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Armada Hoffler Properties (NYSE:AHH)
Q4 2018 Earnings Conference Call
Feb. 7, 2019 8:30 a.m. ET

Contents:

Prepared Remarks:

Operator

Welcome to Armada Hoffler's fourth-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 call is being recorded today, Thursday, February 7, 2019.

I will now turn the conference call over to Michael O'Hara, chief financial officer at Armada Hoffler. Please go ahead.

Michael O'Hara -- Chief Financial Officer

Good morning, and thank you for joining Armada Hoffler's fourth-quarter and full-year 2018 earnings conference call and webcast. On this call this morning, in addition to myself, is Lou Haddad, CEO. The press release announcing our fourth-quarter earnings, along with our quarterly supplemental package and our 2019 guidance presentation, were distributed this morning. A replay of this call will be available shortly after the conclusion of the call through March 7, 2019.

The numbers to access the replay are provided in the earnings press release. For those who listen to the rebroadcast of this presentation, I remind you that the remarks made herein are as of today, February 7, 2019, 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 mezzanine program, 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.

These risks and uncertainties can cause actual results to differ materially from our current expectations, and we advise listeners to review the forward-looking statement disclosure in our press release this morning and the risk factors disclosed in documents we have filed with or furnished to the SEC. We will also 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, armadahoffler.com. We will start the call today by discussing our 2019 guidance.

At this time, I'd like to draw your attention to our 2019 guidance presentation that we published this morning. I'll now turn over the call to Lou.

Lou Haddad -- Chief Executive Officer

Thanks, Mike. Good morning everyone, and thank you for joining us today. This month, Armada Hoffler will celebrate its 40th anniversary. We take a good deal of pride in achieving this milestone not often seen in the commercial real estate business.

Over the years, we've earned a reputation for integrity, consistency, and professionalism, traits that are the foundation of our success. Complementing our seasoned management team, we have a vibrant young staff and likeminded partners that have us positioned for even greater achievements in the future. In addition to analysts and investors, there are many employees and joint venture partners listening in on the call today. On behalf of our founder and chairman, Dan Hoffler, the board of directors, and executive management, we sincerely thank you for being part of our team.

I'm proud to be associated with each one of you. The focus of my comments today will be on our 2019 guidance as presented in the release this morning. Before we discuss those projections, I'll offer a few thoughts on the fourth quarter and 2018. As you can see from our earnings release, the fourth quarter was extremely busy at the company.

We started a number of new projects, signed several third party construction contracts, sold a major portfolio asset, and closed on the distribution center sale with over a 15% profit. Perhaps most importantly, leasing in our portfolio continued at a very brisk pace, with healthy increases in both same store NOI and releasing spreads. Lease-up in the newly delivered development projects remains on track as well. Our fourth-quarter results were in line with expectations, and normalized FFO for the full year was $1.03 per share, which was at the high end of our guidance range.

As we said at the beginning of last year, 2018 would yield respectable growth in per share earnings over 2017, and it has done so with a year-over-year increase of over 4%. More notably, we anticipated that our activities over the course of 2018 would build a solid foundation for significantly higher earnings in 2019 and beyond. Turning to our guidance presentation, as you can see by the earnings target on Page 4, we intend to deliver on that assertion. The midpoint of our per share guidance range of $1.14 represents an increase of more than 10% over last year.

Our guidance is even more impressive when you consider the FFO headwinds from both anticipated and completed dispositions. During 2019, we expect to sell a grocery-anchored center in the fourth quarter. More significantly, on December 31, Home Depot exercised its below market purchase option upon lease expiration at our Broad Creek Center, resulting in a considerable loss of some $700,000 of NOI. Before I walk you through the other highlights of our presentation, I'm going to reiterate a fact that many who follow our company have correctly pointed out, that we do not fit neatly into the standard REIT box.

With third party construction profits, build-to-suit asset sales, and mezzanine interest income, our platform has a unique complexity that can't be wholly measured by traditional REIT metrics. That said, while these ancillary income streams augment earnings and decrease the need for external capital, the end goal of monetizing development spreads in this fashion is to enhance growth in our portfolio income through new development projects and off market OP unit acquisitions. Illustrative of this point, as you can see by the information at the top of Page 5, we expect our portfolio NOI to climb by over 50% from 2018 levels when the current development projects are fully stabilized. The FFO per share contribution from this additional NOI will be meaningfully higher due to the millions of dollars earned from mezzanine interest and construction income that we reinvest into the company, thereby reducing the need for outside capital.

