AH Realty Trust, Inc. (AHRT) Q4 2015 Earnings Report, Transcript and Summary

Welcome to Armada Hoffler's Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. As a reminder, this conference call is being recorded today, Thursday, February 11, 2016. I will now turn the conference call over to Mike O'Hara, Chief Financial Officer at Armada Hoffler. Please go ahead.

Good morning. And thank you for joining Armada Hoffler's fourth quarter 2015 earnings conference call and webcast. On the call this morning in addition to myself are Lou Haddad, CEO and Eric Smith, our Chief Investment Officer who will be available for questions. The press release announcing our fourth quarter earnings along with our quarterly supplemental was distributed this morning. A replay of this call will be available shortly after the conclusion of the call through March 11, 2016. 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 11, 2016 and will not be updated subsequent to this initial earnings call. During this call, we will make forward-looking statements includes statements related to the future performance of our portfolio, our development pipeline, impact of acquisitions and dispositions, our construction business, our portfolio performance and financing activities, as well as comments on our outlook. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations as we advise listeners to review the risk factors discussed in our press release this morning and in documents we have filed with or furnished to SEC. We also will discuss certain non-GAAP financial measures including, but not limited to FFO and normalized FFO. 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?

Good morning. And thank you for joining us today. This morning we posted our full year 2015 results with normalized FFO per share of $0.93, we achieved the high end of our increased guidance range. From our core portfolio to the execution of the projects in our development pipeline to our third party construction business, we realized tremendous growth across all areas of our company during this past year. Most importantly, we took proactive steps and made what we believe to be the right real estate decision to position our company for sustained future performance and long-term value creation. I'll begin with highlights of this past quarter and year and close with comments on 2016. Mike will then provide details on the quarter as well as our 2016 guidance which we introduced this morning. At the beginning of the year I reiterated our long-term growth strategy, recreate value through new real estate development, organic growth in our core portfolio, our third party construction business, strategic acquisitions and efficient capital recycling. This morning I am glad to report that we delivered on each of these fronts during 2015 resulting in significant year-over-year growth in NOI, same store NOI, construction gross profits, FFO and normalized FFO. Mike will walk through each of these metrics in detail shortly. While I am pleased to report such great results, I am more focused on the long-term value that our management team continues to create as a real estate producer and investor not just as an investment vehicle. The fundamental and guiding principle of our real estate company for the past 37 years remains unchanged. To invest in and develop the highest quality real estate in our target market. If there is one thing that our management team has learned over the 30 plus years we've been together is that high quality real estate stands the test of time. Appreciates over the long-term is very difficult to duplicate. Our quarterly FFO growth is well received, long-term asset value or NAV growth is our prime focus. I'll start with primary growth engine of our company, our development pipeline. During 2015, we placed into service four new assets, two office buildings for the Commonwealth of Virginia, Sandbridge Commons shopping center, and the Oceaneering International building. Each on schedule and on budget. The Common wealth building and Sandbridge Commons remain in our core portfolio. As we discussed on our last call, we sold the Oceaneering building at handsome 20% profit and reinvested the net proceeds into a portfolio of high quality retail asset that I'll discuss in a few moment. We continue to make progress on the projects in our active development pipeline. Both Johns Hopkins Village and Lightfoot marketplace are on track for mid -2016 delivery. Pre-leasing activity of both properties has been strong. As of today, 56% of the apartments at John Hopkins Village are pre-leased and over half the retail space is under negotiation. Lightfoot market place currently stand at 71% pre-leased including the addition of a 22,000 square foot build to suite building for children hospital. Brooks Crossing, our joint venture with the City of Newport News continues to evolve and