AH Realty Trust, Inc. (AHRT) Q4 2014 Earnings Report, Transcript and Summary

Welcome to Armada Hoffler's fourth quarter 2014 earnings conference call. At this time, all participants are in a listen-only mode. After management's prepared remarks, you will be invited to participate in a question-and-answer session. [Operator Instructions]. As a reminder, this conference call is being recorded today, Thursday, February 12, 2015. I will now turn the call over to Ms. Julie Loftus Trudell, Vice President of Investor Relations at Armada Hoffler. Please go ahead.

Good morning and thank you for joining Armada Hoffler's fourth quarter 2014 earnings conference call and webcast. With me this morning are Lou Haddad, CEO and Mike O'Hara, CFO. In addition, Eric Smith, our Vice President of Operations, will be available for questions. The press release announcing our fourth quarter earnings along with our quarterly supplemental package was distributed this morning. A replay of this call will be available shortly after the conclusion of the call through March 12, 2015. The numbers to access the replay are provided in the earnings press release. For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, February 12, 2015 and will not be updated subsequent to this initial earnings call. During this call, we will make forward-looking statements including statements related to the future performance of our portfolio, our identified development pipeline and future pipeline, impacts of acquisitions, our construction business, our portfolio performance and financing activities, as well as comments on our outlook and guidance. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations and we 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, normalized FFO, core FFO and 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?

