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Armada Hoffler Properties Inc  (NYSE:AHH)
Q3 2018 Earnings Conference Call
Oct. 30, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to Armada Hoffler's Third Quarter 2018 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 is being recorded, today, Tuesday October 30th, 2018.

I will now turn the conference over to Michael O'Hara, Chief Financial Officer at Armada Hoffler. Please go ahead.

Michael P. O'Hara -- Chief Financial Officer

Good morning and thank you for joining Armada Hoffler's third quarter 2018 earnings conference call and webcast. On the call this morning, in addition to myself, is Lou Haddad, CEO. The press release announcing our third quarter earnings, along with our quarterly supplemental package were distributed this morning. Replay of this call will be available shortly after the conclusion of the call through November 30, 2018. The numbers to access the replay are provided in the earnings press release. For those who listen to the rebroadcast of this presentation, remind you that the remarks made herein are as of today, October 30, 2018 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 development pipeline, impact of acquisitions and dispositions, our construction business, our portfolio performance and financing activities, as well as comments on our guidance and outlook. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond our control.

The risks and uncertainties can cause actual results to differ materially from our current expectations and we advise listeners to review the forward-looking statements disclosure in our press release this morning and the risk factors disclosed in documents we have filed with or furnished to the SEC.

We'll also discuss certain non-GAAP financial measures, including, but not limited to, FFO and normalized FFO. Definition 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 ArmadaHoffler.com.

I will now turn over the call to our Chief Executive Officer, Lou Haddad. Lou?

Louis S. Haddad -- President & Chief Executive Officer

Thanks Mike. Good morning everyone and thank you for joining us today. As you will hear from our discussion this morning, we have a lot going on here at Armada Hoffler. As I mentioned during our last conference call, our Company is built to thrive in a variety of macroeconomic environments and the current backdrop is no exception. The growing economy has yielded increased opportunities in development, public/private partnerships, build-to-suit engagements, third-party construction, mezzanine lending and tenant expansion. We believe these factors more than offset the impact of gradually rising interest rates.

Before we talk about our results, guidance and pipeline, I'd like to spend a few minutes on our business model. Many who follow our Company have correctly pointed out that we do not fit neatly into the standard REIT box. Certainly with third-party construction profits, build-to-suit asset sales and mezzanine interest income, our platform has the unique complexity that can't be measured wholly by traditional REIT metrics. These additional income streams are expected to continue their upward trajectory due to the ever increasing volume of these types of opportunities coming our way.

That said, please do not overlook the positive trends in our operating property portfolio. While we are very proud of the growth in our NAV, normalized FFO and of course, the annually increasing dividend over the past four years, it's important to note that our rental property NOI has nearly doubled over the past five years. We expect yet another double-digit increase in property NOI next year, as our development deliveries stabilize and the mature portfolio continues to excel. Although we will provide 2019 guidance early next year, preliminary forecasts indicate that it is shaping up to be a very strong year in all of our income producing areas.

This morning, we reported $0.24 of normalized FFO per share for the third quarter. Same store NOI was positive across all product types, on both a cash and GAAP basis. Occupancy was higher portfoliowide and now stands at 96%. Releasing spreads in the retail sector were quite a bit higher as well. As you know, our retail portfolio is dominated by strong grocery anchors, home improvement stores, restaurants, entertainment and discounters. We expect continued high occupancy, positive spreads and strong sales performance in our centers over the coming quarters. Overall, across all property types, our stable portfolio continues to perform at a very high level.

As we announced earlier this month, we've reached an agreement to sell our at-cost purchase option to the developer of the multifamily project. The Residences at Annapolis Junction. As many of you saw in our previous press release, we are allowing the developer to refinance the project and extend the mezzanine loan. This will allow the project to achieve stabilization prior to the ultimate sale, enabling him to recognize the full value of the project. We expect the option payment to be received in the fourth quarter. However, the $5 million of profit will be recognized over the next four quarters. This effectively moves approximately $4.5 million of FFO into 2019 and also gives us the opportunity to earn additional fees and interest. Overall, this change in profit recognition has caused our 2018 full year guidance to be updated to $1 to $1.03. Mike will give you the details on our updated guidance.

