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AmREIT, Inc. (NYSE:AMRE)

Q4 2013 Earnings Conference Call

February 19, 2014 11:00 AM ET

Executives

Mary Trupia – Vice President-Investor Services

H. Kerr Taylor – Chairman and Chief Executive Officer

Chad C. Braun – Chief Financial Officer and Chief Operating Officer

Charles Scoville – Senior Vice President and Director of Operations

Tenel Tayar – Senior Vice President and Chief Investment Officer

Analysts

Jonathan Pong – Robert W. Baird & Co.

Brandon B. Cheatham – SunTrust Robinson Humphrey

Carol L. Kemple - J.J.B. Hilliard, W.L. Lyons LLC

Chris R. Lucas – Capital One Securities, Inc.

Craig G. Kucera – Wunderlich Securities, Inc.

Tayo T. Okusanya – Jefferies LLC

Operator

Good day, and welcome to the AmREIT, Inc. Fourth Quarter and Year End 2013 Earnings Conference. All participants will be in listen-only mode. (Operator Instructions). After today’s presentation there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference over to Ms. Mary Trupia, Vice President of Investor Services. Please go ahead.

Mary Trupia

Thank you, Amy, and good morning everyone. Thank you for joining us today to discuss AmREIT’s fourth quarter and year end 2013 results. On the call today are Kerr Taylor, Chairman and Chief Executive Officer; Chad Braun, Chief Operating Officer and Chief Financial Officer; Charles Scoville, Director of Real Estate Operations; Tenel Tayar, our Chief Investment Officer; and Brett Treadwell, Chief Accounting Officer.

The fourth quarter and year end 2013 results as well as a notice of the accessibility of this conference call on a listen-only internet basis were released yesterday afternoon in a press release that has been covered by the financial media.

For those of you who did not receive a copy of the fourth quarter earnings release, you can request a copy from me at 713-850-1400 or download the file at www.amreit.com. Click investors and then quarterly earnings. Also for those who want to listen to a recording of the prepared comments today, we will have a replay available by phone or via webcast on the website.

Before we begin the call, I would like to remind you that some of the statements made in this call are forward-looking statements and as such are subject to many factors that could cause actual results to differ materially from the Company’s expectations. These factors are described in the Company’s SEC filings. AmREIT undertakes no obligation to publicly update or revise any forward-looking statements.

Now, I’ll turn the call over to Kerr.

H. Kerr Taylor

Thank you, Mary. Good morning and we appreciate your participation in our fourth quarter and year end earnings call. As we close out 2013, I am pleased to report AmREIT again posted solid results for the quarter. The foundation of our consistent performance continues to be that AmREIT has one of the highest quality urban retail and mixed-use portfolios within the shopping center sector.

We remained focused on the dense infill submarkets of five of the top growth markets in the country; Houston, Dallas, San Antonio, Austin and Atlanta. With the fourth straight year in 2013, Texas again led the nation in job growth adding over 252,000 jobs, while Georgia ranked fifth in statewide job growth with almost 90,000 jobs according to the U.S. Bureau of Labor Statistics.

Our relentless focus as a local sharpshooter combined with our strict underwriting criteria has resulted in one of the strongest portfolios in the shopping center space from a demographic perspective.

When we completed our IPO 19 months ago, the average household income within a one-mile radius of our properties was approximately $110,000 with approximately 48,000 households within a three-mile radius. Since that time we have successfully completed over a $150 million in acquisitions which recycling over $60 million from dispositions.

We have remained disciplined and have consistently improved the demographic quality of our portfolio. Today, average household income within a one-mile radius of our properties is over $136,000, a 24% increase from the average household income at the time of our IPO and we have in average of over 50,000 households within a three-mile radius, a 4% increase in average density.

The positive results of this past quarter reflect the high quality of our Irreplaceable Corners properties, the strategic advantages of being a local sharpshooter in robust markets and the opportunistic benefits our talented team continue to harvest for shareholders. A benefit of being a local sharpshooter is our ability to create special opportunities that enhance shareholder value. In November we successfully sold the CVS Pharmacy build-to-suit located at Loop 610 & Ella in Houston for a $2.3 million gain. This opportunity was sourced by our investment team who assembled multiple small land tracts and negotiated the lease with CVS.

Our construction group oversaw the development including in a sale of a newly constructed CVS Pharmacy in November at a 5.5% cap rate, because we are local in our core markets, we are able to identify and execute on special opportunities that can drive cash flow, FFO and value for stockholders.

Core FFO was $0.26 per share for the quarter and a $2 for the full year which is at the high end of our annual guidance of $0.98 to $1.3 per share. FFO was $0.38 per share for the quarter and a $1.5 for the full year, in part due to the CVS gain on sale I just mentioned. These results are ahead of our revised FFO guidance of $1.7 to $1.2. Chad will discuss the details of these results in just a few moments.

Let me briefly give you an overview of our operating activity over the past quarter and then I’d like to focus the rest of my comments on our future. Our portfolio remains strong and healthy with overall occupancy of 94.2% excluding properties under redevelopment which includes Courtyard at Post Oak and Uptown Park.

Our same store NOI growth for the quarter was 3% and year-to-date was 3.1%. Including these redevelopments, our same store NOI growth was approximately 0.4% for the quarter and 1.3% for the full year.

