Q3 2020 Armada Hoffler Properties Inc Earnings Call

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Management's prepared remarks, you'll be invited to participate in a question here is a session at that time. If you have a question. Please press star one on your telephone.

As reminder, this conference call is being recorded today Thursday November.

I'll now turn the conference call over to Mike Harris, Chief Financial Officer.

Clearly from our current expectations and revise listeners to review the forward looking statement disclosure in our press release. This morning, and the risk factors disclosed some documents were filed with a furnished to the SEC.

They will also discuss certain non-GAAP financial measures, including but not limited to F F O and normalized SFO <unk>.

Definitions of these non-GAAP measures as well as reconciliations to the most comparable gap measures are included in the quarterly supplemental package, which is available on our web site at amount of offer dot com I'll now turn the call over to Luke.

Thanks, Mike.

Good morning, everyone and thank you for joining us today.

Have you all continue to work through the pandemic in our own ways, We express our gratitude to all those who are making a positive impact in the fight.

And pray for those who have been affected by COVID-19.

Significant source of balance sheet strength with a large portion of the net proceeds likely to be redeployed into new development opportunities.

Please disposition is notwithstanding we expect the retail segment of our business to remain an important and growing component of our business model that.

That we believe will increase in value with the market's eventual recognition that quality retailers in prime locations or a durable source of future income.

Also.

As a result by our recent press release, we have terminated our two Regal cinema leases and intend to proceed with mixed use developments that will feature a large component of multifamily units on is well positioned sites.

As we have mentioned on several earnings calls these properties were designated for redevelopment for quite some time.

While we would have been fine with letting the leases run to completion, but.

The terminations enable us to move much more quickly to capture the true value of this prime real estate.

We believe that the underlying raw land in both these locations is worth more than that of the previously leased assets.

Not to mention the ultimate value creation of the new mixed use apartment communities planned for both sites.

Please read these redevelopments from older retail into new multifamily assets will meaningfully accelerate the rotation, we desire into higher quality assets.

We are already in the preliminary design phase for these properties and expect to commence construction on both by the end of 2021.

This brings us to our second goal increasing the contribution of our multifamily sector to over one third of property NOI.

With the off market acquisitions of the Edison compartments and Annapolis Junction, we've added nearly 600 units have stabilized apartments, bringing our portfolio to over 2300 excuse.

Exclusive of our student housing assets.

This total combined with the development of the Gainesville apartments, and several other sites in predevelopment, including the former rivals.

Virtually assures us of achieving this goal.

In fact, our expectation is that the apartment portfolio will grow to over 3000 units in the next few years.

We are extremely fortunate that our markets are included in the areas of the country, specifically the mid Atlantic and southeast that continue to experience strong population growth and influx of economic activity.

For example, in the third quarter Atlanta alone had absorption of over 8000 units.

One need only look at the high occupancy and financial performance of our apartment portfolio for validation of our belief in these regions.

Next we outlined last fall our intention to reduce the size of our mezzanine lending program over a 24 month period.

While we have great faith in the program and its results to date. This reduction is in keeping with our stated intent to allocate more of our investment capital to equity positions on future ground up development projects.

I'm pleased to report that by year end, the only outstanding mezzanine loans will be at the interlock in the heart of West Midtown Atlanta.

These two loans will run through 2021 to allow for completion stabilization.

With disposition plan for the first half of 2022.

It is unlikely that we could bring those projects on balance sheet, given the low cap rates prevalent in that market.

However, if for some reason our partners cannot achieve full value for these mixed use and multifamily trophy assets, we would be glad to acquire them at a discounted price.

This flexibility made possible only through a diversified model has already allowed us to acquire two top quality assets next in square at Annapolis Junction.

As for the last remaining loan we have a signed letter of intent to purchase the Delray Beach, Florida and whole foods at a significant discount to pre pandemic value.

Although the decreased mezzanine book should still yield some $15 million of any interest income next year.

Both the size and the profile of the program and the income will be meaningfully less than the 2020 levels.

With the pay offs of the interlock loan slated for the first half of 2022, and our desire to only use the mezzanine program on smaller shorter term assets.

