Michael O'Hara - Chief Financial Officer, Treasurer Louis Haddad - President, Chief Executive Officer, Director Eric Smith - Chief Investment Officer, Corporate Secretary.

Dave Rodgers - Robert W Baird Rob Stevenson - Janney Montgomery Scott John Guinee - Stifel Laura Engel - Stonegate Capital Partners Craig Kucera - Wunderlich Securities Bill Crow - Raymond James Erin Aslakson - Stifel.

Welcome to the Armada Hoffler's fourth quarter 2016 earnings conference call. At this time, all participants are in a listen-only mode. After management's prepared remarks, you will be invited to participate in a question-and-answer session. [Operator Instructions]. As a reminder, this conference call is being recorded today, Thursday, February 9, 2017.

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

Good morning and thank you for joining Armada Hoffler's fourth quarter 2016 earnings conference call and webcast. On the call this morning, in addition to myself, are Louis 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.

For those who listen to the rebroadcast of this presentation, we remind you that the 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, 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 Louis and I will discuss our 2017 guidance. Now I will turn the call over to our Chief Executive Officer, Louis Haddad.

Lou?.

Thanks Mike. Good morning everyone and thank you for joining us today. Today we reported full year 216 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 am even more proud of what we have 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 the 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 to retail spreads that we have 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 leased with 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 were able to hold rents at this, the premier address in the region and achieve our target returns.

And with relocations from lower price point space, creating a vacancy that appeals to a wider array of prospective tenants, we are poised to quickly bring office occupancy at Town Center back to its historical level in the mid to high 90s.

As you already know, our expansion of Town Center continues with the construction of Phase VI 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 to the Greater Washington DC Metro area into downtown Durham to Midtown Charlotte and some of the fastest-growing markets throughout the Carolinas.

With not only the volume but the quality of locations and projects in our current pipeline, the potential for value creation 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 have said before, we have 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 will turn the call over to Mike to review our fourth quarter and full-year 2016 results. Afterwards, I will comments 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 $3 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 improved the quality of our portfolio and underlying cash flow.

On a related note, because we structure 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, 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 he full year, we reported a segment gross profit of $5.7 million on revenue of $159 million. At the end of the 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 increased $0.11 per share or 14%. The dividend was well covered with a 73% payout ratio for 2016. Additionally, total shareholder returns of AHH outperformed the indexes.

For 2016, total shareholder return was 47% versus 9% for the RMS and 21% for Russell 2000. And since our IPO in May 2013, total shareholder return was 59% versus 27% for the RMS and 48% for Russell 2000. We are obviously pleased with these returns and 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 acquisition in 2016.

During the year, our equity market cap increased by $322 million to $805 million. Our the total enterprise value increased by $472 million to $1.3 billion year. At the end of the quarter, we had total outstanding debt of $527 million, including $107 million outstanding under the $150 million revolving credit facility.

In January 2017, we added two properties to the credit facility borrowing base to increase the capacity by $25 million with total of $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 three-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 the growth through opportunistic asset sales.

In the first quarter 2017, we sold a single tenant asset at a side cap of $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 increasing 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 will 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 three of the 2017 guidance presentation that we successfully produced and delivered over $300 million of new real estate, creating over $50 million of equity in the process, some of which we monetized but all of which has 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 bottomline per share growth, I am 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 predevelopment opportunities presented on page four, you will 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 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 a new project remain and will continue to be exceedingly strict.

As Mike and I have reported to you on many occasions, we have various mechanisms at our disposal 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 six.

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 are so optimistic about the growth potential of our company.

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

Mike?.

Thanks Lou. Today we introduced 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 for the development pipeline and future growth. In addition, with NOI contribution from new development projects, the midpoint of 2017 guidance is flat with 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 two years. Now I would like to go through the details of the 2017 guidance. Please turn to page seven 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, creating $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 to 1.25% by year end, maintaining core debt to core EBITDA in the mid-six 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 the $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 in 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 million 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 to questions, I am 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 quarter's 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..

[Operator Instructions]. Our first question comes from the line of Dave Rodgers with Robert W Baird. Please proceed with your question..

Hi. Good morning guys..

Good morning Dave..

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 as 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 the tourism or general business or the military. There is huge amount of optimism in the region regarding the 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 folks expanding which is great to see. Everything that's being talked about is positive for this region.

We will see how much actually materializes but I will tell you, it really started in the last six month of 2016. There has been a tremendous amount of win in the region. ATP is locating a huge office here, hiring 1,500 people. Job growth in the area is over 3,000 jobs in the latter part of the year.

A new convention center hotel is opening up in Norfolk, a new entertainment district. The beach is talking about a new arena and a convention center hotel as well. So there is an awful lot happening that we are 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 maybe explain the entirety of the drop in occupancy there.

So could you maybe dive a little deeper into some of your legacy assets of the Town Center to 4525?.

Sure. I appreciate the question. We are very excited about all these developments. The drop in occupancy is potentially 30,000 feet of tenants expanding into 40,000 square feet of space in 4525 Main, when you take that 30,000 feet as a core portfolio with the 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 of around 840,000 square feet that has about 75,000 feet of vacancy.

