AH Realty Trust, Inc. (AHRT) Q2 2014 Earnings Report, Transcript and Summary

Greetings. Welcome to Armada Hoffler’s Second Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management’s prepared remarks, you’ll be invited to participate in a question-and-answer session. [Operator instructions] As a reminder, this conference call is being recorded today, Tuesday, August 05, 2014. I’ll now turn the conference over to Ms. Julie Loftus Trudell, Vice President of Investor Relations at Armada Hoffler. Please go ahead ma'am.

Good morning and thank you for joining Armada Hoffler’s second quarter 2014 earnings conference call and webcast. With me this morning are Lou Haddad, CEO, and Mike O’Hara, CFO and we'll have Eric Smith, our Vice President of Operations here and available for Q&A. The press release announcing our second quarter earnings along with our quarterly supplemental package was distributed this morning. A press release announcing the arrival of five national retailers to Town Center, which completes our co-tenancy requirement for anchor tenant, Anthropologie was distributed this morning. A replay of this call will be available shortly after the conclusion of the call through September 05, 2014. The numbers to access the replay are provided in the earnings press release. For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein as of today, August 05, 2014 will not been updated subsequent to this initial earnings call. During this call, we will make forward-looking statements including statements relating to the current and future performance of our portfolio, our identified pipeline our future pipeline, impact of acquisitions, our construction business, our portfolio performance and financing activities, as well as comments on our outlook. Listeners are cautioned that these statements are made with 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 advice listeners to review the risk factors discussed in our press release this morning and in documents that we have filed with or furnished to the SEC. We also will discuss certain non-GAAP financial measures including, but not limited to FFO, core FFO, core EBITDA, definitions of these non-GAAP measures as well as reconciliations to the most comparable GAAP measures are included in the quarterly supplemental package which is available on our website at www.armadahoffler.com. I would now like to turn the call over to our Chief Executive Officer, Lou Haddad. Lou?