As we've said on many occasions, we expect the multi-family segment of our overall portfolio NOI to grow significantly over the next couple of years. The sale of our purchase option on this project should be viewed as a one-off opportunity that we chose to take advantage of, as opposed to any shift in overall strategy. With over $60 million raised year-to-date under the ATM program, the $5 million of profit on the option sale and the anticipated partial repayment of our mezzanine loan, we remain confident in the overall strength of our balance sheet. We continue to believe that the Company is well positioned to execute on the opportunities in our development pipeline.

Starting with Town Center for the development updates. The Premier, previously referred to as Phase VI, is leasing very quickly in both the retail and multi-family segment. Despite only being open since August, retail has leased or under a letter of intent at 75% and multifamily at 50$0. Also, the second-floor performing arts theater celebrated their grand opening, bringing additional activity to this newest phase of Town Center.

Point Street Apartments at Harbor Point continues its upward trajectory with no sign of slowing down and now stands at 82% leased. We are projecting stabilization in the first quarter of 2019, which is also the time frame that we anticipate bringing the project on balance sheet through execution of our purchase option. The option portion of City Center in downtown Durham is complete and leased at nearly 90%. And the retail is leased are under a letter of intent at 66%. We are in conversations with multiple tenants for the last few available spaces.

The Greenside Apartments in downtown Charlotte, formerly known as Harding Place, have begun delivery and stand at 31% leased. This project is ramping in line with our expectation.

Our 325,000 square foot Wills Wharf office development at Baltimore's Inner Harbor has started vertical construction and stands at nearly 60% pre-leased with several strong prospects interested in the additional space. All other previously announced pipeline projects are on track for its scheduled 2019 delivery.

This morning, we announced our fourth project in the greater Charleston MSA in Nexton Square. This $45 million open-air lifestyle center is expected to contain up to a 148,000 square feet of the area's best restaurants, retailers and service providers. Nexton Square sits at the entrance of a large master plan development of more than 10,000 homes. It is strategically located between the Boeing facility and the new Volvo assembly plant. The project is nearly 65% pre-leased door or under a letter of intent with the first tenants opening in the second quarter of 2019. We will provide mezzanine financing as well as development and construction management. In addition, we will receive a below-market option to purchase the project upon completion, which we ultimately intend to exercise. Furthermore, the asset would be available as a candidate in a tax-free exchange in order to potentially cycle out of an older center.

Last quarter, we announced The Interlock, a partnership with Georgia Tech and S.J. Collins to develop 300,000 square feet of office and retail space in West Midtown Atlanta. In addition, we are in negotiation with Terwilliger Pappas to be the investor and general contractor for the multifamily portion of this project, Solus Interlock (ph). We expect this upscale product to contain approximately 350 apartment units with an anticipated completion in the fourth quarter of 2020. In addition to our construction company's participation in the project, we will provide approximately $20 million of mezzanine financing. We expect to finalize negotiations with Terwilliger Pappas over the next few weeks and expect groundbreaking on the entire Interlock complex in the current quarter.

We are currently working on a few other opportunities to round out the current pipeline. These are exciting, large CBD infill opportunities in Charleston, Charlotte and Nashville. This opportunity set is primarily weighted toward Class A office, followed by multifamily, with a small amount of ancillary retail. We hope to have further announcements regarding these projects in the not too distant future.

Despite this increase in development activity, be assured that we continue to be extremely selective with regard to the projects we pursue. The vast majority of the opportunities that present themselves do not meet our criteria and are quickly removed from consideration. Beyond the aforementioned opportunities, I would not expect any further significant development engagements until we open a number of our 2019 deliveries.

Our construction company continues to perform at a very high level. We expect to finish construction and close on the sale of the build-to-suit distribution center in the current quarter. Our backlog of third-party contracts stands at $25 million and we expect to execute another $80 million to $100 million of contracts this quarter, which will leave this division in a very comfortable position looking forward to next year.

Remember, Armada Hoffler is first and foremost an opportunistic real estate Company that employs multiple strategies to enhance profitability and create value. These have been our central tenants for nearly 40 years and investors can count on this to remain our primary focus. As the Company's largest equity holder, management will continue to operate a business model that includes a variety of deal structures, as well as the disposition of development projects, at-cost options and stable assets.