This sector should produce interest income in the mid seven figures last year and probably thereafter.

Thereby providing a meaningful yet lower risk adjunct to our development and construction activities.

Perhaps the most important component of our strategy is the commencement of a pipeline of new development projects.

The development spreads.

Another aspect of our plan was to reduce our exposure to potentially unstable business models.

Particularly in the retail space.

Fortunately the vast majority of our tenants have proven to be fully capable of surviving the pandemic to date.

Obviously, it's too soon to sound the all clear however, as you've seen by our 96% rent collection rate in both the third quarter and in October along with the collection of nearly all the deferred rent due under payment plans through October.

Mr. Further increase liquidity and fortify the balance sheet in order to fund the future growth.

Once again, our position as the company's largest equity holder governs the critical decision of how best to source new capital.

While we are pleased with the outcome of raising over $100 million in our preferred offering this past summer as a bridge over the pandemic we.

We do not intend to issue any more of these preferred shares at least until the value of the common shares return to 85% to 90% of the whole capital stack.

Likewise, we are not interested in selling any substantial amount of common stock a deep discount prices with the possible exception of a relatively small amount of activity on our ATM.

Not only is our diversified business model and portfolio a key differentiator amongst our peers.

It provides us with the flexibility to take advantage of rapidly changing market conditions and identify alternate alternative and cost effective sources of capital.

First and foremost we feel confident in our ability to sell enough high quality non core assets to fund the majority of our 2021 capital needs.

We've we've finalizing our 2021 disposition plan over the next few months and we were evaluating several assets inclusive of student housing office and a few more retail centers.

Induces durable returns.

As I said.

Expect that by the end of 2020 too much.

Much of the development pipeline will be delivered the existing portfolio stabilize in upgrading and consequently core debt to core EBITDA should fall to pre pandemic levels.

Alright.

Oh this will be the fifth severe economic disruption that our leadership team will navigate.

And I expect the same longterm positive results that we produced and the first four.

Now I'll turn it over the line.

Thanks. So good morning is certainly unprecedented times and I hope you and your families are healthy.

The continued continuing impact the pandemic on our company, we have been busy improving our liquidity and positioning the company for future growth.

And the third quarter reported SFO and normalized SFO of 24 per share.

This includes the right off of $1.1 million from the termination of the two Regal cinema leases, an additional $1 million from various other write offs.

We're including an additional $500000 in Baghdad through the end of the year in our guidance.

Without the effect of the Regal cinema write offs are normalized SFO would've been 26 cents per share.

On known terminations.

The determination of the Regal leases along with the current and upcoming vacancies are in Hawaii will be lower which we expect to have a negative impact on our leverage metrics and Avi.

We are expecting our leverage had higher until new tenants in place.

Well as Lou said, we are seeing a lot of leasing activity on the vacant space. So the higher leverage should be temporary.

As for Navy the land value the Regal properties is worth as least as much as capping a former NOI. In addition, the other vacant space as to value and we believe that will be released or redeveloped.

As we've discussed we in Predevelopment on the two Regal sites. Please.

Due to it being less destructive.

And less costly than issuing common.

We believe that enhancing our liquidity position in this environment is an important moved to position the company. So the recession in future growth.

As I said, we believe preferred stock should account for no more than 15% of our capital sick.

Is preferred raise was for liquidity in a brief to get to the recession.

We do not anticipate issuing any more preferred stocks in the foreseeable future.

Going forward, we anticipate raising capital primarily through asset sales and to a lesser extent through our common stock ATM depending on market conditions.

In total since the pandemic started we have raised a total of $200 million to asset sales and preferred stock issues.

You can play an important part in in those developments and add to obviously to the synergy.

Of the entire development.

We expect that that's gonna continue.

So that segment of the business is going to grow it's just not gonna grow at.

Same pace as the other segments.

They're still looking at retail being a smaller component, which I think is what you communicated for the last couple of years.

Yeah, exactly I think everybody knows we a snapshot in time, we sold in 2016, we soda.

