Welcome to our Armada Hoffler’s Fourth Quarter 2019 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 the question-and-answer session.

[Operator Instructions] As a reminder, this conference call is being recorded today, Thursday, February 6, 2020.I will now turn the call 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 and full year 2019 earnings conference call and webcast. On the call this morning, in addition to myself, Louis Haddad, CEO.

The press release announcing our fourth quarter earnings, along with our quarterly supplemental package and our 2020 guidance presentation were distributed this morning. A replay of this call will be available shortly after the conclusion of the call through March 6, 2020. The numbers to access the replay are provided in the earnings press release.

For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, February 6, 2020, and will not be updated subsequent to this initial earnings call.During this call, we will make forward-looking statements, including statements related to the future performance of our portfolio, our development pipeline, impact of acquisitions and dispositions, our mezzanine program, 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 risk factors disclosed and 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.

Definition of these non-GAAP measures as well as reconciliations to the most comparable GAAP measures are included in the quarterly supplemental package, which is available on our website at ArmadaHoffler.com.We will start the call today by discussing our 2020 guidance.

At this time I would like to draw your attention to our 2020 guidance presentation that we published this morning and now I will turn the call over to Lou..

Thanks, Mike. Good morning everyone, and thank you for joining us today. Next month we will mark the 41st anniversary of the founding of our company. We take a great deal of pride in achieving that milestone, one not often seen in the commercial real estate business.

Over the years we've earned the reputation for integrity, consistency and professionalism; traits that are the foundation of our success. The last decade saw us turn a seasoned vertically integrated multi-asset class private real estate company into a publicly traded diversified REIT.

The results have been stellar.The company has increased its market cap nearly fivefold since its 2013 inception and investors have enjoyed returns in excess of a 150% over the last five years; more than tripling the returns of the RMS.

In addition to analysts and investors there are many employees and joint venture partners listening in on the call today. On behalf of our founder and chairman Dan Hoffler the board of directors and executive management we sincerely thank you for being a part of our team.

I'm proud to be associated with each one of you.Well, the focus of my comments today will be on our 2020 guidance as presented in the release this morning. I'll first offer a few thoughts on the fourth quarter and 2019. As you can see from our earnings release we've been extremely busy at the company.

Over the last few months we've announced three new development projects, signed several third-party construction contracts and made solid progress on our asset recycling initiatives.Perhaps most importantly 2019 saw us maintain high occupancy portfolio wide and generate healthy increases in releasing spread.

Our fourth quarter results were in line with expectations and normalized FFO for the full year was a $1.17 per share which was in the middle of our guidance range.

As we forecasted at the beginning of last year 2019 would yield a double-digit increase in per share earnings over 2018 and it has done so with a year-over-year increase of nearly 14%.As has been relayed to you over the last few quarters we anticipate only a slight increase in earnings per share for 2020.

This is a year where our focus is to substantially increase our NAV through our capital recycling efforts, exciting development initiatives and high return redevelopment.

In short we anticipate that our activities over the course of 2020 will build a solid case for expansion of our multiple and ultimately lead to significantly higher earnings over the next few years.

As the company's largest equity holder management remains committed to generating long-term value for all shareholders.Turning to our guidance presentation. As you can see by the earnings range on page 4, the midpoint of our per share guidance is a $1.18.

Well, and the surface not as exciting as last year's large increase when you look at the assumptions at the bottom of the page you begin to understand our decision to sacrifice short term profits for long term growth and value.Specifically as is detailed on page 5 beginning with the sale of Lightfoot marketplace last year we anticipate the likely sale of 8 of our older commodity type neighborhood centers at a mid 7 cap rate.

The vast majority of the proceeds will be used in the acquisition of two new whole foods centers, the new lifestyle center at Nexton Square and a multi-family asset within sight of the Capitol building in Richmond, Virginia.

It is important to note that all of these high-value acquisitions will be executed off market for a discounted price and with existing partners.

Some of them will be taking their equity in the form of OP units.Despite the discounted purchase prices the cap rate differential between our acquisitions and dispositions will have a negative effect on short-term earnings.

When you combine that headwind with a decrease in mezzanine income and capital raising for new exciting development projects you can see the reasons for this year's range.

More importantly we hope you all feel as we do that these intentional moves are part of our longer-term strategy that positions the company for even greater returns that investors have enjoyed over the past five years.Before I walk you through the other highlights of our presentation I'm going to reiterate the fact that many who follow our company have correctly pointed out that we do not fit neatly into the standard wreath box.

With third-party construction profits build a suit asset sales and mezzanine interest income, our platform has a unique complexity that can't be wholly measured by traditional REIT metrics.

That said while these ancillary income streams augment earnings and decrease the need for external capital, the end goal of monetizing development spreads in this fashion is to enhance growth in our portfolio income through new development projects and off market OP unit acquisitions.Illustrative of this tip at this point as you can see by the information at the top of page 6 we expect our portfolio NOI to climb by over 40% from 2019 levels when the current development projects are fully stabilized.The FFO per share contribution from this additional NOI will be meaningfully higher due to the millions of dollars earned for mezzanine activity and construction income that we reinvest into the company thereby reducing the need for outside capital.Also of note on page 6 as we have been projecting the pie chart showing the NOI contribution of our various product types continues to adjust with concentration moving from retail into multifamily and office.