We are extremely optimistic about the Company's prospects for the rest of 2018 and 2019, as well as our ability to deliver on our promises over a multi-year time frame. As we begin to look forward toward 2020 and the number of projects we intend to deliver and stabilize at that time, we feel strongly that our investors will recognize continued great value well into the future. As we gauge the ultimate size and construction schedules of the pipeline projects, we will be evaluating further dispositions and use of the ATM as a part of a continuing strategy to maintain a strong balance sheet and grow NAV over the long term.

At this time, I'll turn the call over to Mike to discuss our third quarter results.

Michael P. O'Hara -- Chief Financial Officer

Thanks Lou. Today I want to cover the highlights of the quarter, thoughts on our balance sheet and our updated 2018 guidance.

This morning, we reported FFO and normalized FFO of $0.24 per share for the third quarter. On October 4, we issued a press release regarding the anticipated $5 million third quarter gain from the Annapolis Junction purchase option sale and its effect on our 2018 guidance. We anticipated the property being sold, our loan being paid off in full and recognizing a $5 million gain during the third quarter.

During the quarter, we agreed to allow our partner to refinance the project and extend the maturity of the mezzanine loan in order for him to realize the full potential value upon expected stabilization in 2019. In addition, we have the opportunity to earn additional fees and interest income. The expected restructured loan is for approximately $35 million at 10 % for 12 months. Loan includes two one-year extension options to coincide with the new senior loan. With the loan being restructured instead of being paid off in full, the accounting of the $5 million gain from the sale of the purchase option changes. The GAAP treatment of the $5 million payment to the purchase option is now considered as part of the loan restructure, not a sale. Therefore it will be recognized as interest income over the term of the new loan, which is 12 months. Assuming a mid-November closing, $500,000 of interest income will be recognized in 2018 with the remaining $4.5 million in 2019, prorated through October.

Now, turning to our property portfolio. We are happy to report that our properties and development projects did not sustain any damage from the recent storms. As anticipated, same-store NOI continues to improve, with this being the second consecutive quarter being positive in all three property types. The negative impact on this metric from the Town Center relocation and construction activity is over.

Our core operating portfolio occupancy in the third quarter was 96% with office at 94%, retail 97% and multi-family at 97%. Additionally, our releasing spreads were positive 6.2% on cash and 7.8% on a GAAP basis in the retail portfolio. There were no renewals in the office portfolio. All these positive metrics are a reflection of the strength of our properties.

During the quarter, we closed on the Lexington, South Carolina Lowe's Food Shopping Center for $27 million. This transaction is with a strategic partner who is taking back all their equity in OP units, which is consistent with our historic OP unit acquisition strategy.

On the construction front, we reported segment gross profit in the third quarter of $1 million on revenue of $20 million. At the end of the third quarter, the Company had a third-party construction backlog of $25 million. As Lou said, we expect the construction backlog to increase over the next few months.

Today, we announced a new mezzanine loan development project, Nexton Square, in Summerville, South Carolina. This project is being structured using -- utilizing our mezzanine loan structure, which includes a below-market purchase option. It is our intent to exercise this option upon completion. We are using this structure for two reasons. First, our involvement in this project was late in the process. The project began construction the spring, before we were involved. We preferred not to take development risk and have ownership position in a project this late in the development process. And second, we have the optionality of using the properties at 1031 tax-free exchange candidate for future disposition.

As discussed, we are in final negotiation with the developers of the multifamily portion of the Interlock mixed-use project in West Midtown Atlanta.

We are partnering with Terwilliger Pappas, who are longtime multifamily developers. We will be using our mezzanine loan structure and we'll be the contractor of the project. At this time, we do not intend on purchasing this project and bringing on balance sheet. In addition to substantial income from construction fees and mezzanine interest, our involvement allows us to manage the entire construction progress, ensure the timely completion of the $250 million Interlock project.

Now turning to our balance sheet. Over the past quarter, we continue to take actions to enhance the flexibility of our balance sheet and work on low maturities. We are making several moves to position the balance sheet for the new projects and future growth. This quarter, we raised $10.6 million through our ATM program at an average price of $15.66 per share. We raised more than anticipated as we took advantage of the stock trading at or near all-time highs. Year to date, we have raised $60.6 million at an average share price of $14.33. We anticipate receiving approximately $17 million in November from the sale of our Annapolis junction at-cost purchase option for $5 million, allowing an approximate $12 million loan payment.

Now, lastly, we expect to continue our activity in the ATM program assuming favorable market conditions. If not, we'll pursue other sources of capital, including dispositions. With the lengthy construction schedules of all these development projects, we have considerable time to access the necessary capital to maintain a strong balance sheet.