grow. Just last month we completed and sold to the city a new $7 million police leasing.. For the next phase of the project we are currently projecting 50,000 square feet of mixed used space and our negotiations with the Fortune 500 office tenant to anchor the project. Brooks Crossing represents yet another public private partnership on the heels of the two dozen other such transaction that have been our hallmark over the past four decades. We ended 2015 with the announcement of our investment in a new $93 million (as per release $23 million) Point Street Apartments project. As I discussed on our last call, Point Street is located on the water front in the highly desirable in a Harbor east of Baltimore. And is expected to feature 289 luxury apartment units and 18,000 square feet of retail. The opportunity to invest in the project arose from our long association with BD Development Group, a relationship grounded in the $1 billion plus of project that we've completed in the Inner Harbor over the past two decade. As both the mezzanine lender and the projects general contractors, we've realized market rate interest income and fees during the lengthy development and construction process. While at the same time avoiding the stress on our balance sheet during development and initial lease up. But our option to purchase an 88% interest in the project at cost on completion, we preserve a healthy wholesale to retail spread. Most importantly, Point Street Apartments represents our next step in building a portfolio of the highest quality real estate. Our broad based capabilities and track record allow us to selectively invest in some of the best projects in our target markets. We are confident that over time the quality of our assets and the lower cap rates they command will translate into a higher NAV. We continue explore a number of similar restructured opportunities with other experienced developers who are seeking a strong development, construction and financial partner with all the capabilities that we bring to the table. While it would be premature to discuss specific at this time, I can reiterate the attributes that we are targeting in new products to our pipeline. Class A assets with high barrier to entry locations, diversification, primarily targeting the Raleigh, Durham, Charlotte and Baltimore markets, strategic expansion at town center, a healthy development spread of approximately 20% created through premier site selection, cost and timing control through our operating companies and leveraging public private partnerships when appropriate. Joint venture opportunities, utilizing our unique ability to co-develop and construct. We have enough confidence in a number of these potential projects to include their impacts in our 2016 guidance range and look forward to executing agreements and making official announcement in the coming weeks. Shifting to the foundation of our company, our core portfolio, our stabilized assets continue to outperform. During 2015, we grew cash, same store NOI by 5.5%. The fourth quarter of 2015 marked our sixth consecutive quarter of significant same store NOI growth. The organic growth in our portfolio was driven largely by strong retail and multifamily leasing at the town center of Virginia Beach, providing further proof of the quality and growth potential of our flagship asset. At the end of the year, our core portfolio occupancy stood at a solid 95%. Occupancy across all product size at the end of the year stood in the mid 90s and during the third quarter we successfully managed both Encore and Liberty Apartment to stabilization. Turning to our third party construction business. Our general contracting segment finished the year in line with increased expectations reporting $5.9 million of gross profit. An increase of almost 30% over 2014 and well above our historical run rate. Our progress on the $170 million Exelon Tower in Baltimore's Harbor point continues on schedule towards completion this spring. Just next door to the Exelon site our team is already begun construction on Point Street Apartments. Here in Virginia Beach, our work on an ocean front hotel is underway as well. With over $83 million in backlog and several promising opportunities in the pipeline, we expect this segment of our business to continue to generate profit above our historical average. On the acquisition and disposition front, 2015 and the initial weeks of 2016 were busy. During the year, we sold the Sentara Williamsburg medical office building and a new delivered western apartment and utilized the net proceeds to acquire Stone House Square, Socastee Commons Providence Plaza. As a result, we successfully monetize the wholesale to retail spread created by our development process and expanded our geographic reach into Maryland as well as northern -- Carolina. Furthermore, our development in construction expertise runs