Thank you, Julie. Good morning, and thank you for joining our call today. We continue to be very pleased by the performance of our company and grow even more optimistic about the future. This morning we reported another solid quarter with FFO per share of $0.19 and core FFO per share of $0.21, which was in line with our expectations. We raised our 2014 outlook and are enthusiastic about the second half of the year. This is a very exciting time for our company as each of our three divisions firing on all cylinders. We are executing on the goals we laid out at the beginning of 2014 and while only midway through the year have made significant headway. I am going to take the next few minutes to run through these goals with an update on our progress. In 2014, we set out to execute new leases for pipeline projects as well as our stable portfolio and we are doing just that. We are delighted to announce that we have rounded up the co-tenancy requirement for our anchored tenant at 4525 Main Street and properties and have completed our retail plan for the fifth phase of the Town Center here in Virginia Beach. As you may remember from previous earnings calls, we made deliberate choices regarding certain vacancies, in some cases holding space off the market in order to allow our retail plan to play out. Now I am pleased to report that this group of exciting new tenants coming to Town Center will create meaningful long term value for our shareholders across of a number of metrics including occupancy, NOI, retail same store sales, and tenant credit quality. As detailed in our press release this morning West Elm, Free People, lululemon, francesca’s and Tupelo Honey Café have signed leases for retail space at Town Center. West Elm and Tupelo Honey Café will complement Anthropologie at the base of the newly constructed 4525 Main Street Tower, bringing the retail space in that new building to a 100% leased. Free People, lululemon, and francesca’s will be across the street in the South retail property of Town Center. Anthropologie this will be West Elm, Free People, lululemon, and Tupelo Honey Café's first and only locations in South Eastern Virginia. We believe the addition of the first class roster of retailers further demonstrates what we've known for years. The Town Center is the premier address in the region. Negotiations continue for 20,000 square feet of Town Center retail space that once signed will result in virtually a 100% retail occupancy in all of Town Center. As far the office portion of 4525 Main Street, our two anchor tenants [Broadax] (ph) and the City of Virginia Beach have both moved in bringing occupancy to over 50%. In addition to the success with Town Center retail leasing, we are seeing significant momentum at our multifamily development projects. The rollout at Liberty Apartments the first project, which we delivered in the beginning of 2014, is ahead of schedule with approximately 60% of the units leased and about half of the retail space either leased, under Letter of Intent or in negotiation. Lastly, recent negotiations with a handful of retail tenants outside of Town Center are coming to a close at which time our retail portfolio of occupancy will be in the high 90s. In 2014, we set out execute on strategic and opportunistic acquisitions and we did just that. Yesterday we announced that we entered into an agreement to acquire Dimmock Square a retail power center located in Colonial Heights, Virginia just south of Richmond. This acquisition is an outstanding addition to our portfolio representing a best-in-class power center in a contiguous market. The acquisition of Dimmock Square will add over 100,000 square feet of a 100% occupied retail space to our portfolio. Current tenants at Dimmock Square include Best Buy, Pier 1, Old Navy, Dress Barn and Shoe Carnival amongst others. The center is strategically situated between the 900,000 square foot Southpark Mall and at Walmart Supercenter. The definitive agreement provides that we will acquire our 100% interest in Dimmock Square and exchange for approximately 990,000 operating partnership units and approximately $10 million of cash. We successfully deployed OP units in this transaction increasing a capital base and generating earnings for shareholders. We believe the acquisition will be accretive to annual FFO per diluted share and expected to close in the current quarter. This opportunity was born out of a deep and longstanding relationship and we will continue to pursue such strategic and opportunistic acquisitions in the future. In 2014, we set out to maintain stable portfolio occupancy in the mid 90s and we are doing just that. In the second quarter our portfolio occupancy increased slightly to 94.6% from 94.5% at March 31. We believe these figures and their trajectory for the latter half of this year represents the significant time and attention our asset management team gives to only leasing vacant office and retail space, but retaining tenants as well. We've already discussed the leasing success in our retail portfolio. In addition I should note the trajectory of our multifamily occupancy. With construction complete next door to the cosmopolitan apartments in Town Center occupancy has not only rebounded, but is peaking at about 95% as of today at highest level since the project was launched. When combined with the historically strong occupancy at Smith’s Landing apartments, we expect multifamily occupancy to be in the mid to high 90s in latter half of this year as well. In 2014, our goal was to deliver the development projects on time and we are doing just that. Our developments projects are on budget and progressing as expected. The initially delivery of 4525 Main Street here in Town Center occurred in early June, which was back to than the original timeframe of late July. The accelerated delivery date is evidence of the benefits of having our own captive general contractor. We remain on track to deliver the remaining 2014, development projects in the second half of the year. Mike will detail those in a moment. In 2014, we set out to execute contracts for third party construction work with consistent segment profit and we did just that. In the spring we announced that we entered into a contract to build Harbor Point project a 20 story mixed use power for Exelon Corporation. Work on this project located on Baltimore Waterfront adjacent to Harbor East is underway with completion expected in the Spring of 2016. While the first phase of any construction project always carries the most risk from a timing standpoint we are tracking on schedule. We believe the size and scope of this project will help to drive our construction division's annual growth profit contribution in the coming years. As evidenced by the noted accomplishments our team has a lot to be proud of. At this point, I would like to transition from our accomplishments and provide you additional color on our longer-term strategy. We are currently in the process of our budget planning for 2015, so it’s a bit early to be precise on our expectations for next year. However, I would like to provide you a roadmap of our longer term strategy over the next three to five years. Our long-term strategy is simple, continue to grow NOI. Through organic NOI growth in our stable portfolio, there are development pipeline projects through our third party construction growth profits and through strategic acquisitions. When combined with measured decisions about our corporate matrix and balance sheet, we are focused on ensuring that our future NOI growth will translate into healthy FFO per share growth over time and we discussed each of these drivers of growth individually. While we enjoy organic growth from contractual length consistent with our competitors, we recognize that our same store NOI growth is somewhat limited by our high occupancy level. This is a situation we are happy to be in and it means that our assets are well positioned solid by tenants and to be valued at lower relative Cap rates. Turning to our third party construction division, in addition to sourcing development opportunities as well as controlling costs and timely delivery of development projects, the gross profit from this business have been a reliable source of income year in and year out. As we discussed the construction division provides the unique opportunity to reject our brand and capabilities throughout the market place. Historically the construction business contributed approximately $4 million of gross profit annually. We believe that in 2014, and for the next couple of years that $4 million run rate will be the low end of our range. Our development pipeline is a key driver of further growth and our supplemental package this quarter you can see that there are approximately $230 million of developmental pipeline projects marching through our identified and next generation pipeline, which will together refer to going forward as simply our development pipeline. This figure will ultimately be closer to $300 million once we include the John Hopkins Project that we've previously discussed and continue to finalize. We've historically discussed the value creation from our pipeline projects in terms of equity creations from our wholesales to retail spread. We strive to maintain this spread with all of the development and construction tools we have previously discussed including structuring land acquisitions, managing