Michael O'Hara - CFO Louis Haddad - CEO.

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

Greetings and welcome Amanda Hoffler Properties' Third Quarter 2017 Conference Call. At this time, all participants are in a listen-only-mode. A brief Question-and-Answer Session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded.

It is 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 Louis 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 30th, 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 make herein are as of today, October 31st, 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 on our website at www.armadahoffler.com.

I'm now turning the call over to our Chief Executive Officer, Louis 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’ve also raised our guidance for the full-year as Mike 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’ve 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 a 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 at portfolio projects remain paramount. It was a tall order to eclipse the stellar year they had in 2016, to say that the answered the challenge, would be an understatement.

It is important 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 upsized contract volume and a significant one-time savings from a $100 million plus 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 variance 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.

And these negotiations we have offered a menu of field construction and development, build-to-see 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 make take this through the quarterly results and updated 2017 guidance in detail, I'll comment on our retail portfolio and the many exciting office and multifamily and student housing projects in our development pipeline. As a diversified --, we investing develop and build several product sites.

Our office, multifamily student housing, retail and mixed use. And we also generated additional revenue through our operating divisions. Each of 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 and 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 multifamily, student housing and office projects in our development pipeline, we remain confident and bullish about the retail assets in our portfolios. These properties continue to perform with the year-to-date same store NOI up over last year.

Given the current -- of all things retail, I would reiterate our philosophy on this sector of our business. As most of you know, we've 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've adhered to the benefits tenants of real estate, prime locations, proven operators and [don’t give] 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 presenters that may need our standards.

We invest in superior locations in our geographical footprint, including high quality, [indiscernible] in secondary and tertiary markets that most publicly is dismissed. Between 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 [indiscernible] units are especially attractive. I'll 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 miles of Towers 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-suite 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 its 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 VI of the Town Center Virginia Beach has tapped out and is tracking for a delivery next summer.

This in-field 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 anchored tenants of this development.

We sought after names in home furnishings, will join their sister brand, West Elm further solidifying Town Center as the prime destination for shopping, dining and entertainment, the Coastal Virginia.

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

The Point Street apartments in the harbor point, in Baltimore are on track to begin deliveries over the next year. Given their prime locations and compelling market dynamics of both of these off-balance sheet projects, we fully expect to exercise our ad 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. These negotiations continue in earnest and assuming leased execution, the office component will be 90% pre-leased in advance of our expected summer 2018 delivery.

We began preliminary discussions with our joint venture partner and Duke University about this - 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 our 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 S.J. Collins, a seasoned developer of high-quality, grocery-anchored retail centers, to deliver a Whole Foods center in Decatur, Georgia. We’ve 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 the exclusive retailer. Assemble 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 to 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 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 per share and normalized FFO of $0.25 per share which is slightly above expectations. On construction front, we reported segment growth 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 did 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 I'll 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 the instrumental and being successful for 34 years privately owned public in 2013.

With the management team being a larger shareholder with 37% this -- does that not changed. In May we completed an equity offering to raise $85 million to help fund our $440 million development pipeline. With this equity raise, 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 and predevelopment in 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 our new credit facility to stay ahead of the maturity. The new facility is $300 million with an accordion to $450 million.

This facility includes a $150 million revolver and $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 our [Ambary] Harris Teeter Center and lower the interest rate on the Cosmo.

At the end of the quarter, we had a 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 continue with asset recycling. We sold the two comp West Virginia single tenant office buildings at a 6.8 cap rate with a gain of 38% over our development cost.

The proceeds from this sale were used in the 1031 tax free exchange to purchase the Outparcels at Wendover Center. This quarter we signed a term sheet with S. J. Collins solidifying the relationship on our grocery anchor development business.

We expect to be the capital stores on development projects that has signed anchored leases and strong small shot preleasing. In addition, we have the option to purchase these centers upon completion. As Lou mentioned, we closed on a second mezz loan with S.J. Collins for a whole food center, hopefully anchorage center [indiscernible] [Beach] Florida.

The loan is for $6 million at 15%. This center is 85% leased under LOI on a strong market. Now I want to discuss our same store NOI results. Last quarter we discussed this metric which had been positive for 11 consecutive quarters decreased as expected.

It is being impacted from a drop-in occupancy at the Cosmo as the result of the construction of Town Center Phase VI 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 company not negative and adds to value despite the interim financial objects. We expect this anomaly to reverse around mid-2018, once 4525 Main Street is in the same store NOI calculation and the Cosmo occupancy rebounce concurrently with Phase VI opening for businesses 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 deposit 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 the last quarter. The updated 2017 guidance is predicted on the following.

