Q2 2020 Armada Hoffler Properties Inc Earnings Call
[music].
Welcome to Armada Hoffler second quarter 2020 earnings conference call.
This time all participants are in listen only mode. After managements prepared remarks, you'll be invited to participate in a question and answer session at that time. If you have a question. Please press star one on your telephone keypad.
As a reminder, this conference is being recorded today.
Today Tuesday August 4th 2020.
Now I'll turn the conference over to Mike O'hare Chief Financial Officer at Armada Hoffler. Please go ahead.
Good morning, Thank you for joining Armada Hoffler second quarter 2020 earnings conference call webcast.
On the call. This morning addition, myself is only had CEO.
The press release announcing our second quarter earnings along with a quarterly supplemental package were distributed this morning.
Replay of this call will be available shortly after the conclusion of the call through September for 2020.
The numbers to access the replay are provided in the earnings press release.
So those listen set a rebroadcast of this presentation remind you that remarks made herein are as of today August 4th 2020, well not be updated subsequent to this earnings call.
During this call will make forward looking statements, including statements related to the future performance of our portfolio.
The pipeline.
Impact of acquisitions and dispositions mezzanine program, our construction business liquidity position.
Portfolio performance and financing activities as well as comments on our guidance and outlook.
But she has I cautioned that these statements are subject to certain risks and uncertainties many of which are difficult to predict and generally beyond our control, particularly in the light or the adverse impacts of the cobot 19 pandemic on U.S. and global economies.
These risks and uncertainties can cause actual results to differ materially from our current expectations and we advise listeners to review the forward looking statements disclosure in our press release this morning, and the risk factors disclosed in documents, we filed with or furnished to the FCC.
We also discuss certain non-GAAP financial measures, including but not limited to FFO normalized FFO.
Definitions of these non-GAAP measures as well as reconciliations to the most comparable GAAP measures are included in the quarterly supplemental package, which is available on our website at <unk> Dot Dot com.
I'll turn the call it <unk>.
[music].
Thanks, Mike.
Good morning, everyone.
Thank you for joining us today.
As we all continue to fight the pandemic in our own ways. We express my gratitude to those who are battling for us on the front lines and pray for all who have been affected by cobot 19.
We are grateful that the health and wellbeing of our employees and their families remain largely unaffected by the virus and that our company remains strong and optimistic about our future.
Obviously, we must all remain diligent in our activities and stay prepared for potential setbacks.
And you saw from our earnings release this morning.
Please press releases, we've issued over the last few weeks.
We've been extremely busy at the company over the last few months.
Our activities have been consistent with the Formula we've employed during the last four recession is that the company has endured.
Strengthen the balance sheet.
Work with your tenants.
Cut expenses.
Most importantly be ready to outperform your peers in the subsequent recovery.
After my remarks.
Mike will relate to how we bolstered our liquidity position to pre pandemic levels.
Maximize rent collection to nearly normalized levels and reduced expenses.
Prior to that I.
I will focus on the last and most important facet of our strategy.
Positioning the company for growth in the subsequent recovery.
Although the improvement in the economy has been uneven today and most probably will still incur some setbacks.
We believe that the most likely case to be a slow bumpy climb back to normalcy.
The next 18 to 24 months.
We believe that with our multiple property types and operating divisions.
We will thrive in such an environment.
As much as we have done in the past.
Today, we reported earnings of 29 cents of normalized FFO for the quarter.
This was all combined with 32 cents from the first quarter gives us the highest earnings during any six month period in our history.
Although the second half will not be quite a strong.
Primarily due to over $100 million of asset sales and to a lesser extent bad debt assumptions, we're confident in our guidance for the year in the range of a dollar nine to $1.13 per share.
Although there remains a material amount of uncertainty surrounding the effects of the virus on the economy.
As a company that has a hard one reputation for transparency. We think that is important to offer guidance based on the information we have available to us and our best projection of our company performance for the remainder of the year.
Our guidance reflects the proactive measures we've taken to strengthen the balance sheet.
Well, it's taking into account the various affects the pandemic may happen, our company tenants and clients.
As Mike walks you through the components of our guidance later in the call.
Please note that this level of performance is the only made possible through the efforts of a season dedicated and motivated group of professionals.
Who have risen to the occasion under extremely adverse conditions to stabilize our operations.
