida, is this principally as a result with the Whole Foods connection, or is this a state that we might see more activity in going forward?

It's predominantly through this Whole Foods connection, through SJ Collins, but Florida is a market we're comfortable with. We did our first project in Florida in 1992. We've been back several times since. We're very comfortable in that marketplace, and I hope that it will be a focus for SJ Collins, Whole Foods, and Amazon. We're certainly going to be looking for more opportunities there.

Okay, and then as far as the development pipeline, I know you spoke about the bullish thoughts on the retail sector. But as far as seeing more and more multi-family developments in the pipeline, I guess can you just give us your general outlook on that sector in the next, you know, upcoming few years as far as that versus retail, or mixed use, or office space?

Sure. Great question. Multi-family, for us, is going to continue to be a focus. We are concerned about -- and let me back up. We're seeing a tremendous amount of multi-family opportunities. I mean, they're showing up on a weekly basis, and we're weeding through those for the best. What's starting to concern us, even in the best markets like the Charlottes and the Baltimore's Inner Harbor and the like, is that there's becoming less and less space at the top end. People are pushing rents higher and higher, and there's more and more supply coming online, so we're going to be really cautious on that end, and unless it's an A-plus location, we're just not going to pull the trigger, because we think that there's got to be a ceiling out there somewhere, particularly with all the new supply coming online.

One thing that really intrigues us that we're investigating now, and where there is plenty of room currently, is down in the workforce housing market. There's a shortage of good quality apartment projects that are available to teachers, policemen, firemen, and the like, and that part of the market has been left to aging facilities. And so, we're seeing some good opportunities there, and I'd like to think you'll see an announcement here in the not-too-distant future about doing more of that kind of space.

Great. Well thanks for taking my questions, and I'll get back in the queue.

Thank you. Our next question is coming from Paul Puryear of Raymond James. Please go ahead.

Hey, good morning, and thanks for taking my questions, also. Yeah, I was going to ask about the multi-family as well, and I guess since you brought up workforce housing, just curious, when you say you're going to see an announcement, are you just talking about a lower price point? Could you be more -- could you give us any more color there?

Sure, you're definitely talking about a lower price point. You're also talking about -- you know, Paul, we think of that more in terms of three-story walkups, garden-style breezeways, that sort of thing. Still high quality within the units; just not high rise configurations and elevators and the like. You also have less design features on the exterior of the building, which your architecture is really important, because it still has to remain attractive. But you don't have a lot of relief that you see in these products that we're building now that, you know, you're leasing for $2-plus, or in the case of some of ours, the $3-plus range. So it's not really a departure from the basic model; it's just somewhat more value engineered and more of the type of construction that it is.

Okay, and then, as far as your apartments there at Virginia Beach, and of course you've already said it and we're all seeing it, more supply toward the higher end. Are you at all concerned about that in that market, and what levels of construction do you think you see at sort of the higher end for the apartment sector?

Fortunately, in Virginia Beach -- that's a great question, Paul. Fortunately, in Virginia Beach, we really can't be challenged on the location. I think you guys have heard me mention before, as I'm sitting here in our conference room, I'm looking out at probably three apartment projects that are off in the distance, a mile of two away. I think there's a total of seven of them in circumference around us, and the advertisements that we hear on the radio is that you can walk to Town Center, or you can bike to Town Center, or it's minutes from Town Center, blah-blah-blah. And we continue to say, and if you'll pay a little bit more, you can actually live in Town Center. So we really don't have competition at the top end, here in this market.

Now, that said, and I'm glad you brought it up, for years, the Cosmopolitan has been the leading rent-per-square-foot getter in Virginia Beach. it is now over 10 years old, and the two products, the one that's up at the Encore next door on one side, and a Premier that's going up on the new block on the other side, are going to eclipse it, if we're not careful. And so we, next year, we're going to go on a major refresh of the facility and make sure it stays at the top.

But that's a kind of a long answer to a short question, but in Virginia Beach, we believe that we're going to continue to be able to command the highest rents, irrespective of what's going on in the market. Now, in other places where we think we have an A location but not a singular location, for instance our Harding Place project in Charlotte. Charlotte remains robust, but our project, where it's really well located amongst several that are really well located in Charlotte, and those are the kinds of places where we really need to see some caution, hopefully, amongst our brethren in the development business, because at some point, you're not going to be able to drive rents. So we're going to be -- like I said, we're going to be really cautious about anything other than an A-plus location (inaudible).