We've addressed all of our 2018 loan maturities. This past month, we closed on the last remaining loan of 2018, Lightfoot Marketplace. The new loan is for a five-year term at a rate of LIBOR plus 175 basis points. We entered into a swap lock to fixed LIBOR. The initial loan proceeds is $10.5 million at 3% for the five-year term.

At the end of the quarter we had total outstanding debt of $661 million, including $102 million outstanding under the $150 million revolving credit facility. We continue to evaluate our exposure to higher interest rates and look for opportune times to hedge our interest rate exposure. At quarter end, 97% of our debt was either fixed or hedged. This quarter, we entered into a $53 million swap lock on a JHU village loan and purchased a two-year $15 million interest rate cap at 2.5%. Subsequent to quarter end, we entered into a $10.5 million swap lock on the Lightfoot Marketplace loan.

Today we updated our 2018 full year normalized FFO guidance to $1 to $1.03 per share, which is unchanged from our guidance in our October 4 press release. This includes the expected sale of the distribution center by the TRS. The distribution center is a construction project that evolved from our cross-selling platform. We intend to sell this asset before it's placed in service and includes a profit in normalized FFO. We included a (ph) expected gain from the sale on both the construction company gross profit and normalized FFO guidance. This transaction will have an impact on debt to EBITDA in 2018, as our balance sheet will carry the debt with no corresponding EBITDA. Because of the short-term nature of this project and associated debt, we did not issue any equity for this project.

Now like to go through the details of the updated 2018 guidance, first starting with our assumptions. A gain of $2.9 million to $3.3 million from the sale of the distribution center in the fourth quarter. Additional activity in ATM program, assuming favorable market conditions. Interest expense is calculated based on the forward LIBOR curve, which forecasts rate rising to 2.4% by year-end. 2018 guidance of $1 to $1.03 per share is predicated on the following updated components. Total NOI in the $78.7 million to $79.2 million range. Third-party construction company gross profit in the $5.9 million to $6.4 million range, which includes the expected profit from the sale of the distribution center. General and administrative expenses in the $10.8 million to $11 million range. Interest income for our mezzanine financing program in the $10.1 million to $10.5 million range. This includes $500,000 from the amortization of the Annapolis Junction purchase option gain. At quarter end, the aggregate loan balance of these mezzanine loans was $99 million. Interest expense in the $19 million to $19.2 million range, and 64.8 million weighted average shares outstanding.

Now I'll turn the call back to Lou.

Louis S. Haddad -- President & Chief Executive Officer

Thanks, Mike. As some of you already know, Mike and I will not be attending the Nareit conference in San Francisco next week. We are at a critical juncture on several pipeline and unannounced developments, which require our presence for final negotiations, loan closings and lease execution. The timing required for these agreements makes travel to the West Coast for the better part of the week not in the best interest of the Company.

We're happy to take your questions on this or any other topic this morning. Operator, we would like to begin the question-and-answer session.

Questions and Answers:

Operator

(Operator Instructions) Our first question is coming from John Guinee of Stifel.

John Guinee -- Stifel -- Analyst

Great. Thank you. Two questions. One is, what do you anticipate your mezz loan balance to run in 2019? And second, can you talk a little bit more in-depth about the CapEx associated with your retail leasing for 3Q '18?

Louis S. Haddad -- President & Chief Executive Officer

Sure. Thanks John. Good morning. With this past quarter's releasing, that represented about 37,000 square feet and it was not a significant amount of CapEx involved and those are primarily small shops. I don't think -- we're not anticipating a whole lot in terms of rollover in the retail for the rest of the year. We do have some more significant rollovers next year that are going to require some pretty substantial tenant improvement investments, and that's primarily at Columbus Center, the two shopping centers here adjacent to Town Center, as well as releasing in Town Center. But so far it's been pretty light.

Michael P. O'Hara -- Chief Financial Officer

John good morning. On the mezzanine program, we're expecting it to top out, I'm going to say, in the $140 million range. But it's all going to depend on timing. Next year, like in the first quarter, we're expecting the Decatur, Whole Foods Center loan to be paid off. I believe that opens next month, and also give something (ph) around the timing of the ultimate pay-off of the Annapolis Junction loan.