While the non-retail assets that are being added to the portfolio through development and acquisition are of trophy quality and offer significant long-term growth. I'd like to emphasize that we are also very bullish on all components of our retail portfolio.

Neighborhood grocery centers, regional discount chains and entertainment and mixed-use retail will remain as a high occupancy and growing sector of our business.Turning page 7. You can see that we've also been very successful in diversifying our portfolio on a geographic basis.

Upon stabilization of the current pipeline nearly half of our property NOI will come from outside of Virginia. This increased diversification is the result of years of goodwill and strong relationships built with strategic partners in these dynamic markets. The development pipeline is described on page 8.

Premier retail at town centre is 110 and away from stabilization while Summit Place and Wills Wharf are on track for delivery in the second quarter.

We expect both projects to be substantially leased by year end.The three projects that will break ground later in the year; Southern Post, Chronicle Mill and Ten Tryon constitute nearly $250 million of prime mixed-use space can fast-growing sub markets.

All three are weighted towards multifamily and office uses but will also include some complementary retail.On the redevelopment front renovations continuing the Town Center of Virginia Beach with all construction scheduled for completion this year at the Cosmopolitan apartments, Columbus village and Apex Entertainment.

We anticipate returns in excess of our ground-up developments on the new investments in these properties.Beyond the engagements nearing completion and recently announced projects we are evaluating multiple new opportunities in these and other neighboring areas.

Well, nothing has been finalized our expectation is that at least one of these new engagements will be ready to announce later this year.Page 9 shows our mezzanine investment program.

As most of you know this initiative allows us to provide development and construction expertise as well as our strong credit to trusted partners developing high quality projects in return for most of the value creation.

We've separated the program into two types; assets that we intend to ultimately acquire through a discounted purchase option and projects that we feel are better suited as short-term investments.The assets in this latter category are expected to trade a cap rate significantly below our cost to capital thereby making our acquisition less practical.

Consequently, our partners will likely be offering the assets to the general market.However, if an opportunity arises to negotiate a favorable option to purchase we won't hesitate to add top-quality assets to the portfolio as was the case with the pending acquisition of the Delray Beach Whole Foods Center.The mezzanine lending strategy combined with the schedule quality and cost control provided through our general contracting arm enables us to participate in top-quality developments and monetize a large percentage of the wholesale to retail spread through interest and fee income.Stated in another way this aspect of our investment strategy maximizes flexibility and deciding which projects are best suited for inclusion in the portfolio in which our best to monetize based on a variety of factors including capital market and commercial real estate conditions.As you can see over a multi-year period we expect to generate some $60 million of fee and interest income.

Based on the projected payoff dates of the current projects and likely engagements in pre-development we expect the program to stay near the current level at least through 2020 yielding significant profits over the next few years.

Mike will update you on the 2020 guidance on this segment of our business.Page 10 covers our third-party construction and other real estate services. With a healthy backlog of over $240 million the division is expected to have one of its best years ever with over $7.5 million of gross profit in 2020.

This substantial increase in fee income partially offsets the negative effects of the headwinds I described earlier adding a layer of flexibility not available to most any other reap, although significant third-party fee income is perhaps the least important benefit of our construction company.Aside from giving us the confidence and control to pursue our in-house development and mezzanine strategies, construction contracting has brought us many new relationships with high quality developers that we may ultimately add to our circle of partners and new ventures.Stepping back to a macro look at the business, the top of page 11 shows the year-over-year anticipated change in the composition of our normalized FFO.

As you can see FFO from our properties rises the most on an absolute basis followed by construction profit while interest income and other fees slightly decreased.The pie chart shows that while a significant portion of our FFO is derived from ancillary real estate related sources, the vast majority is generated from our portfolio.

With a large increase in construction profit offsetting the decrease in mezzanine and other fees 2020 shows a very similar breakdown to 2019.

However, as we have said in the past our expectation is that mezzanine construction and build -to-suit contributions will stay more or less static or slightly decreased over the next few years while stabilization of the existing development pipeline will increase property NOI by nearly $50 million.We expect the resulting FFO generated will return the property segment to well over 80% of the total on a consistent basis thereby solidifying our free cash flow and expanding our earnings base and our multiple.Now I'll turn it over to Mike to give some further detail on our guidance as well as some specifics on last quarter..

Good morning. Before my comments on the quarter and our 2020 guidance I’d like to bring to your attention our updated website. Last week we’ve launched our new and improved website which is easier to navigate and to find our financial information. When you have time please check it out.

The fourth quarter we reported FFO of $0.29 normalized FFO of $0.30 per share. For the full year FFO was $1.10 and normalized FFO was $1.17 per share.2019 was a very good year for REITs in general and AHH in particular. Our 2019 total shareholder return was 37% versus 26% for the RMS. In 2019 AHH at 26 all-time high closes.