itself to potentially development opportunities at both Providence Plaza and Socastee Commons In April, we acquired Perry Hall Marketplace in a common stock transaction further solidifying our Maryland portfolio. In July, we completed the acquisition of Columbus Village and transaction in which the seller took back over $14 million of value in OP units. This five acre parcel adjacent to the Town Center, Virginia Beach as a prime target for redevelopment and fits squarely within our investment philosophy and long-term strategy. In October, we completed the sale of Oceaneering International building for $30 million and just after the turn of the year we completed the sale of the Richmond Tower Office building for $78 million. We used the proceeds from these sales to partially fund the acquisition of $170.5 million retail portfolio totaling 1.1 million square feet across 11 assets. The core of the acquired portfolio consists of six retail centers well positioned along the I-85 corridor between Raleigh-Durham and Greenville. These core assets feature major anchor tenant including Harris Teeter, PetSmart, T.J. Maxx, Bed, Bath & Beyond, Ross Dress for Less, Hobby Lobby and Petco. The remaining five assets are dis-positioned candidates. We've recognized that the weighted average exit cap rate for Richmond Tower and Oceaneering exceed the going in cap rate for the portfolio acquisition resulting in a sacrifice of some short-term FFO. With our current cost of capital, we would typically refrain from purchasing 6.5 cap assets, however, the opportunity to redeploy our equity from predominately single tenant office assets in the Richmond and Hampton Road market into a portfolio of high quality retail asset in the Carolina, each anchored by solid credit brand name tenant was the right real estate decision. In our evaluation, increasing our presence in the major Carolina markets and diversifying our overall risk profile were well worth cap rate trade off. Furthermore, this transaction allowed us to defer taxes on the significant gains realized on the sales of both Richmond Tower and Oceaneering. Our management team collectively the largest owner of the company remains committed to making the right real estate decision in order to create long-term for all shareholders. We believe that Armada Hoffler is the only REIT that provides investors the opportunity to benefit from three profit centers in real estate. The ownership with income producing properties which is where most REIT focuses. The profitable development of institutional grade properties at wholesale cost for either portfolio placement or for sale to recycle to capital added gain. An in house construction which not only generate substantial profits from third party business but also controls cost and schedule in our development projects. We believe that this third factor is unique to our Armada Hoffler across the entire REIT universe. We will continue to execute across these profit centers to maximize the investment returns of our shareholders. As we look ahead to 2016, I continue to be optimistic about our company and the opportunities presenting themselves in our pre development pipeline. And despite the number of asset disposition that we've executed in a last 15 months, we continue to project growth in the coming year. Once again I'll emphasize that our focus is not on next quarters or even next year's growth in FFO. Our attention is on growing our portfolio with a highest quality real estate in best locations in order to maximize value creation and return it to our shareholders. Along those lines, I am excited that the Board of Directors has declared a cash dividend of $0.18 per share for the first quarter or $0.72 on an annualized basis. This represents a 5.9% increase over the prior quarter's dividend. We believe this reflects the Board's confident in our long-term strategy. The successful execution and delivery of the projects in our pre-development and active development pipeline and the Board's commitment to enhancing value and returning it to our shareholders. This dividend increase is made possible not only by all the successes that I've outlined from 2015 but the growth we anticipate in 2016. As everyone has seen we provided our 2016 guidance this morning of $0.93to $0.97 of normalized FFO per share. With the development pipeline where delivery of new projects can be somewhat lumpy from year-to-year and the conclusion of a number of recent disposition, we believe that the anticipated year-over-year growth we expect in 2016 on top of the 13% growth we experienced in 2015 is emblematic of a strong management team, our focused on quality real estate decisions and a diversified real estate company and business model. With that I'll turn the call over to Mike who can provide some additional details and figures around our 2015 activity and 2016 guidance. Mike?

