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AmREIT Inc (NYSE:AMRE)

Q2 2014 Results Earnings Conference Call

July 30, 2014, 11:00 am ET

Executives

Mary Trupia - Vice President of Investor Services

Kerr Taylor - Chairman of the Board, President, Chief Executive Officer

Chad Braun - Chief Financial Officer, Chief Operating Officer, Executive Vice President, Treasurer, Secretary

Analysts

Paul Morgan - MLV

Ki Bin Kim - SunTrust

Jonathan Pong - Robert W Baird

Tayo Okusanya - Jefferies

Chris Lucas - Capital One

Ki Bin Kim - SunTrust

Operator

Good morning, and welcome to the AmREIT second quarter 2014 earnings conference call. 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 Mary Trupia, Vice President of Investor Servics. Please go ahead?

Mary Trupia

Thank you, Laura, and good morning, everyone. Thank you for joining us today to discuss AmREIT's second quarter 2014 results. On the call today are Kerr Taylor, Chairman and Chief Executive Officer, Chad Braun, Chief Operating Officer and Chief Financial Officer, Tenel Tayar, Chief Investment Officer and Brett Treadwell, Chief Accounting Officer.

The second quarter 2014 results as well as 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 second 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 will turn the call over to Kerr.

Kerr Taylor

Thank you, Mary. Good morning and we appreciate your participation in our second quarter earnings call. This quarter marks our second anniversary as a publicly traded company. Since our IPO, we have continued to build what we call the Irreplaceable Corner company. Simply put, our value proposition for shareholders has been to own the highest quality retail and mixed use portfolio while generating outsized total returns.

Our properties are strategically located in some of the most densely populated and affluent submarkets within five of the nation's most dynamic Metropolitan markets. Our goals have been supported and achieved by the ability to create exceptional long-term growth through our a local sharpshooter advantage and our institutional joint venture business, which provides a proprietary pipeline for acquisition of these exceptional properties. Additionally, our business model and future growth prospects are enhanced by our peer leading value creation potential through our core redevelopment and our emerging vertical mixed use redevelopment.

Before we move into the specifics of the last 90 days, let me spend a few minutes discussing the Board's decision to explore strategic alternatives to enhance shareholder value. Today, AmREIT has one of the highest quality retail and mixed-use real estate portfolios in the country. And given the value of our unique assets, robust development pipeline and promising future prospects driven by our best-in-class team members and platform, our Board believes that now is the right time to conduct a thorough review to determine how to best continue to enhance shareholder value.

We also announced that after a comprehensive review and consultation with our financial and legal advisors, our Board rejected the previously announced unsolicited and conditional proposal by Regency Centers Corporation to acquire AmREIT for $22 per share. As part of our Board's commitment to carefully review any alternatives, with the goal of further enhancing stockholder value, the board believes that it is important to run a fair and orderly evaluation. As a result, our Board elected for AmREIT to become subject to the Maryland Business Combination Act which will facilitate the process.

It is important to note that there can be no assurance that the Board's evaluation will result in any transaction and the Board has not made a decision to pursue any specific transaction or strategic alternative. The Board has set no timetable for completion of this process and does not intend to disclose further developments with respect to this process unless and until the Board approves a specific transaction or otherwise concludes the strategic review and we do not intend to discuss the evaluation process further today.

I would like to stress that it is business as usual at AmREIT during this evaluation. Our people are some of the most dedicated and focused professionals in the industry. We are going to continue to execute on our existing plan.

With that, let me now turn to an overview of our second quarter results. I am pleased to report AmREIT again posted solid results for the quarter. We remain focused on five of the top growth markets in the country, Houston, Dallas, San Antonio, Austin and Atlanta. Texas is the strongest economy in the nation and Houston and Dallas rank number one and number two respectively in job growth. Our focus as a local sharpshooter, combined with our strict underwriting criteria, has resulted in what we believe is one of the strongest high quality portfolios in the shopping center space from a demographic perspective.

Average household income within a one-mile radius of our properties is over $122,000 and we have over 54,000 households within a three-mile radius. The positive results of this past quarter reflect the high quality of our Irreplaceable Corner properties and the strategic advantages of being a local sharpshooter in robust markets.

AmREIT continues to put up top of peer group metrics. Excluding properties under redevelopment, same-store NOI growth was 2.7% for the quarter and 2.9% year-to-date. This compares to our guidance of 2.5% to 3% for the year. Portfolio occupancy is 93.8% and 95.2% leased. For the quarter, core FFO was $0.24 per share, which was at the upper end of our guidance. Reported FFO was $0.22 per share. Cash leasing spreads on comparable space were up 18.6% and on a GAAP basis were up 27.2%. While we believe there are strong opportunities to grow in our core markets. Through our Advised Funds platform and our local sharpshooter knowledge, we have come to believe through almost 30 years of experience that our highest return on invested capital is judicious investment into core properties particularly through redevelopment.