Thanks, Julie. Good morning and thank you for joining our call today. We continue to be very pleased by the performance of our company. This morning we reported another solid quarter with FFO per share of $0.20, which was in line with our expectations. For the full-year we reported FFO of $0.80 per share. This morning I am going to start with a synopsis of the year. I will then comment on new activity, including pending acquisitions, our commitment for a new unsecured credit facility and our recently announced dividend increase. I will conclude my remarks with our long-term outlook. Mike O'Hara will then provide details on the quarter as well as our 2015 guidance, which we introduced this morning. This is a very exciting time for our company. We successfully executed on the goals we laid out at the beginning of last year and are poised to build on that success. In 2014, we set out to maintain a stable portfolio of occupancy in the mid-90. In fact our occupancy reached 95.7% as of the end of the fourth quarter, up 60 basis points from the third quarter of 2014 and up 130 basis points compared to the end of last year. Our retail occupancy is 96.4% as of the end of the fourth quarter, up 300 basis points compared to the end of last year. Our office and multifamily occupancy figures are also strong at 95.2% and 95.7%, respectively. Our success in leasing is evidenced by a quarter-over-quarter increase in same-store NOI on both a GAAP and cash basis. With occupancy at almost 96%, the opportunities to continue to grow same-store NOI are somewhat limited. Remember, it is primarily the NOI from our development pipeline that we expect to drive our growth. In 2014, our goal was to deliver the development project on time. Property is slated for completion in 2014 came in on budget and were delivered on time. We delivered one office high-rise, three multifamily apartments and one shopping center. On the leasing side, we made significant progress in leasing our development pipeline. The initially delivery of 4525 Main, here in Town Center occurred in early June, which was faster than the original timeframe of late July. Retail occupancy at 4525 Main is 100% and the office occupancy is over 50% with ongoing activity across a number of prospects. Let me reiterate that this building is positioned as the most expensive address in the region. It's completely state-of-the-art. It's the premier location in this market and is designed to give us a couple of years worth of office absorption within Town Center. For the last several years, with essentially no vacancy here in Town Center, we have had to turn many prospects away. We now have the capacity to absorb tenant demand over the next few years as well as the opportunity to allow existing tenants to upgrade and/or expand their office space. As for multifamily, we delivered three projects in 2014, Encore, Whetstone and Liberty Apartments. Overall, we are very pleased with our multifamily projects and continue to believe that our disciplined approach in selecting high barrier to entry sites will drive occupancy, stabilization and value over the long-term. In the fourth quarter, we also delivered Greentree Shopping Center in Chesapeake, Virginia. With a shadow-anchored, corporate-owned Walmart, this property is over 90% leased or under LOI and we expect to reach stabilization long before our original projections. In addition, we are set to open four more projects in the first quarter of 2015, including two build-to-suit office buildings for the Commonwealth of Virginia. In fact, these two properties have already been delivered and are 100% leased with 15-year leases for both locations. This month, we will also deliver a new office and manufacturing building for Oceaneering International, which is also 100% pre-leased. And lastly in March, we will deliver Sandbridge Commons, Harris Teeter anchored shopping center in Virginia Beach. Currently this property is nearly 90% leased or under LOI which also is ahead of expectations. As you will note in our supplemental on page 18, for the first time we have included new information on the Johns Hopkins Project as part of our development pipeline. This $65 million development project is adjacent to Johns Hopkins Homewood main campus in Baltimore, Maryland and is part of the Charles village redevelopment program. It will include student housing with some retail space, restaurants and parking. Currently, half of the retail space is pre-leased to DBS Health. We anticipate that work begin next month and expect completion by the third quarter of 2015 at which time this property will be added to our portfolio. In 2014, we continue our long-standing strategy of selling non-core and single tenant assets from time to time. In the back half of the year, we sold the Virginia Natural Gas office building for $8.9 million, which represents a cap rate of 6.25%. The funds from this transaction were used to pay down debt. Early this year, we closed on a previously announced sale of the Sentara Williamsburg office building for $15.4 million, representing a cap rate of 6.3%,. We expect to use the proceeds from the sale in a 1031 tax free exchange. To this end, we have entered to definitive agreements to acquire two grocery anchored retail centers located in Maryland. These acquisitions will add over 185,000 square feet to our portfolio with a combined occupancy of approximately 90%. We will purchase these centers with a combination of common stock and cash including the net proceeds from the sale of Sentara. The combined cap rate of these two properties is approximately 7% on a cash basis and the asset should ultimately yield a cap rate in excess of 7.5% from the value-added lease up opportunity. By virtue of trading 6.3% cap asset for a 7.5% cap asset, the combined transaction results in an accretive exchange. Additionally, the issuance of common stock results in a transaction with expected leverage consistent with our overall corporate metrics thus not impacting our capital plan. These properties will be outstanding additions to our portfolio and continue to provide diversification throughout the Mid-Atlantic region. As always, both transactions are subject to customary closing conditions. In 2014, we set out to execute contracts for third party construction work consistent with historic segment profit. In the spring, we announced that we entered into a contract to build the first building in the Harbor Point project, a 20 story mixed-use tower for Exelon Corporation. Work on this project, located on Baltimore's waterfront adjacent to Harbor East, is underway with completion expected in the spring of 2016. We believe the size and scope of this project will help to drive our construction division's annual growth profit contribution in the coming year. In 2014, we set out to manage the balance sheet to ensure appropriate leverage metrics and position the company for continued FFO growth. In addition to dispositions, acquisitions with OP units and an equity raise in the fall of 2014, in the coming weeks, we plan to close on a new, expanded and most importantly unsecured credit facility, which Mike will discuss in greater detail. Finally I am excited that the Board of Directors have declared a cash dividend of $0.17 per share for the first quarter of 2015. This represents a 6.3% increase over the prior quarter's dividend. We believe this reflects the Board's confidence in our long-term strategy, the successful execution and delivery of our development pipeline and the Board's commitment to enhancing value and returning it to shareholders. To reiterate, our long-term strategy remains unchanged and it is simple, continue to grow NOI trough our development pipeline projects, through organic growth in our stable portfolio, through our third-party construction gross profits and through strategic acquisitions. As it relates to our development pipeline, we continue to execute at our targeted pace of commencing a $150 million to $175 million of development projects every 18 to 24 months. We expect all current development activities, those announced and those in pre-development, to result in an aggregate of approximately $25 million of incremental annualized NOI. As for the return on cost metrics of our development projects, we reiterate our corporate targets of 150 to 200 basis point spreads between development cost and retail value. Because of this discipline, our spreads have continued to widen as we are maintaining our return on cost targets in our pipeline regardless of the continued aggressiveness in market cap rate. We are focused on ensuring that our future NOI growth from development activities will translate into increased FFO and free cash flow on a per-share basis. With that I turn the call over to Mike and then we will take your questions.