Total NOI and its $72.6 million to $73 million range, third-party construction gross profit in $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 financing program in the $6.9 million to $7.1 million.

At the end of the quarter, the aggregate balance of these mezzanine loans was $75 million. This updated guidance includes Delray Beach loan, interest expense in the $17.2 million to $17.5 million range and $60.2 million weighted average shares outstanding. Now, I’ll turn the call back to Lou..

Thanks, Mike. As you may have summarized by now, we remain extremely bullish on the performance of our company. With an accretive pipeline nearing delivery, positive releasing 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 [Operator Instructions] Our first question is coming from Dave Rodgers of Robert W. Baird. Please go ahead..

Hey, good morning, guys.

Lou, I wanted to start with retail discussions that you’re having with Phase VI of Town Center, obviously two great signings since the last time we out spoke, but maybe just more about the discussion, did West Elm helped that commitment or you just really think there was slowdown in the demand for that kind of retail and the portfolio?.

Well, certainly - thanks, Dave. Good question. Certainly, West Elm being here for the last couple of years - obviously there are members of the same parent company at Williams-Sonoma. And so, obviously they like 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 is a lot more and again we all term it as retail and it’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, fat 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 sticking with the town center, I noticed you have some office leases that have not yet commenced.

But you've actually on, but curious as you do have some [host of sale] I think in some of the older assets?.

Yeah. We're feeling really good about what's going on right now in office. We've got some -- what 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 rates 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 within 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 across the entire portfolio.

A lot of that is in the older assets and it's all in a lot of its in small pieces. So, releasing all those somewhat tedious it is pretty robust. And we expect as I mentioned on the last couple of calls that the town center office will be back to its 95% range in very short order. .

And then maybe last one from me on S.J. Collins and the recent loan that you put out this quarter $6 million.

Can you remind us on how big that you'd be willing to kind a go with that program in terms of maybe the impact that it will have on earnings et cetera?.

It's going to be interesting, I mean the relationships 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 how that run rate is going to be. But our companies continues to get tighter and tighter.

Our construction company's 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've obviously very excited about the whole prospects of what could be coming down the pipe in that arena. .

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 a conversation we had previously which I think will 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 [Lionel] and all the 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 four years with category killers coming and going and shifting demographics and the like.

The basic tenants 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 and the [indiscernible] Lowe's Foods, Food City, really good national and retail -- national and regional names. We stick with those names and we stick into the right locations, we feel 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 tell you that, yes, there is going to be some bleed in the internet top-end, and yes, there is going to be some bleed from the Europeans at the bottom-end.

But the middle while effected, is still going to be a great place to play, you 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 we look at the names that play in that space on the grocery business, there is going to be some winners and losers, but certainly going to be some consolidation long-term.

But we face 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 on, Williams-Sonoma and Pottery Barn.

Can you talk a little bit about two things? One what kind of deal you have to cut in terms of base rent, NAV and growth as well as tenant concessions the TI dollars to get them in this 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 you on 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 poor profit collages, those are predominantly the high payers.

I would tell you that in these mixed-use open-air centers, particularly a secondary market like Virginia Beach, you are not doing those deals to get rich. You want to have a good raster with those kinds of names so 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 of rent deal that as a micro CASM is not a great deal for us. When we put it into the mix, it adds where you might have to give some concessions to get William-Sonoma he will then a get a high-volume restaurant next door in $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 the kind retailers as well as restaurants because you got to bring the highest volume -- I'm sorry, the highest income traffic to the center.

With regard to William-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 that consolidate or simply to open these new locations, that's really more for them to say. .

And your next question comes from Scott [indiscernible] from Bank of America. Please go ahead. .

I noticed you sold two office assets in the quarter. I was wondering if you can just update us on the non-core that you make 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's pretty much as it as far as the portfolio.

I've 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 is really further growth to be had there.

One has since renewed, they have come through the end of their 20-year leases, one is 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'd 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.

does your expectation of renew and then also if there any known move outs in those numbers?.

Yeah and again thanks for the question Scott. We don't expect anybody to move out. And again, only get back to the strength here at Town Center. We're home to about 115 commercial tenants, in the office in next two offices. We've been operating this development for going on 15, 16 years.

I believe, I don't think -- correct me on this, but I believe this been count on one hand the number of tenants that have actually left.

I don't expect anybody in that 8.5% to leave, I shouldn't say anybody because I don't know how many small guys there are, but I'm thinking of the top 4 or 5 that make up that percentage and releasing negotiations are well underway..

And is it the same thing on the retail side?.