Last quarter we announced the potential expansion of Kroger at our Fountain Oaks Shopping Center in Atlanta. Now let me give you a further update. As you recall, we acquired this property last June. Our going in cap rate was around 5.9% and we knew that Kroger wanted to expand their successful store. Since acquiring the property last year, we have been working with Kroger in the city of Sandy Springs regarding a potential expansion of Kroger from approximately 60,000 square feet to 90,000 square feet. We will commit approximately $7.5 million in this expansion and expect to receive an incremental 8.25% return on this investment or approximately $620,000 in additional NOI. Kroger will also provide us with a new 20-year lease, Kroger has informed us that they have approved a 30,000 square feet expansion and on June 30, the city of Sandy Springs indicated that they have approved the expansion plans and construction on the expansion is expected to begin within 12 months.

This is a great example of what we do at AmREIT. We don't simply by good properties. Our team creates value on Irreplaceable Corners. Through relationships, hard work and creativity, we believe we have improved the cap rate on this property by 70 to 90 basis points resulting in more value for stockholders. We realize that owning the highest quality portfolio is a strategic advantage, but we also continue to see assets that fit well within our portfolio and where we can add value. As a local sharpshooter, we are able to acquire the best assets in our markets, because we have long-standing personal relationships with many of the sellers and we know our markets better than anyone else. Simply put, we don't miss Irreplaceable Corners in our markets. Additionally, with our Advised Funds and institutional joint venture platform, we have a first look and preferential right to acquire over $500 million of properties in our core markets.

During the quarter, we purchased Lantern Lane Shopping Center from one of our Advised Funds for $22.7 million. This Irreplaceable Corner is strategically located in the heart of the affluent Memorial Villages in Houston. Demographics around the property exceed our targets with average household income in a one-mile radius of $163,000 and approximately 62,000 households within a three-mile radius. Over the past 24 months, the center has gone through a re-tenancy and is now anchored with Fresh Market and CVS Pharmacy. This acquisition again demonstrates the strategic advantage that our Advised Fund business brings to our company, including collecting fees for property management and leasing as well as gaining a deeper understanding of the project allowing us to assess its potential for the future.

Subsequent to the quarter, we have entered into a contract to acquire Tuxedo Festival, a 54,000 square-foot shopping center located in the prestigious Buckhead submarket of Atlanta, Georgia for approximately $28 million. Here, average household incomes are over $137,000 and there are approximately 48,000 households within a three-mile radius of the property. We are scheduled to close on Tuxedo Festival during the third quarter.

As you know, we have been in Atlanta for 15 years and have continued to grow our footprint in Atlanta over the past two years. Last year, we acquired Fountain Oaks, the Kroger anchored center with outstanding demographics and we opened our Atlanta office by relocating one of our outstanding 5C individuals to lead our efforts. The additions of Tuxedo Festival will be synergistic to our presence in Atlanta and we are excited to increase our Irreplaceable Corner portfolio there.

Another value creation advantage is vertical mixed use redevelopment. We are currently working on four different vertical mixed use development sites. The first is the Baker site. As we announced yesterday, the Omnibus Agreement, we have previously entered into with the Patrinely Group expired and terminated on July 25. When we successfully negotiated with Champps to release to us the development rights of their parking lot contiguous to the Baker site, we were able to return to our original vision of developing a lower profile residential project by expanding the building's footprint. While we no longer expect to enter into a ground lease with respect to the Baker site, we believe this more appropriately sized project, which we are calling the Palazzi at Uptown Park will be the finest for rent multifamily project of its type in our market. We now will be able to increase the size of the retail square footage, making the north end of Uptown Park a more prominent place-making experience that is essential to long term value creation of projects of this kind. The project is anticipated to include up to 200 residential units and up to 40,000 square feet of retail. Total project costs are estimated to be approximately $70 million and construction is anticipated to begin in 2015. A rendering of our master plan and The Palazzi at Uptown Park can be found in our corporate presentation.