Thanks Lou and good morning. Today I want to cover the highlights of the quarter including a discussion of the commitment for a new unsecured credit facility and I will wrap up with our 2015 guidance. This morning we reported fourth quarter FFO and core FFO of $0.20 per share, which were in line with our expectations. The full-year FFO was $0.80 and core FFO was $0.84 per share. In 2014, our core FFO was $29.4 million, which is an increase of over 10% versus 2013. This is the last quarter in which we will report core FFO. We introduced this metric shortly after the IPO as we believed it was a meaningful statistic in analyzing our business with a rollout and related impact for non-stabilized development projects. Going forward, we will report normalized FFO, which will not be adjusted for non-stabilized development projects and non-cash compensation. Normalized FFO will exclude certain items including, but not limited to, debt extinguishment costs, property acquisition costs and mark-to-market adjustments or interest rate derivatives and other noncomparable items. For reference, normalized FFO was $0.20 per share for the fourth quarter and $0.82 per share for the full-year 2014. During the fourth quarter, we executed 50,000 square feet of renewal and new leases. Office re-leasing spreads for the quarter were lower by $0.15 per square foot on a GAAP basis and lower by $1.65 per square feet on a cash basis. This was primarily driven by renewal at the Oyster Point office building. The office leasing activity in Newport News, Virginia where this building is located has been soft. The retail re-leasing spreads were higher by $3.57 per square foot on a GAAP basis and higher by $1.71 per square feet on a cash basis. This was primarily driven by renewal of a retail tenant at Town Center. Same-store NOI growth was positive for the quarter and for the full-year. Same-store NOI growth for the quarter was positive 3% on both a GAAP and cash basis. For the year, same-store NOI growth was positive 2% on a GAAP [ph] basis and 1% on a cash basis. During the fourth quarter, our portfolio occupancy increased 95.1% at September 30 to 95.7% at December 31. Retail experienced the most dramatic jump from 94.7% at September 30 to 96.4% at year-end primarily reflecting the new tenants at Town Center. On the construction front, we reported a segment gross profit in the fourth quarter of $1.1 million on revenue of $32 million. For the year, we reported a segment gross profit of $4.6 million on revenue of $103 million. This construction revenue does not include $85 million of construction activity on our development projects which is eliminated under GAAP. At the end of the fourth quarter, the company had total third party construction backlog of $159 million. Now turning to our balance sheet. We continued to execute on our balance sheet strategy to provide the flexibility to fund our growth objectives in most efficient and cost-effective manner while managing upcoming loan maturities. This past year, we have been methodical in our approach to ensuring a strong balance sheet. We executed on a planned disposition and made a capital raise in the fall. We managed our balance sheet so we could one, have the flexibility to sell properties debt-free thus maximizing value and two, work towards obtaining an unsecured credit facility. Today I am pleased to announce that we have a commitment from a syndicate of banks co-led by Bank of America and Regions Bank for a new $200 million unsecured facility on an accordion feature to $350 million. The credit facility includes a $50 million, five-year term loan. We expect to close on the credit facility later this month. The term of the $150 million revolver is expected to be four years and the interest rate expected to be 20 basis points lower than our current facility. Simultaneous with closing, we will be paying off approximately $39 million of unsecured debt which is 100% of our pre-payable debt on stabilized properties, except for the Smith's Landing which I will discuss in a moment. After closing on the credit facility and the Smith's Landing refinancing, the maturity of over $120 million of our debt is extended until 2019 or later. At the end of the fourth quarter, we had total outstanding debt of $359 million, including $59 million outstanding on our existing credit facility. Our core debt to core EBITDA as of December 31 was 6.1 times. Our goal is to maintain a core debt to core EBITDA in a 6 times range, where it now resides and total debt to EBITDA at 8 times range as we borrow to fund development projects. As I mentioned during last quarter's call, we are evaluating additional fixed rate debt versus interest rate caps. We are in the process of refinancing Smith's Landing with a 20-year fixed rate loan. In addition to the Smith's Landing loan, we expect to fix the rate on the $15 million term. On a pro forma basis, after taking these two transactions into account, our fixed rate debt as of year-end would have been 60% of our total debt and including interest rate caps 93% of our debt would have been fixed or hedged. Now let me walk you through our full-year 2015 guidance that were introduced this morning. We expect 2015 normalized FFO in the range of $0.85 to $0.90 per share in comparison to $0.82 per share in 2014. Our 2015 estimates are predicated on the following. Total GAAP NOI in the $52.3 million to $53.3 million range, which includes in excess of $8.5 million from development pipeline projects, our third party construction company annual segment gross profit of $4.5 million to $5 million, general administrative expenses in the $8.3 million to $8.6 million range, interest expense in the $14 million to $15 million range. The midpoint of the range reflects the assumption factors in the LIBOR yield curve which anticipates increase in LIBOR during the year. And 40.2 million weighted average shares and OP units outstanding, which includes the shares that are expected to be issued for the pending acquisitions. To be clear, the company's guidance does include the impact of the two pending acquisitions that we discussed today. However this guidance excludes any impact from future acquisitions, dispositions or other capital market activity. Before we turn to Q&A, I would like to make a few comments about the current quarter. First quarter is expected to be negatively impacted our typically higher first quarter G&A expenses and the timing of the Sentara [indiscernible] exchange. We closed on the Sentara sale on January 5 and we expect to close on two acquisitions late in the first quarter. In addition, the development pipeline NOI and FFO growth back is backend waited reflecting tenant occupancy and leasing. So it is also consistent with the gradual increase in the development pipeline NOI during the year. Taking these into account, we expect the first quarter normalized FFO could be as low as $0.17 per share. In addition, the first quarter FFO is expected to be impacted by debt extinguishment costs relating to the new anticipated unsecured credit facility transaction and cost related to the acquisition of the two grocery anchored tenants. I will now turn the call back to Lou.

