Q3 2019 Earnings Call
Thank you.
Welcome to modify <unk> third quarter 2019 earnings conference call.
This time, Oh, that's it that's alright listen only mode.
After managements prepared remarks, you will be invited to participate in a question and answer session.
At that time, if you have a question. Please press Star then one on your telephone keypad.
As a reminder, this conference call is being recorded today Thursday October 31st 2019.
I will now turn the conference call, a though to Michael Ohio, Chief Financial Officer at a modest also please go ahead. Good morning. Thank you for joining him out of hoppers third quarter 2019 earnings conference call and webcast.
On the call. This morning addition to myself who have had CEO .
The press release announcing our third quarter earnings along with our quarterly supplemental package were distributed this morning.
Replay of this call will be available shortly after the conclusion of the call through December 1st 2019.
The numbers to access the replay I provided in the earnings press release.
So those who listen to the rebroadcast of this presentation remind you that his remarks made here in our as of today October 31st 2019 will not be updated subsequent to this initial earnings call.
During this call will make forward looking statements, including statements related to the future performance of our portfolio.
Help me pipeline impact.
Acquisitions, and dispositions and mezzanine program, our construction business.
Folio performance 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 disclosed in our press release. This morning, and the risk factors disclosing documents, we filed with or furnished to the FCC.
We'll also discuss certain non-GAAP financial measures, including but not limited to if that though and normalize death.
Definition of these non-GAAP measures as long as reconciliations to the most comparable GAAP measures are included in the quarterly supplemental package, which is there's all build on our website <unk> dot com.
Now I'll turn it over the course to our Chief Executive Officer, Lou Haddad Lou.
Thanks, Mike.
Good morning, everyone and thank you for joining us today.
Before we go over our operating results and update you on our other activities Oh first comment on a topic that maybe a new focus for some listening on this call, but for us that amount of software a topic that has been part of our corporate culture since our founding.
Environmental sustainability social responsibility.
The effective transparent governance or D.S.G. for sure.
Our qualities that had been at the core of our business for many years.
When Dan half were founded the business some 40 years ago.
He insisted that good corporate citizenship would always be a focused initiative of our organization.
We summing up in one simple motto.
We build trust.
The trust of our employees the truck of our partners clients subcontractors in vendors.
The trust of our investors and the trust of the communities in which we work and live.
Simply put a business built on trust produces positive results for all stakeholders.
Over the years, we've won numerous awards for community leadership.
Philanthropy and perhaps most importantly workplace excellence.
We have consistently been ranked as the best place to work based on employee responses to numerous regional surveys.
Yes, GE is the primary reason were able to boast I'll be extremely long tenure or the majority of our staff.
Driving to add to the greater good has produced other tangible results in the marketplace.
Many of our projects have been recognized for excellence in design and sustainability.
Several achieving LEED certification.
Undoubtedly these ongoing efforts combined with the transparency we offer in our dealings.
Been instrumental in our selection as a development partner in over 20 public private partnerships with various municipalities and institutions.
Early next year, we will publish a comprehensive view of our long history of U.S.G. activities as well as new developments in these areas.
In a few minutes, Mike O'hara will update you on the important highlights of the quarter.
Oh first report on a couple of ongoing initiatives.
Last quarter, we announced a strategic portfolio review being led by our CIO, Jonathan Morris with support from our President of asset management Jelly Hampton and.
And our excellent team of asset managers.
Well, we've become well known for routinely trimming noncore assets from our portfolio to keep it fresh and on the highest quality.
This effort is more comprehensive in longer term in nature than our previous reviews.
As anticipated, we where we have identified several assets with an approximate value of $125 million for disposition.
Some of these have been released to the market.
And we anticipate launching the sales effort on the rest by the end of year.
It is unlikely that any closings will occur prior to year end.
This group includes the one city Center office building anchored by Duke University as well as several of our well established neighborhood centers.
