Q4 2019 Earnings Call
Welcome to Armada Hofflers fourth quarter two.
A 19 earnings conference call.
This time all participants are in listen only mode. After managements prepared remarks, you'll be invited to participate in a question and answer session.
At that time, if you have a question. Please press star one on your telephone keypad.
As a reminder, this conference is being recorded today Thursday February.
Six 2020.
I will now turn the call over to Mike O'hare Chief Financial Officer at Armada Hoffler. Please go ahead Sir.
Good morning, Thank you be joining a lot of Hofflers fourth quarter full year 2019 earnings conference call webcast.
On the call this morning.
This is myself.
She here.
The press release announcing our fourth quarter earnings along with our quarterly supplemental package not 2020 guidance presentation well distributed this morning.
A replay of this call will be available shortly after the conclusion of the call through much 620 20.
Not really.
Accessed the replay because I didn't hear earnings press release.
So those who listen to the rebroadcast of this presentation.
And your that the remarks made you hearing or as of today February 620, 20 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.
They'll be pipeline.
Tax of acquisitions and dispositions and that's an easy program.
Construction business.
Portfolio performance instances financing activities as well as comments guidance and outlook.
Well.
There's I cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond our control.
These risks and uncertainties can cause actual results to differ materially from our current expectations and we advise listeners to review the forward looking statements disclosure in our press release this morning.
The risk factors disclose in documents, we filed with or furnished to the FCC.
We'll also discuss certain non-GAAP financial measures, including but not limited to FFO normalized AFFO.
Definitions of these non-GAAP measures as well as reconciliations to the most comparable GAAP measures, including the.
Quarterly supplemental package.
Yeah, well on our website at <unk> Dot com.
Let's start the call today by discussing our 2020 guidance at this time I'd like to draw your attention to our 2020 guidance presentation that we published this morning, I'll now turn the call over to Lou.
Thanks, Mike.
Good morning, everyone and thank you for joining us today.
Next month, we will mark the border worst anniversary of the founding of our company.
We take a great deal with pride in achieving that milestone.
Well not often seen in the commercial real estate business.
Over the years, we've earned a reputation.
For integrity consistency and professionalism.
Traits that are the foundation of our success.
The last decade, so lets turn a seasoned vertically integrated multi asset class private real estate company.
Into a publicly traded diversified Reid.
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 150% over the last five years.
More than tripling the returns over 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 Hofh, where.
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.
It's today will be on our 2020 guidance as presented in the release. This morning, I'll first off for a few thoughts on the fourth quarter and 29 team.
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.
Auction contracts.
And made solid progress on our asset recycling initiative.
Perhaps most importantly, 2019, so us maintain high occupancy portfolio wide.
And generate healthy increases in releasing spreads.
Our fourth quarter results were in line with expect.
Patients and normalized FFO for the full year was $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 relate 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 navy do our capital recycling efforts.
Citing development initiatives.
And high return redevelopment.
In short, we anticipate that our activities over the course of 2020, well 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 four.
The midpoint of our per share guidance is $1.18.
Well on the surface not as.
Because last year as large increase.
When you look at the assumptions at the bottom of the page you'll begin to understand our decision to sacrifice short term profits for long term growth and value.
Specifically as is detailed on page five.
Beginning with the sale of Lightfoot marketplace last year.
We anticipate the likely sale of eight of our older commodity type neighborhood centers at a mid seven cap rate.
The vast majority of the proceeds will be used in the acquisition of two new whole foods centers.
The new lifestyle center it next in square.
And the multifamily asset was inside of the capital.
Building in Richmond, Virginia.
Hi.
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 whom will be taking their equity in the form of Opie units.
Despite the discounted.
It's just prices the cap rate differential between our acquisitions and dispositions well 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 a longer term strategy that positions. The company for even greater returns then investors have enjoyed over the past five years.
Before I walk you through the other highlights of our presentation I'm gonna.
To reiterate the fact that many who follow our company have correctly pointed out.
That we do not fit neatly into the standard read box.
Third party construction profits build to suit asset sales and mezzanine interest income.
Our platform has a unique complexity that can't be wholly measured by traditional read metrics.
That said.
While these ancillary income streams augment earnings and decrease the need for external capital.
The end goal of monetizing development spreads and this passion is to enhance growth in our portfolio income through new development projects and off market LP unit credit acquisitions.
Illustrative of this point as you can see by the information at the top of page six.
We expect our portfolio Allied declined by over 40% from 2019 levels. When the current development projects are fully stabilized.
You have to AFFO per share contribution from this additional in July.
We'll be meaningfully higher due to the millions of dollars earned from mezzanine activity and construction income that we reinvest into the company.
