Michael O'Hara - Chief Financial Officer Louis Haddad - Chief Executive Officer Eric Smith - Chief Investment Officer.

David Rodgers - Robert W. Baird Jim Lykins - D.A. Davidson Rob Stevenson - Janney Montgomery Scott Craig Kucera - B. Riley FBR John Guinee - Stifel Laura Engel - Stonegate Capital Partners William Crow - Raymond James.

Welcome to Armada Hoffler's fourth quarter 2017 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 Tuesday, February 6, 2018.

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

Good morning. And thank you for joining Armada Hoffler's fourth quarter 2017 earnings conference call and webcast. On the call this morning, and in addition to myself, are Louis Haddad, CEO, and Eric Smith, 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 2018 guidance presentation was distributed this morning. A replay of this call will be available shortly after the conclusion of the call through March 6, 2018. The numbers to access the replay are provided in the earnings press release.

For those who listen to the rebroadcast of this presentation, remind you that remarks made herein are as of today, February 6, 2018 and will not be updated subsequent to this initial earnings call.

During this 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 the risk factors disclosed 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 ArmadaHoffler.com.

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

Lou?.

Thanks, Mike. Good morning, everyone, and thank you for joining us today. This morning, we reported fourth quarter results of $0.23 of normalized FFO per share, which was in line with our expectations. We finished the full year at $0.99 per share, which was the midpoint of our previous guidance.

We also issued our guidance for 2018, which will be the focus for most of my commentary. To briefly summarize 2017, I'd like to refer back to what we said on this call one year ago. At that time, we informed investors that we anticipated a year of strengthening our balance sheet and executing on our large development pipeline.

Without any development deliveries slated for 2017, we stated that earnings would be more or less flat compared to the previous year, with significant NAV and earnings growth expected to occur beginning in the latter half of 2018 with the delivery and eventual stabilization of several development projects.

And I'm pleased to report that we have met all of our goals for last year and the pipeline is on track to deliver the value that we anticipated. As you can see on page three of our guidance presentation, we anticipate 2018 normalized FFO per share between $1 and $1.05.

The midpoint of this range is a measurable increase over last year's results, even though development deliveries are not expected to provide any appreciable impact to 2018 earnings. We expect another strong year for our company in all aspects of our business.

Portfolio leasing and accretive acquisitions, combined with another stellar year from our construction company, will continue to deliver value to our shareholders. Let's look at these factors in that same order.

Starting with our existing portfolio, and referring to page four of the guidance presentation, our portfolio NOI is projected to rise incrementally exclusive of 2018 acquisitions. This growth is expected to come predominantly from additional town center leasing across all product types.

Our expectation is that with construction disruption ending my midyear, multifamily occupancy will increase. Office vacancies caused by relocation and expansion of existing tenants are well on the way to being backfilled. We also anticipate filling the few pockets of retail vacancy within the project.

The other two-thirds of the portfolio remains leased on average in the high 90s. On the acquisitions front, we've adhered to the basic tenets of real estate for nearly 40 years. Prime locations, proven operators and diligent monitoring of sales traffic and demographics.

As I mentioned on our last call, the current retail environment has yielded a host of opportunities to acquire such properties, particularly in the grocery sector.

Over the last few months, we evaluated numerous assets and identified a number of these centers that only meet our investment standards, but, as importantly, help us solidify relationships with quality operators and development partners to fuel our primary growth vehicle, our development operation.

What you see on page five of the guidance presentation are the completed and pending acquisitions resulting from this effort. As you know, we invest in superior locations in our geographical footprint, including high-quality addresses in secondary and tertiary markets that most public REITs dismiss.

These are predominantly off-market opportunities and some involve the issuance of OP units, a trademark of our acquisition strategy. For example, last week, we closed on the acquisition of Parkway Center, a newly constructed retail center in Moultrie, Georgia anchored by Publix.

We acquired Parkway Center in an off-market transaction, in which this developer, Kara Moore Development took back half of their equity in the form of OP units. We look forward to potential future opportunities to work with his new partner.

We have also agreed to terms on the acquisition of two newly constructed Lowes Foods anchored centers in South Carolina. For those of you not familiar with Lowes Foods, they are a North Carolina-based, family-owned and operated enterprise. They've been in business for over 60 years. Lowes Foods is part of a $2 billion organization.