On the retail side, most significant thing, there's a large Kroger north point that is going to the very high-volume Kroger and it’s going to renew just buying either before the end of the year or probably thereafter.

That was also an exploration in late 2018 of the small Kroger that we talked about last quarter or two in Waynesboro, Virginia and 30,000 employee Kroger, it was a [indiscernible] into the portfolio that we bought and our expectation is that they will not renew there and we're working on redevelopment plan on that space..

Next question is coming from Rob Stevenson. 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, mid-point of the guidance is $0.99, so which would be a $0.23 fourth quarter which is a $0.02 quarter-over-quarter decline.

Is that just construction companies or something else that’s potentially pushing earnings down sequentially?.

Yes, a lot of couple of things in the third quarter that effected NOI. One was the occupancy at [indiscernible] dropped during the summer time, and that occupancy drops lower than that we were expecting, that dropped down into the 25% range and certainly that's going to bounce back to now 100% at least for the full fourth quarter.

We also have some miscellaneous items and some bad debts and smaller tenants that hit in the third quarter, we don’t expect to repeat in the fourth quarter. So, certainly, we are looking for the NOI to rebound.

We had a one-time item during the third quarter, we had sold outparcel [indiscernible] I think we talked about it in the first or second quarter that closed during the quarter and our gain was around $500,000..

Okay.

So, the $500,000 is the only sort of negative to earnings going forward, which shouldn’t rest given the shares outstanding, I mean, shouldn't be more than sort of a penny because just trying to figure out, at the mid-point 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?.

Yeah. 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 say that all the development pipeline, plus the JV and mass projects takeouts are now funded at this point?.

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

Okay. So, the next time you really need capitals is when you kick off anything substantial from a development standpoint and/or decide to make a standalone acquisition without a corresponding disposition. .

To that, and as I just said year 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, we look to file that early next year. And as hopefully we'll see some more development acquisition activity pick up. .

Okay. And then Lou, I mean in terms of the construction company.

I mean is there any -- if 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 and the 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, if I can get this a little bit little more clear for everybody. The predominant drive over there it was a $140 million high rise construction projects in Baltimore inner harbor area. 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 7 figured cheque back to us. And as much as I’d like to think that there is another one that was around the corner I'm not seeing it right now. So that's really that it.

Remember, the 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 helps to track 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 or is nearly a 40% spread between what we've built it at and what we sold them at. The key component to that is that is our construction company. And so that's got to be job one.

So, we've got a full slates of development projects that they're working on that need to stay, we need to stay focused on. And therefore, our expectation is that that's going to go back to norm. Remember we've been in this business for going on 40 years. So, it typically reverts back to the norm. And again, stress, don’t want to go on and on here.

But 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 construction company upfront and working with their architect to bring about the best results.

We are not going to go out and bid for contracts and slug it out for nickel 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 parcel handful 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..

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 give 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 expenses quarter?.

it's a lot of miscellaneous expenses across all the different properties and then the other piece was the bad debt write-off this quarter..

Got it.

So, should we assume, obviously the bad debt is not necessarily recurring, but the other pieces, are any of those recurring or enough more likely non-recurring?.

We hopefully don't expect that bad debt to keep recurring. I think some of it was ramping up some expenses in a couple of properties and doing some maintenance and et cetera, but we expect it to stay in line, going forward..

Okay. And it looks like you had some pretty good success in Annapolis Junction here in October, 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, in 2018, its 400 units. So, we're trying not to get overly excited, but we really happy with the start, where 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 have got a great partner up there, who is active daily in the leasing efforts and 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 the ground in all those various markets.

We're sitting here in Virginia Beach, we've got an office in Baltimore and we’re talking about Annapolis, Downtown or Charleston or Bali or whenever, our partner with boots on the ground is extremely important to our success and Annapolis Junction is proving to be exactly what we would hope..

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 a result with Whole Foods connection or is this a state that we might see more activity in going forward?.

It's predominantly through the Whole Foods connection to S.J. Collins, but Florida is a market we're comfortable with. We did our first project in Florida in 1992, we have been back several times since, very comfortable in that marketplace and I hope that it will be a focus for S.J. 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 [indiscernible] stocks from the retail sector, but as far as see more and more multi-family developments in the pipeline, I guess can you just give us your general outlook on that sector in upcoming two years as far as that versus retail or mixed use or office space?.

Sure. Great question. Multifamily for us and is going to continue to be a focus. We are concerned about and let me back up. We're seeing a tremendous amount of multifamily opportunities and we're showing up on a weekly basis. We'd reading through those for the best.

