Lou Haddad - CEO Michael O’Hara - CFO Eric Smith - COO.

Dave Rodgers - Robert W Baird and Company John Guinee - Stifel Rob Stevenson - Janney Montgomery Scott Craig Kucera - B. Riley Bill Crow - Raymond James Laura Engel - Stonegate Capital Partners.

Welcome to Armada Hoffler’s first quarter 2018 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 is being recorded today Tuesday, May 1, 2018.

I would now like to turn the conference call over to Michael O’Hara, Chief Financial Officer at Armada Hoffler..

Good morning and thank you for joining Armada Hoffler’s first quarter 2018 earnings conference call and webcast. On this call this morning in addition to myself, are Lou Haddad, CEO; and Eric Smith, Chief Operating Officer who will be available for questions.

The press release announcing our first 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 June 1, 2018. The numbers to access the replay are provided in the earnings press release.

Those who listen to the rebroadcast of this presentation, remind you that the remarks made herein are as of today May 1, 2018, 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 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 statements disclosed 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 will now turn the call over to our Chief Executive Officer, Lou Haddad.

Lou?.

Thanks, Mike. Good morning, everyone, and thank you for joining us today. As some of you are aware, next week marks the fifth anniversary of our IPO. I’d like to begin this morning with a word of thanks to those of you who’ve been a part of the journey we’ve enjoyed. It has been a terrific one, filled with several noteworthy accomplishments.

Our growth over the past five years has seen us nearly triple our market cap. Earnings, net asset value and dividends have grown each year. With the total return of nearly 60%, we have more than doubled the return of RMS REIT index over the five-year period.

Investors can be confident that as the Company’s largest shareholder, management will continue to execute our business model in their best interest. Many of you have come to realize that we are a much different than a traditional REIT.

With multiple product types in our portfolio, a robust development operation, a profitable construction business, joint ventures, municipal partnerships, and mezzanine loans, ours is certainly a complex business model. It is also one that has been very successful for nearly 40 years.

Our Company is built to thrive in a wide variety of business environments. The current macroeconomic backdrop is no exception. We believe that the opportunities afforded by a growing economy far outweigh the challenge of a higher cost of capital.

The current climate is marked by increased opportunities and development, public-private partnerships, build-to-suit engagements, third-party construction and tenant expansion. We believe these opportunities can more than offset the impact of gradually rising interest rates.

We intend to further demonstrate the unique advantages of our integrated model in the coming months. As I’ve often said to investors, the best part of being in the real estate business is the transparency it demands. When all is said and done, you either produced the results or you didn’t. The earnings and net asset value are there or they are not.

We’re very comfortable with investors using this methodology to judge our performance. This morning we reported first quarter results of $0.25 of normalized FFO per share, which was in line with our expectations.

While we are not inclined to adjust our guidance at this time, we are extremely optimistic about the Company’s prospects for the rest of 2018 and our ability to deliver on our promises. Perhaps even more importantly, we remain on track with our development pipeline and the expected corresponding increase in both earnings and NAV.

Deliveries have begun and will continue over the next few quarters. My optimism is rooted in our business model, that of a fully diversified, actively managed real estate company with multiple business lines. For instance, one focus is on third-party construction opportunities. And we are poised to sign several new contracts.

Our expectation is for third-party backlog to more than double over the next couple of months and to be well over $100 million by summer’s end. We’ve backfilled a large portion of the office vacancy at Town Center.

And as was anticipated, same-store NOI has begun to recover from its temporary decline and we believe will ultimately return to the positive levels that we’ve enjoyed in the past.

As construction on Phase 6 of Town Center nears completion and leasing commences on the new multifamily units, the additional supply allows us to begin substantial upgrades to The Cosmopolitan Apartments next door without affecting our ability to meet ongoing demand.

We will be cycling through the units over to two-year period to ensure this asset remains the premier luxury address in the submarket. With regard to the rest of the development pipeline, leasing progress remains brisk on the newly delivered multifamily projects and reinforces our view of healthy spreads achieved through our development operation.

Currently, Annapolis Junction is nearing the 45% mark with the prime leasing season yet to come. Harbor Point stands at nearly 40% leased, despite delivery occurring only six weeks ago. We had high expectations for this project, and even we have been pleasantly surprised by the pace of leasing thus far.

In both of these projects, we expect pro forma rents to be achieved. We now anticipate that our Durham high-rise One City Center anchored by Duke and WeWork, will open around the end of the third quarter, nearly fully leased. Construction continues on the rest of the projects in the pipeline and schedule deliveries remain unchanged.