John Guinee -- Stifel -- Analyst

Right. Just a little follow-up here. What it looks like is you're getting pretty healthy GAAP and cash spreads on your new leases. I am assuming these are net rents, but correct me, without spending much at all for TIs and leasing commission. But you've got to come into the tune of about $6 per square foot per year for new leases. Any idea as to what the expiring rents might be on the new leases you're signing versus the renewals?

Louis S. Haddad -- President & Chief Executive Officer

John, are you speaking (multiple speakers)

John Guinee -- Stifel -- Analyst

Yes, retail.

Michael P. O'Hara -- Chief Financial Officer

Good. Retail. Okay.

John Guinee -- Stifel -- Analyst

Yes. Said another way is renewing your tenant seems like pretty good economics. But when you deal with a new lease it seems like pretty challenging economics. You don't provide the old cash grab. So you're not providing the mark to market. So we're looking for a little more detail on when you have to replace that tenant.

Michael P. O'Hara -- Chief Financial Officer

Yeah, John, on that the first is on renewal. One thing, it depends on how the renewal comes about and we don't have a leasing commission on a lot of our renewals. And the other thing is, as we've talked about, we have tenants who are doing well, who don't need a lot of TI specifically in the -- they're happy with the space, you don't have to redo anything. With new tenants, a lot of time it's the TI to get them up and going, which we have already paid for in the renewals.

John Guinee -- Stifel -- Analyst

And any idea on the prior cash contractual rent on the new leases, i.e. is it a rent roll-up or rent roll-down on your new leases, not your renewals?

Michael P. O'Hara -- Chief Financial Officer

On the new rate?

Louis S. Haddad -- President & Chief Executive Officer

Yeah, it is typically higher, John. We haven't seen much compression and I think the only exception to that would be in some of those nooks and crannies in Town Center where we're after specific tenants, basically to add to the mix. That would be about the only time that we would see rents contract. And that happens fairly regularly here at Town Center as we try to keep the mix as fresh as possible and add new offerings.

John Guinee -- Stifel -- Analyst

Then the last question, Lou, you provided 2019 guidance of a very strong year. Can you elaborate?

Louis S. Haddad -- President & Chief Executive Officer

Well, as I said, we will be providing guidance on the next conference call. But John, you've followed us for a while, as has several people on the phone. We've been saying for a year and a half that pointing to 2019 as the show-me year for this current pipeline that we are in the process of delivering. And that's -- we plan on doing just that and all systems are go. You heard the updates on the deliveries and on the lease-up schedules. So I think the math is going to be pretty compelling. And we're really looking forward to that call. There's still a few pieces to put in place, a few leases to sign and as I suggested, Mike and I really have a tough couple of weeks coming up with finalizing a couple of projects and loans. But we're looking forward to a very strong 2019, and I think even stronger 2020.

John Guinee -- Stifel -- Analyst

Great. Thank you.

Operator

Thank you. Our next question is coming from Dave Rodgers of Baird. Please go ahead.

David Rodgers -- Baird -- Analyst

Yeah, good morning guys. Lou, wanted to start off with the Nashville, I think Charleston and Charlotte project. I think that's what you had mentioned in terms of Class A CBD office opportunities. Correct me if I was wrong there. But two things around that. One would be, would you anticipate those being similar type mezz investments and what would be the peak? You said 140 (ph) as the peak, but what would be your kind of max that you'd be comfortable within mezz? And then maybe a second broader question to that, just in terms of that pipeline, you said maybe nothing to be added to the pipeline after that. is that just that things maybe starting to quiet down or that just takes you guys to capacity where you just don't feel comfortable adding anything, Lou?

Louis S. Haddad -- President & Chief Executive Officer

Yeah, I'll start with that second question first. And it is the latter. An easy way to get in trouble in this business is to get way out over your skis. There are -- the opportunities are accelerating, we're not seeing any slowdown in that. However, we've practiced discipline here for nearly 40 years and we really don't want to get further out than where either our balance sheet or our personnel take us. We've got really strong development partners in the locations that we are discussing to round out the pipeline. But that's really the limit of our comfort level, until we deliver some of the projects that we're talking about.