Our five-year total shareholder return for 2019 was 156% versus 40% for the RMS. We are obviously pleased with these returns are grateful for the trust our shareholders have placed in our company.With AHH trading at current levels above consensus NAV with a current interest rate environment our cost of capital is substantially lower than in the past.

With this lower cost of capital we have the ability to acquire higher quality assets such as multi-family communities, also whole food centers and be accretive.During 2020 we'll continue to pursue high quality access to upgrade our portfolio.

Our core operating portfolio occupancy for the fourth quarter remains strong at 97% with both office and retail of 97 and multi-family of 96.Same-store NOI enter was positive 2019, GAAP was positive 3.8% and cash was positive 4.5%. Additionally, our releasing spreads were positive again in this quarter 6.7% on a GAAP basis and 3.4% on cash.

They are also positive for the year. 5.6% on GAAP basis and 2.2% on cash. We believe these positive metrics are reflection of the quality of our portfolio.Now back to the guidance step. Starting on page 12 there are a couple of slides relating to the balance sheet.

As you can see we generally have maintained our leverage within our corporate targets of total debt EBITDA with an upper limit of eight times and core debt to EBITDA in a six times range.The reminder that our core debt includes the debt associated with our operating properties as well as the outstanding balance on our credit facility which includes the equity requirements of construction loans for our development projects with increase in equity requirements required by lenders today which is typically 35% of development cost.We have maintained our target range for the past few years aside from this short-term spike in 2018 related to our built to suit sale of the distribution center.

With the upcoming asset recycling in which we are rotating to a better quality assets EBITDA from these properties will initially be lower.

Due to this after you complete the recycling our leverage may be higher for a short period of time.As for new development projects we recently announced they're expected to break ground during the first half of the year as is typical development projects the initial capital requirements are modest and ramp up during the construction schedule.

Due to the timing of these capital requirements and the effective asset recycling we believe using the ATM throughout the year is a prudent method to manage leverage.Now turning to page 13 to review debt maturities.

During the fourth quarter we’ve completed the refinancing of the remaining 2020 loan maturities and closed on the recast of our unsecured credit facility which extends the maturity of the revolver portion to January 2024 and a term loan to January 2025.Page 14 of the deck illustrates our core operating portfolio occupancy since 2013 which has been in mid 90s.

This reflects the strength of our properties and we expect this to continue at these levels in 2020.Page 15 illustrates the details about 2020 mezzanine investment program guidance while still substantial we anticipate the program being below 2019 levels.

In the fourth quarter we began to recognize interest income from loan exit fees including Annapolis junction and interlock loans. Both these loans have provisions that include a fee when the loans are paid off. These fees are essentially a profit participation within these projects.

The exit fees are substantial, the $5 million including our 2020 guidance in addition to $16 million of interest income.The 2020 interest income guidance is based upon anticipated loan payoffs of Delray, Nexton, and Annapolis Junction as listed on this slide.

As discussed on the last earning call the new GAAP standard known as CECL went into effect on January 1.

This new standard requires companies to establish the loss reserves on most receivables in loans even when current facts and circumstances do not indicate a loss will be incurred.Establishing these reserves companies need to estimate the impact of future business cycles to put affect to the loans.

We have determined that this new standard only materially affects our mezzanine loans. Based on our analysis and data from our consultants we have estimated that we will require a reserve between $2 million and $4 million effective January 1.

As its typical with a new GAAP standard this initial reserve will not go through the income statement and instead will appear as an adjustment to equity in the first quarter of 2020.Going forward we'll go through the same analysis every quarter in just the reserve.

This adjustment is non-cash and with the unpredictable nature of the reserve we decided not to include this adjustment and normalized FFO. That said any actual losses from this program will be included in normalized FFO.On page 16 is our 2020 full-year normalized FFO guidance of $1.16 to $1.20 per share along with our guidance assumptions.

As Lou discussed our asset recycling is included in our guidance with expected completion in the second quarter.

This recycling is similar to 2016 we sold the Richmond office tower and the [indiscernible] build-to-suit for the proceeds invested in eleven retail centers.This recycling load our earnings but increased the quality of the credit behind the leases in NAV.

Our 2020 recycling consists of selling nine centers one of which closed and eight of which are under letter of intent. Proceeds will be invested in higher quality real estate including two whole food centers and a multi-family community. These transactions will probably reduce our NOI by $1.5 million on an annual basis.

As I said in the past real estate is a long-term game and not managed quarter-to-quarter. We believe this recycling increases the quality of our portfolio or NAV and perform better over time.Speaking of entity please turn to page 17 of the guidance deck. During NAV earnings and the dividend of the main focus of our company.

We believe that value we are creating through our unique business model is reflected in the growth of these three metrics. We believe this growth equates to our stock out performance over the past five years and increased our equity market cap by five times.Now back to the fourth quarter.