And the good news is the vast majority of that vacancy has lower price point base that appeal to a much broader section of tenants. So as I said earlier, we are expecting to very quickly get back into the mid-90s overall on a much bigger portfolio..

And lastly just on 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. All right. Thanks for the color here..

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

Good 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. Well, 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 have been running this portfolio is these markets for well into our fourth decade and we look at things more on -- 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 resolves itself into the 1.5% to 2.5% range on a long-term basis. So within the 2017 guidance, in that neighborhood of 1.5% to 2% and 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 your occupancy is in the mid-90s, so we are not going to see any significant variance coming in..

Okay. And then while we are 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's still not really been any change in occupancy or any material change in occupancy in either of the two apartment buildings at Town Center.

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

It's a great question, Rob and I want to make sure we don't throw a head shake 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. And that's part of the reason why that year 2015 did as well as it did occupancy wise.

This year we are forecasting that dip is yet to come. We have been pummeling those people with pile drivers for the last several months. Pile driving is over. Now construction pour starts with backup alarms and everything else starting at around 3:00 A.M. or 4:00 A.M.

So the prudent side of us is forecasting that that dip is going to occur and in fact, to-date we have seen 1%, 1.5% decrease from those year-end numbers at Cosmo occupancy. So a long answer to a short question, we are forecasting 3% or 4% dip in occupancy in those properties..

Okay.

Mike, what is the thought around the adoption of 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's really being pushing, you will see this past quarter that FFO was higher than normalized and that's because of the mark-to-market adjustments on our interest rates swap lots. So I think we picked up about $1.3 million in come 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 are not yet able to announce, is that backing up and piling up and we are 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 about $98 million of unannounced projects. Those are getting closed. So our expectation is prior to the call over 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 ever 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 have seen the report that came out on the national project. That's a great example.

We really liked the project. We really liked the local partner. We really liked 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 will see that move forward.

But Robert, in addition to that, we are already looking at the next project with Duke in Downtown Durham. We are looking at the next project here at Town Center with the city and we are looking at the next project at the Inner Harbor. So we just need to be careful and not get out over our skis.

We have been able to keep this ship in the middle of the channel and chugging forward, like I said, for well into our fourth decade. We are not going to vary from our principal. 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 200s, every 18 months or so.

And that's fine. That's comfortable for us, comfortable for our construction company. But we want to be really careful. Development is a science. A lot of people talk about the art. There is no art to it. It's science.

It's getting in and doing the hard work and the heavy lifting and unless you do that and do it for an extended period of time, you are not going to create value. All you are going to do is, is practice. So we want to be really about loosening any of those standards going forward..

Okay. All right. Thanks guys..

Thank you..

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 have been telling our shareholders, both retail as well as unitholders as well as institutions that we are going to keep that dividend in the 70% to 80% range. We are 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 are trying to serve all of our masters. One thing you have to remember we have acquired a tremendous amount of property with stock and we intend on acquiring more property with stock and OP units.

With near and dear to those people is dividend growth and while we are not going to slave to that by any stretch of imagination, we are going to continue to responsibly increase this when our metrics allow.

Mike, you want to?.

Yes. Good morning John. One of the thing to add, as you know, we said earlier, our payout ratio for 2016 was below 75%. The odd thing that's happening in 2017 is our AFFO is going up even though at the midpoint, our normalized FFO is flat. We are hitting some straight line rent adjustments and the GAAP adjustment that are going the other way in 2017.

We will certainly modeling to keep payout ratio still well below 80%..

And then, so the second question is that, if I am looking at your same-store NOI page, basically you are about 57% retail, 23% multifamily, 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 coming into it, both at the high-end and at the low-end. We feel just as strongly as we as we always have, but the moderator to that is being cautious. And cautious relates to locate. It's no longer and it never really was all about the credit behind the actual store.

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

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

And I still disagree with your connotation of commodity retail but it certainly has some of those characteristics as you exactly pointed out, there is a lot of downside protection there, upside is slower to come, but when you have a lot of development India 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..

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

Good morning. Thanks for taking my questions.

First, I wanted to see if you all could give us, help a little bit about this Greentree disposition? And alongside that, give us an update on any of the remaining properties from that initial 11 retail purchases that are out there and your thoughts on timing on those?.

Sure. I am going to turn it over to Eric Smith, our CIO for that conversation.

Eric?.

Thank you Lou. Good morning. So first I will address your Greentree question. As you can see from the materials, we were able to sell that asset at a five cap rate and obviously I think it speaks for itself.

When we have that opportunity to monetize an asset at that cap rate and use those proceed on the balance sheet as opposed to issuing equity, we believe that to be prudent disposition. And so that was the driving force behind that decision. On the Cavalier portfolio, as you know we have sold a few of those assets.

As we said in previous calls, we were assessing a few other assets that if we found the value in the marketplace, could be potential disposition candidate, not because we were concerned about that quality of those remaining candidates but because they were just somewhat outside our geographical footprint.