Two big office facilities of course, I'm 100, and some odd million dollars and bought several grocery anchored shopping centers with that money that kind of threw us into a situation where nearly half of the portfolio was retail and we didn't whittling way back too, but we can see.

Or a normal mix ever since but like I said mixed use retail is gonna continue to be an important part of our business as well as the the grocery anchored neighborhood centers just about all the groceries, we deal with our hand expansion mode. So I'm looking forward to to do like a few of them.

It's just not gonna grow as fast as the larger projects.

Gotcha that's helpful.

Maybe a little more my yields on Annapolis junction in next den as you bring them on and and kind of how you look at leverage with those two particular assets, obviously coming out of the the medicine Mythomane book.

Sure collect my answer the the leverage question.

An apple stuck here is now sitting 97% leaves we <unk>, we expect that is the stabilize in the six six and a half billion dollar range.

Once it cycles through it's Lisa incentives, which are coming up here shortly.

Make all the leverage.

Yeah leather January closed on a a pretty long I wish we got some really good turns you know and right today in like 2.74%.

And.

Our leverage how do you think about that kind of over a two to three year period.

Well, Dave the short answer is we expect the stock will be back we're supposed to be.

Right.

[laughter] accepting that fits.

We're in a great position and being able to cherry pick.

Only the top candidates for development as I mentioned earlier, we're looking at extended spreads.

Skewing to the higher end then it's been tradition traditionally we've been able to achieve and so we suspect that a number of those are going to be right sized equity wise or close to it when they do come online stabilized.

So.

Our expectation is that a lot of that equity referring to will be created rather then picked up in the market is also going to take take a long time that tonnage that these projects will only started one at this point in time.

Even some over the next three to six months.

Two years, CR App development timeframe, well into 2022 before you really need to be looking at this.

Funding the equity on a stabilized basis of plenty of runtime.

Okay.

Okay. Thank you guys.

Thanks, Dave.

And our next question is from Rob Stevenson with Janney. Please proceed with your question.

Good morning, guys.

If that market continues to be decent and buying back stock given where the implied yield is on your existing portfolio of assets. These days.

Got a $9 stock price.

Sure.

We are not.

In terms of of buying back stock.

We don't make long term, that's not the best use of our capital.

Quarter numbers.

Okay. Thanks, guys appreciate it.

Thanks, a lot.

Okay.

And our next question is from Bill Crow with Raymond James. Please proceed with your question.

Hey, good morning, a couple of questions from me.

The watch list. Besides the tendency you've identified that are moving out.

What's that look like.

Good morning Bill.

Okay.

As you might expect we have an active watch list that.

Predominantly direct.

The restaurants and personal service is people that are still under some restriction.

It's done that they've done exceedingly well, we lost a couple of restaurants here town center actually pre pandemic and we already are in negotiations.

I mean may even have letters of intent signed with replacement for those tenants.

The list is shrunk considerably.

Once we.

In a long term there in that.

8% I think on construction loans, certainly rates are going up I don't know, but on stabilized assets. One of the reason is that we did the preferred rates.

Back and obviously, if you take a look at the cost of capital in the common.

Your.

Depending on how you probably look at same an earning standpoint was getting to be a pretty high but if you take the preferred is 7% or less and then mixing with that 3% interest at year end up 5% cost of cost of capital.

The other one effect is asset sales into what expenses that affect any lead only simply to get to our cost of capital. So.

People out that could change, but from what we're seeing today, we feel good about the two and a half.

Thanks, Dave.

I think it's.

It's important that we keep seeing headlines people one of the.

Paying everything with the same brush.

Hi, guys I tried to highlight.

In our locations.

There is still is obviously a lot of pain, but you'd be amazed that the amount of activity that we have around these vacancies.

People know that at some point this pandemic will be over people know that these markets people continued to move in and invest.

So we're really anticipating a very quick turnaround in terms of getting giving that space back up and running.

Okay. Thanks for that and then del Ray you said that there was a signed letter of intent you're not acquiring that are you.

We are going to acquire that.

Okay I wasn't clear so yeah. Thank you Yep Yep.

Yes.

We were able to acquire a significant discount to pre pandemic value.

We now disconnect your lines they can have a good day.