Thereby reducing the need for outside capital.
Also of note on page six.
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.
Well the non retail assets that are being added to the portfolio through development and acquisition or of trophy quality and offer significant long term growth.
I'd like to emphasize that we're.
Also very bullish on all components of our retail portfolio.
Neighborhood grocery centers regional discount chains, and entertainment and mixed used retail will remain as a high occupancy and growing sector of our business.
Turning page seven.
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 dynamics.
Like markets.
The development pipeline as described on page eight.
Premier retail at town Center is one tenant away from stabilization well somewhat place and Wills warfare 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 10 try on.
Constitute nearly $250 million, a prime mixed use space and fast growing submarkets.
All three are weighted towards multifamily an office uses but will also include some complimentary.
On the redevelopment front.
Renovations continue in the town Center, 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 nine 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 acquired 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 at cap rates significantly below our cost of capital, thereby making our acquisition last practical.
Consequently.
Our partners will likely be offering the assets to the general market.
However.
You have 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 another way.
This aspect of our.
Our investment strategy maximizes flexibility and deciding which projects are best suited for inclusion in the portfolio and which are best to monetize based on a variety of factors, including capital market and commercial real estate conditions.
As you can see over a multiyear period, we expect to generate some $60 million a.
See an interest income.
Based on the projected payoff dates of the current projects and likely engagements in Predevelopment, 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 bid.
Yes.
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 offset the negative effects of the headwinds I described earlier.
Adding a layer of flexibility not available to most any other right.
Although significant.
Third party fee income is perhaps the least important benefit of our construction company.
Size.
I am giving us the confidence in control to pursue our in house development and mezzanine strategies.
Construction contracting has brought us many many new relationships with high quality developers that we may ultimately add to our circle of partners a new ventures.
Stepping back to a macro look at the business.
The topic 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 decrease.
The Pie chart show that well a significant part portion of our AFFO is derived from ancillary real estate related sources.
The vast majority is generated from our portfolio.
With the large increase in construction profit offsetting the decrease in mezzanine. Another fees 2020 shows a very similar break down to 29.
19.
However, as.
As we've said in the past our expectation is that mezzanine construction and build to suit contributions will stay more or less static were slightly decrease over the next few years.
Stabilization of the existing development pipeline will increase property NOI by nearly $50 million.
Yes.
We expect the resulting FFO generated.
Well, we returned 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.
Tail 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 or updated web site.
Last week, we launched our new and improved website, which is easier to navigate and to find our financial information.
We have time, please check it out.
Fourth quarter reported FFO of 29 cents normalized EPS of 30 cents per share.
The full year FFO was $1.10 and normalized FFO was $1.17 for share.
Hi, 19 was a very good year for rights in general and Hh in particular.
20.
19, total shareholder return was 37% versus 26% for the RMS.
29 team H. had 26, all time high closes.
Our five year total shareholder returns through 2019 was 156% Harris is 40% for the RMS.
We are obviously.
I'm pleased with these returns are grateful for the trust I share holders have placed in our company.
With Hh trading at current levels above consensus I Navy.
The current interest rate environment, a 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 multifamily communities most of whole foods centers and be accretive.
During 2020, they'll continue to pursue high quality assets upgrade our portfolio.
Our core operating portfolio occupancy for the fourth quarter remained strong at 97.
10%.
Both office and retail at 97 and multifamily 96.
Same store NOI was positive in 2019 gap was positive, 3.8% and cash was positive 4.5%.
Additionally, our leasing spreads were positive again this quarter 6.7.
7% on a GAAP basis, and 3.4% on cash.
We're also positive for the year, 5.6% on GAAP basis in 2.2% on cash.
We believe these positive metrics are reflection the quality of that portfolio.
Now back to the guidance that.
Starting.
On page 12.
A couple of slides relating to the balance sheet as you can see we generally have maintain our leverage within our corporate targets of total debt to EBITDA, but an upper limit of eight times in core debt to core EBITDA in the six times range.
A reminder, that I could that includes a debt associated.
Operating properties as well as the outstanding balance on our credit facility, which includes the equity requirements of construction loans fried development projects.
The increase in equity requirements required by lenders today.
Which is typically 35% of development costs.
We maintain our target.
And for the past few years side from is short term spike in 2018 related to our built to suit.
Well of the distribution center.
With the upcoming asset recycling, and which we have rotating into better quality assets.
Good afternoon. These properties will initially be lower.
Due to this actually.
Complete the recycling our leverage maybe higher for a short period of time.
As for new development projects, we recently announced.
They are expected to break ground during the first half of the year.
As is typical of development projects, the initial capital requirements, a modest and ramp up during the construction schedule.