We’ve raised $25.5 million through our ATM program an average price $18.30 per share. For the year we’ve raised $98.4 million an average share price of $16.76. The stock trading above consensus NAV during the fourth quarter we took advantage of market conditions.

At year end 77% of our debt was either fixed or hedged with a current interest rate environment we are being patient with our hedging strategy. Last month we’ve purchased $100 million two year LIBOR caps and 1.75%. As you've just heard we have a lot of activity in 2020 with many moving parts.

We'll continue to be transparent and keep you informed.Now I'll turn the call back to Lou..

Thanks Mike. Just a few other items of note. As Mike mentioned and as you've seen in our press release we've refreshed our website with several new features including a sustainability update. As I mentioned last quarter we are very proud of our decades-long track record in this area. Please take a look if you get the chance.

Secondly, we will be discussing further governance enhancements as well as addressing our dividend at our board meeting in a couple of weeks. Operator we would like to begin the question and answer session..

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

Good morning Lou and Mike. Thanks for all the commentary. I wanted to start with the disposition.

It definitely sounds like there's more of a quality bias within the portfolio broadly which I think everybody applauded but in the last couple of quarters we've heard about maybe a one city centre sale in Durham and the potential for something to happen at Summit Place and then kind of the disposition plan came out as there's kind of more smaller retail assets.

So I guess maybe talk a little bit more about your thoughts and processes as you went through and thinking about those assets in particular..

Sure Dave. We had first evaluated the disposition program we had had our eye on those two assets as well as a dozen or so retail assets. So it was always going to be weighted a bit towards retail.

We decided in the final analysis that one at City Center it wasn't good timing to try and sell a building that had substantial rework tenant and in terms of the Summit Place in Charleston we were overtaken by leasing.

Leasing effort started nearly fall when school got back and we've been very pleased with the progress of it and we've decided that is more probably a long-term hold based on the way the projects being received. So these are things that we will continue to evaluate.

We're really happy the way this has turned out with again some of our older retail which is a stalwart in our portfolio yet not highest growth but the opportunity to fold into some newer retail as well as multifamily is something we're really excited about for the future..

How should we anticipate your tenant roster and retail shifting with assets under contract and how you view this plan going forward? Do you expect small or some of the smaller shops to start to kind of peel off of that list? Is there a plan around tenancy?.

Good morning Dave. So certainly with this rotation we're going to be selling some food lines in Harris Teeter Centers and with that change we are surely going to see increase with whole foods and Amazon as one of the tenants.

I would say on the small shop certainly there will be less small shops that are going to be here because with number of centers we sell on our retail versus what we're buying..

And then last, on dispositions, the timing that you mentioned Mike, I mean what's the impact from an NOI perspective on the 2020 number versus the negative 1.5 million of kind of long-term delusion from the trade this year that you talked about in your guidance, so..

Yes. We're trying to get this timed up, so they come April that we'll be selling, we've identified as we said on the presentation, all the assets we're buying other than one.

We have two or three candidates we're looking at right now.So, we think we can time everything up pretty well other than maybe that one asset which will be $20 million plus may lag behind. We're not expecting a huge impact from it..

Great. Last question from me. Lou, you made a comment about keeping the mezzanine pipeline pretty stable into 2020.

As you look beyond that, I know you made the comment that it could vary but what's your confidence level in kind of building that pipeline back up that some of these projects start to mature right now?.

Dave, its and our confidence level is very high. It's really almost the opposite, is we want to make sure that that program doesn't expand.

We want to, we like it at the level that it's at and we really don’t see any issue with keeping it at or near that level.Obviously, it's a bit lumpy but I think you can see it pretty consistent for the next few years based on the opportunities that are coming to us..

Alright, thank you..

Thank you. Our next question comes from the line of John Guinee with Stifel. Please proceed with your question..

Great, thank you. Hey nice quarter, nice guidance. I noticed you increased your disclosure on your construction pipe and something showed up 27th in Atlantic, a high rise apartment in on the oceanfront of Virginia, beach.

What's going on there?.

Sure. That is it will be the as we understand it, the only high rise apartment project on the waterfront on the strip in Virginia Beach. We are simply the contractor there.

It is the same group that did the hotel next door, same ownership group which as you many people may know it can also has a couple of our officers, most notably our chairman and vice chairman are investors in the project..

Isn't that a little bit of a conflict and it looks like you disclosed a $300,000 gross profit in your recent filings on a pretty significant deal?.

John, I guess on the conflict at 27th street, the job the project was offered to the REIT for us. We decided to pass on that because the returns on that aren’t going to fit within our cost to capital on that one.

So, that wasn’t a conflict and we're surely going to make some fees on building that which is good.I'm not sure what you're talking about on the other the $300,000. I have to go back and take a look at it, is it there in the queue..

I think it's in the queue, yes. Seems like an awfully low number at front, awfully bigger a complicated project..

Oh, we just started the project..

Oh that, yes okay. So, yes the fees are in the millions, John. We just started the project, so I'm not sure where that's being picked up but it might be was been on to date I guess. We'll get into that later..

Moderate fees..