the design process, acquiring municipal support through public-private partnerships and managing the construction process. The same value creation can be quantified through NOI. Assuming the inclusion of John Hopkins, we expect in excess of $25 million of NOI from these development projects once they are all stabilized, which is in excess of 60% growth over 2014 NOI. We expect approximately one-third of the $25 million of NOI to come online in 2015 with the remainder in 2016 and 2017 as the development project stabilize. Over time we are looking forward to continue developing a $150 million to $175 million of assets every 18 to 24 months. As a complement to growth from our developmental pipeline we are committed to strategic acquisitions. We recently announced the Dimmock Square as a great example of an opportunity where we were able to take advantage of a longstanding relationship while utilizing our operating partnership unit as currency to ensure both topline revenue growth and accretive FFO per share metrics. We look forward to augmenting the stable income from our business with accretive acquisitions. In the context of our long term strategy, let me now touch on the last annual goal we laid out for 2014, to manage the balance sheet to ensure appropriate leverage metrics and position the company for continued FFO growth. The translation of this NOI to FFO per share growth will come through prudent balance sheet management. We believe we continue to have all the levers at our disposal that we have previously discussed including potential equity raises, dispositions, acquisitions with OP units, sale of pipeline projects and joint ventures and subject to market conditions and other factors, we expect to use them appropriately to provide value to our shareholders. This is important to us as we and our former partners represent approximately 40% of the ownership of the company. As a result, we are continuing our longstanding strategy of selling single tenant assets from time to time. Across our stable portfolio and pipeline, we have a half a dozen such assets, but the majority of these existing within our developmental pipeline and not yet delivered. To this end we have entered into an agreement to sell the Virginian Natural Gas office building, which we can see from our Town Center offices for approximately $8.9 million, which represents a Cap rate of approximately 6.25%. The company will net approximately $7.7 million after tax protection payments and other disposition costs. We believe that investor should focus on this transaction as it relates to company evaluation given the proximity of this property to Town Center. With that, I’ll ask Mike to walk you through some of the key financial and portfolio metrics contained in the second quarter supplemental package and then we will take questions you may have about this discussion during Q&A. Mike? Michael O’Hara: Thank you, Lou and good morning. Today I want to cover the highlights for the quarter including a discussion on our balance sheet and insight into the Dimmock Square acquisition. I will wrap up with an overview of our updated 2014 outlook. FFO for the second quarter was $0.19 per share and core FFO was $0.21 per share. Second quarter was in line with our expectations. We report core FFO as we believe the core FFO is a more meaningful statistic in analyzing our business. Core FFO exclude certain items including, but not limited to non-cash stock compensation expense and the effect from non-stabilized development projects. We add back non-cash compensation expense for those shares that were initially allocated from our public offering. Our adjustments from FFO to Core FFO are illustrated on Page 11 of the supplement package. These adjustments include a reduction to second quarter FFO of 300,000 from non-stabilized development projects. During the second quarter, we executed approximately 49,000 square feet of new and renewal office and the retail leases. This does not include a leasing activity at 4525 Main Street and our other development projects. Office releasing spread for the quarter were higher by $0.79 per square foot on a GAAP basis, lower by $2.18 per square foot on a cash basis. The retail releasing spreads were higher by $0.81 per square foot on a GAAP basis and lower by $0.46 per square foot on a cash basis. Same-store NOI for the quarter was positive $62,000 or 0.7% on a GAAP basis and negative $43,000 or 0.5% on a cash basis. These numbers do not include the leasing activities Lou discussed earlier. During the second quarter, our portfolio occupancy increased slightly from 94.5% at March 31 to $94.6%, while with this increased leasing activity comes TI Leasing Commission which will impact AFFO over the next couple of quarters. Projecting cost in this leasing is approximately $4 million as outlined in our supplemental package of which approximately $1 million impacted the second quarter. Cost-related to retail leasing activity are higher than our typical long-term run rate at tenant leasing outlays, and the return on cost associated with these leases are creating value for our stockholders. On the construction fund, we report a segment gross profit in the second quarter of $1.1 million and revenue of $20 million. During the quarter, we executed approximately $6 million of new contract and at the end of the second quarter the company had total construction backlog of approximately $179 million. Now turning to our balance sheet, we continue to execute on our balance sheet strategy to review the flexibility to fund our growth objective and multi efficient in cost effective manner, while managing upcoming loan maturities. At the loan maturities, we have all exposure to 2015 as we have one loan maturing in 2014 for the balance of $1 million and two loans maturing in 2015 with combined balances of less than $9 million. At the end of second quarter, we had total outstanding debt $350 million including $88 million outstanding on our credit facility. Our core debt, annualized core EBITDA multiple at quarter end was seven times. Our weighted average interest is 3.5% and average averaged loans maturity is 8.9 years. Approximately 42% of our debt was fixed at June 31, and taking into account interest rate caps approximately 75% of our debt was fixed or hedged. Please see Page 14 of the supplement package and details of our interest rate caps. We believe that using interest rate caps limits our exposure to rising rates while giving us the flexibility at a reasonable cost. As our development projects ramp up and start to come online, we're evaluating our leverage metrics and our ratio of fixed rate debt to overall debt. The first step we are taking to reposition our balance sheet is the disposition of an asset. We announced that we’re selling the VNG building and using the net proceeds of approximately $7.7 million to pay down the credit facility. We are also evaluating other dispositions. Now turning to the Dimmock acquisition, we’re acquiring 100% interest in the LLC that owns the Dimmock’s Square Shopping Center in exchange for $10 million of cash and approximately 190,000 op units. We expect to close on this transaction during the third quarter. Assuming a mid third quarter closing this acquisition will add approximately $470,000 to FFO in 2014 and a time weighted share impact to third quarter will be 500,000 shares. Now we’ll walk you through our update full-year of 2014 outlook. We raised our full-year 2014 total Core FFO outlook which excludes the impact from non-stabilized projects and non-cash compensation expense to approximately $27.5 million from the previous expectation, which was in-line from full-year 2013 Core FFO, approximately $26.5 million. This includes the impact from the Dimmock Square acquisition, as I’ve just discussed, which we expected to positively impact Core FFO by approximately $470,000, assuming a mid-third quarter 2014 closing. We remain on-track to deliver five development projects this year which will be excluded from our Core FFO results. These projects include, Greentree Shopping Center during the second quarter we turned over the pad to [indiscernible]; the Encore Apartments; which is expected to open in the first week of September, and the Whetstone Apartments, which are expected to open in mid September. This is in addition to the already delivered 4525 Main Street, delivered in July 2014, and Liberty Apartments, which were completed and acquired in January 2014. Based on the leasing activity we are experiencing, we now expect a negative impact from non-stabilized projects on FFO 2014 to be $1.0 million down from the previous expectations of $1.5 million. In addition, we lower our expected full year 2014 G&A expense to approximately $7.6 million compared to $7.8 million previously which includes $750 of non-cash comp which will add back for Core FFO. Now lastly, we increased the third party annual segment gross profit to approximately $4.3 million from the previous expectations of $4 million. This increase reflects the impact of 170 million new contracts signed in 2014, which begin in earnest later this year. And finally our dividend, yesterday we announced that the Board of Directors declared a cash dividend of $0.16 per share for the third quarter of 2014. The dividend will be payable in cash on October 9 to stockholders of record on October 1. I’ll now turn the call back over to Lou.