I'll reiterate here that we're very comfortable with our current portfolio and its multi year performance has been stellar.
This is not a repositioning effort it is simply a continuation of our long established recycling strategy.
We used to achieve the most efficient allocation of capital to maximize the growth instability in the company.
We believe that recycling capital to create value.
First is increasing the share count to simply increased size is a strategy that will best serve investors over the long term.
Some of the anticipated proceeds may be used for balance sheet purposes helped fund the next development pipeline.
Most will be used to purchase higher growth assets through 10 31 exchanges.
That said please bear in mind the decision to market in asset is not necessarily a decision to sell that asset.
We're very comfortable owning these properties.
So if we feel anyone in particular is not receiving appropriate value from the market, we will not transact on that property.
We expect to give you further clarification on this initiative what next quarter's results.
Secondly.
We previously reported that we viewed the pending expiration of the 84000 square foot Dick's lease at the town Center, Virginia Beach as a major opportunity.
Subsequently.
A number of entertainment concepts as well as back office users expressed interest in the space.
As we announced yesterday, we decided to lease the space the apex entertainment.
This new England based group has proven to be creative and savvy operators.
We believe that their facility will complement the existing entertainment and dining choices that are center.
The intent is that apex entertainment when it's multiple family friendly attractions.
Further expand the already diverse customer base at town Center.
As we suggested earlier the redevelopment and build out of the facility will last through the better part of next year and we do not expect an appreciable income contribution during 2020.
Most of you have seen this in this morning's earnings release that we reported 30 cents of normalized FFO per share this quarter.
Which was slightly ahead of our expectations.
Perhaps more importantly.
The core portfolio continues to show robust performance with increases in renewal spreads occupancy and same store NOI across all property types.
This is the sixth consecutive quarter of increasing same store NOI.
Hi, occupancy and steadily increasing income have long been hallmarks of our portfolio and we expect these trends to stay consistent over the long term.
Given the strength of our properties year to date acquisition activity and the stabilization of several pipeline projects. Our current projections show a double digit budget increase and portfolio and NOI in 2020.
Please bear in mind as we have previously said, we expect lower mezzanine income in 2020, resulting in mater.
Earnings growth versus a 14% increase we anticipate this year.
Well the ancillary income from third party construction fees, a mezzanine interest will continue to be an important part of our business.
Our primary focus remains on increasing and maybe through amassing a top quality portfolio.
This strategy has led to impressive returns over the past several years and we believe we can continue to reward shareholders with outperformance in the future.
As many of you know I.
The majority of our current development pipeline has been delivered in the properties are well underway to stabilization.
In fact, the three multifamily projects delivered in the last year.
Fortino five point in Baltimore Premier in Virginia Beach, and Greenside in Charlotte have all read stable occupancy.
More recently, we delivered half were placed the first of our student housing projects in Charleston.
That facility opened in its first year at over 85% leased which is somewhat higher than we anticipated.
We're also in negotiations with the national retailer that we expect will occupy the majority of the ground floor retail space.
This convenience retailer should give the facility a tremendous advantage over its peers and attracting students.
As we reported last quarter, the second Charleston student housing project Summit place on meeting Street remains under construction and why we gear up for the fall leasing season.
The project will be open for the fall 2020 semester.
Construction continues on the world's Wharf office building at the inner Harbor in Baltimore.
We are expecting an on time delivery towards the end of the first quarter.
Two recently signed leases have brought total pre leasing to nearly 70%.
This project in concert with our adjacent James Street work building and the apartments at Fortino five point.
Give us a critical mass of trophy quality properties in this highly sought after sub market at the inner Harbor Baltimore.
We intend to continue building out Harbor point with our partners at BD development.
Into a world class mixed use destination.
Next in square, a lifestyle center, where we hold the mezzanine loan and discounted purchase option is in the greater Charleston market. Although construction won't be completed until early next year. The first handful of tenants have opened and leasing has over 90%.