As I will discuss in just a moment, the NOI growth potential of both of these properties in redevelopment is significant. The market for high quality assets remain strong, in such an environment it’s even more important that we remain disciplined by adhering to our 5D investment framework. While we carefully assessed the number of acquisition opportunities in the fourth quarter none of these opportunities met our investment criteria.

Now I’d like to turn our attention to our future. As you saw in our earnings release, we have indicated full year 2014 Core FFO guidance of $1.02 to $1.06 and full year preliminary 2015 Core FFO guidance of $1.10 to $1.13. Our focus continues to be on growing our Irreplaceable Corner portfolio, operating our portfolio to maximum long term shareholder value and realized in the embedded value within our portfolio through incremental redevelopment and densification.

One of the mottos that we trademarked over our 30 year history is, good things happen on great real estate, and within our portfolio this could not be more true. Let me share with you some of the exciting plans we have for several of our Irreplaceable Corner properties over the next several of years.

First, Uptown Park in Houston is a single-storey shopping center located in the heart of one of the nations most dynamic urban submarkets. High density office, residential, retail and hotel developments are now under way throughout the submarket. We have identified seven potential development sites within Uptown Park that will allow us to incrementally add significant density and value to the project, while allowing us to continue successfully operating the center as one of our cities most popular destinations for shopping and dining.

The first site within Uptown Park selected for redevelopment contains 12,200 square feet of existing GLA in a single-storey building. It is occupied by three tenants leases allow for termination or relocation by the fourth quarter of this year. After interviewing and wedding a number of highly qualified developers, we executed a letter of intent with a well respected national developer, who plans to build a luxury multi-family residential tower about 20,000 square feet of retail.

The final agreement which are now being finalized will include a structure of a 99 year ground lease to the multi-family developer, who will be responsible for all shell construction. Upon completion of the tower, we will acquire fee, ownership of the ground level retail and the below grade structured parking that will support that retail. The annual NOI attributable to the existing improvements is approximately $360,000. The ground lease payments in the first year scheduled to commence in the fourth quarter of 2014 will be $805,000, a 136% increase above the existing NOI.

In addition the ground lease payments will be subject to a minimum annual increase of 1.75%. We could have simply sold the land much more quickly than negotiating a ground lease agreement, but we strongly believed that retaining ownership of the land, creating a ground lease and controlling the overall development will add significant value over the long-term for shareholders.

This is the first of seven sites within Uptown Park that we have identified for redevelopment, over the next five, seven to ten years. It is estimated that upon completion the aggregate asset value of these seven sites will exceed $1.2 billion and will include expanded retail, multifamily, office and hospitality.

We posted a video on our website that illustrates the long-term master plan for Uptown Park and we will actively communicate with you through press releases as we achieve our milestones. Please take a moment to view our video located on the bottom of the front page of our website next to the blue map entitled Uptown Park redevelopment. It will help explain our vision for this iconic project.

Second, Courtyard at Post Oak in Houston, this too is actively in redevelopment. Located at the strategic intersection of Post Oak Boulevard in San Felipe in Houston, Courtyard at Post Oak is at the epicenter of over $1 billion worth of ongoing development that includes the new 600,000 square foot headquarters building for BHP, Billiton. And a major mixed-use project anchored by Whole Foods.

This past quarter, we negotiated a lease termination with Verizon, our remaining tenant to allow us to immediately begin marking the site for redevelopment in 2015. HFF, a national real estate investment advisor who helped us find our Baker Site partner is leading the marketing effort on our behalf. This site is not subject to any use or building area restrictions and with unobstructed views directly down Post Oak to the Houston Galleria, east to downtown. We believe this site will be well received by perspective hostel and/or multifamily partners.

Third, Preston Royal Village in Dallas, this single-storey neighborhood shopping center occupies two corners at a strategic intersection in one of the nation’s wealthiest neighborhoods. High rise development is not permitted by zoning, but we do have the opportunity to increase density up to four-storeys while significantly improving the tenant mix. We’re working through planning and zoning now and believe this is a 2015 opportunity.

Fourth, Fountain Oaks in Atlanta, Georgia. When we acquired Fountain Oaks we were able to negotiate an extension on the Kroger lease from four years to ten as well as an expansion option. I am pleased to report that we have received capital committee approval from Kroger for a 30,000 square foot expansion in 2015. Total projected costs are estimated to be $7.5 million. The Kroger expansion is structured to provide an 8.25% return on this incremental investment and we will receive an expanded 20 year guaranteed lease by Kroger at the conclusion of this expansion.

Opportunities like these where we can get 8% to 12% return on our invested capital are superior to other capital allocation alternatives we see in the market. This does not mean that we will not be acquiring, we will continue to diligently pursue opportunities in our five core markets and have targeted several that we are working on now.

However, it does mean that we will have a blended strategy whereby we continue to acquire irreplaceable corner properties with the opportunity for value creation. And then we allocate capital into our own properties where we can get superior risk adjusted returns.

I am very pleased with the way our team has performed in the results we have generated, but as you can tell I am even more excited about our future.

Now I’d like to turn the call over to Chad, our Chief Financial Officer.