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

[Operator Instructions]. Our first question is from Dave Rodgers of Baird. Please go ahead.

Good morning. Lou, I wanted to ask a little bit about acquisitions, if we could. Curious about how these two Maryland grocery anchored centers came to you? If this was off market transaction? If this is something identified specifically for the 1031? And then I guess, more broadly, what does that pipeline look for you this year in terms of overall acquisitions? Is that something you want to do more of?

Thanks Dave and good morning. I will let Eric Smith answer that question, specifically, but before I turn the call over to him, make sure that everybody does understand our acquisition strategy and that is one of growth through accretion with people that want to be partners with our firm and this is much like the Dimmock Square acquisition, which was done off market. This was also done off market. It came to us through a related party with that is well known to us. And that will continue to be our strategy for the most part in terms of acquisitions. Eric, specifics please.

Sure. Thank you Lou and good morning Dave. As Lou said, I think he answered the first part of your question. These are off market opportunities to expand upon that to our overall strategy and we started down this road. We are going to continue to look at off market opportunities and selected marketing opportunities, keeping in mind that we feel we have a growth platform from the development pipeline, which is robust in nature. So the acquisition platform is, in our mind, intended to support that. And so we are going to be prudent and cautious as we look at opportunities. We are looking at as many opportunities and the main criteria among a long list that we are looking at are obviously beginning with the quality of the real estate. We obviously are looking for accretive opportunities, opportunities to geographically expand in areas where we didn't want to put a foothold because we were looking at other business opportunities in those areas. And then of course selected value-add opportunities, either because they are leased up opportunity or development opportunity going along with stable asset. And so we hope that over the coming year and in the future, we will have more acquisitions to share with you and to announce, but I want to emphasize, this is going to be a very methodical approach to making sure we are doing acquisitions that makes sense from an income point of view, from a balance sheet point of view and most importantly looking for opportunities that we think complement our portfolio.