Thanks, Lou, and good morning. Today I want to cover the highlight of the quarter, the full year, thoughts on our balance sheet and additional details on our 2016 guidance. This morning, we reported FFO of $0.22 per share, normalized FFO of $0.24 per share which was at the high end of our expectations. For the full year FFO was $0.87 per share and normalized FFO was $0.93 per share. This compares to FFO of $0.80 and normalized FFO of $0.82 for 2014. As a reminder, FFO excludes gains on real estate which was $5 million for the quarter and $18 million for the full year. Despite this treatment, as we've discussed in the past, asset sales and capital recycling will continue to be an element of future value creation. On a related note because we structured these transaction for 1031 tax free exchange, there are no tax full gains in 2015. Tax efficiency remains one of corporate goals. Please see page 10 of the supplemental for the normalized FFO calculation, excluded items this quarter consist of debt extinguishment clauses, property acquisition cost, development and other pursuant cost and mark to market adjustment for interest rate derivatives. The most noble of this adjustment was $185,000 and acquisition development and other pursue cost which is largely due to the January portfolio acquisition. We had another strong quarter of same store NOI growth. Same store NOI growth was positive 2% on a GAAP basis, positive 4.5% on a cash basis compared to the fourth quarter of 2014. For the year, same store NOI growth was positive to 3.2% on a GAAP basis and positive 5.5% on a cash basis compared to 2014. At the end of the quarter, our core operating portfolio occupancy was 95.3% with office at 95.8%, retail at 95.5% and multifamily at 94.2%. On the construction front, we reported a segment gross profit in the fourth quarter of $1.1 million on revenue of $41 million. For the year, we reported segment gross profit of $5.9 million on revenue of $171 million. This compares to a segment gross profit of $4.6 million on revenue of $103 million for 2014. Again at the fourth quarter, the company had a third party construction backlog of $83 million. To summarize our 2015 performance metrics, the company excelled in all areas. Normalized FFO increased $0.11 per share or 13%, construction gross profit increased $1.3 million or 28%, FFO increased $0.19 per share or 31% and same store cash NOI increased by 5.5%. In addition, we believe this past year's asset recycling improves the quality of our portfolio and underlying cash flow. Now turning to our balance sheet, we continue to take actions to enhance flexibility and strengthen our balance sheet including increasing the capacity of the credit facility. Hedging our interest rate exposure and completing a modest equity raise. In December, we issued 3.5 million shares of common stock which net of issuance cost raised $35.1 million. In addition, we continue to use ATM program last quarter as expected to raise $3.7 million on gross proceeds at an average price of $10.21 per share. The proceeds from these transactions were used to repay a portion of the credit facility which was used to fund our development activities and a portion of the 11 property portfolio acquisition. These equity raises as well as our plan to sell five of the non core assets from the recent portfolio acquisition are intended to achieve two main objectives. Delever the company to keep our debt metrics and leverage ratios in line with our corporate goals, and position the company to take advantage of new investment opportunities. At the end of the quarter, we had total outstanding debt of $382 million including $74 million outstanding under the $150 million revolving credit facility. In January, we added three properties to the credit facility borrowing base, increased the capacity by $25 million to $225 million. We continue to evaluate our exposure to higher interest rate and look for opportune time to enter hedges. During the quarter, we purchased a $75 million LIBOR interest rate cap at 1.25%. With this new cap as of December 31, all of our debt was fixed or hedged. Now turning to development. As we discussed last quarter, the Point Street Apartments project did not consolidated and therefore does not stress our balance sheet during construction or lease up. Projects of this size and duration require debt equity for over two years with no return on that capital. With the mezzanine debt structure, you have paid a return on our investment and construction fee during development and have an option to -- controlling interest and property upon completion. Our current investment in Point Street is in the form of $23 million mezzanine loan which bears interest at 8%. As any development project, it takes time for construction ramp up so from a timing standpoint we do not expect $23 million loan to be fully funded until late second quarter. The construction contract is expected to be approximately $67 million and fee of 3%. Earlier as Lou discussed additional pipeline projects that are close to being finalized. Two of these projects have an impact on future earnings. One of these is a multifamily project that in similar size to the Harbor Point Apartments and expected to utilize the same mezzanine debt structure. The other is a joint venture of which is the minority partner. Our construction company will be the general contract on both these projects and will earn third party construction lease. While these two projects are included in our 2016 guidance, the construction contracts are not yet signed and thus included in our yearend backlog of $83 million. On the asset recycling front, we closed on the sales of Oceaneering building in October and a Richmond Tower last month. Combined the sales proceed for $108 million represents 7.6% cash cap rate. These proceeds were reinvested in mid January to fund a portion of the purchase of the 11 retail properties which had a total cost of $170.5 million. Based on our 2016 budgets which include recent activity, and going in cap rate would be 7% of the entire portfolio. However, for the six core asset that remains asset selling to five non core properties, going cap rate will be closer to 6.5%. Inclusive of the equity raise and selling the five non core properties this transaction will be dilutive by $0.05 per share on a cash basis. As Lou discussed, we feel this was the right decision for the company as we manage the long term, make decision based upon asset quality, tenant risk and cash flow not quarterly earnings. We also believe this transaction of treating from a predominately single non credit office tenant into six retail centers anchored by solid credit, brand name tenant improve the company's overall cap rate and risk profile. Starting on page 27 of the supplemental are details on this acquisition including pro forma December 31 data. This pro forma information includes only the six core assets loaded caged along in the I-85 corridor in Carolinas. Now let me walk you through the full year 2016 guidance that we introduced this morning. We expect 2016 normalized FFO in a range of $0.93 to $0.97 per share. Our 2016 estimates are predicated on the following assumptions. GAAP NOI $62.3 million to $63 million range, third party construction company gross profit in $4.7 million to $5.2 million range, general administrative expenses in $8.8 million to $9.1 million range. Interest income from our mezzanine financing program in $2.9 million to $3.1 million range. Interest expense in $16.3 million to $16.9 million. The sale of the five non core retail properties by June 30 and $47.2 million weighted average shares and OP units outstanding. This guidance does include the impact for the two pending pipeline projects I discussed earlier. However, this guidance exclude any impact from future acquisitions, asset sales other than a five retail assets or other capital markets activity with the exception of continuing to ATM program. Before we turn to Q&A, I'd like to make a comment about first quarter 2016. In the past, earnings in the first quarter of the year have been lower than subsequent quarters. However, we do not see that being a case this year. I'll now turn the call back to Lou.