We continue to make good progress on our development initiatives at The Courtyard on Post Oak. During the quarter, we entered into a letter of intent with a regional multifamily developer to develop a 356-unit residential tower with two stories of retail on the 1.58 acre site. AmREIT is currently negotiating a joint venture agreement with the developer as co-sponsors and the venture will seek an equity partner. AmREIT will retain the ownership of the 1.58 acres and enter into a long-term ground lease with the anticipated venture. Total project costs are estimated be approximately $142 million. The parties are working through a variety of predevelopment steps and intend to begin construction during the first half of 2015. The Verizon lease at The Courtyard at Post Oak is scheduled to terminate in February 2015.

Back at Uptown Park, we are in exclusive negotiations with a four-star hotel flag and a hotel development partner for a mixed use development project at the southeast corner of Uptown Park, located at the corner of Loop 610 and Post Oak Blvd. The anticipated development could include 243 hotel rooms, 234 residential units and up to 20,000 square feet of retail. The total project costs are estimated to be approximately $200 million.

We have two different site plan alternatives. One plan is completely housed within the Uptown Park and the other requires us to obtain the release of certain easements and rights of way from the city and county. We are working through this diligence now and expect to finalize development plan by the end of the year. We believe construction on this opportunity could begin within the next 18 months and we will finalize our deal structure as we evaluate our strategic alternatives.

Finally within our vertical redevelopment is the Inverness site. We acquired a 20.3% ownership interest in the Inverness Townhomes during the quarter. This was both an offenses and defensive opportunity for us and a benefit of being a local sharpshooter. The site is located on approximately 2.9 acres and sits at the Northwest corner of Post Oak Blvd and Uptown Park Blvd at the entrance of our project.

Subsequent to the quarter, we entered into a letter of intent with Trammell Crow Company to form a limited liability company to purchase the entire Inverness Townhome site and to form a venture for the development of approximately 560,000 square feet of office and 16,000 square feet of retail space. It is anticipated that AmREIT will be a 5% co-development member, Trammell Crow Company will be a 5% co-development member and an identified institutional investor will be a 90% investor member. Project costs are estimated to be in excess of $225 million and construction could begin within the next 12 to 15 months.

As you can see, we have been very busy over the past 90 days during these development opportunities, such as the potential expansion of Kroger at Fountain Oaks, a four-star hotel in Uptown Park, the opportunistic and strategic potential venture with Trammell Crow on the Inverness site and the multifamily development on The Courtyard at Post Oak, as well as the acquisition of Lantern Lane and Tuxedo Festival. At the same time, we have seen the opportunities in our pipeline increase rapidly and we are confident that our team can capitalize on these opportunities to create substantial value over time for our stockholders. With the highest quality portfolio in our space generating very strong operational results, exceptional growth opportunities as local sharpshooters in our five core markets, a pipeline of growth opportunities through our institutional joint venture business and peer leading value creation potential through our redevelopments, we could not be more excited about our opportunities to enhance value for stockholders.

Now I would like to turn the call over to Chad Brown, our CFO.

Chad Braun

Thanks, Kerr. As Mary mentioned earlier, we did file our second quarter earnings release and supplemental financial information last evening which you can download from our website.

We announced core FFO of $4.6 million for the quarter or $0.24 per share, which was at the high end of our second quarter guidance of $0.23 to $0.24. For the six months ended June 30, 2014 we announced core FFO of $9.2 million or $0.47 per share. FFO available to common stockholders for the second quarter 2014 was $4.4 million or $0.22 per share and for the six months ended June 30, was $9 million or $0.46 per share. Included in FFO for the three and the six months ended June 30, 2014 was $224,000 of acquisition costs related to the acquisitions of the Lantern Lane Shopping Center and our acquisition of Townhome units within the Inverness Townhomes.

Within our portfolio, we reported occupancy of 93.8%, which was down 40 basis points when compared to our year-end occupancy of 94.2% as of December 31, 2013. We continue to have vacancy related to our properties under redevelopment, approximately 9,600 square feet at The Courtyard at Post Oak and approximately 13,700 square feet at Uptown Park. Together, this represents approximately 1.4% of our total GLA.

On a leased basis, our portfolio was 95.2% leased as of June 30, which is an increase of 40 basis points when compared to the 94.8% leased as of December 31, 2013. Our leasing and tenant demand remained healthy throughout the portfolio. During the second quarter, we executed a total of 22 leases for 70,313 square feet or approximately 4.35% of our total leasable area. Our cash leasing spreads on comparable leases were an increase of 18.6% and our GAAP basis leasing spreads were an increase of 27.2%.