Due to due to the mezzanine structure on this project along with our discounted purchase option, we anticipate using some of the disposition proceeds from the expected asset sales I mentioned earlier and it 10 31 exchange for this property.
Southern post the mixed use project in Roswell, Georgia that we announced last quarter is the latest addition to our development pipeline and is on track to commence construction in the spring of next year.
This 95 million dollar infill project located in a fast growing area of the Atlanta M.S.A. has already received significant tenant interest from office users retail concepts and apartment renters, despite being nearly two years from completion.
Our development group is hard at work under underwriting a number of new opportunities.
Although deal flow is that an all time high.
We remain committed to keeping our new development run rate in the 200 million dollar range over an 18 month timeframe.
This disciplined helps to ensure that only the most promising projects are selected for investment.
Currently a couple of mixed use urban infill project similar in size in nature to southern post will likely be the next projects to be announced hopefully by year end.
On the redevelopment front.
Upgrade to the units at the Cosmopolitan apartments in town Center continues to receive rave reviews.
Newly refreshed apartments or leasing at a 10% premium to the same unimproved units.
Our other project currently currently under redevelopment Columbus village one.
He is well underway and we'll bring three new tenants to the region.
Thanks, Jack which opened earlier this year Barnes and Noble's new concept and Kaba.
In the first quarter of next year, we will begin redevelopment for apex Entertainment and the 84000 square foot retail space currently occupied by Dick's Sporting goods here in town Center.
This ability to attract new to market tenants gets further proof the town center that premiered mixed use destination in the region.
At development has become a bigger part of our business. We added expanded disclosures starting with this quarter's supplemental and going forward.
We intend to show that the capital we invest in redevelopment will produce yields that rival if not exceed those of our ground up developments with even less risk.
The construction group continues to perform at a very high level.
Ontime completion of Hoffer plays highlighted the quarter.
We also continue to track scheduled completion for the rest of the development pipeline currently underway.
The value of controlling the construction of our development properties cannot be overstated.
Offering dependable delivery dates to demanding tenants gives us a meaningful advantage over our peer group.
Similarly control of the construction process gives us the confidence to pursue the mezzanine lending strategy that has led to significant cash generation, thereby reducing our reliance on the capital markets to fund our portfolio growth.
Reliable construction time frames are also a large factor in our team selection by third party clients on a repeat basis, which solidifies the steady fee income that we have enjoyed for a number of years.
Third party contract backlog stands at 100 stands at $173 million.
Several potential engagements in the Preconstruction phase we are anticipating an outstanding year in this division for 2020.
Remember Armada Hoffler is first and foremost an opportunistic real estate company that employs multiple strategies to enhance profitability and create value.
These have been our central tenants for 40 years and investors can count on this to remain our primary focus.
As the company's largest equity holder.
Position, we maintained despite a nearly fourfold increase in our market cap since inception.
Management will continue to operate a business model that includes a variety of deal structures.
We are extremely optimistic about the company's prospects for the rest of 29 team as well as our ability to deliver on our promises over a multi year timeframe.
As we look forward, we feel strongly that our investors will continue to realize great value creation well into the future.
This time I'll turn the call over to Mike to discuss our third quarter results.
Thanks, Lou today want to cover the highlights of the quarter thoughts on our balance sheet 2019 guidance.
This morning reported FFO of 29 cents and normalized FFO 30 cents appreciate from third quarter.
The largest difference between these two metrics is a noncash mark to market just minutes relating to our hedging activities.
Core operating portfolio occupancy for the third quarter remains high 97% with both office and retail at 97 in multifamily 96%.
Same store NOI was impressive again this quarter with all property types positive for the quarter and for the year.
This is the sixth consecutive quarter of positive same store NOI growth.
That was positive 6.3% and cash was positive 6.4%.
Most significantly multifamily GAAP same store NOI was positive 16%.