As we have said before, our expectation is that delivery and stabilization of this $0.5 pipeline will contribute well over $1 in NAV per share as well as a significant boost to earnings.

While our intent is to retain ownership of all the projects in this pipeline, market conditions may lead us to monetize a portion of this healthy value creation in order to strengthen the balance sheet as well as help fund another round of exciting projects.

The next development pipeline is taking shape with large, mixed use projects and sought-after locations in large metropolitan markets with some likely to include public participation.

Smaller infill locations, featuring midmarket, multifamily and retail projects may also be included as secondary and tertiary cities are experiencing reurbanization as well. We expect to begin announcing this project later this year.

As I mentioned last quarter, our construction group will be building a 220,000 square-foot distribution center for a wholly-owned subsidiary of PepsiCo in Richmond, Virginia.

In the negotiations with the client, we offered a menu of fee construction and development, build-to-suit purchase or a long-term lease, giving Pepsi optionality that is only afforded with our integrated business model. They 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 that the taxable REIT subsidiary level. Due to the favorable rates contained in the new tax law, it is practical for us to monetize the 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 many of 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.

The disposition of most of those buildings resulted in our acquiring other properties under a 1031 exchange. And while tax rate exchanges will still be a part of our strategy, lower tax rates will enable us to alternatively handle these engagements at the TRS level as well with after-tax proceeds available for balance sheet purposes.

We remain extremely bullish on the performance of our Company with an accretive pipeline nearing delivery and a solid balance sheet. We believe we are poised for significant growth over the next few years. We appreciate the confidence demonstrated by our Board with their approval of the dividend increase of 5.3% this past February.

This brings the total dividend increase since IPO to 25% with the yield well in excess of 5% combined with consistent annual increases. We feel that we are delivering exceptional value to our shareholders. At this time, I’ll turn the call over to Mike to discuss our first quarter results..

Thanks, Lou. Today, I want to cover the highlights of the quarter, thoughts on our balance sheet, and our 2018 guidance. This morning, we reported FFO of $0.26 per share and normalized FFO of $0.25 per share for the first quarter, which was in line with our expectations. As we anticipated, same-store NOI improvements have begun.

As we have discussed the past couple of quarters, this metric was impacted from the ongoing construction of Town Center Phase 6 as well as by the relocation expansion of two significant office tenants at 4525 Main Street, which is not in the same-store NOI calculation. We made progress in leasing this vacated space.

And with occupancy increasing later this year, we expect same-store NOI to be positive. As Lou mentioned we began the renovation of The Cosmopolitan Apartments this quarter. Currently, there are 35 units offline.

With these units not available for rent, The Cosmo is excluded from the same-store NOI calculation and will not return until four quarters after the renovations are completed. To illustrate what is truly happening with our portfolio, we continue to encourage you to look at our occupancy and re-leasing spreads.

Our core operating portfolio occupancy for the first quarter was 96% with office at 92%, retail at 97%, and multifamily at 96%. Additionally, our re-leasing spreads were strong for the quarter with positive 7.8% on a GAAP basis and positive 3% on a cash basis.

On the construction front, we reported a segment gross profit in the first quarter of $600,000 on revenue of $23 million as compared to a $2.3 million segment gross profit in the first quarter of 2017. If not for this decrease in construction gross profit, the first quarter 2018 normalized FFO per share would have been $0.02 higher than a year ago.

At the end of the first quarter, the Company had a third-party construction backlog of $31 million. As Lou said, we expect the construction backlog to increase in the next few months. Now, turning to our balance sheet. We continue to take actions to enhance the flexibility of our balance sheet and work on loan maturities.

Our initial 2018 guidance includes the expected future acquisition of two Lowes Foods shopping centers. With the current market environment, we decided not to acquire one of the centers.

We are still planning to acquire the other center, because this transaction is with a strategic partner who is taking back all their equity in OP units which is consistent with our historic OP unit acquisition strategy.

In addition to not acquiring one of these centers, we have entered into an agreement to sell the Wawa outparcel from the newly acquired Indian Lakes, Harris Teeter center for a 5.35 cap rate with proceeds being used for balance sheet purposes.

By passing on one of these acquisitions and sale of the Wawa, we are reducing our expected capital needs for 2018. We acquired the Indian Lakes center for a 7.1 cap rate and net of this outparcel sale, we now have a Harris Teeter center that is yielding nearly 8%.

Due to the equity market conditions, we did not issue any shares through the ATM program in the first quarter. Hopefully, the market will change before long, but we’re not counting on it. So, we’re exploring other means of raising capital, including selling assets.