Yes, that helps. Yes, thanks, that helps. And then, I guess a couple of more questions for us. With Amazon buying Whole Foods, are you seeing any changes in sort of how you're working with Whole Foods, maybe the store design, anything at all, as a result of what's happened there?

Not at this time. And again, we're working with Whole Foods through our relationship with SJ Collins, who their relationships are right at the top. They keep being told that there's a major rollout that's going to happen. They're braced for it; we're braced for it. We're not sure what it looks like, but right now, it's all talk. And what we're building in the two that we are working on, we really don't see significant changes.

But you -- I mean, they've been pretty clear that changes are coming?

I don't know that changes are coming. They're pretty clear that -- you know, and I think as I read the same stuff that you read, they didn't buy it to sit on it. They want to expand it, but I couldn't tell you -- I don't have any insight as to what's going to happen, configuration-wise.

Okay, great; thank you. Thanks, Lou.

Thank you. Our next question is a follow-up coming from John Guinee of Stifel. Please go ahead.

Oh, great. Thank you. Hey, just to clarify, Mike, when you're talking about bringing assets on balance sheet, are you talking about the two mezz deals and the Durham JV, or just the two multi-family mezzanine deals?

No, John, all three of those projects.

Okay, so all three of them --

City Center should -- yes.

So City Center and the two mezzanine multi-family can all come on balance sheet at full cost, and still stay at the mid-6 net debt-to-EBITDA?

Correct. So I would just break these down. So City Center, which will be completed next summer, we have funded 100% of the equity on that project, so we've already funded the equity, so at that point in time we bring it on, we're just bringing on the construction debt, which is going to be somewhere in the $23 million range or so, so that's not big. And on the two multi-family projects, again, we have funded all the equity through our mezz loan, and we're bring those on balance sheet, we're going to have properties that are producing EBITDA, and we're only bringing on the construction debt onto the balance sheet.

Okay, but the construction debt can come on balance sheet and still stay under 6.5 net debt-to-EBITDA?

Yes, right around 6.5, yes.

Okay, and then the second question --

And if you do the math -- go ahead.

I have to do the math?

No, no, I was going to say if you do the math, you can see what Mike and I have been out there saying. Once this thing stabilizes, we're looking at a double-digit increase in earnings, and if you did that math, you'd see that's pretty much baked in the numbers, given that these projects lease up.

Got you, okay. And then, just out of curiosity, I was actually driving through Waynesboro a few weeks ago. When you have a vacant, 30,000 square foot box in a place like that, is it worth zero or $50 a foot? And then, when you sell a food line, which I'm assuming is a five-year renewal, is that a 10 or a 20 cap deal, just out of curiosity?

If it's a 10 or a 20 cap deal, I don't know, it may be staying in our portfolio. Actually, John, it's interesting, because I was driving through Waynesboro about three weeks ago as well, which is -- who'd of thunk it, right? We actually have some good -- I shouldn't say this -- we actually have some good activity for re-leasing in that center, so we'll probably see that project stay in the portfolio.

And John, this is Eric, but in that leasing activity, you probably do end up breaking up that space to some extent. You know, there are not that many 30,000-foot users looking at Waynesboro, so you could expect that to be a multi-tenant re-leasing effort.

Okie-doke, thanks a lot.

And then, to answer your question on the food lines, to Lou's point, yeah, a 20 cap, we're going to be the proud owners of those food lines. What we're seeing in the market, and again, it looks like some of the anxiety and angst around retail has dissipated slightly. And so, based on the cap rates we're seeing on food lines, the ones that really nobody wants to own seem to be up in that 10, 12 cap rate range with the better ones, and we would put the ones we're talking about in our portfolio in that range, given the location of the real estate. And despite the short term, even after renewal of five years, we're seeing those trade in the mid-8s right now. So if those cap rates held, I think that you could take Lou's statements at face value that those are probably not long-term holds. If those cap rates obviously move materially higher, we would reconsider that at some point. They're much more valuable on balance sheet.

Great, all right, thank you.

Thank you. At this time, I would like (inaudible).

Thanks, everybody. I appreciate your interest in our company and look forward to updating you on our activities and results in the coming quarters. Have a great day.

Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time, and have a wonderful day.