On behalf of our board of directors are heartfelt thanks to our team for their passion determination and X once they continue to display.
Well, we're extremely proud of the accomplishments to date.
You're most excited about the moves being made to position the company for a return to growth.
Well the eventual upswing in the economy.
Long before the pandemic, we embarked on a long term disciplined rotation out of much of our older non core retail centers into higher quality multifamily and mixed use assets.
Both through development and acquisition.
The seven assets sale completed in the second quarter was a major step in the continuation of this process.
As a part of this strategy, we intend to continue the disposition process with abuse smaller retail assets.
These dispositions a strong cash position.
Anticipated payoff of three mezzanine loans and measured use of the preferred stock ATM.
Give us the capital to potentially restart the development process and pursue additional acquisitions later this year.
So that in.
We are proceeding with the acquisition of the Edison apartment complex in Richmond, Virginia as previously disclosed in our original 2020 guidance.
This hundred 74 unit asset was developed by our predecessor company in partnership with an experienced Richmond based multifamily developer.
As such.
Current ownership includes several members from our management team and board of directors.
The building could not be acquired until this year due to the historic tax credit structure of the entity.
The complexes with inside of the same state capital.
And as achieved high occupancy and increasing rents for several years.
We will be acquiring the asset at a 675 cap rate, which equates to a 25 million dollar purchase price.
With a seven and a half million dollars of equity paid in the form Oh P units priced at $12 in keeping with our track record of selling units at a premium to the current stock price [noise].
We appreciate our 40% joint venture partners vote of confidence in our company by taking units priced at a meaningful premium to the current market price of our common stock.
With our increased focus in the multifamily sector.
We created a new division internally to manage the operations gross and opportunities we are seeing and this asset class.
This group will focus on a rapidly expanding portfolio and targeted acquisitions combined with a robust pipeline of high quality apartment development taking shape.
The New division is comprised of seasoned individuals with considerable multifamily experience [laughter], who have been selected from existing development construction and asset management personnel to spearhead all aspects of this initiative.
Well this increased focus on multifamily we expect this piece of our business to expand at a faster rate than the office and retail segments, while we strive to grow the portfolio as a whole.
To be clear.
Mixed use assets CBD office and high quality grocery anchored retail will also continued to be significant drivers of growth and value for the company.
The key to our 40 year track record of success has been the strength of our diversified platform and the flexibility it affords us to adapt and capitalize on the ever changing landscape of commercial real estate.
Over the next few months, we expect to establish a timeline for the ramp up of the previously halted development pipeline as well as new opportunities that have come our way.
Our expectation is that we will be able to enhance the return on cost of new do elements that break ground over the next several months due to our construction divisions ability to procure lower subcontractor pricing that was previously estimated.
Meanwhile, we have delivered the last two projects from our previous pipeline.
Somewhat place went up to student housing complexes in Charleston, South Carolina.
Let's now open and stands at 98% pre leased for the upcoming 12 months.
This asset along with Hoffler place, which is fully leased gives us two high quality assets on the historic Charleston Peninsula.
When combined with our asset at Johns Hopkins University, our student housing portfolio stands at over 95% pre leased.
We've also delivered the world's war office building, a Baltimore's Harbor point.
This trophy office building is nearly 50% leased after that we work termination.
And we are in negotiations with two high credit tenants that would fill the rest of the vacancy.
Despite the slower pace of lease negotiations due to the pandemic.
Well the encouraging amount of activity in this sub market, we're hopeful of having new leases in place by year end.
Turning to the construction business.
We continue to collect third party fees at a very brisk pace.
As most of you know.
This substantial income generator is uniquely hours across the unique the REIT universe.
You'll recall that we entered the year with one of our largest third party contract backlog ever.
As you can see we ended the quarter with nearly $200 million in remaining contract value [noise].
Total that will take us well into 2021.
In addition to adhering to all local pandemic guidelines.
We have initiated protocols for temperature testing protective procedures and safety gear and all of our construction job sites.
Our construction group is maintained this high rate of production and profitability despite the difficult conditions.
This performance is no different than what we have come to expect from these professionals and we greatly appreciate their dedication to the company.
Assuming no change in government guidelines, we expect this division to earn around seven and a half million dollars of gross profit.
Which is in line with our previously disclosed estimates.
And as I said earlier, we look forward to using the unique advantage. This division gives us by tightening budgets and schedules on our upcoming development projects.