Chad C. Braun

Thanks, Kerr. As Mary mentioned earlier we filed our fourth quarter combined earning release and supplemental financial information last evening, which you can download from our website. We announced Core FFO of $5.1 million for the quarter and $18 million for the full year. This represents $0.26 per share for the quarter and a $1.2 per share for the full year which was at the upper end of our guidance.

FFO was $7.4 million for the quarter and $20.4 million for the full year. On a per share basis this represents FFO of $0.38 per share for the quarter and $1.15 for the full year. There are several reconciling items between Core FFO and FFO. Included in FFO for the three months ended December 31, 2013 was a $2.3 million gain on sale from the build-to-suit CVS Pharmacy at Loop 610 & Ella in Houston. Included in FFO for the year end December 31, 2013 was the gain just mentioned on CBS and the $799,000 gain on sale from a non-core single tenant asset.

These gains were then reduced by $171,000 in acquisition costs related to the Woodlake Square acquisition in September; a $279,000 one time charge recorded in connection with our acquisition of the underlying land Preston Royal Village in July; $164,000 in acquisition costs which represents our 30% portion recorded by the MacArthur Park joint venture with Goldman Sachs in March; and $126,000 in acquisition cost related to the Fountain Oaks acquisition in June.

Within our portfolio we reported occupancy of 94.2% which is down 2.5% compared to year-end 2012 occupancy of 96.7%. Roughly half of this change is due to the occupancy of the acquisition in 2013 of Fountain Oaks and Woodlake Square which were 79% and 93% occupied respectively.

During the fourth quarter at Fountain Oaks, the Gym of Buckhead did not renew their lease which was anticipated in our initial underwriting. We view the lower occupancy of Fountain Oaks as positive and believe that it will allow us to accommodate some of the relocations related to the Kruger expansion and should provide occupancy and NOI gains over the next 12 months.

The remaining 1.25% or approximately 50% of the decrease in our portfolio occupancy is due to the redevelopment at Courtyard at Post Oak in Uptown Park, where we have either leased down space to get to the site or held space vacant in order to accommodate tenant relocations. This is the space that we could have simple re-leased with traditional retail tenants and obtained a 30% increase to the previous retail rates.

However we believe that the redevelopment opportunities that we have could provide for a 100% plus growth in NOI over the midterm which more than outweighs the short-term vacancy. Our same store occupancy was a strong 98.4%. Our leasing and tenant demand remained healthy throughout the portfolio. During the quarter we executed a total of 11 leases for 37,890,000 or approximately 2.5% of our total GLA.

Our cash leasing spreads on comparable leases were an increase of 10.4% and our GAAP basis leasing spreads were at an increase 12.8%. For the full year we executed a total of 61 leases for 149,696 square feet or approximately 9.8% of total GLA. Our cash leasing spread on these comparable leases read an increase of 10.6% on a cash basis and 16.1% on a GAAP basis. Looking at our leasing spreads, net of TI has also been very positive. New lease spreads were approximately 23% and net of TI were approximately 16%. Our renewal leasing spreads had virtually no effect as our TI was less than $0.50 per foot on average.

As Kerr mentioned earlier, our same-store NOI excluding our redevelopment properties was an increase of approximately 3% for the quarter and 3.1% for the full year. Our total same-store NOI increase was burdened by the vacancy associated with our redevelopment properties as we lease down space and structure tenant relocations resulting in an increase of approximately 0.4% for the quarter and 1.3% for the full year.

The same-store NOI does not capture the strong leasing spreads we have achieved on properties acquired during the year as these properties are not considered same-store. As such, our reported increase in same-store NOI is primarily due to continued positive leasing spreads, strong increases in percentage when and expense control across the portfolio.

Now let me shift my comments from our historical results to our projections for the future. In our earnings release we announced our guidance for 2014 and our preliminary guidance for 2015. For 2014, our CORE FFO guidance was $0.21 to $0.22 for Q1; $0.23 to $0.24 for Q2; $0.25 to $0.26 for Q3; and $0.33 to $0.34 for Q4 resulting in full year Core FFO guidance of a $1.2 to 1.1.06.

Our FFO guidance was $0.21 to $0.22 for Q1, $0.22 to $0:23 for Q2, $0.23 to $0.24 for Q3 and $0.32 to $0.34 for Q4 resulting in full year FFO guidance of $0.98 to a $1.2 per share.

This guidance is based on the following significant assumptions. Same-store NOI growth target of 2.5% to 3%. The primary driver of same-store NOI growth will be our leasing spreads. We have approximately 145,000 square feet of schedule release maturities in 2014 and believe that on an average these leases are below-market representing an opportunity to increase rents and grow NOI at the property level.

Of the 145,000 square feet approximately 59,000 square feet have contractual renewal rates that represent an increase of about 8.1%, 15,000 feet have fair market value renewals and 71,000 square feet not have stated renewals options.

Average portfolio occupancy is estimated between 94.5% and 95.5%. We are targeting $50 million in acquisitions and an additional $70 million in joint venture activity. Our Uptown Park Phase 1 redevelopment includes termination of the Baker Furniture lease in September of 2014, which is $200,000 of NOI annually and the multifamily ground lease of $850,000 annually commencing in October of 2014. The other two tenants at the Baker site will be relocated to existing vacancies currently in the center.