Also of note on Page 5, as we have been projecting, the pie chart showing the NOI contribution of our various product types continues to rebalance, with concentration moving from retail into multifamily and office. While the non-retail assets that are being added to the portfolio are of trophy quality and offer significant long term growth, I'd like to emphasize that we are very bullish on all components of our retail portfolio. Neighborhood grocery stores, regional discount centers, entertainment, and mixed use retail will remain as a high occupancy and growing sector of our business. That said, we anticipate taking advantage of low cap rates to raise approximately $25 million by selling one of these centers.

Turning to Page 6. You can see that we've also been very successful in diversifying the portfolio on a geographic basis. Upon stabilization of the current pipeline, nearly half of our property NOI will come from outside of Virginia. This diversification is the result of years of goodwill and strong relationships built with strategic partners in these dynamic markets.

Beyond the current pipeline, we are evaluating multiple new opportunities in these and other neighboring areas. While these have not been finalized, our expectation is that at least one of these new engagements will be ready to announce later this year. The development pipeline is described on Page 7. Currently, we have over $0.5 billion in various stages of development.

Several of these projects are nearing stabilization, while some are still under construction. All of these were previously disclosed and are on track, and we are very pleased with the progress to date on each of our projects. The furthest along is 1405 Point, the apartments at the Inner Harbor in Baltimore. This trophy asset is over 90% leased, and we expect both stabilization and execution of our at-cost purchase option in the second quarter.

The fully leased Brooks Crossing office building will also come online in the same time frame. We can answer any specific questions you may have regarding the pipeline in the Q&A portion of this call. Page 8 shows our mezzanine investment program. This initiative allows us to provide development and construction expertise, as well as our strong credit, to trusted partners developing high quality projects in return for most of the value creation.

We've separated the program into two parts, assets that we intend to ultimately acquire through a discounted purchase option and projects that we feel are better suited as short term investments. The assets in this latter category are expected to trade at cap rates significantly below our cost of capital, thereby making our acquisition less practical. Consequently, our partners will be offering the projects to the general market. The mezzanine lending strategy, combined with the schedule, quality, and cost control provided through our general contracting arm, enables us to participate in top quality developments such as Whole Foods centers and monetize a large percentage of the wholesale to retail spread through interest and fee income.

Stated another way, this aspect of our investment strategy maximizes flexibility in deciding which projects are best suited for inclusion in the portfolio and which are best to monetize based on a variety of factors, including capital market and commercial real estate conditions. As you can see, over a multiyear period we expect to generate $60 million of net proceeds, substantially reducing our need for external capital. Based on the projected payoff dates of the current projects and likely engagements in predevelopment, we expect the program to stay at or near these levels at least through 2020, yielding significant profits over the next few years. Mike will update you on the 2019 guidance of this segment of our business.

Page 9 covers our third party construction and other real estate services. With a healthy backlog of over $160 million, the division is expected to make over $5 million in gross profit this year. While we don't anticipate a build-to-suit engagement in this calendar year, this skill set remains a part of our overall strategy in the construction division, and we typically execute on one of these opportunities every 18 to 24 months. Lastly, on this page you'll see the remaining $4.5 million to be recognized from the sale of our purchase option at Annapolis Junction.

You'll recall that the accounting treatment for the $5 million payment we received last fall requires us to book this profit over the remaining term of the mezzanine loan. Stepping back to a macro look at the business, the top of page 10 shows the year-over-year anticipated change in the composition of our normalized FFO. As you can see, property FFO rises the most on an absolute basis, followed by mezzanine interest. The pie charts show that, while a significant portion of our FFO is derived from ancillary real estate related sources, the vast majority is generated from traditional rental income.

With the ramp-up of the mezzanine program and the profit contribution from the option sale, 2019 shows a corresponding decrease in the percentage earned from rental real estate. However, our expectation is that mezzanine, construction, and build-to-suit contributions will stay more or less static over the next few years, while stabilization of the existing development pipeline will increase property NOI by some $30 million. We expect the resulting FFO generated will return the property segment to well over 80% of the total on a consistent basis, thereby solidifying our earnings base and multiple. Now I'll turn the call over to Mike to give some further detail on our guidance as well as some specifics on last quarter.

Michael O'Hara -- Chief Financial Officer

Thanks, Lou. After a couple of comments on the quarter, I will continue the discussion on our 2019 guidance. This morning we reported FFO of $0.26 and normalized FFO of $0.30 per share for the fourth quarter. For the full year, FFO was $0.99 and normalized FFO was $1.03 per share.

The majority of the difference between FFO and normalized FFO in the fourth quarter was from the non-cash mark-to-market adjustments from our interest rate hedging strategy and severance related charges. These unexpected severance related charges caused our G&A to be outside our previously announced guidance range. Although 2018 was not a good year for REIT stocks, our total return was slightly better than the RMS. Our five-year total shareholder return through February 1 was 122% versus 55% for the RMS.