The majority of the increase relates to our Jay to student housing asset or rents for increased by nearly 15% and higher summer occupancy due to transitioning to 12 month leases.
Office and retail same store NOI were also strong this quarter.
Tail gap was positive 4.3% in cash was positive in 3.7%.
Office gap was positive 4.4% in cash was positive 16%.
For the Trifecta gap in cash re leasing spreads were positive for both retail and office gap was positive 6.2% in cash was positive 3.9%.
These portfolio metrics demonstrate why Lou said.
Yes, very comfortable with our current portfolio.
On the construction front reported segment gross profit in the third quarter of $1.2 million on revenue of $27.6 million.
At the end of the quarter. The company had third party construction backlog of $173 million.
Now for an update on our mezzanine program.
The cater whole foods center loan was paid off in the third quarter.
This was a very successful project for all involved.
Alpha sold in an asset and attractive cap rate and we made a profit at $3.4 million alone that was outstanding for 26 months.
You know luck projects in Atlanta are well underway, we anticipate fully funding. These loans by year end, we expect the balances remain outstanding well into 2021.
Timing of the Annapolis junction loan payoff change this past quarter, our partner decided to sell the asset.
Offers study coming in this past week, we'd expected closing early next year, we're working on alone extension.
Now turning to our balance sheet.
Oh, the past quarter, we've completed most of our 2019 capital plan and we believe we are well positioned going into 2020.
2019 guidance in February consist of the following to achieve I'll, let you leverage targets for the year.
First.
The disposition of our grocery anchored shopping center.
During the quarter, we closed on the sale the Lightfoot Harris Teeter center for $30 million, representing a 5.8 cap rate.
Second as I, just discussed that cater whole foods center was paid off in the Annapolis Junction alone is expected to be paid off early next year.
And third.
Anticipated raising $50 million through the ATM program in 2019.
With the stock trading at all time highs and above consensus and AG. This past quarter. We took advantage of these favorable market conditions.
During the quarter, we raised $34.6 million, an average price of 17072 cents in.
And in October we wait another $9.9 million, an average price of $18 in 14 cents.
Year to date, we have rate $82.7 million.
An average price of $16.48.
It's Hh continues to trade at these levels, we will continue to be active with the ATM program.
Updated guidance includes raising a total of $95 million in 2019.
In addition in the second quarter, we raised $63 million. So my first preferred equity offering.
We think preferred as a good source of capital the limited to 10% or so of our equity.
Yeah permanent capital at a fixed rate of 6.75%, which we believe will be less expensive than our common stock over time.
We also have a number of new well respected institutional investors, we invested in the company for the first time.
As Lou said, we are evaluating a number of new development opportunities. The first southern post in Roswell, Georgia, which was announced during the quarter.
We acquired the land last week with construction expected to begin in the spring.
The other development opportunities that we're underwriting will not begin construction until well into 2020.
As is typical development projects. The initial capital requirements are modest and ramp up during the construction schedule.
We believe our execution of our 2019 capital plan reflects management's commitment to managing the balance sheet and leverage as we have in the past with Cowen debt to core EBITDA in the mid six times range.
We added several new metrics in the supplemental package last quarter, reflecting the preferred equity, including additional leverage metrics and fixed charge coverage ratios.
This quarter, we need another change so the core EBITDA calculation due to the new gap lease standard.
We are the lisi on to ground leases, which under this new standard I considered finance leases.
This week why is the ground lease payments to be treated similar to loan payments, but most of the payment classified as interest expense and therefore, not including rental expenses or EBITDA.
And I knew core EBITDA calculation, we unwind this got treatment and reflect the actual ground lease payment in EBITDA.
We believe is appropriate even though he's detrimental to our leverage calculation.
This month, we closed on an amendment to our unsecured credit facility, which extends the maturity of the revolver portion to January 2024, and the term loan to January 2025.
It also includes a minor changes to loan covenants and the credit spreads were reduced by five to 15 basis points depending on leverage.