The mezzanine lending program is also yielding very robust income.
This aspect of our business [laughter] made possible through long term relationships with season developers and the steady influenced that we enjoyed through our construction division.
Well contribute over $17 billion of net income for 2020.
In keeping with the Optionality that this structure provides us we expect three of these loans will be retired over the next several months.
One through a pre negotiated discount purchase price for the nurse next in square lifestyle Center in the Charleston area.
One is on the market the delray hold Bousson whole Foods center.
And lastly, Annapolis junction.
Well, we hope to negotiate a purchase.
We believe that our ability to create a favorable tax and earn outs structure for our partner.
So to be more advantageous to him then taking the property out to market.
With these three payoffs and only the interlock loans active in 2021, we expect this aspect of our business to diminish over the next few years.
This is in keeping with our previously stated goal of using more of our capital and human resources on our own projects to more quickly grow know that net asset value.
Six months ago, we're on the cost of achieving one of our long term goals.
Financial metrics consistent with supporting a share price in excess of $20 and we were well on our way to a 2 billion dollar market cap.
Even with those lofty achievements, we recognized plan that to sustain and ultimately eclipse that level of performance, we would need to incrementally refine our business model over the subs subsequent several quarters.
The adjustments entailed decreasing the percentage of traditional retail in our portfolio.
While enhancing our commitment to the multifamily in mixed use sectors.
Also underway is the planned reduction of the mezzanine loan component of our income.
And with the overall reduction in leverage.
Although we could have not foreseen the subsequent disruption caused by the pandemic.
And we certainly don't want to downplay its horrific human cost.
It has enabled us to accelerate these initiatives and a meaningful way.
As the company's largest equity holder management believes the current share price does not come close to representing the value of our diversified high quality portfolio and our construction and development businesses.
Over the next few quarters, we believe that investors will recognize that the monster both strength of our diversified model in the quality of our portfolio.
We expect investors will reward the company in much the same way as they have in previous years.
As most of you know grew 29 team we more than tripled the returns of the REIT index over the preceding five years.
Before I turn it over to Mike I'd like to thank our board for the Swift action in Reinstituting our dividends.
We believe that it was very prudent to suspend the dividend in early April with so many unknown surrounding our industry.
Although we are far from sounding the all clear we believe that our strong results and even stronger prospects for growth over the next couple of years Meritor recently re initiation of the payments with an eye towards a measured ramping of the dividend level.
Mike.
Hello, Good morning.
He is a certainly unprecedented times and hope you and your families are healthy three months ago. My last earnings call. We discussed how we are reacting to the uncertainty or the pandemics impact on the health and economy of the country.
But this uncertainty we took steps to prepare the <unk> the company for the worst.
Fortunately this time it looks like the countries on the road to recovery, albeit bumpy, we look forward to repositioning the company and taking advantage of the opportunities we are seeing.
The second quarter reported FFO of 28 cents and normalized FFO of 29 cents per share.
The effects of the pandemic on the quarter include deferred rent, a $5.4 million and bad debt write offs of $1.2 million.
We are projecting another $1.5 million a bad debt to the ended the year from a combination of rent abatements and bankruptcies.
We believe this is a conservative estimate given the current economic environment.
The portfolio has performed well and the second quarter under the circumstances with rent collections of 87% portfolio wide, we expect 96% for them off in July.
We have agreements granting rent deferrals with 90% of the tenants that have requested them with deferred rent being paid over the next three months to multiple years, depending on the structure.
He's run the full ranged from simple ever agreements to lease amendments renewals and lease extensions.
Please see the new pages, we add to the supplemental package with detailed information on rent collections in deferrals starting on page 27.
Our core operating portfolio occupancy for the second quarter was strong at 94% with opposite 97 retail at 95 and multifamily 88.
Okay family occupancy was down compared to last quarter due to the seasonality of the two student housing projects.
Without the effect of the student housing properties occupancy was 94% for multifamily which is higher than last quarter.
The pandemic certainly had a huge impact on our same store NOI in the second quarter gap was negative 6.7% in cash was negative 28.8% with retail negative 44.9% on a cash basis.
The cash in on nine.
Cash in a wide number is excluded $4.3 million of deferred rent.
Without the effect of the deferred rent same store NOI was negative 3.8% and retail was negative 6.7%.
Our re leasing spreads was strong for the quarter, both office and retail positive on a GAAP and cash basis.