Looking at our leasing spreads, net of TI has also been very positive. New cash leasing spreads were approximately 51.7% and net of TI were approximately 37.1%. Our cash renewal leasing spreads were 8.2% and are unadjusted for TI as these renewals were done on primarily an as-is basis. Our remaining expirations for 2014 include approximately 72,650 square feet and is all space that individually is less than 20,000 square feet and has an average expiring rent of $27.35 which we believe is below market and we expect to continued positive leasing spreads during the balance of 2014.

As Kerr mentioned earlier, our same-store NOI excluding redevelopment properties was an increase of approximately 2.7% for the quarter and 2.9% for the six months ended June 30, 2014. This is consistent with our published same store guidance excluding redevelopments of 2.5% to 3%. Our same-store NOI growth came as a result of our positive leasing spreads and increases in rental rate combined with improvement in our recovery percentage and less leakage at the property level as a result of improved tenant AR recovery.

Now let me reiterate our full-year guidance and provide some updates on the individual assumptions. We are maintaining our core FFO guidance for the remainder of the year which as previously announced is $0.25 to $0.26 for the third quarter and $0.33 to $0.34 for the fourth quarter resulting in full year core FFO guidance of $1.02 to $1.06 per share. Similarly, we are maintaining our FFO guidance for the remainder of the year which as previously announced is $0.23 to $0.24 for the third quarter and $0.32 to $0.33 for the fourth quarter resulting in full year FFO guidance of $0.98 to $1.02. This quarterly and full year core FFO and FFO guidance does not reflect any expenses that may be incurred in connection with the evaluation of strategic alternatives.

Included in this guidance are the following. First, same-store NOI growth remains on track for our annual guidance of 2.5% to 3% excluding redevelopment and the first half of the year results were at the upper end of this range. We have approximately 72,650 square feet of scheduled lease maturities remaining in 2014 and believe that on average these leases are below market, presenting an opportunity to increase rents similar to our leasing spread experienced during the first half of the year and to continue to grow NOI at the property level. Of the 72,650 square feet approximately 24,250 square feet have contractual renewal rates that represent an increase of 5.2% on average, 17,770 square feet have fair market value renewals and the remaining 30,630 square feet do not have stated renewal options.

At 93.8% occupancy, we are tracking slightly below our previously stated average portfolio occupancy of 94.5% to 95.5%. However, as of June 30, the portfolio was 95.2% leased which is at the upper end of our occupancy guidance. We are on track to achieve our $50 million acquisition target. Lantern Lane was $22.7 million and Tuxedo Festival was approximately $28 million. The acquisition of Tuxedo Festival should close during the third quarter, which will be an acceleration from our budget which anticipated a fourth quarter acquisition.

We are no longer forecasting ground rent to commence on the Baker site in the fourth quarter. However we believe this will be substantially offset through $300,000 in unbudgeted development fees earned in the second half of the year on our Cambridge and Holcombe project in our Advised Funds and through the acceleration of acquisition activity with the acquisition of Tuxedo Festival.

And finally, again our full year and quarterly 2014 FFO guidance do not reflect any expenses that may be incurred in connection with the evaluation of strategic alternatives, which would have no impact on core FFO. Finally, from a balance sheet perspective, we are well positioned. We do not have any 2014 debt maturities, have grown our unencumbered pool of assets under our credit facility and have maintained debt to total capitalization ratio of approximately 33%.

With that, I would like to turn the call back to Kerr for some closing thoughts.

Kerr Taylor

Thank you, Chad. As you will understand, we are not able to comment further today regarding the Board's strategic review process and ask that you keep your questions focused on our operations. Operator, you may now open the line up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question will come from Paul Morgan with MLV.

Paul Morgan - MLV

Hi, good morning. So, on the Baker site and the change there, could you just provide a little bit more color about how that played out? And in your sub now, you have got $75 million to $85 million, that's assuming you take on 100% of the costs. Is that your plan? How would you plan to tackle the 200 unit multifamily component?

Kerr Taylor

Hi, Paul, Kerr. Thank you for the question. Very excited about the north end. As you know, we have been working on the master plan for many years on that and as we went out originally we wanted a more low-profile building.

With the Champps bankruptcy, T was able to go in and negotiate a release on the parking lot and it allows us to now put a, what I would call it, lower rise project there which we are very, very excited about. We also are going to be able to make that area much more of a place making region within our campus.

We are talking to different equity partners now. We have not finalized the ownership. We will be the lead developer on it along with the Oakmark Group who have developed many of the projects on that campus. Bob Richardson of our team will be leading that from an internal perspective. He was project manager of two of the towers that are contiguous on that property at Dallas.