We’re in discussion with brokers regarding opinions and value of various assets to term in a best capital strategy. We continue to work on the five 2018 loan maturities. During the first quarter, the Sandbridge Commons Center was extended for five years in both of the Columbus Village loans were paid off.

Of remaining two maturities, we have a term sheet from TD Bank to refinance the JHU student housing project loan on for seven years, the lowest spread in the current loan. The other maturity is Lightfoot Marketplace loan. We’re in discussions with the lender and expect to extend the loan well before the maturity date.

In addition, during the quarter, we added assets to the credit facility borrowing base and increased the capacity of the facility by $30 million to $330 million. The lending environment has changed during the past couple of months with spreads substantially lower.

We are taking advantage of this environment, are in discussion with our lenders with whom we have floating rate debt. We expect to lower spreads by 35 to 65 basis points and over $100 million of debt.

At the end of the quarter, we had total outstanding debt of $595 million, including $108 million outstanding under the $150 million revolving credit facility. We continue to evaluate our exposure to highest interest rates and look for opportune times to hedge our interest rate exposure quarter.

At quarter-end, 91% of our debt was either fixed or hedged. This past quarter, we purchased a two-year $50 million interest rate cap at 2.25%. As part of a hedging strategy, we have always evaluated interest rate caps and swaps to mitigate exposure to interest rate risk.

The market has typically overestimated the path of LIBOR, which resulted in a steeper yield curve, making swaps more expensive relative to caps. For this reason, we primarily relied on caps for interest rate protection.

As the Fed has been increasing short-term floating rates, yield curve has flattened and the premium to convert to fixed rate has fallen to more attractive levels. Additionally, market expectations were closely aligned with the Fed’s rate projections, which has limited sum of the upside of caps.

In the current market, we believe swaps are a better option to mitigate interest rate exposure than caps. Subsequent to the quarter, we entered into a five-year swap, $50 million, and expect to enter into more in the near future. Today, we affirmed our 2018 guidance with normalized FFO of $1 to $1.05 per share.

As discussed last quarter, the guidance includes the expected sale of the distribution center by the TRS as we view this as a construction project that evolved from our cross-selling platform. We intend to sell this asset before it’s placed in service included in normalized FFO.

We included the expected profit from this sale in both the construction company gross profit and normalized FFO guidance. The guidance of this part of business has a wider than normal range due to the variability and exit cap rates. This is another example of being an opportunistic real estate company.

This transaction will have an impact on debt to EBITDA in 2018 as our balance sheet will carry the debt with no corresponding EBITDA. Because of the short-term nature of this project and associated debt, we do not intend to issue any equity for this project.

I’d now like to go through the details of the updated 2018 guidance, first, starting with our assumptions.

The acquisition of retail center in the second half the year, sale of the Indian Lakes, Wawa during the second quarter with proceeds being used for balance sheet purposes, raising $42 million through the ATM program, assuming favorable market conditions, the sale of the distribution center in the fourth quarter.

Since the FFO will be recognized at the time of sale, fourth quarter normalized FFO will be substantially higher than the previous three quarters. Interest expense is calculated on the forward LIBOR curve, which forecasts rates rising to 2.25% by year-end. The guidance of $1 to a $1.05 per share is predicated on the following updated components.

Total NOI in the $79.5 million to $80.2 million range; third-party construction gross profit in the $4.4 million to $7.5 million range; general and administrative expenses in the $10.7 million to $11 million range; interest income from mezzanine financing program in a $9.3 million to $9.5 million range, as of quarter-end, the aggregate loan balance of these mezzanine loans was $88 million; interest expense is in $19.8 million to $20.3 million range; and 63.6 million weighted average shares outstanding.

I will now turn the call back to Lou..

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

[Operator Instructions] Our first question is from Dave Rodgers with Robert W Baird and Company. Please proceed. .

Lou, on the office side, it looks like leasing volume picked up nicely in the quarter with some really good rental rates. I just wanted maybe you to comment on -- it’s got to be a Town Center. Economics, it looks like maybe -- it is hard to say were up or down, but TIs and LCs were up, the term was longer too.

Maybe just comment kind of on the signings in the quarter and then, your view on overall activity for office in and around the Town Center..

Sure. Thanks, Dave. It was a good quarter for backfilling the vacancies caused by moving the tenants into the new high-rise; spreads were really good, as you can see; and terms are lengthening as well.

What’s most exciting to us is that we finally have the pieces of the jigsaw puzzle put together, so that the remaining space is essentially in three chunks, again forgetting what’s in and out of the metric.

Our office portfolio at Town Center is about 800,000 square feet and there are three decent sized chunks of space that are left, two 10,000-foot spaces and a 20,000-foot space. Our expectation is to get hopefully two of those filled between now and the end of the year and then office occupancy will once again be in the high 90s.

