Q4 2020 Armada Hoffler Properties Inc Earnings Call
[music].
Welcome to Armada Hoffler sports quarter, 'twenty 'twenty earnings Conference call. At this time, all participants are in a listen only mode.
After management's prepared remarks, you'll be invited to participate on a question and answer session at that time. If you have a question. Please press star one on your telephone keypad.
A reminder, this conference call is being recorded today Thursday February 11th 'twenty 'twenty, one I would now like to turn this conference over to Mr. Michael O'hara, Chief Financial Officer at admire Hoffler. Please go ahead, Sir you may begin.
Good morning, and thank you for joining Armada Hoffler is fourth quarter and full year of 2020 earnings conference call and webcast.
On the call. This morning in addition to myself and Lou Haddad CEO.
Press release announcing our fourth quarter earnings along with our quarterly supplemental package and our 'twenty 'twenty one guidance presentation were distributed this morning.
A replay of this call will be available shortly after the conclusion of the call through March 11 2021.
The numbers to access the replay are provided on the earnings press release.
For those who listen to the rebroadcast of this presentation remind you that the remarks made herein are as of today February 11th 'twenty 'twenty, one will not be updated subsequent to this initial earnings call.
During this call we will make forward looking statements, including statements related to the future performance of our portfolio.
Development pipeline impacts of acquisitions and dispositions, our mezzanine program, our construction business our liquidity position.
Portfolio performance and financing activities as well as comments or our guidance and outlook.
Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond our control.
Particularly in light of the adverse impacts of the COVID-19 pandemic on U S and global economies.
The risks and uncertainties can cause actual results to differ materially.
Current expectations, we advise listeners to review the forward looking statement disclosure in our press release. This morning, and the risk factors, we have disclosed in documents, we have filed with or furnished to the SEC.
We will also discuss certain non-GAAP financial measures, including but not limited to SSO normalized debt that's out there.
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 Armada Hoffler Dot com.
We will start the call today by discussing our 'twenty 'twenty one guidance at this time I'd like to draw your attention to our 'twenty 'twenty one guidance presentation that we published this morning.
I'll now turn the call over to Luke.
Thanks, Mike.
Good morning, everyone and thank you for joining us today.
This month, we will mark the 42nd anniversary of the founding of our company.
We take a great deal of Friday on achieving that milestone.
One not often seen in the commercial real estate business.
Over the years, we've earned a reputation for integrity consistency and professionalism.
Great that are the foundation of our success.
This past year has seen our company intensely and tested in several ways.
While the struggles brought on by the pandemic, we're certainly not unique to us.
Our approach to the crisis may seem somewhat counterintuitive.
As this is our fifth major recession, we've managed the company through.
We have developed strategies that have seen us survive and ultimately thrive through multiple cycles over the decade.
From past of this plan are fairly obvious.
Serve your cash work with your tenants.
Reduce operational expenses and most importantly take advantage of new opportunities.
Less visible to on Lookers is our dedication to staff in tough times.
Despite the pay reductions volunteered by our board and executives.
All other members of our team received their yearly pay increases on time early last fall.
We have also recently received their full year end bonuses and several earned promotions throughout the year.
Their performance throughout this difficult year has been nothing short of remarkable in that performance must be rewarded.
We also escalated our outreach activities to support our communities throughout the crisis.
We've learned over the years at the best time to build employee customer and brand loyalty is during tough times.
When others often abandon those principles.
This past year is the main reason why our staff retention has always been stellar.
Debt long term institutional knowledge and staff dedication has been key to our ability to outdistance our peers. After each of the last port last four recessions and why we believe this one will be no different.
In addition to analysts and investors there are many employees and joint venture partners listening in on the call today.
On behalf of our founder and Chairman Dan Hoffler.
Board of directors and executive management.
Sincerely, thank you for being a part of our team.
Vowed to be associated with each one of you.
While the focus on my comments today will be on our 2021 guidance as presented in our release this morning.
I'll first offer a few thoughts on the fourth quarter and 2020.
As you can see from our earnings release we.
We've been extremely active at the company.
Over the last few months.
We've announced three new development projects purchased two high quality multifamily assets.
Made solid progress on re leasing COVID-19 related vacancies.
Perhaps most importantly.
2020 saw us maintain high occupancy portfolio wide.
And collect 94% of scheduled rents since the beginning of the pandemic.
These factors combined.
Combined with the continued strength, we anticipate in our markets.
We have encouraged our board to declare a 36% increase to our common dividend as you may have seen in our press release earlier this week.
We appreciate the confidence the board has shown to the management team both in this action and their solid support throughout the crisis.
2021 is a year, where our focus is to substantially increase N a day through <unk>.
Our leasing initiatives improved quality of NOI.
An exciting development starts.
In short, we anticipate that our activities over the course of 2021 will build a solid case for expansion of our multiple and ultimately lead to significantly higher earnings and dividends over the next several years.
As the company's largest equity holder management remains committed to generating long term value for all shareholders.