Due to the timing of these capital requirements and the effect of 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 completed refinancing the remaining 2020 loan maturities we closed on.
Recast however, 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 nineties.
This reflects the strength of our properties and we expect this to continue at these levels in 2020.
815 illustrate the details right 2020 mezzanine investment program guidance.
Still substantial.
Despite the program being below 29 t. levels.
The fourth quarter, we begin to recognize interest income for loan exit fees, including the Annapolis junction and HELOC loans.
Both these loans have provisions include a fee when the loans are paid off.
These fees are essentially at profit participation within these projects.
Yes, it feels a substantial the.
$1 million included 2020 guidance in addition to $16 million of interest income.
The 2020 interest income guidance is based upon the anticipated loan pay offs Delray Nexsan Annapolis junction as listed on this slide.
As discussed on the last earning.
All the new GAAP standard known as Cecil went into effect on January Onest.
This new standard requires companies to establish loss reserves are most receivables and loans, even when current facts and circumstances.
Indicate a loss will be incurred.
Establishing these reserves companies need to estimate the.
A future business cycles, it would affect the loans.
We have determined that this new standard only materially affects our mezzanine loans.
Based on our analysis and data from our consultants is estimated that we will record of reserve between two and $4 million effective January onest.
As is typical with any new.
GAAP standard. This initial reserve will not go through the income statement and stay will appear as an adjustment to equity in the first quarter of 2020.
Going forward.
Through the same analysis every quarter in just the reserve.
This adjustment has noncash and with the unpredictable nature of the reserve we decided not to include this.
Yes, Matt and normalized FFO.
That said any actual losses from this program will be included in normalized FFO.
On page 16, as our 2020 full year normalized FFO guidance $1.16 to $1.20 per share along with our guidance assumptions.
As we've discussed asset recycling is included in our guidance with expected completion in the second quarter.
It's recycling is similar to 2016, we sold the Richmond Office tower and the Oceaneering built to suit the proceeds invested in 11 retail centers.
Yes recycling lowered our earnings but.
Just the quality of the credit behind leases and Avi.
Our 2020 recycling consists of selling nine center is one of which closed native which are under letter of intent.
Proceeds will be invested in higher quality real estate, including two whole foods centers multifamily community.
These trends.
Yes actions will reduce our in Hawaii by $1.5 million on an annual basis.
As it said in the past real estate as long term game not managed quarter to quarter.
We believe this recycling increases the quality of our portfolio or a navy will perform better over time.
Speaking.
Second entity, please turn to page 17 of the guidance deck.
Going any JV earnings and dividends are the main focus of our company.
We believe the 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 outperformance over the past five years and.
Freestor equity market cap by five times.
Now back to the fourth quarter.
We raised $25.5 million through our ATM program and average price 18030 cents per share.
Yeah, we raised $98.4 million, an average share price of $16.76.
With this stock trading above consensus and Avi during the fourth quarter, we took advantage of market conditions.
At year end, 77% of bad debt was either fixed or hedged with the current interest rate environment, we are being patient with our hedging strategy.
Last month, we purchased $100 million two year.
Well I bought caps and 1.75%.
As you've just heard we have a lot of activity in 2020 with many moving parts.
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.
Mentioned and as you've seen in our press release, we refreshed our web site with several new features including a sustainability update.
As I mentioned last quarter, we're 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.
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 ladies and gentlemen, if you have a question at this time. Please press star one on your telephone keypad.
If your question has been.
Answered and you wish to withdraw it you may do so by pressing star too.
If you're using a speaker phone today, please pick up your handset before entering your request.
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.
Right.
Wanted to start with the dispositions it definitely sounds like there's more of a quality bias within the portfolio broadly, which I think everybody applaud, but in the last couple of quarters. We've heard about maybe a one city center sale and Durham and the potential for something to happen at summit place.
And then kind of the.
And plan came out as that's kind of more smaller retail asset. So I guess, maybe talk a little bit more about your thoughts and process. As you went through in thinking about those assets in particular.
Sure, Dave we had done.
We first evaluated the disposition program, we had had.
Our eyes.
On those two assets as well as a dozen or so retail assets.
So it was always going to be waited a bit towards retail.
We decided in the final analysis that one.
At City Center it wasn't.
Good timing to try.
And so a building that had substantial we work.
Tenet.
And then in terms of the summit place in Charleston.
We were overtaken by leasing.
Leasing efforts 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 is turned out.
With again, some of our older or retail.
Ill.
Which is the whole work in our portfolio, yet not not highest growth, but the opportunity to fold into some.
Newer retail as well as multifamily is something we're really excited about for effort for the future.
How should we anticipate.
