Armada Hoffler Properties Inc (AHH) 2018 Q2 法說會逐字稿

Welcome to Armada Hoffler's Second Quarter 2018 Earnings Conference Call. (Operator Instructions)

As a reminder, this conference call is being recorded today, Tuesday, July 31, 2018.

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

Good morning, and thank you for joining Armada Hoffler's Second Quarter 2018 Earnings Conference Call and Webcast. On the call this morning, in addition to myself, are Lou Haddad, CEO; and Eric Smith, Chief Operating Officer, who will be available for questions.

The press release announcing our second quarter earnings, along with our quarterly supplemental package, were distributed this morning. Replay of this call will be available shortly after the conclusion of the call through August 31, 2018. 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, July 31, 2018, and will not be updated subsequent to this initial earnings call.

During the call, we'll 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 guidance and 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 forward-looking statement disclosure in our press release this morning and in factors disclosed in documents we have filed with or furnished to the SEC.

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

Now I'll turn over the call to our Chief Executive Officer, Lou Haddad. Lou?

Thanks, Mike. Good morning, everyone, and thank you for joining us today. As you can see from the press releases that we issued yesterday and this morning, it's a very exciting time here at Armada Hoffler.

As I mentioned during our last conference call, our company is built to thrive in a variety of macroeconomic scenarios, and the current backdrop is no exception. The growing economy has yielded increased opportunities in development, public-private partnerships, build-to-suit engagements, third-party construction and tenant expansions. We believe these factors more than offset the impact of gradually rising interest rates. This morning, I'll offer several updates that will continue to validate this thesis.

First, a few comments on the results of the past quarter. We reported $0.24 of normalized FFO per share for the second quarter, which was in line with our expectations. Also, same-store NOI was positive across all product types on both a cash and GAAP basis. Although increases occurred across the portfolio, a significant portion resulted from office activity within the Town Center of Virginia Beach. Also, as we expected, with the winding down of disruptive construction of Phase VI, multifamily occupancy has returned to form.

On the retail front, the opening of Williams-Sonoma and Pottery Barn has brought additional excitement and leasing activity to Town Center. In fact, post quarter end, 2 additional leases have been executed, including the region's first Shake Shack. Also, several new retailers are now actively engaged in negotiations for space at Town Center.

Finally, and most notably, we have significantly raised our full year normalized FFO guidance, with the new range rising to $1.05 to $1.08 per share. This change is primarily due to the anticipated sale of our at-cost purchase option for Annapolis Junction. Most of you are well aware of the optionality afforded us by our mezzanine lending program in conjunction with our construction and development expertise.

While Annapolis Junction would make a fine addition to our portfolio upon stabilization, we believe that the capital currently invested as well as the profit from the sale of our option are better deployed in the 2 new pipeline projects announced yesterday. We believe that this decision, despite representing a meaningful discount to a fully stabilized valuation, is the proper path to maintaining a strong balance sheet, creation of long-term value for our investors and ultimately a higher NAV per share.

This transaction returns $50 million to our balance sheet, inclusive of some $5.5 million of profit on our option. All told, between interest income, construction fees and the option sale, we will have recognized over $16 million of profit from this project. This marks the second time in the last few years that we have monetized a significant profit on a multifamily project during lease up, once again proving our development spreads and the advantages in optionality that our integrated model brings to our shareholders.

The increase in our guidance range occurs despite the fact that our original guidance included an acquisition that we ultimately passed on, a disposition that was not forecasted and Annapolis Junction mezzanine interest income originally projected through the end of the year. Additionally, our ATM activity was larger and earlier than we originally anticipated. Collectively, these strategic decisions serve to further strengthen our balance sheet in preparation for the robust future growth that we are anticipating through our development pipeline.

While we are thrilled to have meaningfully raised our normalized FFO guidance range for 2018, we still expect healthy year-over-year earnings growth in 2019 based on the current delivery schedule for the projects in our development pipeline, projected lease up in our portfolio and the potential for new and accretive transactions.

Starting with Town Center for the pipeline updates, Phase VI street-level retail was delivered, and the tenants I mentioned opened to large crowds. Adding to the excitement, the Lego Americana Roadshow has made a 2-week stop in Town Center and has exposed the center to an even broader clientele. The multifamily portion of this block is on track for August delivery with nearly 30% of the units leased.