So we are well positioned and we will obviously own the retail and the parking underneath and we are looking strongly at what type of ownership will have on the vertical improvements. Again, we are going to keep our mixed-use component on our balance sheet in that 15% to 20% range that we talked about before.

Paul Morgan - MLV

So the $75 million to $85 million, what does that represent in terms of the total project cost?

Kerr Taylor

Yes, that is the total estimated project cost at this point.

Paul Morgan - MLV

Okay. So at the end of the day, your share may likely be less based on somebody coming in on the multi-family side?

Kerr Taylor

Yes.

Paul Morgan - MLV

Okay, and then, as I think about the ground lease, so, obviously, that's going away and it's backfilled in the fourth quarter. But as I think into next year, clearly it would have an impact on kind of the way we were thinking about 2015, but you also then noted that you are going to be executing a ground lease at The Courtyard. Would you anticipate that being of comparable scale and starting some time in the first half of 2015?

Chad Braun

Hi, Paul, this is Chad. Yes, I think from a 2014 standpoint, obviously we will walk through that 2015, although we haven't formally updated guidance on that, I think your thinking there is correct, which is the ground lease payments from the Baker site will not be contemplated or included in 2015. But at this stage, it's very possible that the redevelopment opportunities at The Courtyard could be accelerated from what we originally had in our 2015 budget and ultimately help to mitigate the Baker site.

Paul Morgan - MLV

Okay, great, and then just my last question. You mentioned in your comments about opportunities in the pipeline increasing rapidly and if you have any more color there? Is that within your Advised Funds or those third party deals? Any particular geographies where you are seeing acquisition opportunities?

Kerr Taylor

Paul, Kerr. There are a couple of projects within our Advised Fund platform that we have our eye on and are talking to our partners about timing. But there is also the opportunity we are finding, we looking at several off market transactions that are either very close to properties we already own that could add really exciting synergism and there are a couple of projects that we also are talking to that are just third parties that we have interest in and we can see the opportunity to drive NOI or bring some densification to those sites.

Paul Morgan - MLV

Great, thank you.

Operator

And our next question will come from Ki Bin Kim of SunTrust.

Ki Bin Kim - SunTrust

Thank you. It doesn't seem that long ago that we were talking about the Baker site and it seemed pretty concrete that it was a ground lease and you had your plan. When did you approximate, I know when you announced that 25th, but when did you guys really internally decide to change the original plan? Well, the current plan?

Kerr Taylor

Ki Bin, Kerr. Thank you for the question. We have run on any of these transactions that are rather complicated and they have a strong degree of verticality to them. We have a, what we call it, two track program. They are complicated or difficult and you never really can count on a plan A. We really started a plan B and ultimately a plan C, but we are landing on the second Champps declared bankruptcy toward the end of last year, and we saw the opportunity to get to the ground and actually Charles Scoville then started that conversation and when we are able free up that parking lot, we really did then start looking at the possibilities to go back to our original master plan.

You may remember during our IPO that we showed was a similar sized project. So we kept a two track, really, plan going until pretty, and really just this last month where we started moving more toward what we now call the Palazzi. And very excited about it and the economics, I believe, will better at the long-term as well. I have gone over and spoken to the residents of the contiguous towers. They are fully embracing this plan that we now have, which I think is going again to complement the whole campus. Hope that answers your question, Ki Bin.

Ki Bin Kim - SunTrust

Yes, and second, I know that you can't really talk about the potential strategic alternatives for AmREIT overall, but it seems like for a potential suitor for AmREIT, a lot of value, without going into too much detail, is really some of this development opportunity that's available and there is a lot of value in that and maybe that $22, I think, didn't give a lot of value but eventually at some price, it does give value, but if you proceed with a lot of these deals and a lot of these plans, there is some risk, in my point of view, that some of that value might diminish or might change because these things might get locked up. So my question is, and I hope you can answer this part is, for all these joint venture deals that you are pursuing for these different development projects, do you have an option to opt out at any given time? Or once you sign on to a joint venture partner like at Courtyard or Uptown Park southeast corner, are you locked in forever?

Kerr Taylor

Well, thank you for the question. It's a very good one. It's one that we wrestle with every single day. But the answer is no. Once we have entered into an agreement with a partner, we are fully committed to moving forward on that project and that will be the case on the four on-book projects that we have and the one off-book that we are doing down by the Medical Center as well.

Ki Bin Kim - SunTrust

So when you say you have a letter of intent, and the projects that listed on page 20 year of your supplemental, are you saying these are already green-lit projects that cannot be, if you can't go through a plan B for these project, do you find a no option to opt out?