Obviously, we are pleased with these returns and are grateful for the trust that our shareholders have placed in our company. Our core operating portfolio occupancy for the fourth quarter remained strong at 96%, with office at 93%, retail at 96%, and multifamily at 97%. Same store NOI was positive for the third consecutive quarter and slightly positive for the year. Additionally, our releasing spreads were positive again this quarter, 5.7% on a GAAP basis and 3.4% on cash.

They were also positive 5.4% on a GAAP basis and 1.1% on cash for the year. We believe these positive metrics are a reflection of the quality of our portfolio. Now back to the guidance deck. Starting on Page 11, there are a couple of slides relating to the balance sheet.

As you can see, we have maintained leverage within our corporate targets of total debt to EBITDA with an upper limit of eight times and core debt to core EBITDA in the 6 times range. There were exceptions to this in 2018 with regards to core debt to core EBITDA. As we previously discussed, we elevated leverage in 2018 for the build-to-suit distribution center. With the short term nature of this project and associated debt, we did not raise any equity capital for this project, which sold in December as planned.

As you can see, leverage was back in our target range at year-end. We anticipate the following sources will meet our capital needs for 2019, and expect that we will maintain leverage within our target range for the year; first, the disposition of a grocery-anchored shopping center for the expected proceeds of approximately $25 million. The proceeds from this sale will be used to pay down debt. Second, we expect that the Decatur Whole Foods centers and Annapolis Junction loans to be paid off this year.

The expected payments are approximately $60 million. And third, raising $50 million through the ATM program, which is less than 2018, assuming favorable market conditions. As Lou said, we are evaluating a number of new development opportunities. We do not expect any of these to break ground until late this year, and therefore require little capital investment in 2019.

Now turning to Page 12 to review debt maturities. There was only one maturity in 2019, which was paid off in January. In 2020, there are two loan maturities, both of which are construction loans totaling $45 million. The loans are for the Greenside Apartments in Charlotte and Town Center Phase VI.

With the leasing activity on both projects, we have no concerns on either exercising our extension options or refinancing these projects. I'll have further comments on the balance sheet later in my remarks. Next, I'll discuss a couple segments of our business. Page 13 of the deck illustrates our core operating portfolio occupancy since 2013, which has been in the mid 90%'s.

This reflects the strength of our properties, and we expect this to continue at these levels in 2019. Page 14 of the deck illustrates the details of our 2019 mezzanine investment program guidance. The size of this program has increased substantially during the fourth quarter with the closing of the three new mezz loans. With the growth of the program, we are considering making this a separate segment for financial reporting in 2019.

We do not anticipate the program growing beyond current year levels, but will remain substantial over the next few years. If we make this change, under GAAP interest income will be reported net of interest expense. For the year, we expect net interest income of approximately $16 million, which includes $4.5 million from the amortization of the Annapolis Junction purchase option sale. As discussed earlier, under GAAP this property is considered interest income and recognize through maturity.

2019 interest income guidance is based upon the anticipated loan payoffs of the Decatur and Annapolis Junction loans in 2019, as listed on this slide. On Page 15 is our 2019 full-year normalized FFO guidance of $1.11 to $1.17 per share, which is a substantial increase in normalized FFO per share from 2018, which was $1.03. The assumptions of the 2019 guidance are the sale of a grocery-anchored shopping center for anticipated proceeds of approximately $25 million in the fourth quarter; acquisition of 79% interest of the partnership in 1405 Point Street Apartments during the second quarter; acquisition of the commercial component of One City Center from the joint venture in the first quarter. We have not included any other acquisitions in this guidance, but as in the past we continue to pursue accretive OP unit transactions; Decatur Whole Foods center loan being paid off in the second quarter and Annapolis Junction loan being paid off in the fourth quarter, raising $50 million through the ATM program, assuming favorable market conditions.

Interest expect is calculated on the forward LIBOR curve, which forecasts LIBOR at 2.57% at year-end. 2019 guidance of $1.11 to $1.17 per share is predicated on the following updated components; total NOI in the $93.7 million to $96.6 million range; third party construction gross profit in the $4.9 million to $5.7 million range; net interest income from our mezzanine financing program in the $16 million to $16.5 million range, which includes the remaining $4.5 million recognized from the amortization of the Annapolis Junction purchase option; general and administrative expenses in the $10.8 million to $11.5 million range; interest expense in the $25.5 million to $26.5 million range, which does not include the interest expense related to the mezz program as discussed earlier; and 69.3 million weighted average shares outstanding. Now back to the fourth quarter, which had a lot of activity. In December, unfortunately Home Depot took advantage of their purchase option of their store in the Broad Creek Shopping Center.