With that said, not outside our historical footprint of 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 are 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 optimality that that pattern has led us to decide to hold on to 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 is tagged.

Is that strictly a development job or what? Can you clarify your role in that initiative?.

As I said, that's still way down the road in predevelopment. If the leasing comes together, the entitlements comes together, then it is certainly an asset that we would like to own. But there is a lot of wood to chop there. We are excited about it. We are 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 are 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..

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

Hi. 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 are saying is that we have not put in place any development projects during 2017 that will generate any meaningful NOI. So in the past couple of years we have been bringing 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 ups with Lightfoot and JAQ during 2017..

Got it. And so I know you have got a chunk that is at 4525 that's expected to stabilize in the second quarter.

So I guess you are saying of the three that are stabilized in midyear, there's not going to be meaningful impact to NOI this year?.

So Chris, on 4525, the leasing activity that's happening there, certainly some of that will come online during the year. The new leases that Lou was talking about. those tenants probably won't occupy until the end of 217, the best case..

Yes. We have 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 we are really, really pleased with what's going on at Johns Hopkins.

The retail is, it's not at 100%, it's getting really close and we feel it would stabilize with students in August this coming year..

And just the other thing on the stabilization of 4525, Craig, that's going to go into the same-store NOI pool, come the third quarter because of the timing of when that building develops 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 more meaningful in 2018, what kind of yield should we be thinking about relative to what you are developing?.

Trying to think of best way to answer that. So 4525 Main has been leased off essentially at our pro forma rent. So pro forma rents would have had us are creating well over 20% spread between our cost and where that ends up. So I think way you think of it is in terms of value creation.

You have got a 240,000 square feet high-rise that's stabilized in the high-20s rental rate wise and in a market where, as we have said before, there is not a whole lot of comp, but I can't 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 the cap rate is little bit low and it's 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 that along with another project that's adjacent to Town Center you could eventually redevelop..

I am really glad you brought that up because it springs up another point. When we look at our flat guidance for the year, it's somewhat similar to when we traded a bunch of NOI in riskier assets for more stable NOI and it cost us a few cents. That property, in and of itself, is a significant drag on earnings.

We purchased in the low fives for all stock, two million shares and so the impact to 2017 earnings is somewhere $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 is not part of Phase VI. That's on the other side.

Phase Vi is the last piece of the pour of Town Center and it's something we are very excited about. What that represents, along with the Columbus Village I that we purchased earlier in the year or I guess that was in 2015, it 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 resultant NOI gets us back into the 7% range on a cap rat basis. And trust me, that is Plan C. That is the worst that we will ever be there. So we are 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..

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

Hi. Good morning guys..

Good morning Bill..

Lou, could you just discuss the pressures on development and construction costs? And whether we are 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 it's not a really short answer. We seen this cycle, this will be the fourth time where we are looking at increasing interest rate environment along with hopefully some decently robust growth in the economy. A couple of other things happen when that becomes this 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 cost and take advantage of the upside of the expansion that's going on in the economy. For us, 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 these public-private partnership which we are looking at now, we put more pressure on the entity, the public entity. It would be an institution or a city or a state or a 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 risk side and take advantage of the upside. It's an exciting market for us. I would tell you, this is exactly in our wheelhouse. So let's hope it all materializes.

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

The second piece of that is, there is a related note, there is a lot of pressure right now on construction cost, both from a commodity standpoint as well as the labor standpoint. The country never really recovered from the 2008 recession in terms of a labor workforce, the people entering the trade.

So subsequently, subcontractors have much more pricing power than they did, which again is healthy for the overall environment, but is going to present challenges for us. The good news there is having a 40-year-old construction company that has been in this, our President has been here for 26 year, I believe. He has seen all of this before.

We just work harder. And I can tell you, it's a situation that we are 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 and if I missed your answer to this earlier, I apologize.

But the 30,000 square foot 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 with existing tenants?.

There is a lot of both. Thanks Bill. There is lot of moving parts. As I mentioned in our last call, last quarter, we saw a significant uptick in leasing activity. We are seeing more prospects now than we have seen in quite a while, probably since the great recession.

So those 30,000 feet of tenants that moved into 40,000 square feet, by the way, not only expanded and relocated but significantly upgraded rent wise. Because, like I said, we held rents at that building. It created vacancy in four of the Town Center buildings, which again is great news for us.

So we have 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 would say, right now we have a half a dozen prospects looking at those places, all of which are new to Town Center. But we are also, we are not done juggling.

We are actually talking to people about expansion, 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 in 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 manifest itself very well in 2018. The effect 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 work like hell to come up with the upside. And that's exactly where we are positioned now..

Great. Thanks guys..

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

Good morning guys. Erin Aslakson here. I think our question has been answered..

Great. Thanks Erin. Good to hear you..

Thank you..

Thank you. Mr. Haddad, there are no further questions. I would turn the floor back over 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 you lines at this time. Thank you for your participation..