But there’s a good amount of activity, a lot of optimism out there, and we look forward to taking advantage of the rest of it and get this is place back to where it traditionally has been on office basis..

And then, with regard to the retail acquisition activity. We’ve talked about this in the past. But, you continue to buy some retail centers. Obviously, the returns there are pretty good for you.

But, with all the concern about retail and tenancy, should we be looking at this as building retail, maybe sale little bit on the backend to continue to clean up the exposures? Do you just like that business and continue to want to grow it? Talk a little bit more about that especially in the context of Bed, Bath & Beyond who continues to be rumored out there as a potential problem..

Sure. Let me take that one at a time. As you’ve heard me say before, we feel very comfortable with the retail that we own. Sectors that we are active in is the grocery anchored centers with -- in secondary and tertiary cities along the mid-Atlantic.

We’re not seeing any pressure there in terms of sales or occupancy or anything that’s been different over the last many years. We expect to continue to build out that part of the portfolio selectively. It’s still all about location, just like it always has been. And so, you have to maintain caution in that area as well as any other.

We also like discounters. That continue to be a big feature in our portfolio, home improvement and discounters anchoring the non-grocery anchored traditional centers in the portfolio.

And lastly, our mixed use retail which as you’ve heard me say before, is a bit of a misnomer, probably the least amount of space in that portion is traditional retail with the majority being professional office and restaurants and for profit school and that will continue to be a feature as long as we continue to do mixed use development.

Around the edges, obviously, investors pay us to stay attuned to what’s going on in real estate. We’ve talked before about a couple of centers that we ultimately don’t believe we’ll own long-term. We’ve talked about Bed Bath as a company that everybody knows is under some duress; they’re in four of our centers.

And quite frankly, we’d be happy to get the space back in all four of those centers. I don’t believe that’s happening as those stores apparently are doing very well for that company. So, we’ll see what happens long term. But, we continue to be believers in retail.

As you all know, as the pipeline comes to delivery, the percentage of retail in our portfolio will continue to shrink on a relative basis. But, our expectation is that we will cautiously add to that portfolio because as you said Dave, the prices are where they need to be to get some good accretion with very high-value tenants.

So, on an absolute basis, it’ll continue to grow somewhat but obviously, shrink on a relative basis. Hope that helps..

It does. And then, last one for me. I just wanted to ask about the returns in The Cosmo spending. I know the way you put it in the supplement. Cosmo actually has higher rent than Encore, but I think a lot of that has to do with unit size.

So, can you kind of just talk about what type of bumps you’re looking to get out of the unit renovation program at Cosmo..

Sure.

So, once we deliver the premier, which is the apartments in block 6, Phase 6 of the Town Center, we’re going to have three different styles of units at three different price points, with the premier being small, one bedroom or efficiency unit, the Encore being again skewing toward on smaller side, but more traditional units, and thirdly, The Cosmo, which has been the larger luxury units and more of a traditional high-rise.

That property has enjoyed the highest rate in the submarket. It is now nearly 12 years old and the refresh is going to be significant. Mike can talk to you about the numbers. But our thoughts are that’s mainly going to be seen in occupancy as opposed to rates. However, the rates are going to stay above.

And again, we have to look at this on a per unit basis because that’s the way people are renting these things in this area. It’s going to be the highest cost per unit in the space and it needs to stay as a leader of the pack..

Our next question is from John Guinee with Stifel. Please proceed..

First, Mike, how much are you assuming in terms of after tax proceeds on the PepsiCo deal in your underwriting?.

Approximately $4 million on a sale at a 6.25 cap. .

Okay.

$0.06 or $0.07 a share?.

Correct, it’d be just over $0.06..

So, should we assume -- at your midpoint $1.03, [ph] should we assume the $0.24, $0.30 for the next three quarters?.

Yes. So, it’d be $0.06, on the Pepsi sale at 6.25, we put it to high-end of $1.05..

And then, second, Lou, your big sort of transformational year in terms of acquisitions where you sold a lot of office and some tough high CapEx product and you bought about $260 million of retail, basically a lot of Harris Teeters in the mid-Atlantic or South, about $260 million low cap, maybe a low sevens cap rate on average.

If that product came on the market today, is this still low sevens or is it high sevens, or is it low eights, any sense for that?.

It’s a great question, John. It’s something we talk about here a lot. We’re not seeing... .

That….

I don’t know if it’s the answer, but I can give you our market sample of one. We’re not seeing any loosening of cap rates on the high-quality grocery centers. And in fact, it seems to be going the wrong way or the other way, if you will, depending on where you sit.