With a new store concept comparable to Publix and Harris Teeter, Lowes Foods operates nearly in 100 full-service supermarkets, primarily located in the Carolinas. Both were off-market transactions and one involves our strategic development partner, S.J. Collins, who will be taking back a meaningful portion of their equity in the form of OP units.

We anticipate closing on both acquisitions in the late first quarter or early second quarter of this year. Last month, we closed on the acquisition of Indian Lakes, a retail center in Virginia Beach, anchored by Harris Teeter and Wawa. Indian Lakes is a property we know quite well. We originally developed and built the center in 2008.

And when the opportunity to acquire the asset at an attractive cap rate presented itself, we acted on it. The four acquisitions totaled $66 million at a blended 6.8% cap rate.

But as I mentioned previously, these transactions include additional leasing upside as well as positioning us for further engagements with these strategic developers and operators. Again, as seen on page five of our guidance presentation, these properties will temporarily increase the retail percentage of our NOI.

As the far right chart shows, traditional retail is projected to be well under 40% of NOI, with the delivery and stabilization of the current pipeline. Please note that, in all of these charts, a separate portion of our portfolio is labeled as entertainment and mixed-use retail.

This category primarily consists of restaurants, entertainment venues, professional office, higher educational facilities and some boutique shops. We believe the tenants represented here are of a materially different nature than traditional retail. Now, turning to construction.

Our previous expectation was that after two years of record profits for the sector, construction would return to its historical norm of $4 million to $5 million of gross profit. This was based on the expected decrease in contract volume anticipated in 2018.

I'm pleased to report that due to our unique cross-selling platform, we expect to be able to maintain the high end of our historical range despite this projected decrease in third-party contract revenue. As I mentioned last quarter, 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 were rebuilding a $23 million, 220,000 ft.² distribution center for a Fortune 50 company. This new building is the result of a consolidation of three older facilities.

In the negotiations with the client, we offered a menu of fee construction and development, build-to-suit purchase or long-term lease, giving this client optionality that is only afforded with our integrated business model. The client selected the long-term lease arrangement.

As we are not long-term holders of industrial real estate, we expect this project will be designed, built, occupied and sold within 2018, all the taxable REIT subsidiary level. Due to the favorable rates contained in the new tax law, it is practical for us to monetize this value creation in this manner.

Therefore, profit recognition is expected to be significantly higher than just the typical fees we would've earned under a third-party construction contract. As you know, our construction group receives this type of build-to-suit opportunity on a fairly regular basis. Since our IPO, we have executed on four facilities of this nature.

Two state office building, the Newport News police precinct and the Oceaneering building. The disposition of these buildings, other than the police precinct, resulted in our acquiring other properties under a 1031 exchange.

And while tax-free exchanges will still be a part our strategy, lower tax rates will enable us to alternatively handle these engagements at the TRS level as well, where taxes will be paid and the net proceeds can be used for balance sheet purposes.

Turning now to the development business in page eight of the guidance presentation, you'll see here that the pipeline is now at approximately $484 million worth of investments. Given our typical wholesale to retail spread of 20%, we estimate that once these assets are stabilized, NAV will increase over $1 per share.

You'll notice that we already have added to the already robust pipeline previously reported. The market at Mill Creek in Mount Pleasant, South Carolina is our first development with Lowes Foods in a grocery-anchored shopping center.

This center, along with our expected acquisition of the Lowes Food centers previously discussed, are the first steps in what we hope to be a long-term relationship with both this first rate regional grocer as well as our newest development partner, the Adams Property Group.

Construction on all the other projects in our development pipeline remain on track. Furthermore, we'll be breaking ground on the build-to-suit office building for Huntington Ingalls Industries at Brooks Crossing later this month. On the leasing front, I'm excited to announce that WeWork has agreed to lease over 60,000 ft.² at one city center.

WeWork, combined with Duke University, brings pre-leasing on the office component of the project to approximately 90%. As a result, we expect to deliver one city center at or near stabilization later this year. We previously announced that Pottery Barn and Williams-Sonoma will be anchoring the retail portions of the phase six of Town Center.

We deliver the Annapolis Junction project. And as of today, there are over 130 signed leases at pro forma rents. We are very pleased with the initial leasing demand. Assembly of our next development pipeline is well underway and we look forward to discussing those projects with you later this year.

At this time, I'll turn the call over to Mike to discuss our fourth quarter results and 2018 guidance in detail.

Mike?.