Office was positive 8.6% on gap and 4.7% on a cash basis retail was positive 7.7% on gap and 5.5% on a cash basis.
Further details on the second quarter, we see a supplemental package that was published this morning.
We continue to take action to strengthen the balance sheet for the recession, if future growth.
Well the common stock trading at current levels.
Utilizing other sources of capital, including asset sales and issuing preferred stock under our ATM program in May we sold seven unencumbered retail centers for $90 million.
Use of proceeds included paying down the craft this credit facility by $62 million and the remainder in cash.
We continue to review our portfolio to identify disposition candidates for additional capital.
We currently have two additional dispositions of unencumbered assets under all the way they would raise approximately 13 million in cash.
In addition to asset sales, we have been active with the preferred stock portion of ATM program. So we put in place last quarter.
Last month, we raised $16.3 million, an average price of $22, an 88 cents for yield of 7.4%.
We plan on continuing to be active assuming favorable market conditions.
Given that temporarily depressed level, our common stock, we believe preferred stock in asset sale, our lowest cost of capital at this time.
With these steps we've enhanced our liquidity position at quarter end, we had 75 million in cash and 20 million available under our credit facility. In addition, we raised 16.2 million of cash to the preferred ATM after quarter end.
As discussed last quarter, we took steps to position the company immediately after the pandemic became apparent in March.
He steps, including deferring development projects, not essential capex and acquisitions as well as reducing expenses, including pay cuts for the board and CEO and lastly, suspending the common dividend.
At this time, we have not any of the suspended development projects, but hope to do so over the next several months <unk>.
The economy continues to stabilize.
Currently two projects and the final stages development Wells Wharf and summit place.
The remaining cost to complete these projects will be funded by the construction loans and therefore, no immediate cash requirement.
That's redevelopment townson redevelopment projects are well underway.
Thomas village is now 91% leased and close to completion.
The renovation of the Cosmopolitan apartments continue but now at a slower pace to conserve cash.
The expected cash requirement for these projects is $7 million, it's the remainder of 2020.
We have three development projects that were suspended in the second quarter to the coal cost to date. These projects is 23 million, including 14 million for the cost of the Lance.
Minimal carry cost there are no future cash requirements until construction commenced.
In summary, that's all remaining 2020 cash requirements for the development and redevelopment projects a $7 million.
That's right mezzanine loan program.
Two projects currently under construction Datawatch and its wholesale OCC, both which are located in Atlanta has scheduled to be completed in the second quarter of next year, but the alone is expected to be outstanding at least through 2021 to allow stabilization.
We believe both these projects a trophy assets will suffer low caps cap rates, resulting in significant profits for our partners.
That's a development projects, we have no remaining 2020 cash requirements.
With the project construction loans funding all remaining cost to complete.
But the sale and loan payoffs of the Delray whole Foods Center, Annapolis junction being delayed due to the pandemic, we decided to stop recognizing GAAP interest income on these loans effective April onest.
We believe this is prudent to allow for extended hold period due to the pandemic.
As discussed in the past all mezzanine projects were underwritten to the same standard as their own development projects and we're happy to assume ownership.
We believe all these top quality assets, a long term value and we plan on exercising I just kind of purchase option on Exton square as Lou said, we are negotiating to acquire Annapolis junction.
Well good skus in the past the mezzanine program will become a smaller portion of our business would you expect it pay off at three loans this year or the two and a lot loans will be our scanning and 2021, thus, resulting in substantially smaller mezz program going forward.
That's a future mezz activity there will be focused on projects that are smaller have shorter schedules from inception to pay off.
That's a debt maturities, we have no maturities for the remainder of 2020 and four loans maturing 2021.
We have begun discussions with the lenders on all four loans and do not anticipate any issues getting these refinanced.
As discussed in the past that strategy has been a targeted mix at 50% fixed and 50% to be able to rate that along with an interest rate hedging strategy.
This quarter, we continue to be active hedging strategy.
We bought $100 million of LIBOR caps at 50 basis points for three years.
At June Thirtyth, 61% of our debt was fixed 100% was either fixed or hedged.
The weighted average interest rate as of June Thirtyth was 3% with these moves and the current LIBOR floor for yield curve interest expense is expected to be low. The next couple of years, which lowers our fixed charge, thereby therefore increasing coverage.