Disposition of three to four single tenant properties targeted for the second half of the year totaling between $14 million and $15 million in net proceeds, our recurring advice fund real estate fee income of $2.3 million which represents our asset management and our property management fees, our transactional advised fund real estate fee income of approximately $600,000 which is our leasing commissions, development fees and progress fees.

Our interest income on notes receivable of approximately $125,000. Subsequent to year end, our $4 million note receivable related to the Fountain tract was repaid in full by the borrower in January and has been contemplated in that guidance. And our annual G&A run rate of approximately $8.8 million.

Our preliminary guidance for 2015 includes core FFO of $1.10 to $1.13 and FFO guidance of $1.7 to $1.10 per share. 2015 preliminary guidance is heavily influenced by the previously mentioned 2014 assumptions and full years benefit of the ground lease on the Phase I redevelopment at Uptown Park.

I should also note that while we are diligently working towards redevelopment opportunities at the Courtyard on Post Oak, as well as the second phase at Uptown Park we have not included any economic benefit from this activity in our preliminary 2015 guidance.

As the specific financial impact of these opportunities become more tangible, we will update our 2015 preliminary guidance accordingly.

With that I’d like to turn the call back to Amy to facilitate any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Jonathan Pong of Robert W. Baird.

Jonathan Pong – Robert W. Baird & Co.

Hey, good morning guys. Just wanted to get a sense on the assumption for 2015 guidance, on a Core FFO basis you are exiting 2014 at I think $0.34 in the high end, but in 2015, it looks like you’re expecting a more conservative about 2013 range. Can you assure may be the kinds of financing or operational assumptions you bake in there?

H. Kerr Taylor

Sure Jonathan. Good question. I would say a couple of things between fourth quarter of 2014 and our 2015 guidance in kind of looking at that on a run rate. Number one, we do have built in to our 2014 fourth quarter guidance obviously our percentage rent, which from a retail standpoint and at least as it relates to AmREIT certainly runs through seasonality, whereby we record and report most of our percentage rent all in the first quarter. And so that will have to be adjusted from a run rate standpoint looking into 2015.

We have also looking into 2015 and considering some of the redevelopment opportunities at Uptown Park. I’ve been a little bit more conservative as it relates to some of our general vacancy. Assumptions as we look at trying to facilitate that and moving tenants around and then finally just given the fact that 2015 is at its conclusion 24 months out had been just a little bit more cautious in some of our growth assumptions.

Jonathan Pong – Robert W. Baird & Co.

Yes, that makes sense. And then Uptown Park in Houston, can you maybe just tell us what your lease expiration schedule looks like there in the next years and I guess as you think about really [indiscernible] what kind of confessions are you seeing if any that you’re having to give the compensate for the disruption on the redevelopment.

Charles Scoville

Jonathan this is Charles Scoville and I don’t have our lease expiration schedule for Uptown Park in front of me at the moment, but it’s pretty staggered and fairly evenly spread out over the next several years. We don’t have any real lumpiness to it in large part because we don’t have any large tenants there. Our most significant lease expiration is probably Champps which as we have noted is in bankruptcy.

At this point they’re about 110,300 square feet. Their current lease runs through August, but they had exercised an option prior to filing bankruptcy. We are in conversations with them now to determinate if we’re going to restructure that lease and retain them in the space or go ahead and move forward re-leasing that. So that’s the most material lease expiration on the horizon.

Beyond that I can tell you it’s good to be in Houston and it’s good to have Uptown Park in terms of concessions because it’s not really that kind of an environment in that center today. We’re pretty excited about the leasing spreads if we are talking with prospective tenants about, I think, we’ll all be pleased with the results.

H. Kerr Taylor

Hey, Jonathan, I would just add to that on the end as far as concessions go. If you look for example across our portfolio in 2013, our average TI concession averaged about $1.80, $1.88 per foot, so pretty conservative and our renewals was actually less than about $0.50 a foot and that’s again kind of the amortization over the life of those leases. So just piggybacking on Charles comment, I think we’ve been in a very favorable environment here.

Jonathan Pong – Robert W. Baird & Co.

Got it. Maybe just a follow-up on that Champps situation, what you think the mark-to-market would be if you were to get that space back?

Chad C. Braun

If we were to get it back and re-lease it to another restaurant operator and we have a number of incredibly qualified and existing concepts we would love to take that space over. We are at $38 a square foot today. I think we could push $50 but much more importantly Champps has been really an underperformer in that space and so we’ve had no expectation of percentage ramp and that’s what we’re really focused on with the next operator, or someone who can really knock the top out in terms of sales per square foot, if we choose to go that way. But we’re also looking at that space as part of our overall redevelopment strategy.

Jonathan Pong – Robert W. Baird & Co.

Great, that’s helpful. Thanks guy.

H. Kerr Taylor

Thanks Jonathan.

Operator

The next question comes from Brandon Cheatham at SunTrust.

Brandon B. Cheatham – SunTrust Robinson Humphrey

Hi good morning.

Chad C. Braun

Good morning.

Brandon B. Cheatham – SunTrust Robinson Humphrey

How are you guys doing? Can you just talk about the – it seems like there is a delay at the Courtyard at Post Oak redevelopment. You guys said in last quarter completion in 2016, now it looks like that’s about 2017?