Kerr Taylor

No. Each one is in a fluid situation, Ki Bin. As you know, the magnitude of these projects, they are complex. They are hard to get them to land. We will be updating you every quarter on them, but candidly we do have always a plan B on these projects as well. And I believe that the language that we put in the opportunity section of our supplement pretty well describes where we are and what we believe the certainty of those projects might be. We will keep you informed of those, but we are very, very excited about the opportunities that exist on these projects on these sites,

Ki Bin Kim - SunTrust

Okay, thank you for that, and just last question for me. I know it might be a little tough to answer this but given that, at least at the corporate level, there are other things going on with potential M&A, whether that happens or not, and at the ground level when you are pursuing these projects, isn't there some concern or I am not sure what your legal advisors tell you that maybe you have to in some way slow down on development. Does that topic come up?

Kerr Taylor

It does. Again, I can't speculate on what we will do in the future, obviously, but Ki Bin, we are running our business as normal. We have an amazing opportunity. We, as you can see, from just our earnings script and the opportunities that are coming our way, it is an exciting time at AmREIT and I will I will just say, I have this great honor of leading really the best retail team in the country. I mean, they are first rate and to watch them perform out on the field each quarter, you get to see the results you are about to see some fantastic results, in my opinion, that we have talked about. I see the spirit up and down the hall is very tenacious and very excited about the future. And it's just business as normal for us. One of our adages around here is, good things happen on great real estate when they are run by great teams and that is what we are going to go do and we are excited about that. But the conversation, we will be able to continue with you over the next few quarters, as we execute and continue to execute.

Ki Bin Kim - SunTrust

Okay, good quarter. Thank you, guys.

Kerr Taylor

Thank you.

Operator

And our next question comes from Jonathan Pong of Robert W Baird.

Jonathan Pong - Robert W Baird

Hi. Good morning, guys. I just wanted to be clear, with all these partnerships you announced, are you able to terminate those without financial penalty?

Chad Braun

Jonathan, this is Chad. I mean we bear, for example, on the Baker site and with the Omnibus Agreement terminating there. There was no financial penalty on that transaction. As you look at the supplemental and you look at the redevelopment table and as we have talked about, as we are working through LOIs and working through it, at this point, those are still, As Kerr said, fluid and we are working forward, business as usual. Once those get signed into a binding agreement, contract, whatever form it takes, we would be committed to that deal. At this point, again, there is still some runway to get there, as we have talked about. But we are moving in that direction specifically with the Courtyard site.

Jonathan Pong - Robert W Baird

Okay, and then as you think about all the ultimate value creation with the densification of Uptown Park, what are you guys underwriting for stabilized rent per square foot at the property once all the development is done? So if ABR at the center right now is about $35 per square foot, there's obviously a lot of other variables that will come into play, but what do you guys peg as a hurdle number to underwrite appropriate returns as you pencil that out in the future?

Chad Braun

Yes, Jon , to your point, the ABRs of the property right now are in the mid-30s. If you look at new leases and renewals that we are doing at the shopping center right now, depending upon the specific location, they are in the 60s. If you look at what's taking place in the market throughout the Galleria in the Uptown District, $60, $70, $80 rents, again it depends on the space, the tenant, the location, all of those things. It is definitely achievable and taking place in the market. All of our rents aren't going to roll at the same time and it's going to be processes as we go through that, but I think the market is the market and that asset is one of the best assets in the market and we ought to be able to achieve those rates over the long-term as those leases roll.

Jonathan Pong - Robert W Baird

Great. Thanks, Chad. It's helpful. And then can you give us just a directional breakdown of what the lease expiration schedule looks like at Uptown? And then are you guys structuring, I guess, expiring leases to position yourselves for maximum optionality to push rents once the developments and densification stabilizes?

Chad Braun

As far as specific, I don't have the Uptown Park rent roll here in front of me. So we can get back to you with some more specifics, but I would say that within the Uptown Park rent roll, there are no real balloons, if you will, in the lease expiration schedule. It is a pretty well laddered maturity schedule. As we have talked about historically on the Baker site, we have managed those and have the appropriate criteria in those leases and we have held space off the market to facilitate some of those relocations which we have talked about in some of our vacancy numbers. As we think through the hotel site that we have talked about on the southeast corner, obviously there is no potential GLA disruption there and as we look at other development alternatives, we are certainly managing that as we look at lease expirations and how we structure renewals and those things. But as far as specific maturities for the property, I circle back with you after the call, if you would like.

Jonathan Pong - Robert W Baird

Got it. Thanks, guys.

Chad Braun

Thank you, John.