Thank you, Mike. As I hope we communicated on this call, we are doing exactly what we said we will going to do and are ahead of schedule and feel great about where we are going. Thank you for your time this morning and your interest in Armada Hoffler. Operator, we would like to begin question and answer session

(Operator Instructions) Our first question comes from John Guinee with Stifel. Please proceed with your question. John Guinee – Stifel Nicolaus: Hello, John Guinee here. Thank you. A couple of questions, first, it looks to me Lou as if you got basically the third-party GC work is largely Inner Harbor East and then Johns Hopkins and the rest of it is just clean up, is this what we should expect a couple, maybe on big deal announced every year for the third-party GC business?

Thanks, John. I’d like to clarify that. The Johns Hopkins engagement is a development engagement. We will own that facility and therefore there won’t be any construction profit involved in it. The Exelon project is a little bit of an outlier, but not a whole lot and I think you were highly intuitive. We are a company that specializes in large complex deals and so we seem to be able to attract these couple hundred million dollar projects on a regular basis. I don’t about once every year, but it seems much more like once every couple of years but you will see those augmented by deals that are more in our sweet spot of $20 million to $50 million along the way. John Guinee – Stifel Nicolaus: Okay. So Johns Hopkins, the one up there on Charles Street is actually a in-house development deal versus a third-party GC deal?

Correct John Guinee – Stifel Nicolaus: Okay. Then Exelon, you think you can get something of that magnitude every couple of years?