We have three or four deliveries in 2019 that we really want to see done successfully and executed well before we start shopping again. Of course, you never say never if something really compelling could come along. But the three projects that you mentioned, they would be a mix of projects that would be done on balance sheet, as well as on the mezz side. We're comfortable with where the mezz program is now. As Mike suggested, the lot is going to get paid off or paid down here in the not too distant future. And remember, these are large, lengthy projects, and so you have an awful lot of runway before these things ramp into any kind of significant dollars.

David Rodgers -- Baird -- Analyst

Okay that's helpful. One of the other comments that you had made was about recycling out of an older center to help fund that. Can you start to give us an idea of maybe how much assets you're willing to sell into that bottom portion of the portfolio, get a little bit bigger as the development pipeline gets a little bit bigger, and how you think about asset sales relative to what you've been doing?

Louis S. Haddad -- President & Chief Executive Officer

Sure. Actually there's not much down there at the bottom. You've heard us talk about in years past how we may cycle out of the three food lines that we have. We also have a Bi-Lo center. Those projects are doing really well, those assets. Food line is actually gaining market share in our area. And so I'm not sure that's going to happen. However, as you know, we do like to regularly go through that portfolio and recycle. That's why this Nexton opportunity that came up was perfect for us. We love lifestyle centers, we love Charleston. And there certainly will be something in our portfolio that we will be less desirable of. But I don't think you're looking at a change in strategy, Dave. But, it's going to be one-off at best in terms of dispositions.

David Rodgers -- Baird -- Analyst

Great. Thanks guys.

Operator

Thank you. Our next question is coming from Rob Stevenson of Janney, Montgomery, & Scott. Please go ahead.

Robert Stevenson -- Janney, Montgomery, & Scott -- Analyst

Good morning guys. Lou, why do mezz on Interlock if you don't want to buy it, or don't have a purchase option? What's the incentive for you guys to do mezz without past ownership?

Louis S. Haddad -- President & Chief Executive Officer

Essentially it's a money making opportunity. We have an opportunity to take substantial interest above our cost of capital and still control things with our construction company. So we're looking that as basically an income stream that's very healthy. It's not too dissimilar to the two Whole Foods that we're involved in right now, where those are going to trade far below our cost of capital. We expect Interlock would do the same thing. And so, we'd be more desirous of taking current profits as opposed to bringing something on balance sheet that is below our cost of capital.

Michael P. O'Hara -- Chief Financial Officer

The other thing on that Rob is, on the first part that we talked about last time, on the mixed use of office and retail, we do get participation in cash flow and a capital transaction on that over and above our mezz. So we will have some participation on that. As we've talked about before on these mezz projects, we love these projects and reason we are involved, if these people defaulted we love to own them for what would be in form.

Robert Stevenson -- Janney, Montgomery, & Scott -- Analyst

Okay. And then if I'm doing the math right on the supplemental, it looked like during the quarter about 56% of your ABR came from retail. And then if I take a look at the development pipeline, I mean you've got the two Charleston multifamily projects that will come online next year and assuming that you guys will buy in the Point Street Apartments' purchase option, but there's still a lot of retail sort of coming behind that as well. And any of this office looks like it's a 2020 or 2021 or beyond sort of delivery. How comfortable are you in seeing retail ratchet up to north of 60% of ABR for some period of time here before other asset types come into dilute it back down?

Michael P. O'Hara -- Chief Financial Officer

Yes. So Rob, on the retail -- on the development side, there's not a lot of retail. We've got the Market at Mill Creek, which is a $23 million project, not a large one, just the retail piece here in Town Center. But outside of that on the office side we've got the Brooks Crossing Office coming online, which is 100% -- obviously 100% office. And then we also have Greenside Harding Place in Charlotte on the multifamily coming next year.

Louis S. Haddad -- President & Chief Executive Officer

We think that percentage has topped out, Rob. But to answer your question whether it grows by a couple percentages or starts to go down significantly like we believe it will. As I said earlier, we are very comfortable with that retail portfolio. It continues to perform. Sales are strong. Our grocers are strong. At 97% occupancy and releasing spreads as high as they are, we're very comfortable with what we own and we intend on adding to it. We don't -- I don't think it's going to add materially, because we're not involved in large scale retail projects. But it is going to -- we are going to add to that portfolio.

Robert Stevenson -- Janney, Montgomery, & Scott -- Analyst

Okay. And then last one for me. I mean when you sit here in terms of the projects that you have under way and the stuff that you're looking to tee up over the next month or so, how can we be thinking about the general contracting company going forward? I mean does that get bolstered by the continued expansion of mezz, something similar to what you're doing at Interlock? Does it retreat. Does it sort of maintain the sort of current size going forward, how best should we be thinking about the size and scope of the contracting business going forward?