We have a construction fee as well as some development fee in there on the behalf of those people. But just to reiterate, the project came to us first and we elected to pass.

It's going to be a great project but much like you see a lot of these multi-family projects, it's going to be great from an IRR bases with somebody leveraged it up.They have something like a 90% loan and so other cash-on-cash return is going to work out really well but it doesn't work real well in the REIT space as you all know..

Yes.

I'm assuming you disclosed all that and there is with independent Board members only et cetera?.

Correct, yes..

What cue did you put it in or what case did you put it in?.

That was in the third quarter. Will be more and obviously be more and now because initially it was a smaller GMP or a smaller contract, it was done initially for some site work in tiles until they got the full GMP which is now as which was now assigned in this past quarter..

Alright, second one. New board member seems to be more kind of Virginia centric political party driven, all that sort of thing.

I was at the in an NMHC Conference a month ago and there are dozens of qualified women who are with real-estate experience, with the REIT experience maybe give you someone who's outside of the commonwealth of Virginia.But it seemed the new board member seems a little bit unusual, can you expand on that..

Sure. And this is because is extremely qualified and kind of breathes through the process with our existing independent board members basically because of her background.

As a lawyer with SEC experience, in capital markets experience as well as her involvement in charitable causes as well as ESG activities.She is a perfect addition to what we were looking for. And you're right, there are a lot of qualified candidates out there but that's someone..

I noticed a Whole Foods in Delray went from a payoff right now to something that gets paid off a year from now and all of a sudden has a discounted purchase option.

What sort of happened there?.

So John, that's going to get paid-off in the fourth quarter. I mean the second quarter of this year.

Certainly we have a relationship with Collins and as part of that they offered to see if you're interested in buying those that we had to obviously come up with the right price that work for us and which we negotiated.That will be part of when we sell the centers, that'll be probably 1030, 1031.

So, the cash will flow through as part of a 1031 and back to us..

Yes. Are you keeping the tax protection for the OP unit holders or is that burning off, I think that expires second quarter this year which was congratulations seven years since your IPO..

Thanks. Yes, the regional provisions or the tax protection there are what's going to take place..

So, essentially you're going to do a 1031 low tax bases transfers continue to protect the OP unit holders..

Well, it's OP units and let me say all shareholders, John, it's just a -- there is no reason not to do one here that we can think of..

Okay. At acquisition for Whole Foods one's in Delray and one's in Akron, Ohio. Last time I checked LeBron James is no longer in Akron, Ohio.

What's the split in terms of investment in Akron, Ohio and the cap rate versus investment in Delray Beach and the cap rate?.

We negotiated those together. It was a we had to buy both and they want to sell both. It was altogether, so we negotiated a six between the two. And obviously the Delray we traded at a better cap rate and the Akron as well..

How much is Akron and how much is Delray.

You have to know the difference between the 48 million, is it 40 and 08 or is it 24 and 24 million?.

It's neither, John. We negotiated a six cap on the NOI for those two centers..

Akron's NOI is lower than in Delray, so this is more of which weighed towards Delray..

Okay. And then, I was looking at your next page 15 of your guidance. And Interlock in exits the -- since interlocking is paid-off in 2021 I think but you have exit fees in 2020 amortization of them. And then, Annapolis Junction has $5 million of the amortization of exit fees.I thought that happened in 2019.

So, I'm surprised that there's 2020 exit fees in both Interlock and Annapolis Junction. One, because it --..

On Annapolis Junction, the $5 million that was the purchase option fee, remember that was the loan modification fee that closed in the fourth quarter of '18. And we see the cash numbers amortized over a year.

In addition to that, on this and the Interlock is part of our negotiations on this.You know obviously we've talked about, we like get an 80% of the profit on these. Part of that are exit fees that are built into these loans.

We but we've not decide to do from an accounting standpoint is not to recognize, start recognizing those fees until we know that they're collectible and certainly on the GAAP we can't wait until the day you collect the money to start recognizing those fees.We determine here this past quarter that the timing was right as those projects moved along, that it was time to start amortizing those exit fees that which amortize over the next couple of years..

The, how much of the -- Dave Rodgers asked a good question on Durham and the reason that didn’t sell is because we were, how much of your office the office at Interlock is that we work least?.

Down to half. 40%..

40% I think at the NOIs we were..

And you feel comfortable collecting an exit fee in 2020 for a loan that matures in 2021 and has WeWork is 40% of the tenant?.

We feel real comfortable with the Interlock and the demand that's there and in fact we would recognize an increase in the value of the property if WeWork weren’t there; based on the tenants that are there in the market.

However, WeWork continue to do extremely well in Atlanta and is full bore on that space.So, they're going to be there and we're very comfortable with where we sit. As we said, and this came up in the last quarter, just about everybody that you would talk to the yields across the country will tell you that a working space is here to say.

It's somewhere around 2% of the market right now.It's going to again level off according to dependence a 10% to 15%. The whether or not which mains might survive and get bigger and better or go away is not a bet that we're going to make.