It feels that way John whether it’s the Swedish Embassy about four years ago, Four Seasons hotel couple years ago, Legg Mason's Global Headquarters. I don’t want to -- we certainly don’t want to promise it, but it's certainly is in the history. John Guinee – Stifel Nicolaus: Got you. Okay. And then if I’m looking I guess, Mike on Page 34, what’s the -- what portion of your Liberty, what portion of the hoping that I guess of $2 million stabilized NOI. How much of it was in place in 2Q and how much more should we expect before it stabilizes? Michael O’Hara: Good morning, John. Liberty actually had negative NOI during the second quarter. We expect that to turn positive on NOI basis during the third quarter, but the entire year it's still going to be negative from net FFO standpoint. John Guinee – Stifel Nicolaus: Okay. How about from an NOI standpoint, just un-levered cash NOI on the project?

John. Michael O’Hara: Let maybe rephrase it when does Liberty stabilize on a cash NOI basis?

We’re looking for stabilization midway through next year. As we reported earlier, we always project about 18 months for our multifamily project to lease up, that’s been our history. This one is tracking a little bit ahead of that and as we reported this morning obviously with 60% lease then we’re only seven months into it. However, we’ve learned not to take the victory lap on that too soon. So we’re sticking with midyear '15 for stabilization and recognition of the NOI that you referred to. John Guinee – Stifel Nicolaus: Okay. Then how does the math work, is it – if this is a $2 million stabilized NOI and you said you were negative for the second quarter I would have expect Page 11 from Core FFO to have more of that $300,000 adjustment. Michael O’Hara: John, Liberty Apartments on its own was approximately negative drag of around $380,000 during the quarter, but we had some income offset that from our first couple of tenants. We had the City of Virginia Beach move in to 4525 Main Street for instance. John Guinee – Stifel Nicolaus: Okay. So offset slightly by initially occupancy of 4525? Michael O’Hara: Correct. John Guinee – Stifel Nicolaus: Okay. And then just what’s the pricing on Dimmock Square -- what’s the sort of cap rate price per pound? How do you underwrite that?

Great question, John. I’m going to turn that over to Eric Smith, who headed up our acquisition team on that. Before I do, I want to take as a little about Dimmock Square and why we’re so excited about it. We mentioned in our release that this is a best-in-class power center in that submarket and that submarket is continuous to our home market, it’s about an hour from my house actually and it's traditionally been very strong retail wise. This center is equal distance from a very strong mall in a Walmart Supercenter and it's been 100% leased essentially forever. I get indicator of its strength is that high. Many of you may be familiar with what’s going on at Best Buy and while it’s a $10 billion retailer with $3 billion in cash, over the last couple of years it’s has been downsizing, shedding unprofitable stores and renewing for less square footage in a number of locations. This year, they re-upped for five additional years at the fall of 30,000 square foot size at Dimmock Square. This gives you a good idea of the strength of that market. Eric.

Thanks Lou. Good morning, John. A little bit of detail on the transaction. We obviously are -- I think as Lou mentioned in his prepared remarks, we’re excited about it due the fact and it came out of a longstanding relationship we have. The use of OP units as currency in the transaction and the fact that it’s attractively levered right upon consummation of the transaction and we think about this acquisition and future acquisitions as well. We are obviously looking at creating value and we judge that primarily on FFO per share and NAV per share basis and this acquisition does just that. When we were negotiating with the sellers, they obviously could look at the stock price and we’re seeing our stock price the in the mid $9 range or so during negotiations. We actually in the context to that dialogue if they looked at our OP and its net value slightly higher, just shy of $10 around the $9.75 range. In doing so, if you look at the number of OP units at that price level combined with the $10 million cash outlay, that was mentioned earlier, that would imply a cap rate on this asset versus cap rate in the low 8% range. Obviously, if you put a higher valuation on those OP units, that would of course lower that implied cap rates and the two move inversely, but at the end of the day, we’re very pleased that we were able to raise capital of the cost that allowed us to execute on the accretive transaction and grow FFO and NAV per share with this deal and we think that that’s great for our stockholders. John Guinee – Stifel Nicolaus: Got you and next the SouthPark mall, which is the CBL mall that’s about 330 a square I think.

Yeah. I recorded as a date I have that's 97% occupied. We’re real pleased with our retail quarter corridor there in Colonial Heights. We have the one, three and five statistics are all sell it on both households as well our net income and all three radius is on north of 55,000 and one north of 65,000 average household income and then the vacancy rates in that Colonial Heights corridor as well as the in line detailed rental rates compare extremely favorably as compared to the larger Richmond market overall.