Okay. That's helpful. Maybe shifting a little bit to apartments and this is probably going to be a multiple-prong question, but I guess I am curious about Liberty, Whetstone and Encore and the progress there and particularly in the supplemental, I think you have 3Q 2014 as kind of the completion date, but N/A as the occupancy for each of those of the pre-leased percentage of those. So one is, can you give us an update on the progress of those assets? And I guess, the other side would be, from a financial side. Mike, can you talk about are you capitalizing OpEx or interest cost with regard to those assets still? Or is that done and what kind of drag would that be, if not?

Okay. That's a lot of questions, Dave.

I am a fan of umbrella or multifamily.

Let me see if I can hit those points. And actually, I appreciate the question. Maybe we can clarify a little bit more on our multifamily strategy. As we said in our comments earlier, we pride ourselves on putting multifamily and high barrier to entry locations. And that's where we are stick towards hitting. We always put in an 18-month window to reach stabilization. That's not because we believe that every project is going to stabilize in 18 months, but it's a good average. It's a good average because during the process, we often manipulate it one way or another that could lengthen or shorten that opportunity and I will go through each of our three right now. Encore, which is here at Town Center, which was delivered in the third quarter, is leasing far ahead of expectations and right now it's sitting at about 50% leased. And it's only three or four months in. So therefore, we are looking at raising our rate, getting rid of incentives, which obviously would impact the rates of occupancy, but ultimately give us a long-term much better stabilized value. In the case of Whetstone, it's pretty much on target. We are sitting at about 20% lease, again, through activities from October till now and it's about on track for 18 month. We don't anticipate a lot of adjustment there and we don't expect a big push until the school year starts really in July, so leasing fees in there. At Liberty Apartments, we have hit a plateau. We are, again, sitting around 70% leased and we won't get another big slab of leasing until the apprentice school has their fall/semester, which again won't be until July or August of next year. So what we are looking at there is reducing rent and adding incentives as we think it would be better to fill it sooner rather than later, rather than wait six or seven months for those students. In each case, we feel very good about these long-term values. Like I said, these three assets cannot be out-positioned. So it's a matter of actively managing to get the NOI stabilization as quickly as we can without compromising the ultimate value.

And Dave, just to answer your question on capitalize interest, I will take the three of them separately. Liberty, we have not been not capitalizing interest on that one. That was an acquisition. So therefore, we couldn't do the capitalization on that one under GAAP. Both Encore and Whetstone, we have been capitalizing interest on the units that were not turned over. For 2015, we anticipate all units being delivered in the first quarter of 2015. So there is not much to capitalize interest on those two properties.

Great. Thanks for all the color.

Absolutely.

Thank you. The next question is from John Guinee of Stifel. Please go ahead.

Great. Thank you. Nice job, guys. A question for you, Lou or Eric. When you are buying at 7% cap for neighborhood centers, that's an awfully high cap rate and what that does that, that either tells me that you are really, really good at what you do or you are buying stabilized assets with not much upside and maybe a little bit of just about second here in nature. Can you elaborate on that?

Sure, would be happy to, John. Again, when we are assessing an asset, as I went through, there is a handful of metrics that we are trying to check the box on and the quality of the real estate is obviously the primary driver of our acquisition strategy. We think that Maryland is obviously a core market for us and these particular markets, once we have the opportunity to get through the customary closing conditions and talk a little bit more about the detail of the centers in the market, I think that will bear out. And this is a good example of the upside potential we talked about. We think that for reasons we are very comfortable with, it hasn't had the leasing focus from the previous owners. So we think the upside potential for the leasing will add meaningful value to the acquisition.

Okay and back into, I was looking at your picture, I noticed all the votes out in the top of the picture. Can you tell me what's going on with report in Norfolk?