Louis S. Haddad -- President & Chief Executive Officer

Good question. So our company works best between $200 million and $300 million worth of work in any given year. I think we're going to hit that target. It's going to be in that range in 2019. What we don't know yet is the mix of third-party versus in-house and that mainly is going to revolve around a couple of big engagements that are coming up on both sides and there still being a chance that they don't come to pass. However, I think you're going to expect the construction company to be in a range that it was last year. This year it was a little bit less in volume. And it's kind of artificially lower based on the distribution center and the fact that that's all being recognized as gain on sale as opposed to the fee income. But we're going to be in that same range that Mike has guided you to, we believe for next year.

Robert Stevenson -- Janney, Montgomery, & Scott -- Analyst

Okay, thanks guys.

Operator

Thank you. Our next question is coming from Jim Lykins of D.A. Davidson. Please go ahead.

Jim Lykins -- D.A. Davidson -- Analyst

Good morning guys. Just a couple of things for me. First of all, for Nexton Square, can you provide the rate on the mezz loan and also when will that begin to impact FFO. Is that in 2018 guidance?

Michael P. O'Hara -- Chief Financial Officer

Yeah. Jim what (multiple speakers). Oh Nexton. Okay. Yeah that's going to -- we currently have a bridge loan, it's at 10%. We're anticipating going into the full loan here and closing on that here in the next two weeks and that's going to start at 15%. And then when they hit certain performance thresholds, it will drop to 10%.

Jim Lykins -- D.A. Davidson -- Analyst

Okay. And also for the acquisition in Columbia, can we get the cap rate for that one?

Louis S. Haddad -- President & Chief Executive Officer

It's in the high 6s, Jim.

Michael P. O'Hara -- Chief Financial Officer

Yeah, 6.75% (ph).

Jim Lykins -- D.A. Davidson -- Analyst

Okay, thanks guys.

Operator

Thank you. Our next question is coming from Craig Kucera of B. Riley FBR. Please go ahead.

Craig Kucera -- B. Riley FBR -- Analyst

Hey, good morning. I'd like to follow up on Nexton Square. You have an option to purchase below-market. Can you kind of walk us through how that agreement is constructed, is that based on appraisal at the time of completion or just some additional color how we should think about sort of the spread of where you're buying it versus what you think it's going to be worth or anticipated worth?

Michael P. O'Hara -- Chief Financial Officer

We've negotiated a purchase option based on a cap rate times an NOI that will be in place at the time. And the spread between what we believe to be market and what that options at is, is around 50 (ph) basis points. But mind you, in the interim, we'll be collecting significant development and construction management fees, as well as $2 million to $3 million worth of interest income. So inclusive of all that profit that will come our way, we still will be purchasing the project below market.

Craig Kucera -- B. Riley FBR -- Analyst

Got it. And going to the Lexington Square, appreciate that about 10% of the purchase price was paid in OP units. But can you tell us what the pricing was or the number of units issued in that transaction?

Louis S. Haddad -- President & Chief Executive Officer

14-something, don't you think Mike?

Michael P. O'Hara -- Chief Financial Officer

Yeah. They're in the mid 14s (ph).

Craig Kucera -- B. Riley FBR -- Analyst

Got it.

Louis S. Haddad -- President & Chief Executive Officer

Those have been in place for quite a while.

Craig Kucera -- B. Riley FBR -- Analyst

Right. And going to the construction business, I know earlier in the year you were excited a bit that backlog was going to pick up, I think, a little earlier than it's sort of come together and it sounds like you're quite busy here in the fourth quarter. But is that just really a function of just kind of other things taking precedence, or did you have any potential deals that fell out of that pipeline or just some additional color on maybe why that maybe slipped a quarter or so, or even two quarters from what we thought earlier in the year?