But in terms of the locations and the use, we feel very comfortable with what we have there.And in fact, as I mentioned last quarter, we just leave 30,000 square feet to a co-working user here at Town Center. So, it's here to stay and we're going to take advantage of it just like everything else in our portfolio.

We're not going to make a big bet.But that's just prudent but we're comfortable with where we sit..

And John, our underwriting here, we certainly used a cap rate we think works with what we're working at in that building. In addition to that, there are significant tax credits in this project, a combination of the investor lane or the investor lands or bonds as well as Brownfields credits..

Okay. And then lastly, you guys do a great job of outlying your NAV. Now what we noticed is that if you just hold the cap rates fixed, your NAV is about the same now as it was in early 2015. Your NAV per share at a fixed cap rate.

You guys, does that concern you guys, I don’t see NAV going up, kind of it's on the curve going down in the last few quarters.Does your map might tell you the same thing and does that concern you?.

See, a couple of things on that John, I think that when you do your calculation you're using the same cap rate and we believe we have an increase in the quality of our assets over time.

The other thing that stays in this past quarter that hurts us is as you take the redevelopment that we have going on right now with the between the Cosmo and Columbus Village.We've got assets that the NOI is significantly less than if was stabilized. So, on our NAV page you'd only got the NOI, let me say building at 70% least.

And then on top of that really adding the cost of the redevelopment back on the NAV page. So, there's a big delta there between the value of what that property is versus what's showing on this NAV page..

Thanks, Mike. Or what is given you -- you can give us more detail offline. Okay, thanks a lot..

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

Alright, thanks. Good morning, guys. Lou, what's happening with the construction gross profit that you're nearly doubling from 4.3 million to 7.6 million in 2020.

Is that just more volume being put through the construction company?.

Yes. Thanks. It's a good question.

So basically what's happening is we have a lot more third party volume this year versus internal volume and as everybody knows you don't make fees on working for the REIT and last year the construction company had a much higher mix of in-house projects versus third party projects which we have illustrated in the guidance deck. So it's more volume.

It's also, they've been able to negotiate some pretty healthy fees. Most of the work is being done at a 4% basis and then as you can see by the bar chart on the construction page that will continue to ebb and flow. We're not, this isn't commodity construction.

Our people are vested in these deals whether they're third party or they're mezzanine or they're internal. They baby them from inception all the way through completion and so it's not easily multiplied or scaled up and our intent is not to scale it up.

So as the mix continues to fluctuate between internal and external projects you'll see those numbers continue to fluctuate as well..

Okay. I just want to make sure it wasn't just one project or some sort of early delivery bonus or something like that that was skewing the numbers on a one-time thing..

No. it's really all, it's all volume. I think there's very little savings split income in there if any..

Okay.

And then Mike did I hear right that looking at page five of the guidance the acquisitions and dispositions obviously Lightfoot has already been done but the other transaction two dispositions and the three acquisitions excluding the two TBD1 we're all supposed to close sometime in the second quarter or by the second quarter?.

We expect them to, yes, we expect them to close in the first quarter. The apartments and the two whole foods are all set up. We are through due diligence and we're in good position on those to be ready to close as well as Nexton..

Okay and then the dispositions the Greentree and the seven shopping centers?.

Greentree we've got a signed purchase and sale agreement at this time and that's on schedule on the seven shopping centers. We have a signed LOI expect to have a signed purchase and sale agreement this week and with the timing within everything should put us in the beginning of April for a closing on that..

Okay.

And seven shopping centers going to one purchaser or are they being spread around in multiple transaction?.

Yes, one buyer..

Okay.

When did the Apex lease commence and when does it start paying actual cash rent versus just the GAAP amortization?.

Yes. We've got GAAP starting in August and they take occupancy and start paying rent and we're expecting right around the 1st of November..

Okay. So the Apex lease shouldn't really have much of an impact on 2020..

No, really doesn't..

Okay. And then okay..

It's actually flat on 2020..

Okay.

Any node move out of impact in the retail and office portfolios over the next six or eight quarters at this point?.

Nothing that really sticks out. I'm not sure if everybody understands what's happening here at Town Center. We did have a move out or Hampton University downsized in at our headquarters building and we were taking advantage of that by moving our construction company back into the building where they originally started.

Obviously their rent is eliminated and at some point that's going to be a hit in same-store NOI. I guess maybe next quarter Mike. So we'll be explaining that one but outside of that there's really nothing material..

Okay. And then last one for me.

Mike any node difference today between [indiscernible] and normalized FFO in 2020?.

So we're going to have a couple things. Obviously the biggest driver has been mark to market on our hedging strategies. It has been the biggest difference over the last couple years and as I was saying in my remarks is with CECL because of the unpredictability of that it's almost like a mark-to-market.

We're going to exclude that the way CECL is going to work in a pulled approach is we're going to take a look at the overall balance and then adjust the reserve. So that reserve is going to be going up and down based upon the total outstanding balance as well as whatever the data is saying on what the losses should be on that.