Sure. As a matter of fact, there is a great report that came out about two weeks ago, John, that did a bit of analysis that puts the total impact from the port of Virginia at over $60 billion. They activity is up about 7% year-over-year as most of you have heard me allude to before, we are ready for the Panamax ships here. And there is only on other port on the East Coast that is similarly ready. Everybody else is struggling to catch up. So we feel very good about the growth in the port. And that leads me to something else that you might have seen in the paper or online or wherever you get your news from. The President's budget was very good to the military. We told you how this market is underpinned by three legs on a stool, right and one is the port, one is the military, which again full funding for new carrier as well as partial funding for a carrier after that, as well as a $30 billion increase in the overall defense budget, that predominantly will be spent here as the Navy has got the biggest chunk of that. And thirdly, the multibillion-dollar impact from tourism. All of those things are tangential to our business, but they serve to be a great underpinning for the market. And right now we are hitting on all cylinders with regard to that underpinning.

Great. Thank you.

John, back to your other question. I want to take a second here and talk a little bit more about these acquisitions and maybe this is part of the difference in running a real estate company versus running a REIT. We are looking at long-term partnerships with people who do business with over the next decade. The people we are buying this center from as well as the person we bought Dimmock Square from have long pipelines of asset and opportunities and we want them in the fold. So that's part of the criteria we look at when we look at an acquisition.

And John, I want to add one other thing on these two acquisitions. The other is, this is a candidate for the 1031 proceed. So from a cost to capital and cap rate, we sold something at a 6.3% cap that we are 1031-ing into a 7% plus cap asset.

Great. Thank you.

Thank you. The next question is from Paul Puryear of Raymond James. Please go ahead.

Hi. Good morning. Nice quarter, guys. So Lou, as you think about buying assets and issuing your stock, how do you think about the value of your stock here?

Again I will go ahead -- we think it's way undervalued, Paul. Again, I am going to let Eric add some color to it, but it's all part of the same equation. Like I said, we are wanting to encourage people to rather than take this money, be partners with us. We want that relationship. We want that pipeline. We want more opportunities coming our way. So potentially we will give somebody a little bit of a discount on OP unit in order to get that done, but Eric, if you would like to -- Eric has been heading up these acquisitions for us and has a pretty nice pipeline and some good experience with it now.

I would echo what Lou just said in adding a couple of additional thoughts. We are interested in the long term relationship. So in a normal course of business, we would find an opportunity for a win-win profile on both pricing the stock or the operating partnership units and obviously the cap rate that we will get into the asset for and the future opportunity to do business with those folks and all that is often a negotiation. By way of the example of the two Maryland acquisitions, the one piece of information I can share is that when we negotiated those acquisitions and particularly the operating partnership units, what had turned into actually common stock that they are taking back, we negotiated $10 price on those shares. Now keep in mind that that was at a time when our stock was trading below $9.50. So we have gained some meaningful traction in talking to folks on these off market opportunities who are interested in taking back an ownership interest in our company and walking them through the growth in the development pipeline, both the current one as well as the annual pace that Lou mentioned in his earlier remarks and explain to them again that we are a real estate company with an embedded growth trajectory from that pipeline. And I think it's meaningful to know that these folks brought into a higher value of OP units meaningfully above where the stock price was trading at the time we negotiated these. We are obviously building in protections, collars so that we don't end up in a situation where the cost of capital gets way out of line with where the stock is trading by the time it closes, because there can be meaningful time between negotiations and closing it, as everyone on the phone well knows. But even now, we are still comfortable with that price because again with our current stock price and where it's trading, adding transaction or friction cost to any type of raise and we are still issuing at where we could issue common equity and so we still think it is a good deal and accretive deal, obviously as we previously mentioned. So hopefully that provides some color into how we think about the value of those units and doing deals that involve units.

Well, I don't know how you get to it's accretive at $10 a share, your stock is trading at 7.8% implied cap rate right now. So you just bought an asset at a 7% at $10. It must be well over an 8% implied cap rate. That doesn't make any sense.

From FFO, when we say accretive, we are referring to accretive FFO per share standpoint.

That's irrelevant. I mean, I think you should be issuing your stock above net asset value. I get it, when you need to issue stock to fund a development pipeline that's yielding high returns, but to issue your stock for $10 a share for an asset that's paying you 7%, when your stocks worth much more than that, anyway that was my point. I have got one more question for you. When you are thinking about your portfolio and the EBITDA flow from your portfolio spread across three asset classes, how much does that [indiscernible] here, Lou, as you are thinking about adding shopping centers as opposed to, say, office building.