Total NOI in the $80.7 million to $81.4 million range. Third-party construction gross profit in the $4.4 million to $7.5 million range. General and administrative expense in the $10.7 million to $11 million range. Interest income from mezzanine financing program in the $9 million to $9.5 million range.

As of year-end, the aggregate loan balance to these mezzanine loans was $83 million. Interest expense in the $19.7 million to $20.3 million range and 64.5 million weighted average shares outstanding. Now, I'll turn the call back to Lou..

Thanks, Mike. We remain extremely bullish of the performance of our company. With an accretive pipeline nearing the delivery 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 and still yields in excess of 5%, we feel that we are delivering exceptional value to our shareholders. We will be discussing the dividend at our quarterly Board of Directors meeting on February 22 and we will issue a press release shortly thereafter.

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 today is coming from David Rodgers from Baird and Company. Your line is now live..

Yes. Good morning, guys. And thanks for the 2018 guidance presentation. I think that was really helpful. I wanted to quickly ask about the office space that's left at, I guess, at the Town Center overall. Each asset is kind of somewhere hovering around or just above 90%.

So, it seems like a bunch of small pockets, but it sounds like you guys have some pretty good activity.

So, Lou, any additional color you could add there?.

Sure. So, the space that we vacated with those tenants that relocated to 4525 has been filled with a – I want to say it's five smaller tenants are now going to be occupying about half of that vacancy. We're seeing really good activity here of late, Dave. I guess, with the uptick in the economy, we're seeing more people actively looking.

I feel really good about filling the rest of that space. As you said, it's all pretty much in small pockets. So, it's kind of slow going. But we're looking forward to getting back into the mid-90s where we've traditionally been in office in Town Center..

And then, shifting gears to residential and some of the developments coming up, you're within the year of Annapolis Junction and Point Street completing. How are market rents looking on those projects? You've felt pretty good in the past.

I'm just curious on kind of any update on those in terms of how those are starting to play out?.

That's a great question. I want to be cautious with the answer. Both of these properties, the leases that have been signed are predominantly above our pro forma rents. I try not to get overly excited about that until we get towards the end of the initial lease up rather than the beginning, but certainly really encouraged about the results thus far..

Great. And then, maybe last from me, can you talk a little bit more about the retail environment. Obviously, some more acquisitions here in the first quarter and in the guidance for the remainder of the quarter.

But curious on the yields that you're seeing here, how you're viewing these purchases relative to maybe what you could replace thee assets for.

Any additional thoughts on the retail landscape?.

Sure. I'm going to let Eric answer this question more specifically, but, just generally, as I said in my opening comments, we continue to operate as a real estate company, looking for high quality real estate with high-quality partners and high-quality operator. That hasn't change for, going on, 40 years and I don't expect it to change anytime soon.

What we're seeing in our retail properties is very high demand and very high lease up of the few pockets of space. I think we're at something like 97% now on the retail occupancy. The yield on these particular properties, we hope to get into the low 7s by some lease up and also potential dispositions, but I'll let Eric explain that more fully..

Sure. Thanks, Dave. And thanks, Lou. I will be brief in my comments, but I'll touch on each of these very quickly because I think, anecdotally, coupled with the comments, will highlight exactly what Lou said, how we focused on the real estate, then the yields including the upside opportunity and, lastly, the opportunity to expand our relationships.

So, Indian Lakes, obviously, something we were extremely familiar with, having developed it. And while at first blush, it appears to be going in cap rate on NOI in the low 7s, there's an opportunity to peel the high-value Wawa off at a very attractive cap rate and get that into the high 7s, approaching 8. And it's real estate.

We, obviously, know well here locally. We have a shadowed anchor grocery store asset right next door that's perennially 100% leased, still a very strong submarket.

Now, you move down to the Publix acquisition in Moultrie, Georgia, and again, going in cap rate in the mid-6s, but with the small shop space that we have yet to rent, we expect that to get into the 7 range as well. We spent a lot of time diligencing this asset.

This doesn't arguably have the same 1-3-5 mile demographics given that you have a county with a 50,000 population.

But when you actually go down and put boots on the ground, you find out that the population was turning their backs on the local off-brand markets like Harveys and Oxleys [ph], which are low-cost providers and not competitors at all, and driving anywhere from hour to hour and a half round trips to Tifton, Thomasville, Valdosta, et cetera to shop at the Publix in surrounding cities.

And so, we feel very good. This was the only site Publix wanted to be in, limited to take in this city. And so, we feel really good about the real estate. You touch on the other two and we're talking about strong demographics in the Lexington, South Carolina area and Greenville, South Carolina just outside the beltloop there in Greer.