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

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

Hey, good morning, guys. Just wanted to follow up quickly on what the activity looks like in the office leasing, obviously, with the dovetail into Main Street office but a little bit more color on just kind of what the type of activity you're seeing across the portfolio where you do have some availability, Lou?

Dave, it has been pretty slow over the last quarter in office leasing, we are not seeing a lot of velocity of tenants. We've got a couple of things working that will add some occupancy to 4525 specifically. But right now people are not doing as much looking as we would prefer. But ultimately we feel very comfortable with where we sit both at 4525 and of course the rest of the portfolio is essentially leased.

Okay. That's helpful. Maybe a similar question on the apartments side, just trying to get a gauge of activity in your markets, what type of activity you're seeing. Obviously, occupancy is high, but just kind of curious about the available of lease as you look forward a little bit and the overall demand and ability to keep rates high in the assets that you do own?

Yes. We are not seeing any blips out there at all. We always experienced in fourth quarter in first couple of months of the year, things have slowdown, this year isn't any exception but we are seeing a lot of activity and we feel really good about where this is going to end up for this year.

Okay. Last question maybe for Mike. Mike, a little bit on just maybe simplifying down the sources and the uses for this year between the asset sales, between some of the development spending that you have as you could run through its sources and uses for the year that would be helpful. Thank you.

Good morning, Dave. So over the past couple of months we certainly worked hard on getting the balance sheet set up for this coming year. We did the equity raise in December. We increased the capacity on our credit facility in January and we will continue use the ATM. We are also working with lending group on a credit facility to add more properties that we just purchased into the borrowing base and get more capacity from that standpoint. So we are working hard to get the balance sheet set up again, we believe we've done that.

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

Hi, good morning. Lou how should we be thinking about the disposition of these five nine core of retail asset? Is a situation where they are out for bid now and you take the proceeds when you get them or you sort of waiting until you have a need to fund some development or do you find another acquisition to sort of use it as a tit for tat type of things? How should we be thinking about this as it flows through 2016?

We are anticipating selling all those assets in the first half of the year. We want to take our time; we did evaluation as to whether we wanted to hold on to any of them. What kind of opportunities that there maybe. But generally we and of course is always subject to change as new information but generally we've concluded that our capital is best employed elsewhere. I'll now turn it over to Eric Smith, he tell you what kind of process he is going through in order to get rid of those.

Sure. I appreciate that Lou. It's a balance obviously between wanting to glean the most value out of the asset and obviously as Lou said we are looking at the first half of the year as part of the balance sheet strategy that Mike articulated earlier. Having had this portfolio, I don't know market recently they would obviously an opportunity to go back somewhat quickly after we closed on the portfolio in mid January to see if any of those buyers who had been interested at a set portfolio or asset specific level. And already done due diligence were out there and we certainly took advantage of that. And we will glean here shortly the results of that. That being said, if it make sense to do a more fully marketed campaign to either reap value at the individual asset level that higher than what they quicker process may have created or to see if there is a portfolio buyer out there for these five non core assets, we will certainly do that. If we don't see the value we would like to see in the near term. So it's a bit of balancing act on value as well as against the backdrop of the balance sheet strategy.

Okay. And do you have any acquisitions that are in the pipeline right now that sort of lined up to close against these or Mike is there some level of dilution in the guidance from the first half sale of these properties without a corresponding redeployment of the proceeds.