I would expect that will increase FFO but not normalize this year because we're going to be starting at a higher I'm going to say balance to begin with outstanding balance with that $2 million to $4 million initial reserve that will come down as the balance comes down over the year..

Okay. Thanks guys. Appreciate it..

Thank you. Our next question comes from line of James Feldman with Bank of America Merrill Lynch. Please proceed with your question..

Great. Thank you. I guess just sticking with Wework and co-working.

Number one are there any spaces that Wework has not as either given back or plans to get back or hasn't started construction on that you're waiting for?.

No. we're not seeing any hesitation whatsoever and they're doing well in Durham. They're preparing I mean they're working on construction in Baltimore as well as at the inter-lock in Atlanta..

Okay. And then the new lease you guys mentioned it sounds like it's not with Wework it's with another provider.

Is that a shared revenue lease or is that a straight contract leased and then actually when you think about the other leases of the portfolio how are those structured?.

Yes. So that's a great question Jamie. I appreciate you asking that because we are not interested in going into business with any of our tenants co-working included. So both in Durham as well as in Baltimore and at the inter-lock those are all full value leases.

We understand that a lot of those Co-working companies are proposing to landlords the whole shared revenue model. We think our story is complex enough without getting into business with our tenants. So you won't see us, I guess never say never but I'm not thinking you're going to see that appear in our model..

Okay. And then who's the new, you said you signed on new with a different provider.

Who's the provider?.

Yes. I'm looking around that the company called Gather. My only hesitation was I'm not sure that that's been announced or that they've announced it here locally but yes it's company called Gather. They have several locations. It's more regional rather than national..

Okay.

And is there like a conference center or component to it or it strictly just office?.

No. They have got some, it's called Gather and they've got some gather space. So I understand it's a pretty unique looking model and for us that is third-generation space and so it's we think in the midst of almost a million square feet of office space here at Town Center. It's a nice feature to have at very low risk for us.

Okay.

And then when you look at your retail portfolio any additional names on your watchlist this quarter or any you're just kind of watching thinking you may have some vacancy coming?.

Jamie, it's a never ending story. We don't really have anything new on the watchlist. The usual suspects are still out there and we still get back and beyond. We still have four of those. We have five of the pet stores and various and sundry others. We're not seeing any uptick in that.

In fact sales across the portfolio on the retail side of all seem to be on the increase. So I think brick-and-mortar is alive and well but as you know you've got to constantly look at the portfolio and evaluate for risk but we're not really seeing any issues showing up beyond what you read in the headlines on some of these smaller tenants..

What kind of reserves are in your ‘20 guidance outlook?.

When we do our outlook what we do is we take a look at rollover risk and bad debt and everything like we do across the entire portfolio. We don't do, I am sorry, across the portfolio. We do it on a property by property basis. So it's built in to what we expect for renewable, non-renewals and, etc..

Okay. And then you had mentioned probably using the ATM to keep your leverage and check.

What's the range that you're comfortable is at the high end?.

Well, our guidance is 80 million for a year certainly. If the stocks trading at higher levels $19 or so I'm sure we'll get more grass to look at how much more to get yes..

I guess I was just thinking about what's the high end of your leverage comfort?.

Like I've discussed that's total debt to EBITDA eight times and staying in the six times on a core basis..

Okay and then you deliver or Wills Wharf delivers this year 68% lease.

Can you talk about the leasing prospects for the rest of that space and then also just Ten Tryon kind of how we should what the tenant demand looks like for that project too and maybe any other big picture color on that projects pretty recently announced?.

Sure. So at Wills Wharf there's actually it feels like every quarter we should be able to announce the rest of the tenants that remain in that building predominately because there's a good number of tenants circling around the space.

We're not trading paper with anybody yet which tells us that it will be towards the end of the year before we actually would have the project inked but there are no shortage of prospects for that. We've got about a 100,000 square feet left there.

As I said earlier in my comments our expectation is that that building is going to stabilize by the end of this year.At Ten Tryon you guys saw the announcement.

You might have seen there's a lot of speculation in the press about who the anchor tenant is and you can take a look at that but we feel very good about the Charlotte market between the rollover space in Charlotte as well as the increase on a daily basis of the population and companies coming in we think Ten Tryon is going to be a home run.

We've got to get, we got to work really quickly and get the things under way so that everybody knows it is real before we do any speculative leasing..

Okay.

And what do you think the delay is in getting the Wills Wharf leased up?.

I haven’t known that it's a delay. It's just we're dealing with large credit worthy tenants who have processes that take a long time between the RFP processes and all the hands it's got to go through. It's a frustratingly long process.

There is also I think there was some hesitation earlier and people wanted to actually kick the tires and see the space and we could only have tours over the last couple of months of that people could actually get up on those floors..

Okay. All right. Thank you..

Thank you. Our next question comes from the line of Barry Oxford with D. A. Davidson. Please proceed with your question..

Great. Thanks guys.

Coming back to the Wills Wharf and is the parent company on that lease or is it just the entity that is in the space?.