Point Street Apartments at Harbor Point continues to exceed all expectations with leasing now in excess of 60% despite being open for only 4 months.

City Center in downtown Durham is nearly complete. The office portion stands at nearly 90% leased with the first tenants opening in the month of September. The bulk of the remaining space has been proposed to a few small tenants, and we expect occupancy to approach 95% over the next few quarters.

The Harding Place Apartments in downtown Charlotte will deliver in late August, and the leasing office is now open for business.

All other pipeline projects are on track for their scheduled 2019 completions.

Our construction company continues to perform at a very high level. While revenue generated from third-party construction projects is lower than previous years, total volume, including internal projects, will top $225 million for the year, which is near the high end of our historic range.

Now that the sales contract for the disposition of the build-to-suit distribution center has been signed, we've narrowed the guidance range on this business segment to reflect the anticipated gain on sale. The profit is roughly double what we would've earned had we simply built the project for a market fee, which serves as further evidence of the advantages of our unique cross-selling platform. As I mentioned last quarter, we expect backlog of third-party contracts to surge by summer's end, with 2019 shaping up to be another stellar year for this division.

Finally, I'd like to highlight the 2 projects we announced yesterday. The Wills Wharf office project, adjacent to our Point Street Apartment building, will be the latest iteration in our 25-year run at Baltimore's Inner Harbor. This $117 million building is the fourth property we will have built at Harbor Point. As you can see in the press release, in addition to the hotel lease, we expect 100,000 square feet of office space to be preleased, bringing the total committed space to over 60% prior to construction commencement. We are also seeing considerable interest in the remaining square footage despite the early stage of development.

As we have said on many occasions and as evidenced by the amount of construction and leasing activity we've seen in just a few short years, we believe that Harbor Point is one of the top destinations for office, retail and multifamily space in the entire mid-Atlantic.

Just as exciting is The Interlock project in West Midtown Atlanta. This public-private partnership with Georgia Tech was brought to us by our partners at S.J. Collins, and its location at the intersection of 14th Street and Howell Mill Road is in the middle of this highly sought after submarket. As a part of a larger, mixed-use complex, the office and retail portion that we will participate in will total some 300,000 square feet with an estimated cost in excess of $110 million.

With Georgia Tech anchoring the project with a 50,000 square-foot office lease, we anticipate that the project will be nearly 60% leased by groundbreaking, which we expect to occur by year-end. S.J. Collins will serve as the project's master developer and will be responsible for performing several functions, including site development and land sales related to the hotel, multifamily and townhouse portions of the project.

These transactions are not well suited to our REIT structure. For this reason, we will utilize a participating mezzanine structure for our investment in the office and retail components of Interlock. Separately, we anticipate that our construction company will not only construct Interlock commercial for S.J. Collins, but will also be the general contractor for the hotel and multifamily developers as well.

Wills Wharf and Interlock commercial represent over $225 million worth of development and will be the cornerstones of our next development pipeline. Our expectation is to have more new project announcements over the next few months and that this new development pipeline will equal if not exceed the current one. With a mix steering more towards high-credit tenancy and CBD office along with some multifamily and retail, our initial return on investment should be meaningfully higher than the current pipeline being delivered, which is more heavily multifamily weighted.

Despite this increase in development activity, be assured that we continue to be extremely selective with regard to the projects we pursue. The vast majority of the opportunities that present themselves do not meet our rigid criteria and are quickly removed from consideration.

The unannounced projects in pre-development include more signature assets in some of the hottest markets in the Southeast. As these engagements come together, we will be evaluating further dispositions and the use of the ATM as a part of our continuing strategy to maintain a strong balance sheet and grow NAV over the long term.

Remember, Armada Hoffler is first and foremost an opportunistic real estate company that employs multiple strategies to enhance profitability and create value. These have been our central tenets for nearly 40 years, and investors can count on this to remain our primary focus. As the company's largest equity holder, management will continue to operate a business model that includes a variety of deal structures as well as disposition of development projects, at-cost options and stable assets.

We're extremely optimistic about the company's prospects for the rest of 2018 and our ability to deliver on our promises over a multiyear time frame.