Okay, let me just go back to Michael real quick. I am just getting the math wrong on this I think, if I am looking at Liberty, what’s this stabilized NOI. I am surprised to hear a 380 negative in the second quarter with a $2 million stabilized NOI. Is $2 million the wrong number for Liberty? Michael O’Hara: I think it’s around $2 million once fully stabilized in the retail and John I would say on the negative three that wasn’t NOI, that was FFO for the quarter.

Okay, got you. Oh I see, I see. All right and then lastly, Lou can you kind of walk through, I guess you’ve got half of the six leases you signed, Anthropologie and then the five others there are three of them that are going into the new building that is under construction. Now which block is that again?

That’s block 11. That’s 4525 Main Street and those three tenants end up being a 100% of the ground floor space. As a matter of fact, they ended up being 105% of the ground floor space. We had to reclaim back some from the parking garage from the city.

So how many square feet are those three tenants taking of Block 11?

It’s about 26,000 feet John.

Okay. And then the other three tenants are going into which block?

They’re going into Block 4 here at the Armada Hoffler Tower and you guys will remember that space, that’s the old Red Star space that we held off in the market.

Got it. How many square feet are they going into in Block 4?

Yeah. Those three are about 8,000 or 9,000 square feet.

Okay, so if we were to just look at it before and after on Block 4, just looking at that in a vacuum what would be the previous cash NOI when you came public second quarter of pro forma NOI when you came public and what's the pro forma NOI after 8,000 or 9,000 square feet of tenants moved out and 8,000 or 9,000 square feet of tenants moved back in.

Okay, let's makes sure we don’t cross up our timing here. When we came public, the Red Star Tavern was in place and so in our NOI there would have been and I am speaking off the cuff here, somewhere in the neighborhood of a couple hundred thousand dollars on those square feet. Shortly after we came public, Red Star closed as a chain causing a hole in our -- I guess it was our second quarter results last year as well as you guys remember another restaurant in Town Center we had to close on different circumstances. So that happened in July last year. We then said that we wanted to hold that space off the market because we had already had preliminary discussions with Anthropologie and we thought we had a good shot at getting them, but only if we could surround them with their desired co-tenancy. That played out over the last year or so until now, that square feet inch is going to yield somewhere in the $300,000 range as the rents for these retailers start significantly higher than the restaurant range. Now as Mike mentioned going on with that it's a pretty extensive TI build-out, which impacted us by over $1 million of service quarter.

And so the $1 million just has to do with the Red Star space and the 8,000 or 9,000 square feet of Red Star square footage.

Well, it’s not exclusively there and we still have a lot more to spend.

Oh I know that. Yeah. But then the $4 million is that $4 million include the space on block 4 as well as the space on block 11?

Yeah well, not 11. All that is first generation space that’s being capitalized and we’ve been harping back, I want to make sure I want to continue this conversation, these are great questions, John. But also want to give somebody else a shot, but if you’re harping back, one if not two conference calls ago, we talked about long-term strategy with the large tenant here at Town Center where they expanded by 10,000 feet. We turned our 30,000 square foot tenant into a 40,000 foot tenant and we renewed them for 15 years, but that transaction was nearly $2 million worth of outlay. So that’s a big part of that $4 million. The timing-wise is what Mike’s talking about, those deals have been set, the cash washes through between this quarter and next.

Okay great. All right. You have to take some other questions. Thank you.

Thank you, John.

Our next question comes from Craig Kucera with Wunderlich Securities. Please proceed with your question.

Yeah hi, good morning guys.

Good morning.

I was -- had a question about your leverage and kind of your thoughts there. Looking at the quarter and may be pushing 64% net assets and real estates and philosophically how far are you comfortable pushing leverage going forward?

Yeah, I going to let Mike answer that question, but I'll also caution you as a developer leverage on development projects is a big part of how we create value and so at any given time there is going to be a significant amount of construction debt out here that skews these results, which is why we try and focus on core leverage metrics but Mike why don’t you take that? Michael O’Hara: Yeah. Just to continue on, so we’re in the process right now is you may take somebody’s assts just coming online especially with the multifamily, we’ve spent most of the money in getting these projects up and ready to be occupied and borrowed all the money. So obviously, we’re a little bit behind the curve at that standpoint until the NOI comes online. Then if take that out of the equation, the EBITDA right now is in seven times range, I think on ongoing basis we want to be a seven or below debt to EBITDA and that’s what we’re shooting for and we’ll continue to structure our balance sheet accordingly.