So Rob that the first thing we are looking at now is to get some capital back in the house. So we are going to look to extent we can raise cash by selling these and then based upon where that is what's come for other opportunities and where our balance sheet is we'll look at other acquisition.

Yes. Ducktail offers that. It won't surprise. I think this is consistent with what we said in the past about our acquisition strategy. Obviously our primary focus is doing acquisitions that look similar to the one in the past 12 to 18 months which were off market relationship based activity; they can do a lot of operating partnership units with assets if they will under our portfolio. And not necessarily chasing marketed deal unless they make a ton sense and check a box of leverages leverages one of our capabilities either on the development side or otherwise, that's our acquisition strategy as we sit here today.

Okay. But any corresponding dilution from the first half sale these assets are already included in the guidance range?

Yes. We included this -- yes we included the sale of those five non cores in the guidance.

Okay. And what it might -- what's the incremental positive impact from any of the two projects that you talked about, you didn't put into the pipeline yet because contracts haven't closed but they are in the guidance, is it couple of pennies, is it a penny, is it material?

So it's broken down in to two areas Rob. One is in the interest income, so one of is structured as a mezzanine debt; we have new guidance this year with interest income. And the other piece yes in the backlog, don't want get into breakdown that pieces and parts at this time but it's included in our guidance.

Okay. Thanks guys.

Rob, another comment Lou again. You run up the question of dilution and we've included that dilution in our guidance for 2016. We've also included the dilution from selling the higher cap asset and looking into lower cap asset. So I want to stress everybody the significance of that move I mean essentially while it will be really nice to have FFO over a $1 this year which we would, had we not done a transaction. What we get as we took over $100 million worth facility that were anchored by regional law firm and an oil exploration equipment company. And turn that into building that are anchored by people who sell food, dog food, sheet and towel and we feel really good about making that decision.

You guys still having positive earnings growth despite that right? I mean is it -- midpoint of the guidance range basically is almost 10% -- is about 9% earnings growth even with that dilution in there.

Yes. We are expanding growth again this year like I said it could have been substantially higher have we been managing for the short term. So thanks very much.

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

Okay, great. Thank you, all right. So essentially you guys you build office, you sell office, you acquire retail. Looks to us like you're basically just selling the Kroger portfolio, looks to us like two of them are just pretty much stand-alone, 50% of the -- maybe 65% of the 406,000 square feet or it's just all Kroger credit. What does that $3.1 million income stream of primarily Kroger credit sell for?

Eric?

Sure. Thanks Lou. It's obviously John based on this I would guess despite the cougar credit you have a mix of asset here, you have some stronger assets in the south band and national location based on those particular market. These are larger centers higher quality assets overall. And then you have three smaller assets more royal in nature et cetera. So when you think about that, in fact you think about Kroger you think about the cougar credit but also the mix in location of the asset themselves. They are also going to trade higher than the going in cap rate on the whole portfolio. Whether that mid eight or somewhere slight higher or lower the market will bear out as we go through the process I articulated earlier. But that’s our thought process right now.

So, if I look at page, there a lot numbers are floating around, I think Lou had said earlier, we generally don't acquire 6.5% cap real estate. Is it safe to say that if I'm looking at page 17 at $170 million at 7.2% cash cap rate and then you sell off these five Kroger anchored, does that mean the net cap rate on the balance of the 675,000 square foot Harris Teeter power center assets is a mid-6 cap rate? Is that what we're looking at?

That's correct, John.

That's it John. You got it exactly.

Okay. My god, all right, thanks a lot.

Our next question comes from the line of Bill Crow with Raymond James. Please proceed with your question.

Good morning, guys. Couple of questions for you. First question is if you go back to the time that you initially underwrote the acquisition and the retail portfolio. How are the cap rates and the five assets you are looking to sell, how is that changed? What are the brokers telling you about the increase in cap rates if any over the last four months, five months?