At this time, I'll turn the call over to Mike to discuss our second quarter results.

Thanks, Lou. Today, I want to cover the highlights of the quarter, thoughts on our balance sheet and our updated 2018 guidance.

This morning, we reported FFO of $0.24 per share and normalized FFO of $0.24 per share for the second quarter, which was in line with our expectations. As we anticipated, same-store NOI continues to improve, with this quarter being positive in all 3 property types. The negative impact on this metric from the Town Center relocation and construction activity has finally ended.

The portfolio continues to perform well. Our core operating portfolio occupancy for the second quarter was 95%, with office at 94%, retail at 97% and multifamily at 89%. Multifamily occupancy was lower than last quarter due to the summer occupancy at the JHU student housing project. We do not expect this impact next year, as we've changed to 1-year leases rather than the current academic-year leases. Without the effect of this property, multifamily occupancy would have been similar to the 96% of last quarter. Additionally, our re-leasing spreads in the retail and office portfolio were positive on a GAAP basis.

On the construction front, we reported a segment gross profit in the second quarter of $600,000 on revenue of $21 million. At the end of the second quarter, the company had a third-party construction backlog of $38 million. As we've said, we expect construction backlog to increase over the next few months.

Now turning to our balance sheet, over the past quarter we continue to take actions to enhance the flexibility of our balance sheet and work on loan maturities. As Lou discussed, we have 2 large development projects with several more in the predevelopment. We are making several moves to position the balance sheet for these projects and future growth.

First, during the quarter, we sold a Wawa out parcel from the newly acquired Indian Lakes Harris Teeter Center for a 5.35% cap rate. We acquired the Indian Lakes Center for a 7.1% cap rate, and net of this out parcel sale, we now have a Harris Teeter Center that is yielding nearly 8%.

Second, we raised $50 million through our ATM program last quarter at an average price of $14.07 per share. We raised more than anticipated due to a couple of large reverse inquiries.

And third, we anticipate selling our at-cost purchase option on Annapolis Junction to our partner. We are selling this option, instead of acquiring the property at-cost and bringing it on balance sheet, in order to use the capital for the development projects we announced yesterday. We expect over $50 million in cash from this transaction through the payoff of our loan and the proceeds from this sale.

As we've discussed, this mezzanine structure gives us optionality, including bringing the property on balance sheet, using the property as a 1031 candidate or selling our option. By selling the option and not the real estate, we avoid the 2-year holding period required under the REIT tax laws. Since this transaction is the sale of an option and not real estate, it will therefore be included in FFO. We are also including this in normalized FFO because we view this as an integral part of our business model.

We will continue joint venture development projects with this structure and, in the future, expect to periodically monetize the equity creation in this manner. We like the flexibility this structure provides us, especially with multifamily projects, which we can sell below our cost of capital and keep the proceeds for balance sheet purposes. The capital raised from these transactions is expected to be about $105 million, which have and will be used to pay down the credit facility.

We continue to work on the 2018 loan maturities. As of June 30, 2 loans remain to be refinanced. First is the JHU Village loan which closed last week. The loan is for a 7-year term at a rate of LIBOR plus 125 basis points. We entered into a swap lock to fix the rate at 4.19% for the 7-year term. The second maturity is the Lightfoot Marketplace loan, which we expect to close in the next couple of weeks.

As discussed last quarter, the lending environment has changed this year, with spreads substantially lower. We took advantage of this environment and refinanced our loans that have floating interest rates. We have closed on loans over $100 million, lowering the spreads by 35 to 65 basis points, which equates to an annual savings of over $500,000.

At the end of the quarter, we had total outstanding debt of $587 million, including $83 million outstanding under the $150 million revolving credit facility. We continue to evaluate our exposure to higher rates, higher interest rates and look for opportune times to hedge our interest rate exposure. At quarter-end, 89% of our debt was fixed or hedged. This past quarter, we entered into a 5-year swap lock for $50 million. Subsequent to quarter-end, we entered into a $53 million swap lock on the JHU Village loan and purchased a 2-year, $50 million interest rate cap at 2.5%. Inclusive of these 2 transactions, we are now 100% fixed or hedged.