Got it. So it sounds like you are about where you want to top things out. As far as the way you’ve been managing the balance sheet, you’ve got a lot of that coming due in a few years, lot of it is floating, you are capping at which makes sense, but is that just a function of kind of your size relative to your development pipeline. Do you see over time maintaining that strategy versus maybe a locking in some low long-term rates? Michael O’Hara: Yeah so on the maturities between -- up to 2015, we discovered 10,000 worth of maturity and $10 million worth of maturity. So not a lot of maturities in the next couple of years. In 2016 as we hit the first big maturities, a big piece of that is the credit facility, which matures in 2016. We’ll certainly make sure that we get that expended before 2016 on that and we’re certainly taking a look and starting to evaluate what assets we want to go put permanent financing on and put that out for 10 years. That’s something we’ll continue to do here over the couple of months and make sure we pick the right assets in doing that and we haven’t done it at this point in time because we want the flexibility with our assets to either do dispositions if need be in order to keep our leverage metrics NOI and also have the flexibility of adding to our borrowing base for our credit facility. So we’re continuing to fine tuning and we’ll continue to work on it over the next six months.

Got it. And finally you have some 50,000 feet that looks like things have improved over the job front Virginia Beach as we’re moving further away from the sequester. I know you’ve only assigned ten or so commercial leases during the quarter, but did you see improvement there or any hiccup in traffic at the top of the cosmopolitan or pricing power as you went through the quarter?

Yeah and we’ve seen significant increases, which as we reported that the Cosmo occupancy now is trending, it’s 95% occupied and actually 98% leased. That’s where we are headed. The traffic has picked up considerably. I don’t know if that’s a statement about the broader market as opposed to what’s happening here at Town Center, but I think when you have the retailers that we just announced making the decision to come here on a long-term basis, it’s indicative of what people are thinking is going to happen here.

Okay. Thanks a lot.

Our next question is from Dave Rodgers with Robert W. Baird. Please proceed with your question.

Just wanted to start with a couple of clarifications. Mike, maybe for you, you mentioned that the new retail center you acquired was 470,000. is that NOI or above? Michael O’Hara: That’s FFO and that’s for 2014.

For the remainder of the year, it’s only a mid quarter close, right?

Okay. Just wanted to verify that and then maybe the difference in your non-stabilized FFO guidance and I think maybe we’ve been around a little bit but my guess is it Liberty and/or retail, can you talk about that $0.5 million increase I guess if you will in the guidance, which related with respected to that noncore number, how much is Liberty, how much is retail? Was retail anticipated in that number or did it come in better than anticipated, any color on that will be helpful? Michael O’Hara: Yeah, so the major pieces on that -- the initial $1.5 million number are the multifamily because they opened up with majority of occupancy for the most part in trying to ramp them up. So to say, we took the look at three multifamily coming online during the year and as what we had as -- what we saw as occupancy schedules based upon some preliminary reports we saw from -- we got from our property managers. A couple of these; one is Liberty leasing quicker than we had in our projections and we’re seeing a tremendous amount of activity especially at Encore more so than we were expecting as well. So it’s a combination of those two things and we’re seeing the leasing activity on the retail over the 4525 Main Street.

Okay. Okay thanks for that. And maybe talk a little bit more about 4525 Main. I don’t think you put a lot in your comments about the office component of that building, but what are you seeing in terms of traffic for that space and talk about your confidence I guess with respect to being able to get that building leased up in fairly short order and at least continue to make progress on the occupancy side.

Sure David, I appreciate you bringing that up. I would like to elaborate on that a little bit. We want to make sure everybody to bear in mind how that project is designed. That building is positioned as the most expensive address in the region. I am not talking about the South Hampton road I mean the peninsula as well. It’s completely state of the art. It’s the best addressed that you can get if you’re going to be in this market and consequently it’s got the highest rent and it is designed to give us couple years worth of absorption. We came out with it because we didn’t want to get stuck where we’ve been for the last several years here at Town Center with essentially no space to lease. The open space at Town Center is somewhere in the 99% percentile and has been in forever. We’ve had one maybe two tenants lease in our history. So we’re hopeful, it sounds counterintuitive but we’re helpful that this inventory will last us a while. That being said, that all sounds great, but remember when you are at the top of the market, there is a smaller subset of firms that ramps our position and take advantage of that. The handful of tenants I’ll give you a good example, the [tenant cart] (ph) which is the largest architectural firm based in Virginia, they do business in 47 countries. They’ve effectively nearly double their rent in coming here. They’ve done that because they feel that they can compete much better on a world stage from an address like that versus where they were. Those are the kinds of companies that we need to get and they are not here on an everyday basis. All that said traffic is really good. We are over 50% leased as we sit today and we’ll be cash positive from day one. But we’ve just started scheduling the broker events and the grand opening and the ribbon cutting will later on in September. So we’re very excited about the project but I don’t have an expectation that all this space is going to be gone in the next 12 months. That would be good on one hand. On the other hand it put us right back in the box and we’re certainly not ready to launch yet another.