So, the Publix, the Harris Teeters, Whole Foods, they’re all either compressing or staying the same. At the low end of the scale or the value end, if you will, there’s a lot of widening because there is a lot of competition out there. And frankly, there is going to be -- or there has been some consolidation.

So, at the regional grocer level, you all saw what happened with southern shopping group. Food lines, centers, I think would be out in the high 8s at this point. But the kind of -- the kind of centers that we want to own, we’re not seeing the bargains out there that you would hope..

Okay, very consistent with what we hear elsewhere. Thank you.

And then, last question, do you have a sense for if you’re able to acquire at your fixed purchase price the mezz deals you did or the Durham JV? Do these come in at five yield on cost or eight yield on cost?.

In terms of about where our option to purchase sits, those are in the high 6s as far as the Annapolis Junction at Fort Meade and Baltimore, Harbor. In Durham, it’s in the mid-7.

What we are talking about there and what you heard from Mike’s commentary is we are deciding whether it’s going to make more sense to hold a number of these long-term or to go ahead and reach some of that spread because as you know, multifamily rates are really low at this time, cap rates, as well as a high-value credit on the office side in CBD.

So, I think, John, you probably had the best the insight a couple of years ago when you endeavored to explain how that mezz program worked. And with your four quadrants, whether it was make sense for Armada Hoffler to exercise their option or to sell. I think that’s still a pretty good guide..

You mean, I have to reread that? All right, will do. Thank you..

Our next question is from Rob Stevenson with Janney Montgomery Scott. Please proceed..

Could you talk about what the expectations are for the construction segment as we move throughout the year? The backlog is down to $31 million.

Are we going to see a meaningful drop off before it picks up again, or are the projects about to start here in the second quarter that we’re not aware of that keeps that segment more even keeled throughout the year?.

Thanks, Rob. So, the construction business by its nature is a bit lumpy. Our expectation, as Mike alluded to, had we been booking the appropriate fees on the on the Pepsi engagement, then, you would see things a lot smoother.

Because of the way are doing it and because we have the ability make a lot of extra profit, it’s going to be by its nature, lumpy. However, I think at the end of the day, you’re going to see that the construction company had its best year ever last year; it’s 7 plus million dollars.

And our expectation is that depending on the exit cap rate of that Pepsi distribution center that this year will rival that. What’s shaping up in backlog, as I alluded to, I think you are going to see that backlog well in excess of $100 million by the end of the summer. We’re very close on a number of different contracts.

And while, as lumpy as 2018 is going to be, I think, 2019 is going to be much smoother, because you’ll be coming into the year with a significant backlog..

Okay. And then, Mike, in terms of that guidance you were talking before about I guess the sequential drop in the second and third quarters before the $0.04 bump back up in the fourth quarter because of the sale.

What is that? Is that the removal of the units of Cosmo plus some fall off in construction, plus something else? What else is in that sort of when you’re thinking about a sequential decline in FFO?.

It’s mainly going to be the increase in the share count as we get into the ATM program. So, that’s mainly. We don’t see any big drops through. And on The Cosmo, the plan as we start, we’re taking 10% of the units offline; after we roll through that initial 10% is to keep 5% offline, so that we hopefully write at the natural vacancy at that 5%..

So, if you guys don’t issue shares under the ATM, then there shouldn’t be a sequential drop in earnings?.

Well, it depends on, if we sell something and lose the NOI associated with that sale..

And then, remind me, the capital needs for 2018 and the guidance doesn’t anticipate either the purchase for the sale of Point Street or Annapolis Junction out of the mezz pool, they stay in the mezz pool for the full 2018?.

Correct..

Okay.

And then, in addition to Cosmo, anything else that you guys are nearing redevelopment of at this point in the portfolio?.

No. That’s pretty much it. Cosmo is bit of a special case. Like I said, when you have the market leader, you really can’t sit on your laurels. We’ve got to continue to have that wild people in order to get those kinds of rents..

But nothing in the retail portfolio that you guys are thinking about doing any substantial redevelopment of or anything like that at this point?.

As you know, we purchased the two centers adjacent to Town Center with an eye towards redevelopment. And we continue to work on various schemes with the tenants that are there, as well as the city. And ultimately, those will be done, but that is not imminent.

We also, as we’ve been telling you folks for a while, our old outdated Kroger in Waynesboro, Virginia, we had anticipated that Kroger wouldn’t renew that. They are not going to renew it. So, we’ll be redeveloping that. We actually have some tenants that are looking at that now. But other than that it’s really, really pretty much it.