Today, we raised our 2018 full year normalized FFO guidance to $1.05 to $1.08 per share, up from $1 to $1.05 per share. The guidance includes the expected sale of the Annapolis Junction purchase option and the sale of the distribution center by the TRS. The distribution center is a construction project that evolved from our cross-selling platform.

We intend to sell this asset before it is placed in service and include the profit in normalized FFO. We include this expected gain from this sale in both construction company gross profit and normalized FFO guidance. This transaction will have an impact on debt to EBITDA in 2018, as our balance sheet will carry the debt with no corresponding EBITDA. Because of the short-term nature of this project and associated debt, we do not intend to issue any equity for this project.

Now I'd like to go through the details of our updated 2018 guidance, first starting with our assumptions: the acquisition of the Lowes Foods shopping center in the second half of the year; a gain of $5 million to $6 million from the sale of the Annapolis Junction purchase option during the third quarter; a gain of $2.4 million to $3.2 million from the sale of the distribution center in the fourth quarter; no additional activity in the ATM program; interest expense is calculated on the forward LIBOR curve, which forecasts rates rising to 2.38% by year-end.

The guidance of $1.05 to $1.08 per share is predicated on the following updated components: total NOI in a $78.8 million to $79.5 million range; third-party construction gross profit in the $5.6 million to $6.4 million range, which includes the expected profit from the sale of the distribution center; general administrative expenses in the $10.8 million to $11 million range; interest income from mezzanine financing program in the $7.9 million to $8.1 million range -- as of quarter end, the aggregate loan balance of these mezzanine loans was $93 million -- interest expense in the $18.3 million to $18.8 million range; and 64.5 million weighted average shares outstanding.

Now I'll turn the call back to Lou.

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

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

(Operator Instructions) Our first question is coming from the line of Dave Rodgers with Robert W. Baird.

Lou, wanted to start with the new development announcements. A lot of excitement there. Can you talk a little bit more about the project with S.J. Collins in Midtown Atlanta, maybe with respect to the sizing of the mezzanine loan and any purchase option that you're considering there as well?

Sure. Thanks, Dave. I'm going to let Mike discuss the size of the mez loan. It's still not tied down because we're waiting on Collins to finalize how they want to handle their construction loan. But Mike, do you want to comment?

Yes. So certainly the loan package is out to the financing on that. And once we know the amount of the senior loan, which will probably be in the 60% to 75%, then we'll know the actual amount of the mezzanine financing.

It's an interesting deal structure here. We're going to earn a significant coupon on our mez interest like we have -- like we are in the other projects with S.J. Collins. We also have a cash flow participation that is significant as well as opposed to the at-cost option. Therefore, there'll be some meaningful income coming throughout the construction period with this particular structure.

Okay. That's great. Sounds like more to come as well there. I wanted to look -- I wanted to dive into your new leasing activity. I think you did 13 leases this quarter, over 50,000 square feet. You mentioned 150,000 square feet in total leasing for the quarter, including renewals, obviously both big numbers for you guys. But in your comments earlier, you kind of mentioned that that would lead to the redevelopment of Columbus Village, but it's obviously not in the development or redevelopment pipeline. So maybe what does that look like? How quickly is that coming just given your comments in the press release today?

Sure. There's a lot of moving pieces surrounding Town Center and the redevelopment of the 2 shopping centers we purchased, which are Columbus Village. The first piece that has landed is the Shake Shack that we'd mentioned, and according to the Millennials in our office, that really means Town Center has arrived, so we'll see if that ends up being the case. But that section of Columbus Village will probably be the only section that remains more of a traditional shopping center, which is great for the project because we do have some tenants that want to be a part of Town Center but need a parking field out front, so those 3 or 4 acres involved there, with an out parcel building with Shake Shack, will end up staying in the traditional sense. The other pieces of Columbus Village are -- like I say, there's a lot of wheels in motion. All the tenants that are there want to stay in the new facilities. The city would like to see us go vertical. All those things are moving around, and I'm not quite sure of the timeframe. It could come together very quickly, or it also could be another year. But in any case, it's been a great purchase for us, and cash flow is going to continue to increase irrespective of development activity.

Great. And then maybe finally for me, as you look ahead to '19, fairly large lease expiration year both on retail and in office and combined. Any concerns or opportunities that you guys see today as you begin to now look out to 2019?