Yes. Bill, we are not seeing that happening. I mean that maybe something that's going to happen in not too distant future given what's going on in the marketplace but so far the sales that we are seeing are holding up right with the cap rates have been over the last six months. So to make sure you guys understand these five have -- we took an opportunity to see what kind of possibilities there maybe and what we are seeing is the same reason why they are going to trade into 8% to 9% range versus with the overall portfolio was. A couple of these are redevelopment opportunities which we might have taken had they been more located in our market or of a larger size. Couple of them are older probers their much smaller than what their current footprint wants to be. So we are looking at the potentiality of a full redevelopment on that. And we decided that if the returns just wouldn't be there to occupy our time. Eric, anything add to that?

No. I would only add maybe the perspective that again your comment is yet third consideration as we think about this process over the first two quarters and what offers to accept and how quickly to close them. Obviously if the near term process doesn't yield results and we are contemplating going with the fuller process that would take the full two quarters that risk of possible cap rate movement that you mentioned obviously has to be a consideration there as we think about that timing trade off.

That's great. Thanks. The other question I had really been on development pipeline. And more the shadow pipeline. You guys know gosh the vast majority of developers in the Mid Atlantic region, you've known them for long time, would they telling about their thought process given the economic data point, the stock market changes. Anything dropping out of this shadow pipeline that surprises you? Any just change in trend that you are seeing?

Bill, I have to say no and you got to understand our perspective. If in fact we are headed for a recession which we all hope is not the case, it would be our fifth recession that we look after. And so they all kind of the same characteristics. There is a tremendous amount of deal flow out there right now. But whether is in boom time or recessionary time you can tell the project that you should stay from. And so we stick to that -- and ours -- with a company of our size it's not market as you look it submarket and within those submarket it's location, and we are looking at, we are cherry picking is the strength that's driven by high drivers and credit tenant and that was always must smaller subset was out there. So my guess is with credit tightening you are going to see a lot less of these springs project getting off the ground which is just buying by us and you will continue to see a really strong project, they are well underwritten move forward. And so we are not seeing anything, if it makes into our pre-development group, that means it was one out of 15 or 18 projects that we were evaluating. And so once it makes it there, I don't want to say it's bullet proof but its pretty there and close.

Anything you're seeing on the retail side in reaction to the consumer or anything that's going on in the retail side that makes you concerned, more tenants on the watch list or anything like that?

Again that's a great question but it's a broad one. And our gross rental retail, we are not seeing and duress at all. Our small shops are doing well. We are essentially a 100% leased across that subset of the portfolio. On the larger projects and like a town center where we are looking at the fashion and specialty, there some nervous people out there. And if you seen the results that came out of Outfitters or even lululemon, they are nervous. Their sales are doing fine right now. There is still lot of lead off from the internet but we are seeing a lot of activity, in fact we hope in a next month or so to make couple more announcement in that regard.

I would add one other recent data point as we went through, this is Eric, as we went through the diligent process on a portfolio, and we obviously talk to tenants recently in our role as asset managers group and their role of managing our stabilized asset. But we are obviously excel those touch points with those tenants as we are going to do that due diligent process and so it's a fairly recent data point of having all those conversation and what we found was that there were certainly as we've already spoken to I think in the last call a handful of the larger box tenants who had some comments about some downsizing in the 3,000 to 5,000 square feet range. We obviously look at that closely to make sure we could really tax base and it was in good location into the shopping centers. But we didn't hear anybody holistically moving out of market or trying to close certain stores and refocus on others in the marketplace. So there were some things on the margins from that experience but nothing wholesale that gave us cause for concern.

Great. I think I'll hold off on asking you if you are in discussions with Amazon and their brick and mortar efforts.

Our next question comes from the line of Craig Kucera with Wunderlich. Please proceed with your question.

Hi, good morning guys. Lou, I appreciated your comments on the recession scenario, we like to revisit that really in regards to how municipalities react as they start to see their local economy slowdown? Is that change the way they look at the public private partnership? Do they look more, do they look less what's been your experience?