H. Kerr Taylor

Yes, this is Kerr. We’re very, very excited about that project and one of the stepping stones that we had to take was getting Verizon’s lease terminated and that took a little longer than we thought but it’s done. We also formed quite a bit of due diligence on the track and we’ve now released, we’re going to be careful, I cannot overstay how excited we are about that project that really is the pinnacle project on Post Oak. It was put out into the market last week. We’re going to take our time to be sure that we have the right use of that project, but we’re very excited about it. And really were it’s a green light in this point on.

Brandon B. Cheatham – SunTrust Robinson Humphrey

Okay. And on shifting to leasing spreads for next year, you mentioned about 59,000 of renewal options, about 8.1% spread. On the rest of that that you consider below market can you give us an idea of what you expect those spreads could be?

H. Kerr Taylor

I’ll let Charles go in and provide some color, but if we look at our leasing spreads that we’ve achieved in 2013, it certainly been in the double digits in the call it on average probably 12% range, 12% to 13% range. I don’t see anything across the portfolio and given that space that would cause us to be less than that. So I think that’s probably a pretty good run rate going into 2014. Charles, any other thoughts?

Charles Scoville

I think that’s all. I mean, got a couple of specific situations that I am even more bullish on where we are likely to recapture a space at Cinco Ranch from Blockbuster later this year that we’re in the low 20s on that existing rate, be north of 30. When we back fill it, we’ve got some other space at Uptown Park will beat those spreads on. So, yeah, I mean, I am pretty bullish.

Brandon B. Cheatham – SunTrust Robinson Humphrey

Okay.

Charles Scoville

All of our centers are in great shape.

Brandon B. Cheatham – SunTrust Robinson Humphrey

And when you’re looking at these renewals you mentioned that you might look more towards hoping I guess the percentage rent contribution?

Charles Scoville

Yes, that’s a huge focus of ours at the moment, really a major criteria in determining – well, when we negotiate a lease that doesn’t currently have that percentage rent we’re making sure we get it in. If we don’t have a break point that we like, we’re addressing that, but that’s kind of the power of a strong market and full centers.

H. Kerr Taylor

Adding to what Charles said, this is Kerr. I am very delighted of the effort that Charles and his team is making. We’ve got 42% of our leases now under a percentage of gross clause which I would think is probably the high water mark within our peer group. And I think as we see sales on these high streets particularly increase, we’ll see the benefit of that over the next 3, 5, 7 years.

Brandon B. Cheatham – SunTrust Robinson Humphrey

Okay. That’s excellent color. And on your three major markets, Houston, Dallas, and Atlanta, can you provide some extra details on the demand you’re seeing on each one of those and how the leasing spreads in those markets compare against each other?

H. Kerr Taylor

I’ll start it off and then ask any of the guys to jump in. This is Kerr. We really are a submarket story within each of those markets and we continue to be. And I think we continue to read the benefits of being in the most dense urban affluent submarkets within those three major growth markets. And I think that’s why we continue to see outperformance on our leasing spreads and our occupancy.

Atlanta, as you know we’ve been there for over a decade in that market and we’re bullish on Atlanta’s being the southeast capital part of the country and we’re seeing in our markets a good strong support. But Houston and Dallas continue to also be very strong. Any color, Charles?

Charles Scoville

I think that’s accurate. And obviously Houston is quite strong; Dallas is just right behind and it is a submarket story. That portion that we’re going interact, submarket is there. Atlanta I would say definitely in the last six to 12 months we’ve seen that market beginning to accelerate. We don’t have the product and well we did not have the product part of the acquisition at Fountain Oaks, but we do now. We are in the process of making some improvements to that center and kind of building the pipeline of leasing activity partially focused on improving rents and partially focused on improving tenant mix which we have an opportunity to do there. So better, but portion getting this is Atlanta is rapidly improving.

Brandon B. Cheatham – SunTrust Robinson Humphrey

So you’ve seen a momentum to gulp in the Atlanta area.

Charles Scoville

We are again fortunate to be in the right spots in Atlanta.

Brandon B. Cheatham – SunTrust Robinson Humphrey

Okay.

Charles Scoville

I am not sure I’d say that as across the board for every submarket that where we are in. It is good.

Brandon B. Cheatham – SunTrust Robinson Humphrey

Okay, thanks a lot.

Charles Scoville

Thanks Brandon.

Operator

Our next question comes from Carol Kemple with Hilliard Lyons.

Carol L. Kemple - J.J.B. Hilliard, W.L. Lyons LLC

Good morning.

H. Kerr Taylor

Good morning Carol.

Carol L. Kemple - J.J.B. Hilliard, W.L. Lyons LLC

Earlier in the call you said, you all passed on some acquisition opportunities in the fourth quarter because they didn’t meet your investment criteria. Could you talk about those acquisition candidates and was it more pricing or was it more quality of the asset?

H. Kerr Taylor

Carol, thank you for the question, good one. My goodness, we dug deep on a number of projects and it was a combination I have not seen really the five deep projects come across our radar so to speak and the pricing are kind of A minus to B plus projects. We’re quite robust. That said I think we see the opportunities within our pipeline over the next 90 days to 120 days for a couple projects that do meet those. And I believe we’ll be successful in bringing some of that – a couple of those projects on our platform into our portfolio. Go ahead.