While this is a financial negative to the company, we believe this shows the strength of the center and why it has experienced historically high occupancy. The proceeds from this sale were used to purchase an out-parcel adjacent to our Wendover Shopping Center through a 1031 tax-free exchange. The net loss of NOI after this acquisition is over $700,000, which equates to over $0.01 of earnings per share. As expected, Kroger did not renew the lease at their Waynesboro Shopping Center.

The store is only 38,000 square feet, which is too small for their current model. With its small size and rural location, we decided disposition is the best option. With an executed purchase sale agreement, the center is now classified as held for sale in the balance sheet. An impairment loss was recognized in the fourth quarter.

When City Center was placed in service with Duke University and WeWork occupying the building, income for this building net of depreciation and interest expense is recognized in a new line on our income statement, equity and income of unconsolidated real estate entities. This project is in a joint venture, of which we own 100% of the commercial space. We expect to distribute this property out of the joint venture and refinance it this quarter. We also had a lot of activity with our mezzanine loan program.

We closed on the Nexton Square project in Summerville, South Carolina, and two projects that are part of The Interlock development in Atlanta. Interlock projects are the Terwilliger Pappas Solis multifamily project and the S.J. Collins mixed used building. Please see the press release we issued last month for more information on these projects.

The first project in our mezzanine program was the 1405 Point Street Apartments. As part of this structure, we have an at-cost purchase option of the project, which we can exercise in two phases. We intend to exercise our first purchase option, which is 79% of the partnership, during the second quarter. Now back to the balance sheet.

In the fourth quarter, we raised $5.9 million through our ATM program at an average price of $15.05 per share. In 2018, we raised $66.5 million at an average share price of $14.39. This month we paid off the North Point Center Note 1, which is our only debt maturity in 2019. We added this property to the borrowing base of our credit facility and utilized the accordion feature to increase the capacity by $25 million to a total of $355 million.

At quarter-end, we had total outstanding debt of $701 million, including $126 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 year-end, 100% of our debt was either fixed or hedged. This quarter we purchased a two-year $50 million interest rate cap at 2.75%, and we entered into a $10 million swap lock on the Lightfoot Marketplace loan.

As you've just heard, we have a lot of activity in 2019 with many moving parts. We will continue to be transparent and keep you informed. Now I'll turn the call back to Lou.

Lou Haddad -- Chief Executive Officer

Thanks, Mike. We remain extremely bullish on the performance of our company. With an accretive pipeline starting to deliver and a solid balance sheet, we believe we are poised for significant growth over the next few years. When combining these factors with a dividend that has increased annually and still yields in excess of 5%, we feel that we are delivering exceptional value to our shareholders in the form of above average growth in income.

We'll be discussing the dividend at our quarterly board of directors meeting on February 21, and we will issue a press release shortly thereafter. Thank you for your time this morning and your interest in Armada Hoffler. Operator, we would like to begin the question-and-answer session. 

Questions and Answers:

Operator

Thank you. The floor is now open for questions. [Operator instructions.] Our first question is coming from Dave Rodgers of Baird. Please go ahead.

Dave Rodgers -- Robert W. Baird and Company -- Analyst

Yes. Mike, Lou, good morning. Wanted to ask a little bit about the development pipeline, obviously, $550 million with a couple of the mezz purchase options in there, but most of that completes or stabilizes between 3Q 2018 and kind of 3Q 2019. So you mentioned adding some more projects, potentially, by the end of the year, but can you kind of talk about the activity that you're seeing to kind of keep that pipeline full and continue to be able to grow the core NOI of the company?

Lou Haddad -- Chief Executive Officer

Sure. Thanks, Dave. Yes, I mentioned last quarter that we're looking at further opportunities in Charlotte, in Charleston, in Baltimore and in Nashville, and those still remain the areas of focus. These are pretty complex multiuse projects.

I still -- at this point, we really can't forecast that they are going to start, but they all look promising, which I will remind you typically means that one gets started, one gets delayed, and one gets killed. But we'll see how that develops. But there's an awful of activity out there and it's really good to see. Our development partners are very active, as well as our own development group.

Dave Rodgers -- Robert W. Baird and Company -- Analyst

All right. Great. Thanks. And then maybe moving on to the mezz program, it's obviously -- sounds like it's kind of getting to a peak level for you guys over the next couple of years, and it's been a good contributor.

But I guess what happens if something kind of goes wrong or if a developer defaults on some of these projects or can't fulfill the obligations? How do you guys foresee handling that if that were to happen?

Lou Haddad -- Chief Executive Officer

That's a great question, Dave. Let me start by saying that in almost all of these engagements our construction company is the general contractor on the project from inception, so our development group is involved in support of the prime developer on the deal. So in the event of a developer faltering, we have a built in smooth transition process for us to fulfill the lead role. As you're aware, we have decades of experience in construction and development, which really is the key reason that we're comfortable with this whole mezzanine structure.