We've also been working in our three 2020 loan maturities, we signed an application a life company for a 10 year $34 million loan with the interest rate 63.
One 7% for Greenside apartments.
This week, we closed on a five year loan extension with the current lender, but the interest rate lowered to LIBOR plus 155 for the premier.
And finally, we have proposed terms from the existing lender on fortino five point in other long quotes are due over the next couple of weeks.
The ended the quarter, we had total outstanding debt $952 million, including $110 million outstanding under revolving credit facility.
At quarter end.
85% of bad debt was hedged your fixed.
With interest rates falling we had been patient with buying new interest rate caps and entering swap blocks.
Now I'd like you go through the details are updated 2019 guidance.
Your assumptions.
Guidance are raising a total of $95 million to the ATM program 2019.
Assuming favorable market conditions.
Interest expense is calculated on the four LIBOR curve, which forecast lie bore.
Our updated 2019 normalized FFO per share guidance of $1.16 to $1.18 per share.
Well in Hawaii, and $102.8 million to $103.2 million range.
Third party construction gross profit.
In the $4.5 million to $5.1 million range.
General administrative expenses, and a $12.3 million to $12.6 million range.
Genie was increased this quarter due to legal accounting and expenditures.
Interest income from mezzanine finance program $16.3 million to $17.6 million range, which is net of 5.5 million of interest expense also includes remaining $4.5 million recognizing the amortization of the Annapolis junction apartments purchase option.
Interest expense in the $25.1 million to $25.6 million range, what the which does not include interest expense related to the Mets program.
And 72.6 million weighted shares outstanding.
In January 2020, you had another new GAAP standard will go into effect current expected credit losses, which is known as diesel.
This new credit standing requires companies to establish a loss reserve on most receivables and loans.
And establishing these reserves companies need to estimate the impact of future business cycles that would have an impact on loans.
We're working through how to apply this new standard purchasing external loan default data and assessing the f. it affect on our financial statements.
While we do not know the impact at this time, we expect will reduce our 2020 reported mezz interest income.
This makes three years in a row was a significant new GAAP standard, which belief Rob business makes a financial statements less relevant.
We believe adjustments, we are making to GAAP measures in arriving at normalized FFO and adjusted EBITDA result in better messages to understand our business.
There's been a couple of articles recently in the Wall Street Journal discussing that most companies are now define their own non-GAAP performance metrics.
Although these articles are very critical of this practice, we believe it's necessary and appropriate.
This changing gap and increases in Hawaii, and therefore creates the illusion of increase value about properties.
Changes in gap do not make our real estate any more or less valuable.
Well, it's too early for our 2020 guidance I want to give some insight into next year.
As in the past earnings growth has been lumpy, but the delivery of development projects with earnings growth over the long term.
Some of our other a 2020 earnings headwinds are we are expecting three of the current mezz loans to be paid off during the first half in 2020.
This reduces the outstanding balance significantly from most of the year.
In addition interest income will be lower due to the absence of amortization the $4.5 million Annapolis junction purchase option.
84000 square feet, Dick's base being vacated for at least six months during renovations.
Got you student housing real estate taxes are increasing by $600000 because the expiration of the real estate tax abatement.
We'll also have a significant effect on same store NOI.
As discussed earlier, we expect to have raised approximately $95 million under the ATM ATM program. This year.
These extra shares will be dilutive to 2020 earnings.
After unexpected 14% increase in earnings this year I focus for 2020, concentrating on enhancing portfolio quality an increase in AG.
At some of you already know, Mike and I will not be attending then they read conference next week.
Makes travel to the West coast, where the better part of a week not in the best interest of the company.
We're happy to take your questions on this issue or any other topic. This morning.
Operator, we're ready to start question and answer.
Thank you ladies and gentlemen, if you have a question at this time. Please press star one on your telephone.
If you're using a weaker foreign today. Please pick up your handset before entering Everquest. Your first question comes from Dave Rodgers from Bad. Please go ahead.