But your tenant roster in retail shifting with the assets under contract and how you view. This plan going forward do expect smaller now some of the smaller shops to start to kind of Peel off of that listed there is there a plan around tenancy.
Hi, good morning, Dave So certainly.
With this rotation and we're going to be selling some some food line. Some Harris teeter centers and would that change, we're certainly going see increase with whole foods.
An Amazon as one of the tenants I would say on the small shops certainly to be less small shops that are going to be here. Because this is because the 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 on the 2020 number versus a negative million and a half of kind of long term dilution from the trades. This year that you talked about in your guidance up.
Yes, we are a we're trying to get this timed up so they've come.
Come April that will be selling with we've identified as you saw in the presentation. All the assets were buying other than one or we have two or three candidates were looking at right. Now. So we think we can time everything up pretty well other than maybe that one asset.
It will be 20 plus million dollars may may lag behind suite.
We're not expecting a huge impact from it.
Great and last question for me I'm Little 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 and kind of building that pipeline backup in some of these.
Projects start to mature right now.
Hey, if it's.
Our confidence level is very high it's really almost the opposite it's we want to make sure that that program doesn't expand.
We want to we like it at the level that at that.
And I really don't.
See any issue with with keeping it at or near that level, obviously, it's a bit lumpy but.
But I think you can see it pretty consistent for the next few years based on the opportunities that are that are coming to us.
Alright, thank you.
Thank you.
Our next question comes from the line of John dining with Stifel. Please proceed with your question.
Right. Thank you Hey.
Nice quarter nice guidance.
I noticed you increased your disclosure on.
Euro construction.
Pipe and something showed up.
27th and Atlantic.
Big High rise apartment in on the Ocean front in Virginia Beach, what so what's going on there.
Sure Dave that it that is a it will be the as we understand it the only high rise apartment project on the waterfront err on the strip and Virginia Beach.
We are simply the contractor there it is the same group.
That did the the hotel next door same ownership group, which as you.
I think people may know.
Also has a couple of our officers or most notably our chairman and Vice chairman our investors in the project.
Isn't that a little bit of conflict and it looks like you disclose day.
300000 dollar gross profit profit in New York.
And your recent filings on up.
Any significant deal.
John I guess on the conflict for 27 Street the job. The project was offered to the right for US we decided to.
To pass on that because the returns on that aren't going to fit within our cost of capital on that one so that wasn't a conflict and were certainly going to make some some fees on on.
On that which is which is good I'm not sure what you're talking about on the other than the 300000.
Not to go back and take a look at that into Q.
I think its into Q yeah.
Seems like an awfully low number for an awfully big complicated project.
Just started the project yeah, Okay. So yes the.
These are in the millions John.
The we just started the project so I'm not sure where thats being picked up but it might be.
It might be within earned to date, I guess, we'll get into that market rate fees yeah.
We have a construction fee as well as us some development fee.
In there on behalf of those people, but yet just just to reiterate the project came to us first.
And we elected to pass it so it's going to be a great projects, but much like you see a lot of these multifamily projects, it's going be great from an IR basis with somebody levers it up.
[music].
They have something like a 90% loan and so their 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.
Yeah, I'm, just I'm, assuming you disclose all that and there is still with.
Independent Board members only et cetera.
Correct.
Yes.
What you did you put in there or what can you did you put into that.
I was in the third quarter.
It will be more obvious you'd be more in it now because initially there was a smaller GMP small contract that was done initially fore sight.
And tiles until they get the full GMP, which is now is which was now signed in this past quarter.
All right second one no board member.
Seems to be more kind of Virginia centric.
Political party river and all that sort of thing.
I was that the.
And then make see conference a month ago and.
There are dozens of qualified women, who are with real estate experienced with read experience, maybe give you someone who's a outside of the Commonwealth of Virginia.
But you seem to the new board member.
It's a little bit unusual.
Can you expand on that.
Sure.
And Ms. Mcauliffe is extremely qualified and in kind of breeze through the process with our existing independent board members basically because of her background.
As a lawyer with F.
You see experience in capital markets experience as well as her involvement and charitable causes as well as SG.
Activities a few the perfect addition to for what we were looking for.
And I and you're right. There are a lot of a lot of qualified candidates out there.
But thats you on one.
Okay noticed.
I noticed a whole foods and.
And Delray went from a.
Hey off right now.
To something that gets paid off a year from now on all of a sudden have they discounted purchase option what sort of happen.
There.
So John that's kind of get paid off in the fourth quarter I mean to second quarter of this year.
Certainly we have a relationship that's what's 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 what the right price that.
For us of which we which we negotiated.
That will be part of a when we sell the centers that will be part of the Tenthirty Tenthirty one.