I think you’re going to see that CapEx go down pretty noticeably next year, but for the continuing of The Cosmo..

Our next question is from Jamie Feldman with Bank of America Merrill Lynch. Please proceed. .

Good morning. This is Kim Hong [ph] on for Jamie. I think someone already asked this question on the spike in TIs this quarter for the office lease.

But, can you just talk broadly about across your market what the general rent growth is and how TI and concession trends are trending, for both the office and retail segments?.

Sure. Well, on the office side, it’s a pretty small microcosm of what’s going in the markets. I wouldn’t want to comment on a macro level here. We have -- here at Town Center, we have an 800,000 square-foot office portfolio that stays pretty much fully leased for the last 15 years. Spreads are good.

You see this past quarter we are few percent on the positive side, on cash basis. And we think that they’ll continue to be good. And again, that’s a very small demographic. We have very few square feet left to lease. And so, we can be -- on one hand, we can be pretty selective and pretty stiff on the pricing.

On the other hand, it’d be nice to have it gone. So, it’s kind of too small of a market sample to make any general statement..

Okay.

And is it the same case for retail?.

So, retail is a bit broader. Our centers are throughout the mid-Atlantic. And again, this portfolio is predominantly anchored by either grocery centers, home improvement centers or discounters. Those -- that makes a large part of the NOI very stable, number one, but not growing very fast, number two.

When you take the rest of the occupancy, I think, Mike said the occupancy on the retail is somewhere around 97%. There just isn’t enough movement to create for us to comment on a trend. We have significantly higher re-leasing spreads this past quarter. That has been the norm.

At the same time, it’s a small enough market sample that one renewal for less could skew the results the other way. For us, that underlying strength in the retail center is what gives us an awful lot of stability over which we can do our development business. And that’s the way it’s been designed.

As we’ve mentioned on numerous occasions, the depths of the great recession, the occupancy in those centers went all the way down to 92%. And that’s what it’s constructed for, not so much the growth but the stability to keep that dividend well covered..

Got it. And it seems like next year, you have some expirations, both in the office and the retail portfolios. Can you speak about any future move-out risk in those portfolios and any progress on backfilling the major vacancies? I know, you spoke about the three chunks in the Town Center..

So in the -- again, in the office portfolio on a relative basis, it’s pretty small. We’ve got a couple more lawyers that are left to downsize. Each lawyer in Town Center has renewed and taken less space. Our expectation is that what’s going to happen on the two remaining that rollover next year, although those are smaller square foot basis.

So, the impact won’t be as great. The other major office tenants were already in discussions for renewals. So, again, we’re -- the expectation is that the occupancy -- office occupancy at Town Center is going to be in the mid-90s through a combination of those events. As far as the retail, today, we don’t see anybody giving up their space.

We do have interest from a couple of larger tenants that want to buy their space. We rather not see that happen. But, they’ll have the ability to do that. Right now, we’re not seeing anybody making noise, as if they would likely -- of course things change; it’s a rapidly changing landscape and we need to stay on top of..

Okay. And the last one is on the preleasing product, on the delivered but not yet stabilized assets. I think there are two of them and they are scheduled to deliver this year. So, just wondering what the progress is around that. And I’ve noticed that you’ve added some project to the development pipeline as well.

Could you speak to the new ones too?.

On the office deliveries, the office delivery for this year is the City Center in downtown Durham. With the signing of the WeWork lease, the office space is sitting -- is about 13 or 14,000 square feet left to lease beyond Duke. And WeWork, our hope is that it’s going to be leased by time we open.

On the retail side, there is about 20,000 square feet of retail there. And it’s about half spoken for so far. But, we are optimistically thinking that that building is going to open pretty much full. That is it for the office deliveries of this year.

The multifamily, I’m not sure if that was part of your question or not, the multifamily projects Annapolis Junction at Fort Meade and Harbor Point at Baltimore -- Harbor, both of those now have delivered are in lease-up. And we are extremely pleased with those multifamily projects and their rate of lease-up at this point.

The two projects that were added -- I’m sorry. Go ahead..

Sorry. I was talking about the Brooks Crossing and the Lightfoot Marketplace, so the two retail assets..

Yes. So, Brooks Crossing is --that is a small center that is a part of a large public-private venture with the City of Newport News. We are under construction with the 100,000 square feet of office that is 100% leased. But that won’t deliver until the first quarter of ‘19.

The few-thousand square feet that is in the retail center, there is an adjoining retail center, some small shop space, have a couple of tenants there that are circling again our expectation as it’s going to be all but full here by the end of the year. But, again, it’s only a 14, 15,000 square-foot center.