Yes, Craig, it's been our experience so over three decades that they ramp up activity in that scenario. If you think about it the basic tenant of municipal government is that expensive, they are going to grow faster than income. And so in periods like this where that disparity is even wider, they are even more looking to disproportionately affect the tax rate. And so for relatively smaller amount of money and of course stronger municipalities you can get, you can essentially money at 0% right now. For a fairly small amount of money they can incentivize something. Our issue and again as it has been in the last four recession is no matter how much money someone might be throwing at you, you still got to decide whether or not it's going to be good long term project. Some of these things need municipal help because they really shouldn't be built. And so we stride ourselves here three decades later and doing is separating that wheat from the chaff into something that's going to stand the test of time. And then very much like town center, town center was born right on the heels of 9/11, it went through 2007 and 2008 and it has not had any issues throughout. So you got to make sure that you really cherry pick the best opportunity but long answer to a short question, that as part of our formula for recession, construction ramps up not commercial construction but institutional construction, medical construction and government construction because they want to take advantage of lower prices. And public private partnership ramp up. What suffered obviously is your garden variety, retail office development.

I appreciate the color. How forward looking are these municipalities? Are they looking 12 months in the rearview mirror, are they thinking ahead as far as what may or may not be leased?

Again it's really interesting question and I could go on for an hour on that one day. Most municipalities don't have the fortitude to see past the next election cycle. And so a lot of them are looking for that quick hit and we stay away from those guys. There are a few in coincidently it seems to go along with real high credit rating. There are few that have 10 and 15 and 20 years horizon. And those are the people that we grab attention.

Got it. My last question is just on the balance sheet. Given that the futures market now doesn't seem to be seeing an interest rate hike until possibly till 2018, you guys have heavily used floating rate debt with swaps. Do you anticipate changing that in this environment? I would have guessed you probably are going to stick with what seems to be working as long as the interest rates are remaining low and expected to remain low?

Yes. Craig, we got to continue to look at -- continue to look at hedges. We find it -- we've been doing more caps actually than swap or occupying cap is a really economical way to hedge interest rate and I have been talking here last couple of days, we are getting to real good point right now as well, buy some more cash, it's really cheap insurance.

Our next question comes from the line of Laura Engel with Stonegate Capital. Please proceed with your question.

Good morning. And thanks for all the details, hope all is well. Wanted to see if we could touch back on the guidance just a little bit. One thing that was a bit higher than I expected was the acquisition development and other costs and I wondered if that was -- what was recorded for the year, if that was a level we should expect for next year and if that includes I guess some of these disposition costs related to the transactions this past year as well?

Yes, good morning. Yes, so we certainly had a lot of that cost in the fourth quarter and lot of it had to do with this acquisition of the $170 million portfolio from a gas standpoint we are going to be expensing those cost as they take place in most of the due diligence and legal work was all done in the fourth quarter since we closed right after the first year on that. Looking out to 2016, it's tough for me to give you numbers what it is going to be, certainly it depends on what kind of acquisition activity we have out there but I would be surprised if we acquired another $170 million portfolio and spend that kind of money.

We won't see that in the far -- I think that's one of primary reasons we report normalized FFO because we are opportunistic and acquisitions and disposition and don't have a specific plan.

Right, okay. And then also related to the guidance, on the construction company guidance, you mentioned some of the contracts. Can you just review one more time that I guess the timing on that and you did say there is I guess significant potential upside to that guidance number because I think unlike the gentleman earlier, I have numbers all over the sheet but is that guidance actually shows a bit of a decrease over the full year for 2015 as it stands but it doesn't factor in this contract, is it correct?

Correct. It is a decreased from last year 2015 was a really strong year for the construction company. That one of the highest that I can remember generating those kind of profit. So yes we are seeing going down a little bit, it does include couple of contracts that are not signed. We expect to get firmed up in the next couple of weeks to months. For instance on Harbor Point, we started construction so we would be getting a notice to proceed on, I think we are operating under a couple million dollar proceed contract. We do some side work while we negotiate out the GMP here which is eminent.

Got it, okay. And all of my other questions have been addressed. Again, sounds like 2016 is going be just a great year. So I'm looking forward to seeing how it progresses. Thanks again.

Yes. I do reiterate that. We are very excited about 2016. So the company is set up well. We've got really good project in the pipeline. Leasing has been strong across the retail and multifamily front. Hopefully, we will see little bit more in the office. But we really look forward to having another great year. Operator, is there any more questions?

We have no further questions.

Great. Well, thank you everybody for your time this morning. We look forward to like we said we anticipate having a few announcements in the next several weeks. So that -- this pipeline. So stay tuned and thanks again.