Our security in case of default is the developer's partnership interest in the project. And that's where our underwriting comes in. We are just as meticulous in the evaluation process as we are in our projects. We underwrite the market demand, the location, the tenants, the design, the cost estimates, all of this thoroughly before we agree to fund the loan.

So while we certainly wouldn't wish our partners to default, we would be fine with assuming their ownership and their obligations at what would then be a significant discount to the value of the asset. Nothing in real estate is completely bulletproof, but we believe we have a tremendous amount of protection around these transactions.

Dave Rodgers -- Robert W. Baird and Company -- Analyst

Great. Thank you for that. And last one for me on the retail leasing. You had a really active quarter in retail leasing.

Can you kind of talk about where that activity was in terms of maybe kind of the entertainment and restaurant versus kind of inline centers, and talk about the activity that you saw there?

Lou Haddad -- Chief Executive Officer

Yes. We're seeing the most activity in -- you kind of hit the nail on the head. It's more in restaurant and entertainment than it is in traditional retail. As you can see, our occupancy is very high at this point, and we're not seeing any cracks in the armor to speak of.

But the fast casual restaurants really are on a tear. We've signed a few here at Town Center in the last few months. We have had a number of renewals in our neighborhood centers as well as the couple of power centers that we own. And as we said, somewhat unfortunately Home Depot took advantage of the option at the end of their 20-year lease at our Broad Creek Center to buy the project from us.

I think it's important to note there that that project is all on a ground lease, so effectively Home Depot has signed up for another 30 or 40 years of operations. That center's been extremely strong for day one and continues to be so.

Dave Rodgers -- Robert W. Baird and Company -- Analyst

Great. Thank you, guys.

Lou Haddad -- Chief Executive Officer

Thank you, Dave.

Operator

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

John Guinee -- Stifel Financial Corp. -- Analyst

Great. Bunch of questions here. First, just out of curiosity, Interlock, do you have any equity there, one? Two, is it close enough the MARTA to be MARTA accessible? And three, I think WeWork as your major tenant, which is your second development with WeWork as your primary lead tenant, the first one being Wills Wharf in Baltimore.

Michael O'Hara -- Chief Financial Officer

Yes. I guess, John, a couple of things. One, we do not have equity in that project outside the mezz loan. Obviously, we've got the collateral around that.

It is not next to MARTA. It's in the mid-west part of Atlanta, which is a new thriving, booming area which has what we like in those kind of centers, is walkability, great location from that standpoint. And yes, WeWork is another major tenant at that location. And they are I think 100,000 square feet of a development that's over 300,000 square feet.

Lou Haddad -- Chief Executive Officer

John, just as a reminder, in both of those projects that you're referring to, the anchors in one case were Duke University, in the other case is Georgia Tech. So we're happy to have WeWork as well, but the foundation was with the credit of those two tenants.

John Guinee -- Stifel Financial Corp. -- Analyst

Gotcha. OK. And then looking at Page 14, probably Mike projected mezz interest expense of $5.5 million. What's your average balance on that mezz program, and what's the interest rate you're assuming to get to the $5.5 million as your cost of capital?

Michael O'Hara -- Chief Financial Officer

Yes. So on a total balance, we expect it to peak out like I think we talked about last call, in the $145 million range or so. And that's all going to be dependent on when the payoffs come, like the Decatur Whole Foods and etc. On the cost of capital, we're using our credit facility, which is in that 4.5% to 5% range at this point in time.

And the amount of interest for us that we use here for 2019 is $5.5 million, which obviously doesn't include any interest expense against the Annapolis Junction piece of that.

John Guinee -- Stifel Financial Corp. -- Analyst

And so essentially, if I'm looking at this page, essentially, the $16.2 million equates to roughly $0.23 in FFO.

Lou Haddad -- Chief Executive Officer

Correct.

John Guinee -- Stifel Financial Corp. -- Analyst

Yes. OK. Then on Page 9, I guess -- well, let's see. Where is your sources you used? OK, this is Page 11.

You have a source. You have basically your target, which you hit in 2018, and then you have your sources of capital in 2019, which is sort of weighted toward the end of the year. You don't have uses here, but I'm assuming the primary uses are the net funding on One City Center and the net funding on 1405 Point. What's the net funding? If I look at Page 7, I've got $99 million and $46 million.

Are those the -- I'm assuming those are gross numbers or are they net numbers?

Michael O'Hara -- Chief Financial Officer

Yes. So the main capital needs are going to be funding the development pipeline, which is Wills Wharf office, finishing up the student housing projects in Charleston. On 1405 Point and One City Center, we've already funded 100% of the equity requirements on those, so then it's just a matter of bringing those on balance sheet.

John Guinee -- Stifel Financial Corp. -- Analyst

So essentially what you're saying, I think, is that your mezz is essentially the equity and you're going to just bring the debt on the balance sheet.