And we're very pleased with those as well with some of the similar upside opportunities we discussed. So, when you look across those acquisitions again through the lenses and the metrics that Lou outlined, you're talking about an opportunity with one of our strategic partners. We talked about a lot with S.J.

Collins and the acquisition of the Lexington asset from them and the taking back of OP unit, the development in Mount Pleasant with the Adams Group, the acquisition of the Publix in Georgia with the Kara Moore Group. So, all long-term local partners that we plan on doing more business with.

And then, you're talking about long-term relationships with Lowes Foods and Publix that we feel are very strong operator as well as might be a little less well-known, part of the $2 billion Alex Lee conglomerate. But we spent a lot of time with their corporate team at their headquarters and touring their new concepts.

And it's every bit a true competitor, Publix, Harris Teeter and Whole Foods given their organic and local sourced concepts, given many of their unique in-store concepts as well as – and their high service levels. And so, we feel very comfortable about those partnership relationships and those operators and, obviously, the real estate itself..

Thanks, Eric. Appreciate all the color. Thanks, guys..

Thank you. The next question is coming from Jim Lykins with D.A. Davidson. Please proceed with your question..

Good morning, guys. And thanks for taking my question..

Good morning, Jim..

Hey. So, first of all, the two acquisitions, for the one in Georgia, I didn't see in the press release the square footage for that one. And I'm wondering if you can, first of all, give us that and then any other color on those two transactions.

Occupancy, how much you think you might be able to push rents? There may be a value-add component at either one of those?.

Absolutely. Again, I'll let Eric take that..

Sure. In similar order that I mentioned them, I'll start with Indian Lakes. We're going in at 95% occupied on a 71,000 ft.² center. So, you have a little over 3000 ft.² vacant. So, there's an upside on leasing there. Like we said, we also feel good about that retail corridor, over time, for there to be some upward re-leasing rates.

And then, finally, the Wawa I mentioned that we could spin off to get that from the low 7s to approaching an 8 cap rate, so that upside is across those three metrics. And then, on the Parkway Center in Moultrie, Georgia, kind of little over 61,000 ft.².

We're going in there with just under 5000 ft.² vacant across four bays and we feel really good about filling those, which is why we were happy to go in at a mid-6 cap rate, with the goal of getting it over 7.

Like I said, this is that market – in addition to folks doing the hour to hour-and-a-half round trip to other Publix in the three neighboring towns I mentioned, what you have here is a new retail corridor to the northeast of town as you come in on route 319 and this is where you have all the players of note on the retail side in the market.

And this is at Main and Main in that market. And so, the extent that there is small shop demand in that market, it will be at this intersection in this Publix center. And so, we feel really good not only about filling that space, but, over time, having the premier asset in that market being able to push rates as those leases rollover in the future..

Okay. It's very helpful.

And also, could you just talk about who, if anyone, may be on your watchlist right now? And also, what you're seeing with leasing trends so far into Q1 on the retail side?.

Again, on the retail side, Jim, it's been very robust. It's just a very small amount of vacancy. We're seeing good tenant rollover and leasing spreads, as Mike had mentioned, have been healthy. In terms of our watch list, as I've mentioned before, we still own four centers that have Bed, Bath & Beyond in them.

We are somewhat concerned about them as a company. However, the volumes that they're doing in our stores are skewing to the high end of their average store. So, we'll see. We feel really good an eventuality that those actually might go out, being able to re-lease those.

And as we've mentioned before, we're continually looking at this portfolio for where we think peak value has been reached. I've mentioned that we still have three food lines in the portfolio as well as Buy-Low. Feel really good about the locations and the sales.

But as I've mentioned before, I could see us divesting ourselves of those over the next couple of years. Certainly, no reason to dump them, if you will, particularly in the current environment. But, I think, long-term, you'll see that rotation out of those few stores..

Okay. Thanks, Lou. And I'll pop back in the queue..

Thank you. The next question is coming from Rob Stevenson from Janney Montgomery Scott. Your line is now live..

Good morning, guys.

The Lowes Foods anchor stores that you're going to build or buy, those are actually Lowes stores and not their Just Save concept, right?.

That is correct. And I would add to that, they are not only the Lowes Foods, but they are all the Lowes Food new concept, which were – for those on the phone who might be familiar with Lowes to start with, there is a notable difference between the older store concept and their new store concept.