Louis S. Haddad -- President & Chief Executive Officer

Thanks for your question. Nothing has fallen out and our expectation is that we're going to be -- it's going to be a very robust backlog going into the first of the year. But what we're seeing the results of and I would imagine you guys have heard this on a number of conference calls. It's very difficult to find labor and it is very difficult to confirm pricing. Schedules have elongated. And so, the businesses -- we're proceeding very cautiously before we execute contracts. The great thing about being in the development business, either working for other developers or working for ourselves, is that you have the time to set your cost pro formas before having to commit to tenants. And that's kind of where we are. So our construction company has been working the same projects that we had anticipated being under contract by now. They've been working them for several months, but finalized hopefully in the next month or two. But it's really a function of what's going on in the marketplace.

Craig Kucera -- B. Riley FBR -- Analyst

Got it. Wanted to circle back to one of your retail tenants that has four leases, Bed Bath, kind of had a tough quarter, they announced earlier this month. Can you give us some color on how you feel those stores are performing and any update on discussions you had with them?

Louis S. Haddad -- President & Chief Executive Officer

Yeah, it's interesting you know we have a few people kind of in that same category, Bad Bath being one of them. Their business is still very healthy and in particular our centers are doing great. We understand that the center that we have here, next to Town Center is one of the best performing stores in the state. We're watching that very closely from a couple of standpoints. One is, Bed Bath is not a very strong rent payer. Those are fairly below-market deals, so it wouldn't be the worst thing in the world if we got some space back. But perhaps more importantly, we're looking for them to update their concept. They've got a tremendous amount of goodwill. Great name, and if they can just get -- if they can just get going in a direction, we think they can probably turn around. They may need to shrink their stores, but we're very much engaged in watching that process. We've got the similar situation with Barnes & Noble, who is in a couple of our centers. Again, they're working -- they are a little bit further along working a new concept that seems exciting and seems like it's going to be well received and we're going to work with them here at Town Center and help them pull it off. But that environment is changing quickly as everybody knows. We are -- like I said, we are very happy with our retail portfolio. That doesn't mean that we're not vigilant and worried about various things that are happening in the marketplace, particularly in soft goods. There is a lot of winners and losers out there and you've got to be careful. But when you operate lifestyle centers, you're going to have tenants that come in and out of favor. But that's why we get paid, is to stay on top of those sorts of things.

Craig Kucera -- B. Riley FBR -- Analyst

Got it. One more for me. There seem to be rising concerns about global growth, just due to higher interest rates and maybe another round of tariffs. Doesn't sound like you guys are seeing anything on the ground. But after going through a number of cycles, I guess what are the triggers Lou that you look at to sort of say, hey, we need to maybe start pulling back on development? I know you sort of outlined you have three new potential -- or three new markets with new projects, but kind of what are you looking forward to say, maybe, hey, let's pull back and slow things down and just finish what we have?

Louis S. Haddad -- President & Chief Executive Officer

Sure. I tell you, for us the precursor is always a slowdown with our tenants. We've got a lot of architects, engineers, money managers, insurance companies and the like. And as you might imagine, all those people are on the front end of expansion in the economy. And so it gives us a good gauge of what's going on out there. That has been -- I'd say it's been a great bellwether for us.

The second piece of that is remember, we are not a large -- on a relative basis, we're not a large Company. And so we really can have a rifle approach to where we want to play and where we don't. When you do the types of public/private ventures or ventures with well heeled tenants that we do, you're really not looking at a macroeconomic situation, you're looking at specific markets and more specifically, even a specific sub-market where you can do a really good deal in really just about any kind of an environment. So the macroeconomics are important for our overall tenant expansions and our construction company and the like. But in terms of development opportunities, short of something like the Great Recession, the opportunities in the good markets are there and I guess, as I said, before we feel really strongly about Charlotte and Charleston, Nashville, Atlanta and the like.

Craig Kucera -- B. Riley FBR -- Analyst

Okay, great. Thank you.

Louis S. Haddad -- President & Chief Executive Officer

Okay thank you, ladies and gentlemen. We appreciate your interest in our Company. We look forward to updating you on our activities and results in the coming quarters. And we look forward to 2019 guidance. Take care.

Operator

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may now disconnect your lines at this time and have a wonderful day.

Duration: 49 minutes

Call participants:

Michael P. O'Hara -- Chief Financial Officer

Louis S. Haddad -- President & Chief Executive Officer

John Guinee -- Stifel -- Analyst

David Rodgers -- Baird -- Analyst

Robert Stevenson -- Janney, Montgomery, & Scott -- Analyst

Jim Lykins -- D.A. Davidson -- Analyst

Craig Kucera -- B. Riley FBR -- Analyst

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