So discussed we issued 20 updated 2020 guidance on a dollar nine to $1.13 of normalized FFO per share.
This guidance includes an additional $1.5 million the projected bad debt.
So in the two properties for $13 million acquiring next in square Edison apartments, and raising a raising additional capital to the preferred ATM.
The details of our guidance on page six of the supplemental package.
And he is uncertain times, we will continue to be transparent and keep you informed as it affects our company.
Now I'll turn the call back to <unk>.
Thanks, Mike.
Before we start the question and answer period.
I mentioned that although it might have gotten lowest in the midst of the pandemic the decision to opt out of Muto as well as the adoption of several other best practices.
Served to enhance what we believe was off an already stellar SG stance.
I hope you can find time to take a look at our 2019 sustainability report.
And related enhancements on our website.
The current state of affairs.
Only emphasizes the need for good corporate citizenship.
Operator, we'd now like to begin the question answer session.
Thank you ladies and gentlemen, if you have a question at this time. Please press star one on your telephone.
If your question husband answered and you wish.
You may do so by pressing star to.
If you're using a speaker phone today, please pick up your handset before entering your.
<unk>.
Our first question comes from the line of Dave Rodgers with Baird. Please proceed with your question.
Hi, Good morning, guys and thanks for all the details this morning on the quarter and the outlook I wanted to maybe start Lou on the acquisition side do you kind of make two comments one is more multifamily in the future and then potentially more acquisitions as the year moves on and as you move into 2021, So maybe tell us what you're seeing out there and how you think.
It maybe some of the multifamily acquisitions from a yield perspective will fit in with the portfolio and kind of gets into the goals that you're looking for.
Sure.
Thanks, Dave the [noise].
Well first up is the one we just announced this morning.
Which is a great project for us it's been a great project for a number of years. This is our first opportunity to bring it into the right.
And we're happy to take a did take stock or Oh P units.
In exchange for that equity can be a great addition to.
To the portfolio secondly, as we also mentioned Oh, we're hopeful of getting control of Annapolis Junction.
Which is a great asset right outside of Fort Meade.
And.
Our expectation is that we'll be able to consummate a deal here and I'm not too distant future.
Beyond that the what's really taking shape is a lot of exciting opportunities and our development pipeline.
As we pre announced.
As we announced that pipeline prepaying pandemic, a you'll recall that the majority of what was in those projects was multifamily.
[noise] with one pure multifamily at Chronicle mill.
Outside of Charlotte.
As well as Roswell, Georgia, where as a substantial portion of multifamily the opportunities that we're seeing coming our way.
Are largely those.
Multifamily in the multifamily sector.
And really strong markets in the southeast and at this point in time, where basically just cherry picking deciding which ones that we want to execute on.
So we.
This is all in keeping with the same rotation that we talked about a year ago. When we did our first portfolio review our extensive portfolio review and came up with the the assets that we wanted to sell which we've set subsequently yet executed on and you'll see that rotation continue.
I believe that where we end up is somewhere around a third a third a third as far as office retail and multifamily.
Leased in the foreseeable future and we're very comfortable with that kind of a mix.
Great. Thanks for that maybe second on Charleston, obviously, great success on the lease up of the two student housing assets. There maybe any additional detail. If you said at the beginning of the call I may have missed it but.
Where these just kind of one off student leases with other master lease from the University any clauses about co bid that we should just be aware of and I guess, how these end up shaping up relative to pro forma.
They leased up pretty quickly this year.
Yeah, obviously, we're very pleased with with the lease up on the.
On the student housing a section.
No there aren't any master leases of any notes.
In any of the three properties.
Those were all out one off.
And with the indicates a Charleston.
There are simply 12 month leases with no contingencies whatsoever at the at Johns Hopkins students do have the ability for a significant penalty to get out of their lease.
At least the preponderance of those leases contain that caused a they contain that caused from the beginning we don't anticipate a whole lot there.
With regard to pro forma Oh, I'm, sorry to be to be Frank said second student housing project in Charleston is not where we wanted it to be pro forma wise.
We wanted to make sure it was full we'll worry about.
Rent Escalations later.
But the initial the initial lease up contains some incentives and therefore isn't where we wanted to be from a return on cost standpoint, but our expectation is that will stabilize over next few years and be a great asset for us.