So the silver cash will flow through as part of a tenthirty wanting back to us.
Yeah are you keeping the tax protection for the LP unit holders or is that burning off I think.
Think that expires.
Second quarter this year, which was congratulations 77 years since your IPO.
Thanks, Yeah, the whatever the original provisions of the tax protection, there or what's going to take place.
Oh, so essentially you're going to do at 10 31 low tax.
Basis transfers continue to protect the LP unit holders.
Well I'd soap units and I'd say all shareholders. John It is it's just it's just that.
There was no reason not to do on here that we can think of.
Okay at acquisition for a whole foods ones and del Ray.
Okay and ones in Akron, Ohio last time, I checked Lebron James is no longer in Akron, Ohio, What's the what's the split in terms of investment in Akron, Ohio, and the cap rate Arses investment and.
Alright Beach and the cap rate.
We negotiated those together.
It was it was a.
[music].
It was up.
We had to both we had to buy both and they wanted to sell but that was it was all together. So we negotiate to six between the two im obviously the del Ray we traded at a better cap rate and they actually not as as well.
How much is Akron and how much is that del Ray.
You have to know the difference between the 48.
40, donate or is it 20 424.
Well yeah. It's it's it's neither John <unk>, we negotiated a six cap on the <unk> for those two centers Akron generalize lower than in del Rey. So it's just more of its weighted towards del Ray.
Okay.
And then I was looking at your.
You're a mess page 15 of your guidance.
And Interlocken exits the it says interlocking gets paid off and 2021, I think but you have exit p. isn't 2020 amortization of them.
And then Annapolis junction has $5 million of.
Amortization of ex hippies, but I thought that happened in a.
2019, so I'm surprised.
That there's 2020 exit fees in both interlock and Annapolis junction.
One because it one because.
But.
On the Annapolis junction the 5 million that was the purchase option C. remember that that was the the loan modification see that closed in a fourth quarter of 18.
We received the Kashmir busy advertised over a year. In addition to that on this in the in a lock is part of our negotiations on this you know we've talked about we like it and 80% of the of the profit on these part of that are exits easy to built into these loans.
We well we've done decide to do from an accounting standpoint is not to recognize start recognizing those fees until we know that they're collectible and certainly under gap you can't wait until the day you collect the money to start recognizing those fees. We determines here this past quarter that the timing was right as those.
Projects moves along that it was time to start advertising those exit fees that which advertise over the next couple of years.
The how much of.
Dave Rogers asked a good question on outdoor and the reason that didn't sell was because we work how much of a.
Your office.
The office it in or lock is the we work Lees.
Oh goodness.
<unk>, 40% sent I think of the otherwise we were.
So do you feel comfortable collecting exits d. in 2020 for a loan matures and 2021 and has.
We work is 40% of the tenet.
We feel real comfortable with with the <unk> in the demand that's there and in fact, so we would we would recognize so who would recognize an increase in the value of the property. If we work weren't there based on the tennis that are there in the market. However.
We work continue to do extremely well in Atlanta.
And is full bore on on that space. So there are going to be there and we're very comfortable with where we sit as we said only because came up in the last quarter.
Just about everybody that you would talk to C.E.O.'s across the country will tell you that co workings bases here to stay it's somewhere around 2% of the market right now it's gonna good level off according to the pundits that 10% to 15%.
So whether or not which names might survive get bigger and better or go away is not a bet that we're willing to make but in terms of the locations and they use we feel very comfortable with what we have there and in fact as I mentioned last quarter, we just leave 30000.
Square feet to co working a user here at town centre.
So it's it's 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.
Because that's just prudent, but but we're comfortable where we sit John r. underwriting here, we certainly used a cap rate, we think works with a with we work in that in that building. In addition to that they're a significant tax credits and this project.
A combination of the invested lander invest Atlanta bonds as well as as brownfield credits.
Right and then lastly, you guys do a great job outlying U.R.N.A. neat.
And what we noticed is that.
If you just hold the cap rates fixed your any v.. It's about the same now as it was in.
Early 2015 year, and 80 or per share it affects cap right.
Do you guys.
Concern you guys I don't see any v. going up.
Kind of it's it's on the curve going down the last few quarters. So does your math might tell you. The same thing and does that concern you.
Oh see a couple of things on that John I think though when you do your calculation you're using the same cap rate and we believe we had been increasing the quality of our assets over over time. The other thing that say in this past quarter that hurts us as you take the redevelopment do we have going on right now with the between the Cosmo.
And Columbus village, we've got assets to the N.Y. is significantly less than if we stabilize.