Again in all three of those instances we have a corporate guarantee on behind the leases..

Okay. Great.

When I look at your all switch moving a little bit out of retail and more into kind of apartments and office is that just more a function of kind of your portfolio or is it what you're seeing in the marketplace as far as risk adjusted returns and growth?.

It's a little bit of everything Barry.

A few years ago when Mike alluded to the transaction we did which had our retail portfolio swell and that was when we pulled out of we sold about $140 million worth of office space and bought 11 centers at the time and that the move there again was negative to earnings higher on credit which obviously would move your cap rate that people are looking at when judging your portfolio.Now it's more function of where the opportunities are.

With the company has long been a specialist in these mixed use assets like we have here at Town Center and those opportunities are coming faster than retail opportunities or at least high-value retail opportunities.

So I think that's why you're seeing [indiscernible] that way and everything is also seems to want to have a multi-family component in it.So the whole movement towards a live-work-play environments is exactly where we, that's our wheelhouse and has been for 30 years and it's just manifesting itself more and more as cities starting to re-densify and there's lesser emphasis on the suburbs.

So I think it's an overall market move and we're well positioned to capture it..

Okay. Great.

Thanks for the color and then last one I know it's hard to look into 2021 but is it safe to assume the dispositions will flow substantially in 2021?.

Yes, this is we've been talking about how the company's been able to make it through good times and bad because we keep our portfolio fresh. We evaluate it constantly for what doesn't belong there any longer or where we think we can achieve peak value. This effort this past year always past six months was larger than usual.

Again a number of those older centers were coming towards the end of leases and into option periods and not that there are bad projects. I think they're great assets but we saw the opportunity to upgrade and again move the cap rate, move the multiple and stock by upgrading the portfolio.

I don't think you'll see again you're right it's hard to crystal ball it but we don't have much more in the portfolio that we would want to sell. Now obviously everything is for sale for a price but as far as us pushing the envelope to try and turn over the portfolio I don't see that kind of effort into 2021.

I think this was the big push and then we'll be sitting tight largely..

Right.

By definition then what would you guys be more reliant on issuing equity in 2021 or not necessarily?.

Not necessarily. Again as Mike mentioned the development pipeline is stacking up again. We're going to fund that through the ATM largely this year. I would suspect our ATM activity would continue into next year. God willing us the stock market still is good to us.

So it's a pretty steady flow for us and again as the development pipeline that we've recently developed delivered stabilizes and those rent because we get those rent increases I think there's going to be plenty of room for debt as well..

Okay. Thanks for the color guys..

Thank you..

Thank you our next question is a follow up from the line of John Guinee with Stifel Nicolaus & Co. Please proceed with your question..

Yes.

I forgot to ask hey Mike going back to this Meza program and including your purchase option or exits fees are you able to book those as GAAP income and run it through NAREIT defined or is there a spread here between normalized and NAREIT defined with these exits fee amortizations?.

As far as we know that that's fine running through NAREIT defined FFO because of the nature of the income. It's being booked as interest income like all the other from a GAAP perspective..

Yes. It's just another way of running through merchant profits, merchant building development profits through. Okay.

Second question Edison multifamily deal right near the State Capitol in Virginia, 68 cap can you explain the nuances there? There's, we were just NMHC and we all, we do understand cap rates on multifamily and 68 is unique cap rate?.

Yes. We're very pleased with that transaction as you might expect. So I am glad you asked the question John unfortunate it's not a short answer.

This is a project that we developed, a development of it started pre IPO we have an external partner that brought it to us and it's a tax credit deal and where we sold tax credits and the ownership of those tax credits needed to stay in place for a period of time that just expired at the end of last year.So there wasn't any opportunity to bring it into the fold but as we were getting close to the ability to sell it we approached our external partner about the opportunity of taking OP units protecting their cash flow and their taxes in return for a better cap rate.

We were able to cut a deal with them and they'll be receiving all their equity in OP units and then we told our old partners who are still executives here that they had to live with the same deal that our external partners had agreed to.And so consequently again as the largest shareholder will be increasing our stake in Armada Hoffler by taking more OP units when that transaction comes in but and it just kind of shows the power of using your stock and particularly stock that's done well in order to purchase assets, tax protection and cash flow means a lot more of these guys than getting a big-big paycheck and paying a lot in taxes.

So that's why we were able to negotiate a very favorable cap rate..

And any near-term CapEx plan for that project?.

Nothing out of the ordinary. It's a historic rehab. We love the project. It's been full since day one and as you might expect the upkeep is more than in a new-build but it's all in the numbers that we're forecasting..

Great. Thank you..

Hey John that should help move the cap rate from 2015..

Thank you. Ladies and gentlemen that concludes our question and answer session. I'll turn the floor back to Mr. Haddad for any final comments..

All right. Thanks for but I must apologize for the length of the call today. It's always a tough one when we get into guidance. We try and be as transparent as we can and as complex as our model is. It takes a little while to go through it so I appreciate everybody's patience. Thanks for listening and your interested in Armada Hoffler. Have a great day..

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..