Great maybe last question for Lou you in Mike just with regard to capital and liquidity, Mike you ran through the liquidity, which appreciate but maybe maybe go back to the dividend and reinstating the common dividend I think after the first quarter call. You had said that you guys were.
Are you comfortable putting the dividend back in place at a lower rate, which I understand on the flip side. You had also indicated that leverage was a little higher coming into this than you wanted so I guess, maybe help to bridge the gap of reinstituting. The common dividends that we didnt need for tactical reasons for the rest of the year and then also issuing on the preferred ATM, which will serve to increase leverage again.
So I just tying those comments that would be helpful.
Hi, good morning to age so yes, certainly the we've been focused on liquidity right now more so than than leverage with the you know what the bad debt now is obviously affecting EBITDA, which is increasing.
Our debt to either but that will come back overtime as we focus on liquidity.
So Sally Hansen liquidity position certainly makes us more comfortable on we are putting a dividend bad backout 11 cents a share as well as as I rent collections continue to go up and looking at 96% for April we now have more I mean for July we now have more than enough cash flow in order to cover all our requirement.
It's a that I went through as well as paying paying the dividend.
Great. Thank you got.
Thank you.
Our next question comes from the line of Rob Stevenson with Janney. Please proceed with your question.
Good morning, guys.
Have you had to go to cash accounting on any of your tenants at this point, that's fallen below the sort of 75% Collectability threshold.
Oh is it do is there's been a change in gap recently, Rob where a new leased as it came out last year. It right now either deemed its collectible or not there is no kind of midway anymore.
We certainly spent a lot of time going through all our attendance and are going through with where we thought everybody who is going to fall. So certainly on the 1.3 million that we wrote off we deemed as a uncollectible and all the associated gap that goes with that and you know straight line rent and et cetera.
Income and we continue that going through and said okay. What are the tenants. We have here, who do we think might come into trouble based Monty economy. It looks like over the next six months and based on that's where we came up with the projection or we're going to say out there. It's another $1.5 million works.
Acting this year now we don't have a crystal ball, that's what we think it's gonna be hopefully it's more on the conservative side.
Okay, and then how many tenants do you have that haven't paid and where you haven't come to some sort of agreement.
At this point [noise].
Oh right now we have Oh, we got to the deck on page 28, we've got 16 tenants right now the we expect to collect it where in some sort of negotiations, but not completely done at this point in time.
As of today that number is down to 14, we've gotten a couple more tenants are down at this point in time, we haven't reserved for those.
Bad debt, because we expect to get something done.
Okay and then how are you guys thinking about restarting development, and then possibly having to stop but again. If you know there's another significant outbreak made are you guys planning to try to get to a threshold that make sense, where you could just you know stop the site is that a situation where you're thinking you know.
Probably wait to early 2021 until some of this is better known to restart this how does that sort of coming into play because if you know it's typically you know depending on the project to where you are on the project can be difficult to stop construction again.
Yes.
[laughter], yeah, Rob the but we suspended development projects that we suspended and not broken ground yet I'm. So had they broken ground. We would not have stopped we've never stopped a construction project and as you've seen.
All construction sites essentially work right through the pandemic.
If we decide to start these you're looking at 18 to 22 months schedules.
In terms of delivering so we don't expect a once we start to have to stop and when we deliver no nearly two years later.
Our expectation is that the current circumstances will be well over.
Okay and then how are you characterizing the we worked negotiations on their other locations with you and your partners or are they still is that still negotiation to try to get back some space and reduce the lease are they happy and you're happy with them and the or other locations how how's that these days.
Well again, there's a well make sure we're clear there we have one we work location a and that is in Durham North Carolina.
They are open operating and paying rent a they along with a a couple of hundred of our other tenants.
Had requested some sort of deferral for a couple of months during the during the year and that was all worked out.
Obviously in Baltimore.
We negotiated an exit.
And our partners.
The last location, which tangentially, we have through our mezzanine loan with our partners. Our partners are in negotiations so with we work to rightsize that lease.
So all the negotiations have been very professional the guys seem to really believe oh hardly in there in their business model and we're certainly bowling form and.
Look forward to them to continue paying the Renton derm.
Okay, and then last one for me, Mike, what's the sort of Max amount of preferred that you'd really want to have as a percentage of your capital stack going forward I mean, how much road do you have to keep issuing preferred before you sort of Max out where you want it where you you think it should be as part of the Captech.