Like with outparcels is a new project in the development pipeline that is fully spoken for, with a few outparcel tenants. They’ll break ground a little bit later this year and ultimately be delivered midway through next year. Those are 100% leased and spoken for already.

And last piece is the market at Mill Creek which in Mount Pleasant, South Carolina that’s to Lowes anchored shopping center that we just started construction on it. .

Our next question is from Craig Kucera with B. Riley. Please proceed..

As you mentioned in your prepared comments, the two multifamily developments in Maryland are leasing up pretty nicely, maybe even faster than expected and rents performance.

[Ph] Can you give us an update on what you might convert those loans? And while it’s not in your guidance, is there any chance an event could fall [ph] in the 2018 for either of them?.

There is a possibility, Craig. So, we have -- what we model is that we would be purchasing those at the end of the year. Obviously, with the pace of leasing as fast as it is, we’ve got to look at whether or not we would rather do that earlier.

And the other piece of that as Mike mentioned is that we also are seeing a pretty healthy spread and look back to bring what those projects could bring on the open market. So, a lot depends on -- the analysis we look at is we’ve been talking about the spreads and our development pipeline for five years now.

We’ve demonstrated how healthy those speeds are with a number of sales. The equation we look at it’s going to cause us to have that long-term in our portfolio versus the projects that are forming in a new development pipeline and would we rather fund those with those kind -- with that spread, essentially free money versus raising money in the market.

If I would just let the stock go to $25, we wouldn’t have to worry about these decisions. We would just own everything. But, as the market is -- as it is, we want to be selective in what we do..

Yes. I would just add one thing.

There is an interesting narrative that’s prevalent in the multifamily space right now, which is some of the larger institutional money is willing to take market -- submarket specific and asset specific lease-up risk in exchange for taking interest rate risk off the table by investing in a multifamily development and facing three -- potential three years, maybe three years plus of interest rate risk.

So, those buyers are willing and very interested to look at strong assets with strong lease-up trajectory that are in the as low as 25 but certainly in the 50% plus preleased arena.

That combined with all of the money that flowed into the bridge loan space is providing the capital that’s allowing institutional buyers to bridge that purchase, lease it up and then permanent debt.

And so, what we’re seeing and hearing across the multifamily space again for high-quality products is that that discount you may take as a seller, has compressed to as low as in some cases, 25 basis points or so.

So, I think, it’s necessary and prudent for us to look at that sale option, given those dynamics in that space, to Lou’s point, relative to bringing on balance sheet as attractive as some of those sale opportunities are up prior to full lease-up..

Got it.

And I guess, when you think about sort of that current environment, looking down the road, does that make you more inclined to maybe control more multifamily development off balance sheet through the mezzanine lending opportunities, or you may be going to focus more of that line of business on the Whole Foods development?.

I would say both. So, the model is very successful on both sides.

On the Whole Foods side, that is more of a traditional mezz opportunity where you are trying to simply make money on your mezz as well as leverage your construction company and a very good partner, ultimately with Whole Foods trading as we’ve seen them as well as sub-5 cap rates that we probably would not end up acquiring those.

And we’ll see how that pipeline rolls out, once Amazon, Whole Foods starts accelerating the expansion. On the multifamily side, those opportunities continue to exist.

We’re seeing -- what’s coming in the new pipeline is extremely exciting for us because it’s right in our wheelhouse where we can bring the maximum amount of our expertise to bear in a mixed use facilities, in a highly dense areas, combining multifamily as well as retail and office. Those are the assets that we really want to have.

Those have stood the test of time for very long time. So, we will see where that ends up. But, the mezz program will continue in some form or fashion across the product types..

Got it. And one for me, just going to the office side, I think, you have three art institutes that are expiring next year. I guess, I’d be curious as to any update on any discussions.

Have you started them and sort of can you handicap what you think whether or not they are going to renew?.

Yes. If I were to bet today, I would say, they are all going to renew. We’re already in discussions for the one here at Town Center. So, we think they’re doing pretty well in our locations. And we’re not hearing any noise about anything other than renewing. Again, it’s somewhat early, but it looks positive so far..

Our next question is from Bill Crow with Raymond James. Please proceed. .

And the anticipated increase in the construction backlog, you talked about some mix used projects, merger markets.

Just wondering, if you could give us any example, so maybe some of the markets you’re looking at either expanding in or maybe entering for the first time?.

Sure. And again, two different things. The construction contracts that we are close to signing are not -- don’t quite overlap with what we’re talking about in the new pipeline. The construction contracts, some of them are local and some of them are as far afield as Baltimore or all the way down to Atlanta. As far as what we’re looking at….

[Indiscernible] that you’ve kind of focused on historically….