Hi, good morning, everybody and thanks for the detail in the prepared comments.
I wanted to start on the development side, you just kind of touched on at the end then your name read comment, but I mean, you said, you've got a record level of kind of activity in the pipeline, but also that you wanted to limited to the 200 million. So curious one on what you're seeing terms of kind of more color on what's out there are you seeing compression in the development yields due to the.
Well first of all we are seeing compression, but it's mainly coming from the increase in construction prices, we're getting a lot of pressure upward pressure on on pricing and obviously that tends to compress yields which makes us more cautious about about all these opportunities.
I'm not really seeing it from a turn in terms of competition and the markets, where we're playing.
With that partners, we have as boots on the ground.
It's really a situation, where we really enviable position of being able to cherry pick the opportunities that.
The 200 million again is is the run rate.
That's consistent with the pipeline being at a level of four to 500 million, which should had been.
Until all the deliveries of this year, so don't look at that as a cap.
Just simply a gauge of how fast all this gets put into place.
Great. That's helpful. And then on the portfolio review of the $125 million sounds like you'll take all that to market, maybe not sell all of it but at least trying to get it out into the market next year.
Looking at one city center the piece of that it looks like it's about half retail centers in half.
Of that one city center project, plus or minus but I guess on the flip side of that what do you like what do you put that into where are you really confident deploying that capital on 10 31 basis is it. Some land is it all retail of what are your thoughts on that as you sit here today.
Well one thing it definitely is not.
His lance as you guys as most of you know who followed us.
That's been a tenant of ours for 40 years that we don't we don't speculate on land.
Unless obviously, we have a an anchor tenant and can start development right away.
At the same time.
We've got a rise Dave on the types of properties that we think will offer the best growth and it's really not necessarily the product type as you know we love mixed use we love walkable environments for a number of different reasons.
So in a perfect world. So we will acquire more mixed use assets and if.
Remember, what we're doing here.
And so into something better.
But no we're prepared to be wrong.
And if it turns out those become the best things available that's we're going to do.
Dave You know if you Powell photos from the beginning we're we're under no.
Pressure to increase the size of our business.
Great I appreciate that color one last question for me.
Go to Mike on this and Lou can chime in if you want but you had a pretty long list, a 2020 guidance impact sense.
You kind of talked about a slower paced the growth I guess, maybe one or more direct question is there a risk that 2020 earnings is lower than 19, and then Mike maybe some added details on how summit place could also impact and any potential office move up like Hampton University. How also would that impact the guidance as we try to kind of start to hone in on a number.
Hi, Good morning day, So you know.
Hopefully won't be lower than 2019, certainly that's not where what we're looking to do.
Talking about a big impact here is on the mezzanine program, where we have three loans getting paid off in the first half a year, which is kind of reduced that substantially.
And as I was saying also with the new credit standard we do not know the effect on that at this point in time. So that's certainly something we've got to work over here over the next few months as far as for summit.
That will be a what that will be a drag that will be placed in service come mid summer June July timeframe.
But obviously no income coming in until till today August .
Let me try made on that as well Dave.
You've followed us over the over the long haul and you know our our big years of earnings growth coincide with development deliveries and Stabilizations. So if you look past look look over the last six years of history and effectively works out to reasonably every other year being a significant increase.
Followed by every other year being a moderate increase our expectation is that's where it's going to happen this time around.
Kind of scale back or any.
Any urgency to scale back to see exposure given the recent traveled the right yeah.
Sure.
[laughter] Alex.
I guess I want to look at this a little bit of a broader context for us.
It's still comes down the proper underwriting of your assets for a long term.
By almost all accounts co working space is here to stay.
As a small but not insignificant portion of the class a office market.
Most folks are saying somewhere between three and 10%.
We look at we work as simply one of a host of operators in this space.
And if you're confident in your underwriting their co working space is a positive contributor to the NOI of your asset in a given location.