Okay. Fair point and I guess maybe on your equity-owned next generation development pipeline maybe a little bit color in characterizing the demand for the discussions that you’re having today, the feel of those discussions and you’re confidence in the ability to maintain or even grow that development pipeline in the equity-owned side.

David again another great question. I hope your call lasts forever and the opportunities out there are at a deeper pace. So actually Dan Hoffler and I had a conversation about a one month ago that while all this was happening while we were probably would have gone public. But the funnel has really opened up and we’re having a tremendous amount of discussions. I’ll tell you that the toughest problem right now and not the toughest, but the biggest challenge is maintaining our discipline. We feel a lot of really good projects, we’re trying to narrow the funnel to only do great projects and of course the difficulty is in identifying those from the offset because the development process, it’s a fairly lengthy one. But from everything we’re seeing there isn’t going to be any issue for the foreseeable future in maintaining our pipeline where we want it to be. We want to be careful about expanding it. We really don’t want to get out over our skews. We have a plan. As I mentioned our five year plan has us being right where we want to be in the next five years if we don’t do anything other than execute what’s within our control and I would like to think that that’s a baseline and then we’re going to be do some additional great things from there, but we’ve got to be careful not to -- just stick to our netting, not get out of our skews and just get that growth trending upwards.

Last question from me with regard to the asset sale. You talked about with the VNG building making out some tax protection payment modestly we're lowering I guess the net to the company. Talk about how you think about that concept going forward with respect to additional asset sales versus 1031 proceeds and kind of redeploying those. You have the opportunity to put maybe those proceeds into the retail center that you bought this quarter. But when I think about 1031 versus the tax protection payments then how should we expect you to think about that going forward?

That’s another great question David. I am going to turn it over to Mike to give you our thought process on that and before I do, I just want to make sure we are sitting in a wonderful position here and people on the call know there is a lot of froth out there in terms of what people are paying for assets. It gives us a tremendous amount of flexibility in terms of what we do with our balance sheet. We do plan on employing 1031s in order to maximize those proceeds. In some places as Mike will tell you and sometimes it will be better for us to pay down debt particularly where the markets are right now relative to our stock price and other times when really good acquisitions are lining up it will do – what the service will do to 1031s. Mike? Michael O’Hara: Yeah Dave. I guess the first is on a [generic] (ph) transaction that is not a candidate for 1031. With [indiscernible] we’re acquiring LLC interest and not the building. While they are not eligible for a 1031 and evaluating dispositions of asset obviously the net to the company after-tax protection it’s got to be involved in our thinking of whether or not -- sell an asset or not. Like most REITs when the IPO happens the former owner’s got tax protection and we’re not different than anybody else. Amongst our assets, we have assets that don’t have full protection. VNG is one of those that had 75% tax protection and not a 100% tax protection and then we’ve tax that’s going to come back to the former owners that are over and above the agreed upon value for the tax protection.

All right. Thanks guys.

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

I am sorry. So the best way to look at this Virginia International Gas deal basically a 6.15 cap on 8.9 is really about a 7.15 cap on the $7.7 million net.

John, now that math is correct, John.

Okay. Great, and then on your guidance, if I look at $27.5 million for the year and do the complicated math of subtracting out first and second quarter core FFO, I get to about $13.6 million for the rest of the year. Is that a correct number Mike? Michael O’Hara: Yeah.

And now if I subtract out Dimmock Square I get down to $13.1 million and change, which seems like a slope in the wrong direction from an average core FFO per share under $7 million a quarter for the first two quarters and then a run rate excluding Dimmock of 6.5 to 6.6 for Q3 and Q4. Am I missing something there and what’s causing that slippery side?

There are a couple of things John. Keyword there is we’re seeing approximately $27.5 million and we’re saying that good reasons and secondly does that's a VNG disposition in there is that gets removed from obviously from FFO NOI.

Gotcha. Okay thank you very much.

There are no further questions in queue at this time. I would like to turn the call back over to Mr. Haddad for closing comment.

I really appreciate everybody taking the time to talk with us this morning and we appreciate your interest in the company and look forward to updating you on our activities and results in coming quarters. Take care.

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time and have a great day.