Michael O'Hara -- Chief Financial Officer

Correct, yes, except for One City Center was not a mezz project. That's a joint venture, of which we had to contribute our capital for our piece of that joint venture, which was the commercial space.

John Guinee -- Stifel Financial Corp. -- Analyst

So is it safe to assume that you're going to spike up in your debt metrics in the first half of this year and then come down in the second?

Michael O'Hara -- Chief Financial Officer

No. Based upon our models, we're going to stay within the ranges that we have here. Will it be a little higher than fourth quarter? Yes. But will it be within our ranges? We believe so.

John Guinee -- Stifel Financial Corp. -- Analyst

OK. And then the last question is, if you look at your -- you have on Page 10 $5.3 million of construction build-to-suit net profit. How much of that is your net profit on your construction business, your fee business, and how much of that is a build-to-suit, on Page 10?

Michael O'Hara -- Chief Financial Officer

So in 2018, of the $6.1 million, $3.4 million of that was the build-to-suit on the sale of the distribution center. In 2019, we do not have any build-to-suit property in there. That's all third party construction.

John Guinee -- Stifel Financial Corp. -- Analyst

OK. OK, great. All right. Thank you very much.

Michael O'Hara -- Chief Financial Officer

Thank you, John.

Operator

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

Rob Stevenson -- Janney Montgomery Scott -- Analyst

Good morning, guys. Back to Dave's question on development pipeline, Lou, it sounded like that -- when you were answering those questions, it sounded like that the stuff that you anticipate starting in the remainder of this year are multiuse, more complex projects. Is that fair to say?

Lou Haddad -- Chief Executive Officer

That's correct. These are really exciting projects. I don't want to get too far out there because it's still -- they still are in that predevelopment phase where they still could potentially not come together. But these are large, infill CBD type projects that have multiuse which, as you guys know, is really in our wheelhouse.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

OK. I mean, I guess the question there in terms of looking out on the development pipeline, I mean, basically everything except for Wills Wharf winds up completing this year. And so if you're starting in the middle or end of 2019 with complex projects that are likely to have at least 18-month probably, maybe closer to 24-month construction timetables, it seems like the development pipeline is going to ebb in 2020 just in terms of deliveries, that you're going to have a bunch of deliveries this year and then it's going to fall off. You're just going to have the one next year and then maybe some pick back up in 2021, but just wanted to make sure that I was thinking about that correctly.

Lou Haddad -- Chief Executive Officer

Yes, I think that's a fair assertion. We haven't mentioned we're looking at a number of smaller projects as well that I really haven't called out. We said that our retail portfolio is going to continue to grow. Particularly our grocery anchors are very active, so I think there'll be some infill with that.

But I think in 2020, as we tried to illustrate, the majority of growth is going to come from that extra $30 million worth of NOI that comes from the development pipeline stabilizing.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

And then what type of IRRs are you getting on the Cosmo redevelopment currently?

Lou Haddad -- Chief Executive Officer

I'm sorry. Could you repeat that?

Rob Stevenson -- Janney Montgomery Scott -- Analyst

What type of IRRs or returns are you getting on the Cosmo redevelopment now that that's stabilizing back up?

Lou Haddad -- Chief Executive Officer

That's a great question. And I hesitate to answer because the returns are better than expected, but it's early. At the end of the day, we will have invested over $10 million in Cosmo over a couple year period. The revitalized units have come back online, and we're seeing a significant increase in rental income.

We also expect that any kind of concessions will go away as well. So at the front end, it looks like a double digit return. I'm just not ready to take that to the bank because we have to cycle through 350 units. But it certainly looks really good at this point.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

And then in Mike's guidance, it includes ATM issuance. When you're thinking about it today, given the still decent market for asset dispositions, how do you think about raising capital in the ATM versus selling a few more retail centers to fund your capital needs?

Michael O'Hara -- Chief Financial Officer

We're going to continue doing like we have, Rob, and that's looking at both. If the capital markets are good, we'll get on the ATM. And I thought -- especially in the second half of last year, really pleased that we were able to sell stock and raise capital. At this point right now, the plan is to sell that one center.

But certainly if the dynamics change, we will switch course.

Rob Stevenson -- Janney Montgomery Scott -- Analyst

OK. Thanks, guys.

Michael O'Hara -- Chief Financial Officer

Thank you, Rob.

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, everyone. First of all, is there any color you can provide on the office leases expiring this year? Looks like you've got over 9% of the portfolio rents coming due.

Lou Haddad -- Chief Executive Officer

So at this point, we're not anticipating any big holes in the ship. We've got some expirations toward the end of this year. It's kind of an interesting phenomena right now, Jim. We all kind of lived through the downsizing of all of the lawyers here several year ago, and then we all kind of lived through the downsizing of the investment houses and financial brokers.