That's a great question, Dave. We're focusing on a couple of the large retail renewals, or expirations if you will. Our expectation is that everybody's going to remain in place. I think everybody knows about our small Kroger in Waynesboro that Kroger will not renew going forward. We've got some re-leasing efforts going there. But aside from that, our expectation is that things are going to roll over but for the Home Depot, which is the largest expiration that comes due in 2019. Unfortunately, Home Depot, we believe, is going to use their option that they have to buy the project out from under us. So the good news is it's a very strong store in a very strong center. The bad news is we're going to lose that income stream, we believe, as things move forward.

The next question is coming from the line of Bill Crow with Raymond James.

2 or 3 questions from me today. Mike, maybe we can start with you and just help us think about sources and uses over the next 18 months. If we just look at what's been announced, what's pending, etc., what are we looking at? We've got -- and as far as income, the sources coming in, we've got the mez repayment, we've got the sale of the distribution center. What else do we have as far as inflows?

Yes, so as I've discussed earlier, we've got $100 million between the ATM and the sale of Annapolis Junction. On top of that, we've got the proceeds from the distribution center, and that will certainly get us well on our way to get these couple of big projects underway. These projects of this size take a while to get out of the ground, and it'll be a while before there really gets to be heavy capital requirements on those. So certainly, we'll be looking to get back into the ATM in 2019 and start to bring in the capital required for that. And we'll additionally continue to look at sales of assets like we have in the past. We'll continue to manage the balance sheet and keep the leverage in appropriate places like we always have.

So well -- I know you're not sure how much the mez piece will be on The Interlock yet, but do you have a general range of outcomes there?

Yes, it's going to be in the mid-$30 million range, and certainly we'll be receiving the coupon on that that will provide the EBITDA in order to keep the leverage right on that piece of it.

Okay. And then Wills Wharf, the expected outflows over the next year and a half?

Yes. You've got a 20 month-or-so construction schedule, so we've got a long runway in order to meet those capital needs, and that building is entirely on balance sheet. And Mike will be shopping for a construction loan appropriately.

Yes. Okay. Mike, on Wills Wharf or more generally on Harbor Point, what's left there? What are the opportunities that you see over the next few years or are we getting to the point where it's getting built out?

No. Actually, I'd need to direct you to the website, to the Harbor Point website. You can see that there are still -- there's an additional 4 development parcels there. People have asked us for years, where's the next Town Center? This is our fourth building in that little development. It's going to include a great waterfront park and 3 additional vertical buildings. So our intent is to continue working with Beatty Development and build out the entire center.

Okay. And then I guess one more for you, Mike, and this is a bigger picture question. But it's an interesting time. We're 10 years into the cycle. We've got fairly significant cost inflation in construction, and we've got rising interest rates. So the question we get from clients is, what are you doing with all this commitment to development late in the cycle? Obviously, it's something that you're comfortable with, but why are you comfortable? Kind of give us your perspective on that.

Okay. This is Lou again. Thanks, Bill. That's a great question. You're right. We've gotten that question from investors several times as well. I'm trying to address it as best I can. First, let me say that the next recession that we're subjected to will be my fifth at Armada Hoffler. And we've learned several lessons through the first 4. A couple of them come to mind very quickly, including our central tenet. But first and foremost, let me say that time to time, the business cycle is a fool's errand. Nobody knows whether we're in the ninth inning or in the top of the first of a doubleheader or what have you. And so it's just not worth a lot of consideration. The second point -- and if you accept that first point, then the second point becomes even more important, and that is underwriting. We are meticulous in our underwriting of projects, and when I say underwriting, I don't just mean the financial models. I mean underwriting your tenants, underwriting your locations, underwriting your design, your construction. Every facet that goes into a building has to be parsed and reparsed, if that's a word, in order to make yourself as bulletproof as possible, or at least bullet resistant. If you've done your underwriting properly and the cycle turns against you, then all that means is that it's going to take you longer to be right. I'll give you a great case in point. We launched our Richmond Tower in 2007 at the crest of the biggest boom in history, absolute worst possible time to launch a high rise. But we did our underwriting properly. We had a fantastic location, an iconic building, really strong tenants. And despite all that, when we brought it online in 2009, I don't believe we could have sold it for what it would've cost to build. So what happened? Well, we enjoyed some great cash flow for about 5 years, and then in 2014, we sold the building for a $24 million profit. Now they don't always turn out that well. But the bottom line, I guess our view is whether it's late cycle, early cycle, midcycle, whatever, if you do your underwriting properly, then you're generally going to be okay. And that's a tenet that Mr. Hoffler started some 40 years ago and is going to remain our tenet going forward. But thanks for your question, Bill.