Carol L. Kemple - J.J.B. Hilliard, W.L. Lyons LLC

I was just going to ask, if you can talk about the cap rates, the opportunities that you passed up in the fourth quarter traded out?

H. Kerr Taylor

We saw one great project that would meet our 5D type of framework, but it was and I’ll let Te, who is here with us talk a little bit about this well. But we saw that project go below five. And it was just remarkable to see the aggressiveness on couple of the projects that we saw out there and obviously it gives us a great strong feeling about the value of our own projects, but Te, you want to add a little color to it.

Tenel Tayar

Sure. As Kerr mentioned it’s a combination of factors. We see cap rates on Class A property that is in the high fours or low fives. We have that visibility to some value creation opportunity. And some of the opportunities we saw there was a long path to get to those value creation opportunities. So what we were seeing were long periods of mediocre returns. And so if we see that we have to find the opportunity to get to that value in the near term and we couldn’t.

And so if we want to pay that kind of pricing we have to have visibility to creating that value and so. Right now the market is very aggressive. We are all looking for core investment opportunities. But I think that’s one of the strengths of our investment strategy going into 2014 as the embedded options of investing our capital into these value creation opportunities in our existing portfolio and still having an allocation that goes into generating income with some of the investment capacity that we have right now.

H. Kerr Taylor

And Carol again we’ve grown since our IPO, our platform by about 20% over the last 19 months. So we have not been sleepy, we’ve been pretty aggressive in the projects that we brought on board or just wonderful projects that we are already strong visibility to upside returns. So we are going to stay very focused. I still believe we will be growing in that 10% to 15% range, which I think will move the needle as far as our growth, better than our peers. But we will be very intensive in our search for these projects. They are couple of them in the pipeline, I’m very excited about. But we passed on those, it just don’t meet our high watermark. And Te, thanks for pointing it out.

Carol L. Kemple - J.J.B. Hilliard, W.L. Lyons LLC

Okay. And then at this point do you expect the dividend increase in the next 12 months?

H. Kerr Taylor

I don’t think so. I think again we look at a percent of FFO is kind of a good focal point for us and I think we’ll continue to sit where we are over the short-term. As these projects that we’ve discussed in our call come on and have meaningful FFO upside and we’ll certainly be looking at increasing our dividends as those occur.

Carol L. Kemple - J.J.B. Hilliard, W.L. Lyons LLC

Okay, thanks.

Operator

Our next question comes from Chris Lucas at Capital One Securities.

Chris R. Lucas – Capital One Securities, Inc.

Good morning, guys.

H. Kerr Taylor

Hi, Chris.

Chris R. Lucas – Capital One Securities, Inc.

Chad, if you could just a couple of quick questions on guidance. On the $0.04 delta for 2014 between Core and reported FFO, what are the items that are in that?

Chad C. Braun

Chris, that’s really exclusively acquisition cost related to the acquisition guidance that we gave.

Chris R. Lucas – Capital One Securities, Inc.

Okay. And then with the first quarter guidance number that delta is about $0.04 down negative. It looks like $0.025 is probably percentage ramp. What’s the other sort of $0.005 or so? Is that just kind of fall out or is there something else going on there?

Chad C. Braun

Yes, I mean that’s it. It is some general vacancy that we’ve got baked in to our guidance being a little bit conservative on that recognizing that there maybe a little bit of down time with some of the tenants that are moving around, but outside of that really no news to report.

Chris R. Lucas – Capital One Securities, Inc.

Okay. And then couple of questions on the redevelopment projects. On Fountain Oaks with the Kroger expansion, are you guys going to end up taking out some of the inline space and how much of that is ultimately going to go away out of the 30,000 foot expansion?

Chad C. Braun

Yes. On that it will be a combination of taking down some of the existing retail space. It’s three tenants that are…

H. Kerr Taylor

It’s about 12,000 square feet.

Chad C. Braun

…probably about 12,000 square feet and then taking in some excess land or parking field back, behind and anticipate that those three tenants will be relocated elsewhere in the center.

Chris R. Lucas – Capital One Securities, Inc.

Okay. And then just as it relates to Uptown on the ground lease deal a couple of quick questions on that. As it relates to the construction timing, is there a requirement that you’re imposing on the developer in terms of when they have to act?

H. Kerr Taylor

Yes, we are in the process now of working through our restricted governance, kind of many declarations, governance documents and the ground lease and they will have a milestones and which they will need to execute on this.

Chris R. Lucas – Capital One Securities, Inc.

Okay. And then you probably mentioned that the increases could – are minimum 1.75% or what are the other items that would drive that above that. Is it productivity out of the multi-family? Is it CPI, but what are you looking out there?

H. Kerr Taylor

Yes, it’s a CPI that is a minimum of 1.75% and maximum of 3%.

Chris R. Lucas – Capital One Securities, Inc.

Okay.

Chad C. Braun

I would add in there real quick. Going back maybe to some of the motivations and the timings, keeping in mind that the way we’ve structured it at this point, the ground lease will commence, payments will commence as we deliver that 50,000 square feet of land unencumbered and so the multi-family developer will be highly motivated to begin construction quickly because that will ultimately be a cost of that development.