Now we're living through the downsizing of the schools. We have four schools here at Town Center, and each one of them is in the process of downsizing. So that's really kind of been the focus in terms of a sector. Fortunately for us, the professional services sector has really picked up strong here with architects, engineers, insurance brokers and the like.

We've also got a good foothold now in technology. So I don't anticipate any large vacancies. We are going to have some holes to fill, like I said, through the downsizing of some of these schools. But it's nothing that gives us a whole lot of heartburn at this point.

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

And kind of the same question for retail. Is there just any commentary you can provide on what you're seeing right now with how you see what's trending in retail into the quarter and throughout 2019 right now?

Lou Haddad -- Chief Executive Officer

Right now, we really don't have anybody under duress. I tell you, this is -- it takes constant monitoring, because even the stores that are doing reasonably well can become a problem mainly because of what's going on at a macro level in the retail industry. Our people are all over sales. And we've talked about this before on this conference call, how we've really got to stay on top of the sales in our centers.

And that's really the key. In the retail center game, as long as you're tracking sales and your sales are strong, even if a tenant becomes weak, you know you can refill that spot. It's interesting the way the market continues to shift. Now we're heavily weighted to fast casual restaurants and to discounters as well as services, and 10 years ago we were all after the higher end boutique shops.

It requires constant monitoring. But as you see, our retail centers have averages over 95% for quite a long period of time. So we anticipate being able to continue at that kind of pace. And like I mentioned in my opening comments, we feel really good about the retail business the way we're approaching it.

We've got a lot of optimistic grocers in tow. And as long as you keep your small shop construction in a reasonable place, these centers yield great results for many, many years.

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

OK. And one last one. Labor construction costs are up for everyone across the board. I'm just wondering, sitting here right now as you look across the timeline for your development pipeline, are there any projects that kind of stick out that could be just another you feel pretty good about how that timeline looks right now?

Lou Haddad -- Chief Executive Officer

Yes, I think we're OK now. All these things are a challenge. As you correctly pointed out, Jim, the market's very tight. The market for labor is extremely tight.

We're seeing schedules elongate on a regular basis. We're trying to anticipate that as much as is possible. Not anticipating any issues right now. We're got some critical deliveries coming up this year between the HII Building later on this spring, as well as the Charleston projects coming this summer.

We appear to be tracking exactly where we need to be. Our construction group does a great job of staying on top of this, but it is definitely a challenge. And we saw the projects that we delivered last year took longer to fully close out, even though we made the initial dates. Just getting these things put to bed 100% has become quite a challenge.

But it's what we get paid to do, and feel pretty good about where we sit.

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

All right. Great. Thanks, Lou.

Operator

Thank you. Our next question is coming from Bill Crow of Raymond James. Please go ahead.

Bill Crow -- Raymond James -- Analyst

Thanks. Good morning. Lou, you talked about some of the tenant downsizing in the office sector with the lawyers and financial institutions. Have you turned any leases, renewed any leases with material expansions over the last two or three years in office?

Lou Haddad -- Chief Executive Officer

Yes. So that's what I meant about the sectors that are really performing. We've increased in the technology sector. We had a significant expansion from Mythics as well as Lumos.

We expanded in the architects and engineers. You may recall that when we had to expand and relocate Kimley-Horn out of an older high-rise into the newer high-rise. Professional services is really, really doing well, and that's very fortunate for us. Both here and at Town Center, as well as at One City Center, we've got a number of prospects for the last little bit of space there, expect to be filled pretty quickly.

And Wills Wharf, again, abundant prospects, and we'll see who lands first. But outside of a 2008 type event, it's been my experience over 30-some years that there is always robust sectors of the market, and you've just got to be positioned to take advantage of that. Our asset management group is really good at staying on top of these things. As you guys all know, the real estate business is very fluid.

You can't -- you've got to wake up every day and anticipate where things are headed. And we don't always guess right, but I can tell you we are constantly thinking through how to gain an advantage and keep our properties strong.

Bill Crow -- Raymond James -- Analyst

Yes. I appreciate that. On the retail front, you talked about staying on top of revenues. Maybe you can just tell us, Town Center, what happened to revenues per foot 2018 versus '17?

Lou Haddad -- Chief Executive Officer

That's a great question. And unfortunately it's all over the board, so I can't really give you a good characterization. The restaurants continue to be extremely strong, and now we are adding a few. A couple of the specialty retailers struggled.

They're still here, but they've struggled. I think they're struggling nationwide. In terms of sales, Bill, I wouldn't venture -- I wouldn't want to point you in one direction or the other. I could -- depending on where we concentrate, we could paint it as positive or negative.