Then that particular brand is not as important as the quality of your build out.
We're going to continue to closely monitoring the actual performance of the locations and keep our exposure limited on an overall basis. That's one reason why we may end up selling one city center.
Conversely, where we are actively trying to create some vacancy at town center in Virginia Beach for the purpose of attracting an operator the lease a relatively small amount of co working space.
To add to our mix of our million some odd square feet of office space.
So.
And we're kind of intrigued by the drama as everybody else is but you really got to look beyond that into what that uses and if it's a good fit for where you are.
I hope that answers your question.
Okay. That's very helpful. Thanks, and then my second question just.
Taking a step back and.
Long term strategy are there any any markets that you're you're looking at for expansion, either new markets or Mark you're currently and.
Sure.
And we're in a number of high growth markets.
And hopefully that when when we can publish this the new projects that are coming out you'll see a coincides with our existing markets were very active and the Raleigh Durham market, the Charlotte market Charleston, Atlanta.
As well as the inner Harbor, a Baltimore and I think this next pipeline.
Group will probably come from those areas.
We're also looking at ancillary areas use some of you have seen the big announcement of our foray into South, Florida with Dania Beach and a public private partnership we'll see if that ends up bearing fruit.
But we don't see a whole lot of reason to go very far afield, there's just a tremendous amount of opportunity in the markets, where we're very comfortable in.
Great. Thanks.
Thank you. Your next question comes from Barry, Okay, but can be a Davidson. Please go ahead.
Great. Thanks, guys.
I just mentioned that you would be looking at some mixed use properties for for acquisitions and I know you guys aren't different marketplaces, and so you know the cap rates can range kind of widely from market to market, but what are you seeing on cap rates for properties like a mixed use properties.
The way people are evaluating things.
But a good quality mixed use center.
ER trading in the mid sixes.
In our markets.
And that's a that's a fine place for us to play.
Then do you want to maybe help us with a range on the hundred 25 million for dispositions I know you don't want to kind of peg it but what might we'd be looking at you know as far as an overall range not commenting on any one building a range of what you guys might be looking for.
Of that 125.
I'm not sure I can I can give you that that color.
From the standpoint of.
Is it is the ability to have a higher growth asset so.
And what with what we're selling.
Versus what we're buying.
I would say it could be slightly negative.
And.
Thats.
Again, it's hard to say depending on the mix if it if it looks like we're not based on our values for what we believe these things are worth.
Right perfect I appreciate the color guys. Thanks.
Hi, good morning, guys, <unk>, how extensive or the tenant improvements.
For Apacs, a town center to convert from decks to an indoor amusement park, essentially and how are the rents versus decks.
Worked very very hard to attract them, obviously track what was then galleons.
With a very attractive deal.
What.
Again.
We only reiterate what I said last quarter, we looked at this as a major opportunity to do something a town center that you really typically can't do by the vacancy legacy created in this kind of a box we had the ability to do.
Back office space, which you really can't do a town center.
But we were looking to add something unique that's not in the market that could increase the customer and client base here at town Center.
And this fits that bill perfectly.
We have had to we've all grown up here with town center and in.
And running this place.
And we believe that really does this.
It just so happens that it also is slightly accretive to what we were getting from the old tenet.
Okay and this pose any parking issues either you know a in the evenings, our especially.
During the summer when the kids are out of school and its rainy outside.
Oh I think we're in good shape in each of them. This is a great partnership we have with the city of Virginia Beach.
They own the 5000, plus parking spaces that are and that underpin our buildings.
And with each phase that's added to town center, we get to a new parking study done by third party expert that's been with us for the past 20 years.
That's a great question, because it's something that we have to be mindful of.
In terms of day night uses said are here at town center, but this one fits the bill exactly.
Okay, and then can you talk about where the construction companies forward deal flow is today in the contract value is roughly 577 million. The backlog was 173 at September thirtyth, but between the Armada hoffler projects slated for start in 2020 and third party deals you are kicking around how does that compare to pre.