Yes, and the past to say, we want that to be in that 10% to 15% range and that's still where we're thinking now the only the only issue now is that market cap is half of what it used to be a while ago, but so if we do more preferred now would be the anticipation or the equity market cap overall increase in so we stay in that 10% to 15% range.
Okay guys. Thanks.
We'd like to think that we're not going to continue trading at nine times earnings. So we'll see.
Thank you.
I think comes from line of Jamie Feldman with Bank of America Merrill Lynch. Please proceed with your question.
[noise], Thank you and good morning.
I guess, just sticking with the capital stack.
How should we think about where you'd be willing to take leverage as you do ramp up.
Projects.
Good morning, Jamie.
Our target range has not has not changed on that that is quite adept to core EBITDA in the six times Sutton range and Max and.
Hi Sevens.
Times that that's not going to change will continue to to manage to that we will not start the development projects and less we've got the capital to get those underway.
Jamie one thing to keep in mind on our development projects as I said before these are 18 to 22 months schedules. The land the land purchases have already been made and so you're looking at a very slow ramp up on any kind of equity needs.
Okay.
And then as you do look at the prefer it's more.
I think you said something mid sevens yields.
How do you just thinking about your cost to capital versus the returns on these investments.
Yeah, So obviously you'd be a mix of debt and equity and see the equity portion has got more expensive.
It was an average is 7.4%.
But since then actually the preferred now is trading above above par. So that's certainly going to be helpful. On the costs on on the preferred side and on the other side equation. The debt side has has dropped.
Substantially so now you're looking at 3% debt. So a mix of the too obvious you'd have more debt and equity.
You know works out so the cost to capital works for the thought the development projects were working that and haven't be accretive.
No 140 aircraft as him.
Grabs perhaps as importantly.
Obviously is no dilution.
And compilation effect.
On the preferred.
Okay. So did you say, you're I ours or are not that different than pre pandemic based.
Capital costs or you've actually you've seen some lead.
Our projected fleet.
Jamie like I said earlier.
Earlier in my remarks, so we believe it's going to be better. This is as you guys know and you probably heard me say too. Many times is our fifth recession for the first four we believe the fifth one is gonna be no different are going to get a nice discount on construction pricing coming out of it.
And that should serve to enhance returns.
Not by a lot, but but by enough to be measurable.
Okay.
And then you know heading into this you had a good amount of retail and experience. So retail in the portfolio. How do you think about.
I guess first.
Continued potential pain for those tenants and if you need to flesh those out of the portfolio.
And then second just thinking about your business longer term, what a great type of retailers are right.
Sure.
Like I said the can the percentage of traditional retail is going to continue to fall, even though on an absolute basis. It may grow because all of our all of our grocery partners are anxious to expand.
Oppose the contract but.
For us remember a large part of what we do is mixed use a and a large part of mixed use is having an experiential retail on these ground floors and that's how you enhance your returns on both the office and the multifamily.
So that's going to continue to be a part of our portfolio. We've we've seen this movie before so to speak.
We're gonna have to continue working with our tenants over next several months.
We don't believe that.
On the other side of this thing that people are going to lose their appetite for Boeing to hair salons, and spas, an exercise places in restaurants and alike.
We think if anything that's going to accelerate and like you guys have heard me say before are you.
You don't build real estates, what's going to happen over the next six months.
The ability for for the long term and so we believe a mixed use and walkability.
And less use of commuters is going to be continue being a trend and a part of that trend is having options for people to take advantage of at their place of work and and and where they live.
Okay. Thank you and then just finally.
You had mentioned.
Bad debt to come in the back half of the year in lease termination fees can you talk specifically about what do you expect and then just curious why.
Why would you why Wouldnt you have taken it already if you see it coming.
Well first off because they're not they're not bad at this point in time, we expect to collect but what we're saying is chant probability is we're not going to collect a 100% of the tenants. The rent that's due and some other tenants may go into bankruptcy. During these Ah This pandemic we thought.
Jamie It was important for us to reestablish guidance Weve.
We've come to be known for our transparency.
We have a lot of information available would get as much of it out there as possible and in order to put that guidance out and not having to revise it we worked really hard on where the low end of the range could be.
And <unk> and a worst reasonable case scenario and that's where you see what Mike talked about with potentially within our guidance. We are taking a conservative view of what may happen and we're hopeful that none of it happens.