One thing that I can say is that, at this point in time here at Town Center, I think we're seeing more retail prospects than we have in quite some time. So, the activity is really encouraging. We've signed a -- we are in negotiations for a few more leases now. We don't have a lot of vacancy, but it looks really good as far as filling it.

I think this place has established itself as a great place to do business. What's really good, encouraging for me, is that not only are we seeing the national groups, but now we're getting more play from local mom and pops, good regional players that are looking at Town Center as a great place to service the greater Virginia Beach area. And that's why I think we have a lot of one of a kind stores.

Bill Crow -- Raymond James -- Analyst

OK. I do have one for Mike, but let me follow up with that. And I don't want to ask an open-ended question, so maybe we'll try and keep it short. But can you characterize the economic trends and the vitality of the Virginia Beach market? I mean, what do you see in there that has you encouraged or discouraged about the area?

Lou Haddad -- Chief Executive Officer

I'll try not to take up too much of everybody's time. You kind of hit the nail on the head, Bill. I'm encouraged and discouraged all at once, and I'll tell you why. The area is doing really well right now.

There's been a considerable uptick in defense spending after years of decline. You also may have read that the government just let a double aircraft carrier contract to HII over on the peninsula, first time in the history of our country. And so the economy here is on the rise, again, that underpinning from the port which is doing incredibly well, as well as tourism, which is certainly holding its own. And now we add a little uptick in government spending, which is really helpful.

So, I'm really encouraged in what's going on right now. But I'm also as someone trying to do some things in the community, I'm part of a group that is advocating that the area try and reduce its dependence on government spending. And that's where we've got a lot of wood to chop in order to get where we need to get to.

Bill Crow -- Raymond James -- Analyst

I appreciate it. And then Mike, just finally for me, if I just think about your mezz loan program this year, a little over $16 million of income. You lose $4.5 million from Annapolis Junction. You lose $2 million from 1405 Point and Nexton Square.

You lose call it half of a full year at the Decatur Whole Foods, $700,000. I think that gets us down about $7 million to about $8.5 million or $9 million for next year gross. I don't know what happens to that $5.5 million of expense. And is that the right way to think about it as a run rate for next year if you don't do any -- if you don't originate any more mezzanine loans?

Lou Haddad -- Chief Executive Officer

Bill, let me start there and then I'll turn it over to Mike, as I want to try and make this clear in what I was saying when looking at the guidance there. If you look at that Page 13 or whatever it was where we had the pie chart showing the makeup and you see that the other activity is in that 22%, 23% range for this year, we believe that that's going to stay pretty much static. And we believe that based on all the arrows in our quiver, based on construction activity that we're seeing, further mezzanine engagements that are shaping up, as well as more build-to-suit opportunities. So in our thinking, we believe that 2020 is going to stay at or near those levels.

We just don't have things to announce at this point. Mike?

Michael O'Hara -- Chief Financial Officer

I don't have a lot to add to that, other than the ones that just closed here in December will certainly have more outstanding balance during -- average balance in 2020 than they will in 2019, as those ramp up during the year. As Lou said, there's activity out there on the Whole Foods. That activity seems to be picking up, and we hope to be involved in more of those coming up here later this year.

Lou Haddad -- Chief Executive Officer

Yes, I had neglected to mention that we're really excited about S.J. Collins and the ramp up they're seeing in the Whole Foods-Amazon portion of their business, as well as some other grocers they've become close to. I tell you, I can't -- if I haven't said it before, I can't say enough about our joint venture partners, to work with Pappas people, S.J. Collins, Michael Beatty in Baltimore, Maryland.

We've got top quality developers that we are doing business with on a repeat basis in really trophy type assets. And that's where a big part of our optimism comes from.

Bill Crow -- Raymond James -- Analyst

Appreciate it. Thanks for the time, guys.

Lou Haddad -- Chief Executive Officer

Thank you.

Operator

Thank you. At this time, I'd like to turn the floor back over to Mr. Haddad for closing comments.

Lou Haddad -- Chief Executive Officer

Thanks, guys. We appreciate all the time you spent this morning. It seems like it's longer than usual, so we won't keep everybody. We really appreciate the interest.

I hope that the presentation that we made helps to clarify some things in our business. Mike and I are available the rest of the day for any comments or questions you might have on a further basis. And have a great day and we hope to talk to you soon. Take care.

Operator

[Operator signoff]

Duration: 58 minutes

Call Participants:

Michael O'Hara -- Chief Financial Officer

Lou Haddad -- Chief Executive Officer

Dave Rodgers -- Robert W. Baird and Company -- Analyst

John Guinee -- Stifel Financial Corp. -- Analyst

Rob Stevenson -- Janney Montgomery Scott -- Analyst

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

Bill Crow -- Raymond James -- Analyst

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