Chris R. Lucas – Capital One Securities, Inc.

Okay. And then as it relates to the parking, I guess couple questions there. One is with the underground structured, is that going to be available only to the multi-family tenants or is that a retail and multi-family use there. And then how are you guys thinking about, is there revenue opportunities there or is that – who is controlling that space.

H. Kerr Taylor

Yes, we are in the process Chris of working through those details. The underground parking would be retail focused. There might be a separate entry to that parking and it will have some revenue opportunities that we are really thinking through now, we’re not sure on the timing of that as well. As we continue to develop the other six sites on the campus, we’ll need excess parking and so a lot of what you are seeing now is a master plan that will be – step-by-step that will allow us as we tier down other space to have additional parking hopefully within that tower, that podium parking. So working through all that, that’s one of the reasons, it’s taken a little longer for us to ink the deal that we’re daunting those.

Chris R. Lucas – Capital One Securities, Inc.

Okay, and then the last question Kerr, on the Verizon lease, is that lease terminated or just agreed terminate, what’s the timing on the loss of revenue there.

H. Kerr Taylor

Yes, that is a date certain of January of next year where we will get to the ground, pay their rent through that period. And then we believe that will go inside hopefully with the opportunity to tear down the improvements and get started on the vertical improvements that we hope to put up there.

Chris R. Lucas – Capital One Securities, Inc.

Okay great. Thanks guys.

H. Kerr Taylor

Thank you.

Operator

Our next question comes from Craig Kucera at Wunderlich.

Craig G. Kucera – Wunderlich Securities, Inc

Hi guys,

H. Kerr Taylor

Hi, Craig.

Craig G. Kucera – Wunderlich Securities, Inc

Given that you’ve seen deals with the floor handle in some of your markets, at least in fourth quarter, can you provide some commentary or color on how you’re seeing developers reacting, our rents high and up that they can start up sort of accelerating things with particularly in Houston or Dallas where supply has been little bit down last couple of years.

H. Kerr Taylor

Well. Again on the high streaks and in our submarkets there is great deal of migration of the top ten is end of these places and there I think it’s a tale of two cities. I think you have excess retail in the suburbs and you have not enough retail in some of these urban markets. So it’s a demand function. And the reason people are paying up for these size is they believe that you are going to have outsized growth in enhance, which we are seeing and some of our other peers who are on the urban streets are experiences as well. There is densification opportunities which we are very, very focused on. So a combination of those two factors. I think improving cap rates to historic lows. We are not biding as Te said on projects where we don’t have strong visibility to creating value for our shareholders. We don’t want to allocate capital into projects that may look good on performance, may look good on brochures but don’t deliver the goods for our – so we’re being disciplined.

Craig G. Kucera – Wunderlich Securities, Inc.

Great, and I know last quarter you guys had a pickup in real estate taxes. It sounds like with even more downward pressure on cap rates, can you, can you talk about your expectations in your guidance for real estate taxes.

Chad C. Braun

Sure, Craig, this is Chad, I think what we have seen or just call it kind of generically the last couple of years on ad valorem taxes in cities, counties and municipalities heavily focused on that. I don’t really see that trend changing, again with our portfolio. Again our same store portfolio being 98% occupied in our full portfolio being 94% 95% occupied really with no caps on our ability to pass through property taxes that full burden is ultimately being recovered. We engage a number of partners and consultants to aggressively fight and distribute the property taxes to keep those as low as possible, but ultimately think that that is a trend that will continue to see at least for the foreseeable future.

Craig G. Kucera – Wunderlich Securities, Inc.

Okay, thanks. I appreciate the color.

Operator

Our next question comes from Tayo Okusanya at Jefferies

Tayo T. Okusanya – Jefferies LLC

Yes, good morning everyone.

H. Kerr Taylor

Hi, Tayo.

Tayo T. Okusanya – Jefferies LLC

Couple of quick questions, a long current line of questions, the dues you guys passed up in fourth quarter where any of them related to any assets in the Advised Funds on that?

Chad C. Braun

No, Tayo none of those were related to the Advised Funds. I’ll say all just kind of open market third-party deals. The deal that Kerr eluded to and I think Te did as well earlier and that we have talked about before in the Advised Funds as Lantern Lane and that is on our radar screen and we are working through some of the administrative process that we need to go through now and that is contemplated in our guidance.

Tayo T. Okusanya – Jefferies LLC

Okay, that’s helpful. And the second question, just along the tenant front any other tenants that kind of on your watch list similar to Champps that could be admin issues where you may have to restructure the lease, so at least deal with the risk of bankruptcy?

Chad C. Braun

I really just Blockbuster, because this as you may know put all those leases into a single entity that had no assets other than the lease. But again we feel strongly that’s a good opportunity for us and beyond that I am not thinking of any other material treats.

H. Kerr Taylor

Even the Blockbuster again that’s limited to one lease and then I know other kind of retailing news that’s out there radio shack and some other closures and downsizing. Again, we have extremely limited exposure there. Only one lease less than 2000 square feet. So I think the ones that Charles mentioned or really does.

Tayo T. Okusanya – Jefferies LLC

Okay. And then what do you ultimately think happens with PAM Summit, it’s chapter 11, at one point but we’re were trying to sell the restaurant. I am just kind of curious what you’re hearing and how that whole process is going?