Correct. As far as what’s developing in the pipeline, those large areas that we’re looking at, again, it’s kind of more the same. It’s Baltimore, it’s Raleigh-Durham, it’s Charlotte, and it’s Atlanta. And we’re looking forward to making some announcements soon in all these locations..

Maybe Mike for you.

The Cosmo investment, is there a return expected on that investment or is this more defensive in nature, just trying to maintain the competitive nature and maintain -- I think you talked about rents kind of staying flat, is it fair to think of -- this is more defensive spending?.

Well, I would say, it’s a combination of both. I think, the main part of renovations is the kitchens and flooring which certainly has changed and you want to keep that there. And you recently would like to -- you can pick up the nice return on that investment by having occupancy in the high 90s versus the low 90s.

But, I am hopeful that when you drive occupancy, gets up into the high 90s, then we can start pushing rates. And we do know that in talking to the tenants, obviously, they all want the new units,sSo, I’m hoping that they look really -- come out really well and we can drive rents..

Do you think that’s a fair timeline, 10 to 12 years kind of need to go and redo multifamily at this point?.

I think for the most part, again, if you’re in a mid market property, you may not have to do as an extensive a job as what we’re talking about now. When you’re trying to stay at the top of the market, then, I think you’ve got to look at that every decade or so or you’re not going to be at the top of the market..

Fair enough.

And then, finally, for me, if we pull the $0.06 out of -- assume that doesn’t recur in ‘19, and I know you’ve got some puts and takes next year and some timing issues, without I guess giving us guidance, but do you think next year is poised to be an up year from an FFO per share, assuming you hit kind of that 1.05 this year with the full $0.06?.

Great, question. So, Mike and I have been saying for quite a while that this pipeline, when it gets delivered, you’re going to see significant NAV and earnings growth. Our expectation is that that’s exactly what you are going to see. We’re not changing that at all. I tell you, there couldn’t be a better time for our business.

We’ve been operating this model for very long time. We’ve always done better in a growth economy than we have in a stagnant economy. And like I said earlier in our prepared remarks, shame on you, if you can’t overcome gradually rising interest rates when there’s always opportunity out there.

We’re not seeing any reason why we can’t deliver on what we’ve been promising with the delivery of this pipeline, with the assemblage of the next pipeline as well as continuing on with high volume construction and good proceeds in the mezz program. So, all systems are go for 2019..

Our next question is from Laura Engel with Stonegate Capital Partners. Please proceed..

Good morning. Thank you. I just have a clarification, again on the mezz program.

Can you just -- you commented on the Whole Foods and the potential for those as far as the option to purchase, but can you comment just on the -- is the stabilization for the Point Street in Annapolis still let’s say first half of ‘19? And then, at what point would you make a decision or what’s the likelihood on those purchase options?.

I think the likelihood is high. I mean, right now, the discussions here as people are somewhat giddy about the pace of leasing, and so I guess at this pace, we’re going to have those decisions a lot earlier to make versus later.

But, our -- we have -- our management hasn’t changed the guidance, our expectation is that those will be purchased around the end of the year. And as we’ve alluded to, we’re looking at our optionality to not do that as opposed to raising capital for the next pipeline. And we’re just going to make the best decision we can at the appropriate time.

It’s just nice to have the backdrop of really good leasing velocity in order to make those decisions on top of..

Okay, great. Well, thank you I appreciate all the good information. And I will get back in queue..

Thank you..

Our next question is a follow-up from John Guinee with Stifel. Please proceed..

Mike or Lou, when you do the math, obviously, if you can sell lease assets at 4.5 cap and your stock is at 11 bucks a share, you’re seller of the assets versus an issuer of your common. But on the other hand, if the cap rate is a 6 and you’re stock is at 15, you go the other way.

Have you done enough analysis to understand where the breakpoint is where you’d rather issue equity versus sell the assets?.

Yes. You are talking about where those lines cross, and John, I wish that was a stagnant model. Part of that -- with just those two factors, those lines do cross in the 15s.

But, the subjective piece that you got to layer on to that is a very exciting group of opportunities that are forming behind that and whether or not you’re going to be able to sustain of raising the amount of capital needed to keep everything.

And so, that’s kind of the mitigating factor that has us essentially waffling on what exactly we’re going to do..

Ladies and gentlemen, we’ve reached the end of the question-and-answer session. I would like to turn the call back over to management for closing remarks..

Thank you. And thanks to everyone. We appreciate your interest in our Company. Look forward to updating you on our activities and results in the coming quarters. Take care..

This concludes today’s conference. You may disconnect your line at this time and have a great day..