We view this years, because I mean, you've been cautioning for the last few not extrapolate growth in that business, but our trailing 12 months, you're up to over $7 million or profit how should we be thinking about you know what's going to be happening what the construction company.
Over the next 12 to 18 months.
Sure.
One thing to remember there Rob is that there was an outlier in those last 12 months in that to construction company.
Built and effectively sold the Pepsi distribution center for.
And a significant profit over and above the fee.
Something that we take a lot of pride and doing these build to suit. So it was a little bit inflated. There that said, we think we're headed to a really good year.
The mix is going to be the pendulum is going to swing much further to the third party.
Which is the actual fee income portion of the business because on the development side will be ramping up and those new projects in the pipeline won't be well be putting in as much volume so it's going to be more.
More fee generation that we saw this year.
Things are shaping up really well for that business.
Guys are doing a fantastic job in a really tough environment, it's really difficult to find good people as well as good contractors.
Really tough in the would force so I'm looking forward to a great great year in that in that sector.
Hey, constant or the amount stayed relatively constant and over what period of time does that burn off.
They've done a price I Didnt go mark to market.
Okay and is there anything else other than that and we should be that's known at this point is a gap as a difference between day rate normalized.
Well for fourth quarter at this point.
I'm now.
Okay. Thanks, guys appreciate it.
Thank you.
Your next question comes from Bill Crow from Raymond James. Please go ahead.
Good morning, guys.
And I'm sure. This has come up on prior calls I just can't can't recall your response, but.
To what extent as.
Interest and looking at broken malls, and the ability to to use your skills to redevelop.
Mixed use facilities.
Bill that's something that's been intriguing for a long time.
There's a there's a great opportunity and a well located mall thats outlived its usefulness in.
We just haven't found the right place to play we've looked at a number of those opportunities as you might expect as a mixed use developer.
All in trouble, we're certainly one of the groups that somebody would reach out to.
Just haven't found the right circumstance yet.
But you're.
Your your very prophetic I'm hopeful im hopeful lets say you will see announcement on that and not too distant future, where some place we can get in involved in in a big way.
Great. That's all I had today thank you.
No.
Thank you.
So again, if you wish to ask a question. Please press Star then one on your telephone keypad and wait for your name to the now.
Your next question as a follow up question Dave Rogers.
Hey, Mike just one detail on the mezzanine and as you think about the Cecil rules, which one of the effects next year. That's the equity on top of your Mezz I mean, what's the kind of the last dollar or less percentage exposure of a project that the Mezz is for you guys just on trying to maybe some estimate.
Yeah, Dave So what we're always looking at it obviously is what's the exit cap rate versus what's the total capital stack and certainly on the ones were involved in specialty whole foods centers and those kinds of things as well, we see is plenty of spread and it's something we obviously update the cap rates as we get market data each quarter.
And.
So far we've been really comfortable and you know we haven't had any losses, but under the new standard. There's the assumption is that a loan is going to go bad in because of our history.
Not not a long history I know we've had a few loans paid off we're gonna have to go out and get market data as how other mezz loans have performed and then when they have to take that information and kind of right overlay that onto what we have to come up with these new loss reserves. So.
Fortunately this point in time, we just don't have an idea what that's going to look like until we get further along.
Well, we what we do know Dave is that it's going to whatever that reserve, it's going to have the effect of delaying.
A recognition of income some portion of the income until the loans paid off.
Which as Mike said as you've heard the frustration is voice you kind of skews.
What's actually going on the company, but we obviously will comply in and that'll be the new standard and we'll make it work.
Gotcha. Thank you.
Thank you.
Thanks again, everybody for your interest in our in our company.
In a few weeks, but we are available for follow up calls.
From anybody any interested party. Thanks again have a great day.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.
Yeah.
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Thanks.
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