The next question is coming from the line of John Guinee with Stifel.

Our next question is coming from the line of Jim Lykins with D.A. Davidson.

Just a couple things. First of all, I want to make sure I heard something correctly. Did you say at Wills Wharf that that could go from $117 million possibly up to $225 million? Is that correct?

No, no, no. It's a $117 million building. My $225 million reference was just the volume that the construction company expects to do this year in total.

Okay. And also regarding the shadow pipeline, I know you've got a pretty significant shadow pipeline. Just any color at all right now about additional -- when we can expect some additional announcements for more projects and also what you're looking at, if it's more public-private partnerships or more mixed use. Just anything more you can tell us about that shadow pipeline.

Sure. And Jim, let me correct myself. The $225 million is a combination of both Wills Wharf and The Interlock project that we announced.

Okay.

So with regard to the rest of the pipeline, it's coming together pretty quickly. My expectation is that we'll have further announcements prior to the next conference call. I think everybody can kind of guess where we're going. We're very active in Charleston. We're very active in Charlotte. We're active in Raleigh-Durham. People know that we've been nosing around in Nashville. All these places have projects that are coming together. Again, back to my earlier response on the late cycle, at this point, we have the ability to just cherry pick the best deals that we can underwrite. And so while all those locations are very positive for us, I suspect that 1 or 2 of these projects won't make the cut. But ultimately, I believe that this whole pipeline will be announced by the end of the year with a couple possibly coming prior to the next conference call.

So Lou, from where you're sitting right now, I know previously you'd talked about that shadow pipeline could be potentially in excess of the current development pipeline. How do you think about that right now? You said you'd cut some things back or do you think that at this point that could still grow larger than the current development pipeline?

Jim, it's tough to call. If you use $0.5 billion as a benchmark, to throw around big numbers, it could be $100 million on either side of that depending on how things go. And the answer to your other question is that, yes, there are more public-private opportunities within what I just said.

Okay. And one last one from me, I'm just wondering if you can give us any more color on the potential asset sales. I'm wondering if you're still seeing a lot of private equity chasing high-quality multifamily.

Yes. Actually, I'm going to let Eric Smith take that, as we are seeing quite a bit of activity there.

Yes. Thanks, Lou. The narrative that we outlined on our last conference call appears to be still strongly in place. And that narrative, as you may recall, that we're hearing from multiple sources is that the buyers of multifamily are shying away from the interest rate risk and the construction cost inflation risk that was mentioned earlier on the call. And in lieu of that, they are willing to take specific submarket lease up risk. And so we're seeing still a huge amount of interest in well-located projects that may be in an untraditional range of lease up and certainly even sub-50%. Combine that with the amount of money that has been raised for bridge loans. Those folks have the financing capacity to bridge those purchases until stabilization when they can put on permanent debt. So it seems like avoiding the risk as well as the availability of money, we are still seeing an immense amount of money chasing well-located, high-quality multifamily.

The next question is coming from the line of Venkat Kommineni with Janney Montgomery Scott.

Beyond the Wawa land parcel sale, how active on the disposition front do you guys expect to be in the second half of the year?

We're more opportunistic, Venkat, than we are formulaic in terms of our approach to dispositions. As Eric said, there's a lot of money chasing deals out there, and I guess I'm talking a lot about our basic tenets. Another basic tenet we have here is we don't fall in love with real estate, particularly when they're not core assets. So it's very easy -- we very easily could see more dispositions coming over the next 12 months.

This is Eric to provide a little more color commentary to that. You would imagine, based on what Lou just said and it being a central tenet of ours, our asset management group and our individual asset managers are in constant communication with our investment team as they review the stabilized properties in the portfolio and, while they may be performing just fine, constantly asking the question of, is that capital better used elsewhere, be it in a 1031 or working with Mike and questioning the balance sheet and whether the capital is better used on the balance sheet. And so that is an ongoing, active conversation at all times internally.