What's starting to concern us even in the best market like the Charlottes and Baltimore's Inner Harbor and the like is that it's becoming less and less space at the top end. People are pushing rents higher and higher and there is more and more supply coming online.

So, we're going to be really cautious on that end and then unless it's in an 8 plus locations we're just not going to pull the trigger because we think that there is got to be feeling out there somewhere because 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 is 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 thank you'll in announcement here not too distant future about doing more of that kind of space. .

Your next question comes is coming from Paul -- of Raymond James. Please go ahead. .

Hey good morning and thanks for taking my questions also. Yeah, I was going to ask about the multifamily as well. And I guess since you've 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 more color there?.

Sure, you are definitely talking about our lower price points. You're also talking about -- probably think about more in terms of the three storey [well cuts garden styles grease ways] that sort of things. Still high quality within the units, just not high-rise configuration in elevators and the like.

You also have less design features on the exterior of the building, which rock testers really important because it still have to remain attractive. But you don't have a lot of the relief that you see in these products that we're building now that you're leasing for $2 plus or in the case of some of ours the $3 plus range.

So, it's not really departure from the basic model. It's just somewhat more value engineered and more of a 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 towards 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 am sitting here in our conference room, I’m looking out at probably three apartment projects that are often a distance of a mile or two away.

I think there is total a of seven of them, conference 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, its minutes from Town Center or blah, blah, blah, and we continue to say and if you 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, I’m glad you brought it up, for years Cosmopolitan has been the leading rent per square foot getter in Virginal Beach.

It is now over 10 years old and the two products, the one that’ up at the encore next door on one side and the Premier that's going up on the new block on the other side, are going to eclipse it if we're not careful. So, next year we are going to go on a major refresh of the facility and make sure it stays at the top.

That's kind of a long answer to a short question. But, in Virginia Beach, we believe that we are 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 a location, but not a single location, for instance our Harding Place project in Charlotte.

Charlotte remains robust but our project where it's really well locating amongst several that are really well located in Charlotte, and those are kind of places where we really need to see some caution, hopefully amongst our brethren in the development business, because at some point, you are not going to be able to drive rents.

We’re going to be really cautious about anything other than A+ location at the high-end..

Yeah that helps. Yeah, 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 are working with Whole Foods maybe the store design, anything at all as a result of what's happened there?.

A not at this time, and again we’re working with Whole Foods through our relationship with S.J. Collins who at their relationships are right at the top, they keep being told that there is a major rollout that's going to happen, we are 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, really don't see significant changes..

They have been pretty clear. The changes are coming..

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

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

Great, thank you. And just to clarify Mike. When you are talk about bringing assets on balance sheet.

Are you talk about the two mezz deals and [indiscernible] JV or just the two multifamily mezzanine deals?.

No, John. All three of those projects. Yeah. .

The City Center and the two-mezzanine multifamily can all come on balance sheet at full cost and still stay at the mid-6 net debt-to-EBITDA. .

Correct. So, I'll just break these down. So, City Center which will be completed next summer, we have funded 100% of the equity on that project. So that we've already got -- we've all funded the equity. So, at that point in time we'll bringing on the construction that which is going to be somewhere in the $23 million range.

So that's not -- two multifamily projects again we have funded all the equities through our mezz loans and we bring those on balance sheet where we're going to have properties that are producing EBITDA and we're only bringing on the construction debt on to the balance sheet..

Okay. But the construction debt can come on balance sheet and still stay under 6.5 net debt-to-EBITDA. .

Yeah right around 6.5..

I have to do the math?.

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

Got you. Okay and then just a curiosity I was actually driving to Waynesboro few weeks ago. When you have a vacant 30,000 square foot box in a place like that is 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 15 pass deal. Just out curiosity..

It’s a 10-year 25 deal I don't know maybe staying in our portfolio. Like actually John it's interesting because I was driving through Waynesboro about three weeks ago that's what -- we actually have some good activity for releasing in that center. So, you'll probably see that projects stay in the portfolio. .

And John, this is [Gary] in that leasing activity you probably do end up breaking up that space to some extent. They're not that many 30,000 fleet users looking at Waynesboro. So, you could expect that to be a multi-tenant releasing effort. .

Okay though. Thanks a lot. .

And then as you asked on the Food Line to Lou's point, 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 rate 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 than 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 5 years, we’re seeing those trade in at the mid-8s, right now.

So, if that - if those cap rates held, I think that you could take Lou's statements, a base value that those are probably not long-term hold, if those cap rates obviously move materially higher, we would reconsider that at some point, they’re much more valuable on balance sheet..

Thank you. At this time, I would like to….

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

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