They spent a lot of time demoing the market and working with their customers. And like we said, I don't know that we would be buyers of their older concept stores, but we're very big fan to the new concept stores..

And for the ones that are operating currently, what are they doing sales-wise and how does that compare a Publix or a Kroger or a Harris Teeter in a similar market?.

Sure. Then the information that we have on – let's see, let's start with – Greer/Greenville, South Carolina location. They've been open about a year and their sales per square foot are approaching $400 a square foot. The Lexington store has not been open, but for a few months, but we expect that based on early trends to be even better.

And based on our research and diligence, we believe that they are at par with, if not in excess of the competitors that I mentioned when they are located right across the street, down the street, et cetera, in the same submarket..

Okay. That's great. Thanks. And then, Lou, with the Duke project now 90% leased or preleased, at what point do you guys start talking to the school and start kicking off whatever the next one is to City Center or I don't know how the numbers work down there. But the next project down there – this one is already 90% preleased at this point..

Great question, Rob. And the answer to that question is we've been in the talks with Duke for the last several months about anchoring the next high-rise. My expectations is that you're going to see some really exciting announcements over the next several months of large, mixed use public-private type developments.

They're going to stock a new pipeline for us that's going to add the same kind of value that we believe the current one is zeroing in on..

Okay. And Mike talked about alternatives to the $55 million of ATM issuance that you guys have in your guidance at this point and if they stayed low or went lower. You talked about having some OP units not only in deals that you've already closed, but deals that are going to close.

At 13-and-change, how do you feel about including OP units at a price like that versus just selling an asset or something like that or using cash at this point in the cycle?.

That's a great question. And it's something we have to continually evaluate. We've got a number of properties coming online, I guess, that we develop these properties in order to own them long-term. However, again, as the largest shareholder that's not at any cost. We think we're adding a tremendous amount of NAV with this pipeline.

And if it looks like the stock isn't trading the way we would like it, then we're not afraid to reap some of that value and book the cash. As you know, this is not a static game. And I didn't get overly excited when the stock hit 16 bucks. Not going to get overly excited when it hits 13 bucks.

But we need to operate our business with an eye towards what's going on in the market simply for the availability of capital and use the best sources that we can..

I'll add to Lou's comment very quickly, which is both the OP units that were issued for the transaction that closed as well as the pending transaction in both cases, those OP units were transacted at a price higher than the current stock price after this material sell off the last few days..

Okay, that's great. And then, Lou, given that comment, you've got on – I forget, page five of the guidance, you've got the pie chart showing current portfolio breakdown and then what it is with the stabilized portfolio – development portfolio.

If you guys were to sell stuff out of there, I mean, obviously, the multifamily stuff is probably the most liquid.

How comfortable would you wind up being having retail go to – from 49% to 55%, 58%, even 60% if you wind up harvesting gains from other asset classes for some period of time in the portfolio? Is there an upward bound where you start saying, I've got to start selling retail as well as other asset classes when your portfolio mix gets there, you think?.

We don't want to let it get too far out of whack. But, remember, this is a long-term game. We feel really good about the retail that we own. The mixed use retail is always going to be there. The grocery-anchored stores are always going to be there, although we continue to look at recycling those things. We're comfortable with the real estate that we own.

Investors pay us to be real estate professionals, not market reactors. And we've got stores that are – or centers that are 97% or 100% leased and sales are going up. We're going to feel really comfortable about holding that real estate. These are not big boxes. These are not department stores. They're not malls.

They're very solid real estate assets that we intend to have for the long haul. That said, we don't want to turn into a retail company. And as such, like we've said before, the majority of this pipeline as well as the pipeline that's forming takes us away from retail centers and more to mixed-use office residential..

Okay. And then, last one, for Mike, so that he doesn't feel too lonely..

Thanks, Rob..

Why are the same-store expenses in the apartment segment running so high in 2017 at 5.5%? Was there anything in particular, property tax or something else, really drove that number up or was it just a variety of expenses?.

Yeah. It was in three areas. First were utilities and real estate taxes. And then the third is repairs and maintenance. So, at the Cosmo especially as its ageing and putting money into carpet refresh and those kinds of things..

Okay. Thanks, guys. Appreciate it..

Thank you. Your next question is coming from James Feldman from Bank of America Merrill Lynch. Please proceed with your question..

Thanks. And good morning. This is Kim Hong-Hong [ph] for Jamie Feldman. It seems like office and multifamily same-store NOI had meaningful drivers in 2017.