Well, I think you might have heard my thoughts before on office, but we feel a lot better about neighborhood centers than we do suburban office. We have seen too much trade with no barrier to entry, no real locational advantage and extremely high tenant improvement refitting on roll over in markets that we play in. So I think you are going to be a pretty special case in order for us to buy office space. On the other hand, well-positioned, well located, retail stays well, particularly with the kind of tenant that we are talking with. But back to your previous question, Paul. Again, I want to reiterate, there is and again, maybe this is the difference between a real estate company and a REIT. We see a very large opportunity with the owners that we are buying these two shopping centers from. And so therefore that comes into our thinking. We can't run this business for this quarter or this half or this year. We have got to run it for long-term growth and we see opportunities, we are going to seize them. As Eric said, it may be accretive on FFO basis, it's accretive on an NAV basis, but I will tell you, on a real estate basis, anybody would take this step. And so I will ask you to bear with us until the rest of that comes out.

Okay. Fine. Just for the record, at $10 a share, that's a heck of a price.

We understand that. Thank you.

Thanks.

Thank you. Our next question is from Craig Kucera of Wunderlich. Please go ahead.

Hi. Good morning. Getting back to the acquisitions that you have coming forward, I just want to double-check some of the metrics. It looks to me based on your outlook for average weighted shares about roughly 5 million of OP units and then is rest cash or is there any debt you are assuming? Can you just give us a breakdown of how that looks?

As we said in the call and again reiterate, your math from the share count is on the issuance of common stock is approximately 435,000 shares. The rest of it, as Mike said in his comments, being cash and the use of the proceeds from the Sentara sale.

Got it and I think Lou you hit on this earlier, but to just sort of double-check. it sounds to me like over time, just given what you can sell office at and buy retail that the company may grow more into, you may recycle more into retail maybe yielding north of 7%?

I don't want to draw that broad a conclusion. I think you certainly can steer in that direction and I think with what's evident right now we would head that way, but we are working on a couple of pipeline projects that would be substantial on the office side that's going to bring [indiscernible] back. So it's hard to say. I guess the best place for us to be, if you are trying to figure where this portfolio is headed, is that we are getting continue to develop core office space, much like Town Center that is best-in-class, best in location and typically fairly heavily subsidized, from apartments and those kinds of opportunities on the acquisition side just really don't exist. So I think you will see the office NOI grow more organically as opposed to acquisitions. But never say never, right.

Right. That makes sense. And when you look at your development, I think in the past you have said that you were targeting 8.25% yield on cost. Is that still where you see projects today and in the future pipeline being or have those come up a bit?

I really appreciate you asking that question. We tried to allude to that in our comments. And that's why our spreads are continuing to widen. We are maintaining that. When we were talking about our pipeline at the IPO, we talked about, I think it was like 8.13% or 8.25%. That metric is holding up. It's skewed a little bit downward by virtue of the three build-to-suits that we are bringing online. Obviously, it's not quite the spread that the others did, but now with what we see in the pipeline, we are going to be back into that range. And, of course cap rates have fallen. We don't know how long they are going to stay down there and that's really kind of immaterial though. But the spread has gotten even wider.

Got it and then finally there was a pretty big list in your tenant improvements this quarter. Looking at last quarter, there wasn't that much space that was rolling over. And I can't really seem to pick it from the schedules that are in the supplement. So can you comment on, was that concentrated in any one project or is there any color that you can give us on the increase?

Yes. The big numbers were here at Town Center and it really revolves around the retailers that we put in with Free People and lululemon. Those were some pretty massive lists in terms of tenant improvement and now those tenants are in and operating.

Yes and there was one other was law firm renewed and that was the TI and leasing commission relating to that tenant you are talking about.

Okay. Thank you.

Thank you. We have no further questions in queue at this time. I would like to turn it back over to management for any closing remarks.

Thanks very much for your interest in the company. We appreciate your time this morning and we look forward to talking to you soon. Take care.