But we thought would be prudent for mainly for our analysts to make sure that you knew that we were taking all that into account.
So would you say that bad debt is tied to specific can answer it's more of just a bucket.
We are we went through like it was saying we went through every tenant and put and we you know we went through and say okay. What is the likelihood of these tenants and just went down through the whole the whole list.
And what we came up with his we came up with who we think of the most likely candidates to go bad here between now and we ended the year and went to analysis and went through a probability and from there just kind of did a matrix and came up with a with the number.
Okay, and then what about the termination fees it does that.
We're going to get them that's also.
[music].
We are in a negotiations with a couple of tenants who want to give back some some space.
As part of that is a as termination fees.
Oh that they're not at this point in time affected that we expected to happen.
What's the size.
Termination fees are net of expenses were thinking to be a up which is a million dollars.
$10 million total earnings impact.
Correct, yes.
Okay.
Alright, thank you.
<unk>.
Our next question comes from the line of Bill Crow with Raymond James. Please proceed with your question.
Good morning, guys <unk>.
Oh I've heard your discussion about.
20 dollar share valuation and I certainly appreciate your comments about how today's.
You doesn't come anywhere close to reflecting what you you all have built or building.
And so that leads to the question of why issue any equity it at $12.
Share LP units at $12 a share when you wouldn't have done that four or five months ago, and you may not do that six months from now on it.
He said it was that kind of the first opportunity to acquire this particular asset.
You know just talked about how valuation dynamics would have changed if you would wait at six months or a year.
I think a lot of things could have changed spill or what we were looking at was the ability to get.
Right I mean, I don't think anybody on the phone has heard of a fully wheezed multifamily project in a capital city that trades at a 675 cap. So when you take the 675 on top of charging a 20% premium for the stock price.
I think.
As a CEO the rate we've made a very good deal.
HM.
Add to that that it's immediately accretive and we didn't see any reason to two to wait.
How many more.
Sure there is no pressure from the partnership.
I have amount of but right now right.
No Sir Oh, it was initiated by the rate.
Yeah Okay.
How many more properties are there that a board or or management team owns interest and that.
Might be a good fit for our model kind of build in that pipeline.
I believe that's the last one.
My Yeah, we've got a we have partial minority ownership in a couple of hotels and that's the last thing when it wouldn't read obviously you know your I'd tell you I don't but [laughter], how do we want to do own Ah, yes, well yourself.
[laughter].
And ER and I think that's that's that's it certainly there has been you know we've talked about the construction company building the two buildings that the ocean front.
The Lou and eye on involved in the Hyatt House.
At the Ocean front and in the multifamily properties going up next to it but neither one of those we have we have any interest in acquiring.
Gotcha, and then just bigger picture when you're thinking about shifting increasing your multifamily exposure you right 60.
Three quarters cap rate is pretty attractive really attractive.
But you think you can you can make the shift.
Uh huh.
A neutral basis selling retail redeploying.
Redeploying into multi families that is that possible at this point.
Hey, it it takes time Bill was so like I said in my opening comments, we knew we need even when the stock was trading at 19, something we knew long term that we wanted to make this move.
We thought it would take a few years.
Because we weren't interested in destroying earnings in the process.
This obviously that the pandemic gives us the opportunity to accelerate a it a bit but at the same time, a we're not looking to retrace our earnings footsteps beyond beyond this year, so we'll be measured with it.
We have no desire to fire sale anything more likely we're gonna grow our way out of it.
We've got as we have a significant spread and the.
Multifamily projects that we're developing a and so our hope is that we can approach yields there that we offset a the yields that we lose on the retail side. So we've got to be patient in order to preserve the ability to increase dividends and increase earnings.
All right one last one from me I appreciate the time in your student housing properties did you approached the schools themselves to see.
If you could do large leases with them.
No. They I mean Hopkins for years has had a a lease of around 40 or so units that they didnt do this year.
And actually in Charleston, the colleges Charleston put out an RFP.
To try and get beds, but by time, a they got around to it we had already filled up so.
We didnt really need to do anything on the on a massively side.
Okay.
Thanks appreciate it.
Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the floor back to Mr. for any final comments.
Thanks very much for your interest in the company. We appreciate Everybodys time, this morning, and Oh, we are available to take additional questions.
If there any further otherwise so look forward to speaking with you next quarter and stay tuned for more press releases. Thank you.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.