Can you discuss your expectations for same-store NOI in these segments? And are office leasing spreads included in your 2018 guidance?.

Sure.

Mike?.

So, on same-store NOI, we're expecting to see a rebound in the middle of the middle year, especially on the effects on the office. The re-leasing has started to happen. So, that will start hitting the pool in those leases there, as well as the 4525 Main Street. That will be in the same-store NOI pool come third quarter of next year.

So, office, obviously, is going to be rebounding. Multi-family, we are expecting the same. We're expecting to see the occupancy begin to climb back at Cosmo. And on retail, we are expecting a slight growth in same-store NOI, like we've had the past couple of years on the retail..

Okay. And then, I know you just spoke about the retail acquisitions, but more broadly speaking, what type of grocery anchor tenants are you looking for? Currently, we're seeing a lot of winners and losers in the grocery anchor space.

So, what are the characteristics you look for in these types of tenants and how do you think these grocery anchors will be successful over time?.

Sure. We've got long-standing relationships with Kroger, Harris Teeter and we're forming one with Whole Foods. And now, we're working hard on this Lowes opportunity. For us, it is long-term proven operators in the business, as well as looking at the competitive set that's out there. So, I'd mentioned food line.

We don't think there's anything wrong with food line. And with Delhaize credit behind them, they are not going anywhere. But we're seeing a lot of pressure at the low-end, particularly from the Europeans, and that's why we're not thinking that those stores that we have of theirs would see a lot of growth. For us, it's a combination of several factors.

It's familiarity with an operator that's proven over and over and over. It's a location that we feel good about, irrespective of the operator, as evidenced by the sales, both in the grocery as well as is in the small shops. It's getting a development partner, who can bring us further opportunities. That's the lifeblood of our business.

All those factors need to come together. And, of course, we are looking for accretion as well. But I want to make sure that everybody understands on the phone that this company is not set up to grow meaningfully through strict acquisitions. For us, it's creating that value and the wholesale and retail spread is going to fuel our growth.

And also, the same lens is applied to acquisitions. Simply buying something at a 7 cap because our cost of capital is in the low 6s isn't where we want to go.

But that same acquisition, when it contains an opportunity to bring another partner on board through OP units, as well as further development opportunities, that moves the needle far enough for us to act..

Okay. Thank you for that color.

And then, regarding the WeWork lease in 4Q, what type of impact do you think WeWork will have on One City Center? And as a landlord, are you open to co-working platforms broadly or specifically attracted to WeWork?.

It's something that the market is embracing across a number of different names. I'm not sure that we're ready to embrace it. I believe WeWork is far and away the leader and the best capitalized. And as far as we can see, the most successful model. It's going to bring a tremendous amount of energy to the building.

So, we're really excited about them picking our building as their base of operations in Durham. And I think it validates what we've been thinking all along about downtown Durham. Tremendous activity. They're also looking at a couple of other of our facilities around the portfolio.

I suspect that we're going to have further announcements with his particular tenant..

Okay. And then, the last one for me is, your net debt to EBITDA was 6.6 at year-end for 2017. Wondering what your comfort range is and what the leverage will look like in year-end 2018.

And then, once all the developments are in process to deliver?.

Yeah. So, our debt to EBITDA climbed in the fourth quarter, mainly affecting the fourth quarter. The construction company's gross profit dropped quite a bit from previous quarters. We are saying we're comfortable with the core debt to core EBITDA in the mid 6 times something range, which is where we certainly focus and try to keep it in that range.

For 2018, it will be a little higher during the year than our typical range or has been in the last 12 months because of the distribution center that we talked about where we're going to be carrying the debt and the associated EBITDA, but it's not going to be until the sort of fourth quarter.

Long range, I'd certainly want to be in that 6.5 times range, looking out at 2019. That's where we want to have. And what's going to happen between now and then, this is not a static business. As Lou was saying, we're looking at a lot of development projects right now. There's a lot of activity.

So, we're working on the 2019 plan and as it comes together..

Okay, thank you so much..

Thank you. Our next question is coming from Craig Kucera from B. Riley FBR. Your line is now live..

Hi, guys. Mike, I appreciate your commentary on the balance sheet. You've got about $145 million of interest rate caps rolling off here in the next couple of quarters.

Do you anticipate just rolling – or extending those again or are you thinking about maybe taking a different tack in regard to managing your floating rate debt?.