H. Kerr Taylor

We are talking about that actively now, we are in touch with them. We are trying to balance the opportunities to continue to work with Champps at that spot versus the opportunity to do something with either another tenant or as Charles mentioned to put that, queue that project up a little more quickly to our redevelopment opportunities. So, I think we will have better color on that over the next 30 days.

Tayo T. Okusanya – Jefferies LLC

Okay, great. Okay, thank you very much.

H. Kerr Taylor

Thanks, Tayo.

Operator

(Operator Instruction) And our next question comes from Brandon Cheatham with SunTrust.

Brandon B. Cheatham – SunTrust Robinson Humphrey

Hi, actually it’s Cheatham, so sorry if someone asked this already, but in regards to your acquisition guidance for 2014, walk me through a scenario where, there is a couple that we will be looking at maybe more than $15 million. Your stock price isn’t at the price where at least from a mathematical standpoint makes too much of those. All right, what happens, do put it on the line or as you part from the deal or JV or what other options that you would take – preferred to take?

Chad C. Braun

Yeah, Cheatham, good question, this is Chad I mean, I think a couple of things. One, we certainly have availability under the line in the credit facility. Currently no outstandings on that and sitting in a cash position today. Also within the guidance that we have provided on capital recycling, kind of three to four single tenant assets and plus or minus about $14 million of capital that can be recycled there. I think that’s also something that if we saw acquisition opportunities that met our quality criteria, that met our accretion criteria then we could accelerate some of that recycling initiatives with even more of our single-tenant assets to satisfy that. So combination of cash that we have on hand, borrowing ability through the credit facility and capital recycling I think they are the three key initiatives that would likely fund any opportunities that we would see in the market.

Brandon B. Cheatham – SunTrust Robinson Humphrey

And just sticking with that one point, you said on, the deal would have to be accretive. I mean I guess there is many ways you can make deal financially accretive. But when you guys talk about that and with that perspective are you – your pro forma numbers are you assuming a 50:50 debt and equity or what do you mean by that when you say as to be accretive?

Chad C. Braun

Yes, when we look at that, I mean we really look at also a buy and large kind of a when we underwrite deals we look at kind of leverage neutral scenario. So we are targeting leverage in that, call it 35% to 40% range. And so when we run our analysis we’ll run it on that. Obviously you can super charge leverage and probably make just about anything accretive today. But we look at it leverage neutral.

And then really we do want year one from a cash standpoint to be accretive. We can’t always accomplish that, but we’ll look down over a, call it a two to three year period and I think as Te mentioned, even beyond just the initial accretion looking for value creation opportunities where either we can get outside same-store NOI growth because of a leasing storey or we’ve got opportunities whether through pat development or more intense redevelopment to create value and generate value beyond just the going in cap rate.

H. Kerr Taylor

So, to add color on what Chad said, if you look at the past couple of acquisitions we don’t know where we’ve – during the negotiation for that property, we’re able to secure an increased term on Kroger and because of our relationship with Kroger, Charles did a great job of really getting that store put way up in front of their pipeline for expansion and we’ve recently received capital allocation towards the expansion of that store.

We are also contemporaneous with that or doing what we call an AMRE standards program on that property. You’ll see over the next six months pretty much of transformation that takes place on that property and you will see us then be able to bring the tenants, that our void analysis shows needs to be there, the next level up. So when you roll that all in and you look out three, four, five years you see really very strong increases in not only tenant mix, but in leasing spreads.

And Preston Royal back over in Dallas, which is perhaps the second best corner in Dallas relative to demographics, we are particularly on the east side going through a master planning process. There well the first stage will be to bring in the next level of tenants that will bring energy more energy to that project. Then we have really a five to seven to 10 year view on densification on it. That model is what we do pretty much on everyone of our properties.

Brandon B. Cheatham – SunTrust Robinson Humphrey

Okay. And last a question really about – I know we’ve talked about in the past in terms of your TI per square foot disclosure related to your releasing schedule, lease renewal schedule. I was wondering if you could perhaps was there improving that disclosure going forward?

H. Kerr Taylor

Yes, we will be doing that and we can provide you some information on that even after the call as well. One of the comments that I made earlier that you may or may not have been on the line before. But if you look at our new leases as an example, Cheatham over 2013, our TI amortization on average was about $80 per year. So, on our new leases that would have taken if you will our spreads from about 23% to about 16%, so still pretty healthy. And our average TI on renewals again kind of on an annual amortization was about $0.50 per foot. So really a negligible impact on our kind of net leasing spread there. But I can give you some specific information on that post call. And yes we can embed some of that information within our supplemental on our leasing grid.

Brandon B. Cheatham – SunTrust Robinson Humphrey

Okay, thank you guys.

H. Kerr Taylor

Thank you.

Chad C. Braun

Thanks, Cheatham.

Operator

At this time, we show no further questions. And I would like to turn the conference back over to Kerr Taylor for any closer remarks.

H. Kerr Taylor

Thank you for your participation today. We encourage you to visit our website, where you can download a copy of the fourth quarter earnings release and get detailed information on our properties including virtual property tour videos and our redevelopment video, master plan of Uptown Park. Thanks again for your time today.

Operator

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

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