Okay. Great. And then can you provide a little color on the sales process at Annapolis Junction? What do you guys expect the stabilized pro forma to be if you had kept it? And maybe discussing the cap rate and price per unit this represents.

I want to be careful because that transaction -- the ultimate transaction is between our partner and a buyer, and we are not a party to it. Obviously, we have knowledge of it, but it's not a hard contract yet. But it's a -- as I said earlier, it's a meaningful discount to what we believe it could bring stabilized. I believe you're talking about a cap rate in the low 5s with a stabilized asset. So we've got a decent discount to that, but it's still a very good price for us.

The next question is coming from the line of Craig Kucera with Wunderlich Securities.

Lou, I feel like in prior cycles, you've spoken about how when rates are rising you've often seen business improving, particularly as measured by requests for expansions. Are you starting to see any of this pick up as we move through 2018, and is that expectation driving you guys toward an increased development weighting towards CBD office?

Yes and yes. We're seeing an awful lot of optimism out there, both on the municipal side with various cities as well as very large tenants. So it really is different than any other cycle that we've seen in that people are optimistic. Unemployment, we're essentially at full employment. Rates are low in a matter what anybody says. They're low relative to historical averages. So it's a great time for the development business, and it's a great time for the real estate business. It's like we said before, if you can't take advantage of all these various factors and you focus simply on that you've got a mildly rising cost of capital, then you really shouldn't be in this business because this is what we all hope for.

Got it. And one more from me, I think you mentioned that you expected higher development returns on these types of projects. And can you give us a rough idea of what you might be looking at versus where some of the multifamily projects have been penciling out recently?

Sure. As you guys know, we talk about we look for a 20% spread between our wholesale and retail construction projects. And so if we follow the cap rate curve down, with multifamily, obviously, we're building to mid-6s to high 6s, even low 7s. For office and retail, it starts with a 7% and goes up to 8 1/2%, so if you -- the math simply says if we have more CBD office, our initial return on cost is going to be better than on the multifamily side.

Our next question is coming from the line of Rob Stevenson with Janney Montgomery Scott.

Just on the development pipeline and the shadow pipeline and what you guys are looking at, can you just talk a little bit about the rough mix is between office, retail and apartments and, I guess, other? How does that -- if you wind up going through with these projects, how does that sort of mesh out in terms of what the future of the company starts to look like from an asset class perspective?

Okay. Let's see. So obviously, the 2 projects that we just announced are almost singularly weighted towards office. Within the remaining projects, it still, I would say, is on the order of half office and with the other quarters being split between multifamily and retail. And of course, it's subject to change in case something dies. I could easily see there being very little retail in what's left. But it's all going to come together in the next few months, and we'll be able to be a little bit more certain on it.

Okay. And then on the redevelopment at -- the new development that you're going to do at Town Center with Shake Shack etc., what's the aggregate dollar amount that you guys are going to end up investing in that?

Yes. In that particular phase, it's going to be pretty small. Like I said, what we're going to be effecting first is that 4 acres or so that is horizontal shops. I believe we're looking at $6 million or $7 million in terms of the total rehab of that center. As things progress and go more vertical, that number will ramp up pretty significantly. But those future phases involve tear downs rather than rehabs, and we also would expect significant city participation in those phases as well.

The next question is coming from the line of Dave Rodgers with Robert W. Baird.

Just one more follow-up from me, the Home Depot sale and then the Lowes Foods acquisition in the second half of '18, can you provide dollar amounts for each of those or a rough estimate?

Yes. The Lowes acquisition is in the mid-$25 million range -- around mid-20s, $25 million-or-so range. On the Home Depot, it's somewhat complicated in that the building sits on a ground lease, so the acquisition will just be for the building itself, which is not a lot of money. But what we still have to work out is what is their participation on paying us for the underlying ground lease that it sits on?

Sale-wise, it's 20-year-old bricks and sticks. It's a few million dollars, Dave.

Thank you. It appears we have no more further questions at this time. So I would like to pass the floor back over to Mr. Haddad for any additional concluding comments.

Thanks very much for your interest in our company. We look forward to updating you on our activities and results in the coming quarters. Have a great day.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time.