<unk> page, you've only got the N.Y. or something to say a building that 70% least and then on top of that really add and the cost of the of the redevelopment back on the N.S.V. page. So there's a big Delta day between the the value of what that property is versus what chewing on this N.A.V. page.
Oh, we'll just you you can give give us more detail off line. Okay. Thanks, a lot okay.
Mm.
Thank you are next question comes on line Fromstein G. with Janet. Please proceed with your question.
Thanks, Good morning, guys Blue what's happening you know with construction gross profit that you're nearly doubling from 4.3 to 7.6 million in 2020 is that just more volume being put through the construction company.
Yeah, it's nice.
Hmm, it's a good question we.
So basically what's happening is we have a lot more third party volume this year versus internal volume and <unk> as as everybody knows yeah, you don't make fees on working for the read.
And last year. The construction company you had a much higher mix of inhouse projects versus third party party projects.
Would you be illustrated in the guidance deck. So it's more it's more volume. It's also you know they've been able to negotiate some pretty healthy bees. Most of the work is being done in a 4% basis.
And then okay as a as you can see by the Bar chart under construction page that that'll continue to Evan flow. We're we're not.
This isn't commodity construction. Our people are are vested in these deals whether their third party or their mezzanine or their internal they baby them from their from inception, all the way through completion and so it's not easily.
Ah multiplied or scaled up and and our our intent is not to scale. It up so as the mix continues to fluctuate between internal and external projects, you'll see those those numbers continue to fluctuate as well.
Okay I just wanted 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 it's really all it's it's all volume I think there's very little saving split income in there if any.
Okay, and then Miked I hear bright that looking at page five of the guidance the acquisition disposition, obviously like four it's already been done but that the other transactions are two dispositions enough three acquisitions, excluding the two <unk> T.B.D. one we're all supposed to close sometime in the second quarter or by the.
Second quarter.
We expected with yes, we expect him to close in the first quarter of the apartments and the two whole foods, you're all set up you know where three due diligence and we're in good position on on those to be ready to close as well as next and.
Okay, and then the dispositions the green tree in a seven shopping centers.
Green tree, we've got a sign purchasing sale agreement at this time and that's on schedule on the setting shopping centres, we have assigned Delaware I expect to have assigned purchasing sale agreement. This week.
And with the timing within everything should put us in the beginning of April for closing on that okay.
Okay I know the seven shopping center is going to one purchaser are they being spread around and multiple transaction on one.
Yeah, one one buyer.
Okay.
When does the apex least commence and when does it start paying actual cash rent versus just a gap amortization.
Yeah, We've got gap starting in in August and they take I keep seeing start paying rent and we're expecting right around the first of November.
Okay. So the apex Lee shouldn't really have much of an impact on 2020.
No it really doesn't.
Okay.
And that right yeah.
Okay, it's actually pretty Mad on 2020.
Okay any node move out of impact in the retailing office portfolios over the next you know six or eight quarters.
At this point.
Mm.
Nothing that's.
It really sticks out at yet I'm not sure.
If everybody understands what's happening here in town centre, we did have a move out or Hampton University downsized and 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 the same store in Oh, I guess, maybe next quarter Mike Yeah.
So.
So we'll be explaining that one but outside of that there's really nothing nothing material.
Okay, and then last one for me Mike any no difference today between they read and normalized F.F. open 2020.
So we're going to have a couple of things obviously, it's the the biggest driver has been mark to market on our hedging strategies has been the biggest difference over the last couple of years as I was saying my remarks is would Cecil.
Because of the unpredictability that it's almost like a mark to market, we're going to exclude that the way Cecil is going to work in a pulled approach is we're going to take a look at the overall balance and then adjust to reserve so.
So that reserves going to be going up and down based upon the total outstanding balance as well as whenever the data is saying on what the and what the losses should be on that I I would expect that that will increase F.F., all but not normalized this year, because we're going to be starting at a higher.
<unk>.
Balanced to begin with outstanding balance with that two to 4 million dollar initial reserve that will come down as the balance comes down over the year.
Okay. Thanks, guys appreciate it.
Yeah.
Thank you sorry next question comes from line of Jamie Feldman with Bank of America Merrill Lynch. Please proceed with your question.
Great. Thank you.
It's just sticking with a wee working co working number one are there any spaces that we work is not as either given back or plans to get back or hasn't started construction on that you're waiting for.
No. We're we're we're not seeing any hesitation whatsoever, and if you're doing well in Durham, they're preparing I mean, they're working on construction in Baltimore as well as at the end, Okay and in Atlanta.
And then the new lease you guys mentioned it sounds like it's not with we work with another provider is that is shared revenue lease or is that is strait contract least and then actually when you think about the other at least the portfolio how are those structured.