We're going to look at two things. Certainly, we're going to stick with caps. For us, it's a good way to have a pool of assets that don't have – that have pre-payable debt. So, it gives flexibility for disposition and keeping the value there or unencumbering the asset for the credit facility or going through a – for credit rating.

Obviously, we won't be buying caps anymore at 1.50% -- LIBOR and 1.5% will probably be 2% or something that, but we'll certainly look at the pricing. And second part is starting to look at some more fixed rate debt. We've got a couple of properties here that are coming up that will be good to start looking at long-term debt.

Obviously, one of them being the JHU project, of which now 100% leased. The leasing for the next school year has been very strong. So, now is a good opportunity to take a look at that one..

Got it. Going to the of multifamily side of the portfolio, there was some split between occupancy, I think, quarter-over-quarter, particularly at Liberty.

Is that property such that we kind of have to wait until the next school year start because we'll see a recovery? Are there other things that you can do there?.

That's a great question. I'm going to be brutally frank about Liberty. We're not pleased with where that sits right now. It shouldn't be as cyclical as it's behaving. Not with the rolling admittance that they have at the Apprentice School with Huntington Ingalls, Inc.

We don't see any reason why this property shouldn't be in the 90s and we're giving it a lot of attention, as we speak and we're working with Huntington Ingalls to raise the profile.

There appears to be some good news in the offing with another ship that's going to come in for a major overhaul and be here for an extended period of time and it's multiyear. But I do want to stress that we're not pleased with where it is and I don't really see the reason why it's there.

And it's going to get a lot of attention and we're going to get that performing better, is one of our goals for this year..

Okay. And one more for me. Just going from a modeling perspective, you mentioned that you had a couple of deals where you priced OP units.

Can you give us specifically how many units were issued and what the price was?.

I don't remember specifically the number of units on the Lexington deal. It was a couple of million dollars' worth. Or will be a couple of million dollars' worth on that one. And that was when we cut that deal with our partner. That's in the low 14 handle range – 14, 15 or so.

And on the one that closed down in Georgia, I believe those went off just slightly sub 14. .

Okay, thank you..

Thank you. Our next question today is coming from John Guinee from Stifel. Your line is now live..

Great. Two questions. Exactly on a growth and an after-tax basis, in the build-to-suit, you're planning on putting into normalized or core FFO for the industrial build-to-suit on a dollar and on a cents basis, FFO basis.

And then, second, more big picture, the big deal in retail these days is co-tenancy clauses, occupancy clauses, favored nations clauses.

What do you have to give both in attracting nationals and regional tenants and then also how are you underwriting co-tenancy occupancy and favored nation clauses when you're buying these food-anchored centers?.

Okay. All right, John. Good morning, by the way. Let me take those one at a time. So, on the distribution center, the way we're looking at it is this. Had this Fortune 50 client selected us to simply design, build them a distribution center, our fees would've been in $1.20 range. We'd have charged them about 6% for construction and development.

That's the way it would have headed. In the long term lease arrangements, we will basically get that, obviously, as well as another couple million dollars' worth of profit dependent upon what that ultimate exit cap rate is.

So, the 10-year triple net lease with, obviously, an extremely strong company, but there is a lot of variability right now out there in the marketplace. So, our expectations is for an extra couple of million dollars. That, obviously, can go up. I don't believe it's going to go down because of the nature of this credit.

But, again, that's the reason for the wide range. With regard to what's going on with co-tenancies, there's a couple of different categories. And, John, you and I have talked about our mixed-use retail before.

In terms of these boutique retailers in our mixed-use, of which they don't represent a tremendous amount of that mixed-use, but what is there is important. And we're talking about the Anthropologys and Lululemons and William-Sonoma and all that. There are very – back up for a second.

In order for a secondary market, like Virginia Beach, to attract those types of tenants, where they're basically going to do one store in the entire market, you are not competing with the center down the street. You're competing with other secondary markets.

So, an Anthropology might have a handful of opportunities for stores in the secondary cities, and there might be 30 secondary cities after that tenant. So, as I've stressed before, these are not moneymaking propositions for us in and of themselves. They demand a tremendous amount of tenant improvement and they don't pay a very high rate.

What they do do is enable you to get the other tenants in that mixed-use space at very favorable rates, be they restaurants or professional office or entertainment or the like. So, long answer to a short question, you basically get tied up with a very long co-tenancy list, when you are putting these people in.