Operator

The next question comes from Tayo Okusanya of Jefferies.

Tayo Okusanya - Jefferies

Yes, good afternoon, everyone. Just to focus on the development activity during the quarter, which was immense to say the least, Kerr, I am still trying to understand, again when you kind of match-up the economics of the new deal versus the old deal at the Baker site, trying to understand why the new deal could create more shareholder value because basically the old deal was ground lease. You were doubling the NOI, very little risk to you, you were barely putting any equity, if any at all, into the high-rise building. And now this time, you have to put in much more capital into it, you have to take the lease op risk. I am just trying to understand how this works relative to the older transaction?

Kerr Taylor

I think it's really a combination or the tension between cash upfront and more value creation over the long-term. We think as we look at the project and if you look at comparable projects around the country, we may give up a little cash return in the first couple of years, but we believe that value that we will be able to create, the cost of developing the project is substantially lower. The rents that we are seeing for this type of project are accelerating very rapidly. We have a competitive property down the road not far that's really knocking the cover off the ball relative to rents. So we really look at this as how to create value versus how to maximize short-term yield. We also, Tayo, took into account the high-rise residential that we are now negotiating on down at The Courtyard at Post Oak and we believe that that project really, you know it, you have seen it, is a better fit for the ground lease. We believe that the verticality that we will have there will be appropriate and we did take into account the competition between that projects and what we are going to put in the north end of Uptown. So as weighing all those together, we felt the Palazzi plan is the better way to go.

Tayo Okusanya - Jefferies

Got it. That's helpful. And then going to the hotel transaction at the Uptown Park. Again, with that one, total construction costs are $204 million. Do you expect to actually put equity into that? Like how is that potential development meant to work?

Kerr Taylor

And again, as we started negotiations with that partner, we are anticipating their ground lease. We also are anticipating and talking through an amount of equity that we might invest in there without balance sheet risk. So right now it's it still under negotiation, but we believe it will end up being a ground lease with an equity participation co-development with AmREIT.

Tayo Okusanya - Jefferies

Okay. That's helpful, and the last one for me, with the acceleration and all of the development activity, is there a way, wondering if I could just kind of take a look at your capital needs? Do you see a need to go to market over the next six to 12 months as the projects start to ramp up?

Chad Braun

Yes, Tayo, this is Chad. At this point, as we have talked about there is still a fair amount of a valuation and determination on specifically what our ownership percentages will be and what the specific capital needs are. I think that our balance sheet is in good shape. Our credit facility is in good shape and at this point we would not have anything to lead or guide to.

Tayo Okusanya - Jefferies

Sounds good. Thank you.

Chad Braun

Thank you. Thanks, Tayo.

Operator

The next question comes from Chris Lucas of Capital One.

Chris Lucas - Capital One

Good morning, guys. Kind of follow up on line of questioning here. As it relates to the Baker site and really just the Uptown Park projects, in general, putting the capital aside and the balance sheet risk issues, do you have the team in place to actually do this stuff on your balance sheet completely?

Kerr Taylor

Thanks, Chris. Yes, no question about it. I think not only from the ground-up development as we have continued to grow that team, we have the team to execute. We are going to be conservative though. We bring in partners where we believe it can strengthen the team. That's what we are doing with Oakmont. They are a great group. Love working with them. We could do it ourselves, but we are going to partner. We are going to be very conservative relative to capital and balance sheet exposure. That's been our tradition, almost three decades, but we can do it. Our leasing is as good as they get and our markets. I can't tell you the excitement we have on some of the tenants that we want to bring into this space. Chad talked about the rental rates that we are starting to see up and down Post Oak. They are going to accelerate. If you drive down Post Oak today, I can't count the number of cranes and the densification that's happening on that street. And we have the finest campus in that area. So yes, to answer your question, we are going to be conservative. We will continue to build the team, but we can execute.

Chris Lucas - Capital One

Okay, and thank you. As it relates to Courtyard, is there any equity participation considered for the residential component?

Chad Braun

Yes, Chris, this is Chad. There is the anticipation and again we are still in the process, but the anticipation at this point is that we would be a co-general partner co-developer of that. We would have a 5% equity stake in that and as we continue to navigate and finalize those, obviously we can provide further updates.

Chris Lucas - Capital One

Okay, and then just as it relates to specific projects. Kerr, you mentioned a little bit about the potential competition between Courtyard and the old Baker site plan. Can you describe what your target is for the, in terms of the type of tenant size, units, et cetera, as it relates to what you are looking at, at Baker site now? And how that compares to the prior plan as well as what it looks like compared to Courtyard?