Yeah. So that's that's a great question game and I. Appreciate you African that because we are not interested in going into business with any with any of our tenets co. Working included so both in Durham as well as in Baltimore and that the inner lock a those are all full value leases we understand that.
A lot of those co working companies are proposing to landlords the the whole shared revenue model.
We we think are stories <unk> complex enough without getting in the in the business with our tenets. So you 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 send a new one with a different provider who's the provider.
Yeah, it's are they.
Around the the the company's 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 or they have several locations, it's more regional rather than a national.
Okay.
Conference Center component to it or it's strictly just off it.
No they've got some.
<unk> called gather and they've got some gather space so.
I understand that so it's it's a pretty unique looking model and for US that is third generation space and so it's we think a in the midst of almost a million square feet of office space here at town Centre. It's a nice it's a nice feature to have at very low low risk for us.
Okay.
And then when you look at your retail portfolio any additional names on your watch list. This quarter already you're just kind of watching thinking you may have some vacancy coming.
Jamie.
It's it's a never ending story they hmm.
We don't really have anything new on the watch list the usual suspects or are still out there and we still bed Bath and beyond we still have for those we have a five I'm the pet stores and.
Various and sundry others I'd I'd, we're not seeing any upticking that in fact sales across the portfolio and they were 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 you've got to constantly looking at the at the portfolio evaluated for risk, but we're not really seeing any any issues showing up beyond what what you read in the headlines on some of these smaller tenets.
What kind of reserves or in your 20 guidance outlets.
Well, we do our.
And we do our outlook what we do is you know we take a look at roll over risk in bad debt and everything like we do you know across the entire portfolio. We don't do a crime talking across portfolio you do it on a on a property by property basis. So it's built in to what we expect for renewal nonrenewals and et cetera.
Okay.
And then you would mention probably using the H.T.M. to keep your leverage in check what's the range that you're comfortable with at the high end.
Well why Guidances is you know is 80 million for the year, certainly if the stock straight and.
At higher levels 19 to all of the so I'm sure we'll get we'll get more ground to look at how much more to get yeah.
I guess I was just thinking about what's the high into your leverage comfort.
Oh like I've discussed that's a total debt t. that on it at eight times in staying in the six times on a core basis.
Yeah.
And then you deliver our well it's worth delivers this year, 68% least can you talk about the leasing prospects for the rest of that space and then also just.
10 triad kind of how we should do you know with the tended to me it looks like for that project too and maybe any other.
Big picture color on that project since it was pretty recently announced.
Sure.
So it will is war there is I I should it feels like every quarter, we should be able to announce the rest of the tenets that that are coming in that building.
<unk> because there's a there's a good number of tenants circling around the space.
We're not trading paper with anybody yet, which tells us that it'll be towards the end of the year before we actually would have have the projects Inc. But there are no shortage of prospects for the we've got a about 100000 square feet left there as I said earlier my comments or expectation is that that building.
<unk> going to stabilize by the end of this year.
[noise] at at 10 trying on you guys. All the announcement you might have seen there's a lot of speculation in the press about who the anchor 10. It is and you can can take a look at that but.
Oh.
We feel very <unk> very good about the the Charlotte market between the roll over space in Charlotte as well as the increase on a daily basis of the population and companies coming in we think 10 trial and is going to be a home run. We've just got a good we've got to work really quickly and get the thing.
They are underway so that everybody knows it is real before before we do any expected to leasing.
Okay.
Do you think the delay isn't getting the world's worst least up.
I don't know that it's a delay it says we're dealing with a large credit worthy tenets, who have processes that take a long time.
Between the R.P. processes and all the hands, it's got to go through it's.
It's a frustratingly long process. There's also I think there was some hesitation earlier and people wanted it to actually kick the tires and see the space then we could only have tours.
A couple of months that people would actually a good up on those floors.
Okay alright, thank you.
Mmm.
Thank you are next question comes from line is very Oxford with D.D. anything. Please proceed to your question.
Right. Thanks, guys getting back to that we works and if the parent company on that on on that leaf or to just the entity that is in the space.
Again, and all three of those instances, we have a corporate guarantee on oh behind the leases okay, Okay, great what I.
When I look at your all switch you know living a little bit at a retail and more into kind of apartments in office.
Just more function of kind of your portfolio or is it what you're seeing in the market place as far as risk adjusted retards growth.
Oh, it's it's it's a little bit of everything very <unk> the.
<unk> a few years ago, when Mike alluded to the the transaction, we did which had our retail portfolio swell and that was when we pulled out a we we sold or about $140 million worth of.
Worth of office space and bought 11 centers at the time.
And that the move there again was was negative to earnings higher on credit.