And it's something we have to adhere to and look at constantly in order to keep the mix where these folks are going to stay. In terms of the grocery-anchored centers that we buy, far less stringent.

Obviously, in the small shop space, basically, what we're talking about is stores where you have a grocery anchor and somewhere between 10,000 and 20,000 feet of small shops. The most we will give somebody is a covenant that that grocery store will be there or will not go dark. But beyond that, we're not having to give anything.

As I've said, leasing in small shops has been very robust for us. We're at 97% occupancy or so. Re-leasing spreads are good. You are seeing, again, mom-and-pops, some of them pressured and particularly people that are somewhat exposed to Internet sales.

But, again, wherever those go out, we're not seeing any slowdown in the velocity of getting those spaces refilled..

Great. And just a quick follow-up.

If I wanted to carve-out the build-to-suit profit out of 4Q, should I carve out $0.04, which would give us FFO guidance of $0.96 to $1.01 for 2018?.

I think that's in the right neighborhood. I don't think that basically – if you simply said the value is what we've spent to build, you would cut that number in half. So, I don't – but I think your math is correct..

Okay, great. Thank you. .

Thank you. Our next question today is coming from Laura Engel from Stonegate Capital Partners. Please proceed with your question..

Good morning. Thanks for taking my question. I know we're going to a little bit here, so I'll be quick. Most have been answered.

In general, other than discussing the industrial disposition maybe for later in 2018, I guess, broadly, how can we look at that disposition activity for this year versus maybe compare it to prior year or the year before that overall? It sounds like you're pretty fixed with the portfolio, but any other thoughts on things that might get released this year?.

Sure. Again, we've got a very strong pipeline that we've talked about ad nauseum. We've got a developing pipeline that's going to give us further requirements for capital and most likely more in 2019 than in 2018. We're also anticipating using the ATM this year, assuming the market conditions are favorable. Again, they may not be favorable.

And so, we may be in a position where we decide to reap some of that NAV that we're creating in our pipeline irrespective of our desire to own these things long-term. And that's part of the flexibility that we have to maintain.

We try not to pay too much attention to the market, but you can't ignore it in its entirety when you might need to raise capital. So, we're going to looking at that very strongly. I would say – our druthers would be that the stock goes back to $16 and we don't sell anything. We'll see if that ends up being realistic..

Okay. Well, always appreciate all the good information as well as the market insight. So, thank you for taking my question..

Thank you..

Thank you. Our next question is coming from Bill Crow from Raymond James. You line is now live..

Good morning, guys.

Mike, maybe for you, what is your assumption as far as the issuance of the ATM, as far as – is that pro rata each quarter? Is it backend loaded? What have you built into the guidance?.

What's built in is $10 million here in the first quarter and then $15 million for a quarter thereafter..

Okay, that's helpful.

And then, assuming that gets done, or some other way you raise capital, let's say, a similar amount through an asset sale, does that position you for all the activity for next year without having to raise additional equity? Or do you anticipate that that issuance will occur again based on what's delivering next year?.

Bill, I'm going to say that there's too much going on right now to answer that question. Like Lou said, we've got a couple of large build-to-suit projects. I mean, large, mixed-use public-private partnerships we're looking at right now that are certainly going to take some capital.

So, when we see what's going on with these development projects and the time, we can give a better answer on that..

Bill, as you can imagine, just what we've discussed on the phone today. If we succeed in bringing our next project with Duke together, you're looking at another $100-plus-million high-rise mixed-use facility. And as that develops and starts taking capital, our decision is going to be, do we own this long-term versus everything else in our portfolio.

And that equation has to be done on the fly continually. So, it's really difficult to put anything out there right now..

Yeah, that's fair. I guess I was thinking about just what's been announced, what's being delivered as we can look through 2019. Obviously, the things that gets announced after that would be incremental from a capital perspective. So, if the market remains – go ahead..

Sure. If everything were completely static and we basically just stop moving forward and deliver the pipeline and not selling anything in 2019, my guess is we would need a little bit of capital. But that's obviously – it's only in a hypothetical. That's just not going to happen..

Yeah. No, I understand. Okay, thank you, guys. Appreciate it..

Thank you. We've reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further closing comments..

Yes. I really appreciate everybody's attention today. Great questions. We look forward to having an announcement after our board meeting in a couple of weeks. And subsequent to that, hopefully, announcing some new products – projects coming up this coming year. Thanks again for your attention. And have a great day..

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today..