Kerr Taylor

So the Palazzi will be the younger, white-collar executive that is not ready to move into a home, but loves the excitement of the number one mixed-use community in our city. They will pay $260, $270 a foot in rents and they will be, I think, a great project for that customer. Down the road on the high-rise, it will be a little older customer. He will be an executive at BHP, the headquarters that is going up next door or Apache or one of the projects that are walkable from that site. He will be able to get down, or she will be overcome down to get on the transit station, notably right in the front door and that rent, well we think it will probably touch the top of the per square foot rental in the city. So a little different profile but the size of the units are still being worked through. They will be obviously be moving away from penthouse to smaller units. I think it will probably, with an average of around 1,000 to 1,100 square feet. Some would be larger, some would be a little smaller.

Chris Lucas - Capital One

Okay, and then just in general over the last 30 days, how disruptive has this been as it relates to your conversations with potential partners and co-developers and others in this process? And how do you navigate going forward while the strategic alternatives process is ongoing?

Kerr Taylor

It's a good question. I would have to say that it's been very little. Little impact. And I mean that. People know that we have been here 30 years doing business day-in and day-out. We are executing as we have in the past. We are excited about what we are doing. Our partners are partners we know and it's really, Chris, an exciting time at AmREIT and the opportunities that we see up and down our street are very strong. We are just going to execute. We are going to do the best we can. Our whole focus is TSR for shareholders, total shareholder return. When we did our roadshow two years ago, we said that's what it was. We lead our peer group since that time I believe. We will continue to do it. And the only way we do that is not get distracted but to focus on execution and how do we drive and enhance shareholder value. So as we hang up, that's what were back to doing.

Chris Lucas - Capital One

Okay, and last question for me, just a little clarity on the southeast corner project, the hotel residential. Is that a single building project? Or is that a two building project?

Kerr Taylor

It's single.

Chris Lucas - Capital One

Okay, great. Thank you.

Kerr Taylor

Thank you.

Operator

Next we have a follow-up question from Ki Bin Kim of SunTrust.

Ki Bin Kim - SunTrust

Thank you. Just a couple of quick ones. On the Inverness Townhomes, how much did you actually pay for that? 20% interest?

Chad Braun

Ki Bin, this is Chad. Our investment in that is about $5.7 million, $5.8 million.

Ki Bin Kim - SunTrust

So if I understand that deal correctly, that $5.7 million investment is being translated into a 5% equity stake overall on the total project,. Is that correct?

Kerr Taylor

Generally yes, but functionally the way it will work as an owner in those town homes is, as the process moves forward and assuming the deal closes into the joint venture, we along with all of the other town home owners will sell or surrender the property to the venture and then AmREIT will make its investment into the venture equivalent to its 5% interest. I would say the numbers aren't dramatically different, but there is a little bit of a process or technicality to go through.

Ki Bin Kim - SunTrust

Okay, and on the Advised Fund activity and the development announcement you made here, what is your share of cost on the $101 million?

Kerr Taylor

Yes, on that, from an AmREIT standpoint, Ki Bin, it's zero. The investor, if you will, in that is our AmREIT Monthly Income & Growth Fund IV fund. And so they are the ones that are invested in that project. The development fees that AmREIT is earning on that project are associated with basically all of the predevelopment and the development elements and expertise that we have brought to that. But AmREIT has no obligation on cost. AmREIT has contingent liabilities or recourse associated with that project.

Ki Bin Kim - SunTrust

Okay, thank you. And then just last question. For the ones we just talked about, Inverness and the one that's being done within the fund, do you have the ability to take on higher equity stakes?

Kerr Taylor

Really right now, we struck the equity that we think it is prudent for us and that's where we are going to stay and we think it's a good balance between being conservative as we traditionally have done but also maybe driving CAGR a little bit for our shareholders through that smaller equity investment GP. So we will keep it as it's been delineated.

Ki Bin Kim - SunTrust

Well, I guess my question is, I understand what you are saying. I guess my question is more from a technical standpoint. Could you take a higher equity stake?

Kerr Taylor

Yes.

Ki Bin Kim - SunTrust

Okay, all right. Thank you.

Kerr Taylor

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Kerr Taylor for any closing remarks.

Kerr Taylor

Thank you for your participation today. We encourage you to visit our website where you can download a copy of the second quarter earnings release and get detailed information on our properties including virtual property tour videos. Thanks again for your time today. Good bye.

Operator

This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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Source: AmREIT's (AMRE) CEO Kerr Taylor on Q2 2014 Results - Earnings Call Transcript
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