Which obviously would move your cap rate that people are looking at when judging your portfolio.
Hmm now it's more function of.
Of where the opportunities are.
The company is is long been especially with the news mixed use assets like like we have here at town centre and those opportunities are coming faster than retail opportunity to release high value retail opportunity. So I think that's why you're seeing screw that way.
And everything is also seems to want to have a multi family component in it so the the whole <unk>.
The whole movement towards a live work play environments is is exactly where we that's our wheel house and has been for 30 years, and it's just manifesting itself more and more as cities.
<unk> 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, Thanks for the color and then last one it's we I know it's hard to look into 2021, but is it safe to assume that dispositions will slow substantially.
2021.
Yeah. This is yeah, we've been talking about how the the the company has been able to to make it through good times in bad because we'd keep our portfolio fresh we evaluated constantly for what doesn't belong there any longer or where we think we can achieve peak value.
This effort this past year always best six months was larger than usual.
Again, a number of those older centres, we're coming towards the end of leases and into option periods and I'm not that there are bad projects I think they're <unk>, they're great assets, but.
We saw the opportunity to upgrade and again move the Capre move the multiple and stopped by upgrading the portfolio.
I don't think you'll see.
And again, you're right, it's hard to crystal ball, it but right. We don't have much more in the portfolio that we would want to sell no. Obviously everything is for sale for a price, but as far as us pushing the envelope to try and turned over their portfolio I don't see that kind of effort.
Into 2021, I think this was the big push.
Then we'll be will be sitting tight largely.
Right.
Finish and then <unk> would you guys be more reliant on line issuing equity and 2021 or not necessarily.
Not necessarily.
Again is Mike mentioned, the the pipe the development pipelines stacking up again.
The we're going to fund that through the A.T.M. largely this year I would suspect R.H.T.M. activity would continue into next year, you know God willing to the stock market. It's still it's good to us So I I.
It's a pretty steady flow.
For us and again as the.
Has the development pipeline that we've recently developed delivered stabilizes and those rent because we get those rent increases.
I think there's gonna be plenty of room for for debt as well.
Okay. Thanks for the color guys.
Mhm.
<unk>.
Thank you are next question is a fall off the line of John dynamics default place for C. with your question Yeah for I forgot to ask Hey, Mike going back to this mess program and <unk>.
Including your purchase option or you know exits fees are you able to books.
Those as a gap income and run it through a knee redefined or or is there a a spread here between normalized and a name read to find with <unk>.
With these exits the amortization.
Far as we know that that's fine running through Knavery defined F.F., though because of the nature of the income. It's it's it's it's being booked is interesting come like like off all the other from a gap perspective.
Yeah.
Yeah, It's just another way of a running through March and profit so <unk> merchant building to element profits through okay.
Right second question second question Edison.
Multi family deal right near the state capital in Virginia, six Saint cap can you explain the nuances there there's.
And now we were just at N.M.H.C. and we all we do understand cap rates on multi family and six eight is unique cap right.
Yeah. We're we're very pleased with that transaction as you might expect [noise].
So.
I'm glad you ask the question John because unfortunately, not it's not a short answer this is a project that we developed.
The development of it started pre I.P.O., we have an external partner that brought it to us and at the tax credit deal and where we sold 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 there wasn't any.
Opportunity to bring it into the fold.
But as we were getting close to the ability to to sell it. We approached are external partner about the opportunity of taking O.P. 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 there'll be receiving all their equity and Opie units and then we told our old partners, who are still executives here that they had to live with the same deal that are external partners had agreed to.
And so consequently.
Again, as the largest shareholder will be increasing our steak and I'm out of Hofler by taking more O.P. units when that transaction comes in but it just kind of shows the 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 these guys then getting a big big big paycheck, and and paying a lot in taxes. So that's why we were able to negotiate a a very favorable camp rate.
Any near term cap X. plan for that project.
[noise] not as not nothing out of the ordinary it's a historic rehab we love. The project has been full since day, one and and as you might expect the upkeep is more than in a new build but it's a it's all in the numbers that we're forecasting.
Great. Thank you.
John that should help move the cap rate from 2015.
[laughter].
[laughter].
Thank you, ladies and gentlemen that cause our question and answer session I'll turn the slide back to Mr had that for any final comments.
Or thanks for but it must apologize for the length of the call today, It's it's always a tough one when we we we get into guidance, we'd try and be a transparent as we can and as complex as our motto is it takes a little while to go through it. So I appreciate everybody's patients.
Thanks for listening and and you're interested in our motto <unk> Oh, Great day.
Thank you. This conclusively teleconference. You may just connect your lines at this time. Thank you for your participation.