Turning to our guidance presentation.
As you can see by the earnings range on page four.
The midpoint of our per share guidance is right at a dollar.
As we relate to you over the last few quarters.
We anticipated a moderate decrease in earnings per share for 2021.
While a portion of the decline is due to the temporary effects of the pandemic.
The major reason is the repositioning of the company for higher quality earnings over the next several years.
This was a conscious decision made in mid 2019.
And as you'll see in the subsequent slides one that sacrifices short term earnings but it is on track to produce long term growth and value.
Specifically.
As you may recall prior.
Prior to the pandemic, we detailed our plan to reduce the percentage of NOI contributed from retail properties.
Disposition of older centers.
Increase the percentage of multifamily NOI through development and acquisition.
While also decreasing the volume of mezzanine loans, thereby allowing us to allocate more resources to portfolio growth.
And ultimately decrease leverage ratios over the medium to long term.
We believe this results in a qualitatively stronger income stream.
And higher per share asset value.
However, it does reset earnings during the transition.
We believe the trade off is well worth it.
These factors.
With the return to normal construction profit levels from all time highs last year.
And the pandemic related cars and new development deliveries are the main drivers of this year's earnings range.
Hopefully you all feel as we do debt. These intentional moves are part of our longer term strategy that positions the company for you.
Even greater returns than those enjoyed by investors for the five years preceding the pandemic.
Before I walk you through the other highlights of our presentation I'm going to reiterate the fact that many who follow our company have correctly pointed out.
That we do not fit neatly into the standard REIT box.
In addition to our high quality diversified portfolio third party construction profit build to suit asset sales and mezzanine interest income.
Given our platform our unique complexity that can't be wholly measured by traditional REIT metrics.
That said.
While these ancillary income streams augment earnings and decrease the need for external capital.
The end goal of monetizing development spreads in this fashion is to enhance growth in our portfolio income through new development projects and off market Op unit acquisitions.
Illustrative of this point as you can see by the information at the top of page five.
We expect our portfolio NOI declined by over 40% from 2020 levels. When the current development projects are fully stabilized.
We believe the <unk> per share from this additional NOI will be meaningfully higher due to the millions of dollars earned from mezzanine activity and construction income that we reinvest into the company, thereby reducing the need for outside capital.
Also of note on this page as we have been projecting the pie chart showing the NOI contribution of our various property types continues to adjust.
With concentration moving from retail into multifamily and office.
While the non retail assets that are being asset added to our to the portfolio through development and acquisition are of trophy quality and offer significant long term growth.
I'd like to emphasize that we are also very bullish on all components of our retail portfolio.
Neighborhood grocery centers regional discount chains and mixed use retail all dominated by stable viable tenants will remain as a high occupancy and growing sector of our business.
Turning to page six.
You can see that we've also been very successful in diversifying our portfolio on a geographic basis.
Upon stabilization of the current pipeline over half of our property NOI will come from outside of Virginia.
Much of it from high growth southeast markets.
This increased geographic diversification.
As a result of years of goodwill and strong relationships built with strategic partners in these dynamic markets.
Later on the call Mike will detail the performance on the portfolio in terms of maintaining both high occupancy and a sustained level of rent collection.
<unk> mentioned some important statistics on our leasing efforts.
What we've learned over the years is that a solid high quality portfolio not only stays full during recessions, but also quickly re leases at market terms when space becomes available.
Our office and traditional multifamily sectors have maintained mid ninety's occupancy and near 100% rent collection.
Performance that is indicative of the strength of our assets and their respective markets.
However, as you might expect.
The retail portfolio did experience some additional vacancy through the pandemic.
That said.
Our retail assets have shown remarkable resiliency as evidenced by our 88% retail rent collection rate during the pandemic.
Last quarter I reported that we already had over 60000 square feet of new L. O I's on Covid related vacancies and with many additional prospects, we hoped to significantly add to that number.
I also mentioned that we were working with Regal and bed Bath and beyond to find mutually beneficial solutions to expiring leases in a handful of locations.
Page seven.
Illustrates the value of having well located real estate when the economy is down.
I am pleased to report not only that all of those LOI are now executed leases.
In total we have leased 90000 square feet since our last update net of the Regal leases.
We're also nearing execution of another 46000 square feet of retail leases.
In fact, our expectation as seen on page eight is that we will be nearly back to our retail sector historical norm of approximately 95% leased within the next 12 to 18 months.
Back to page seven before individual assets listed on page on this page had recent lease termination scheduled debt.
Would have left us with a large amount of vacancy had they not been in top locations.
As you can see both of the Regal cinemas have been re leased to Regal as is.
And even more importantly, we've secured development rights to enhance returns on these parcels with additional mixed use assets.
The wendover bed Bath and be on was re leased in its entirety on an as is basis and.
And we are in negotiation with a credit tenant to take the entire space vacated by bed Bath at North point.
In all we expect significant upside from the new leases in the short term and tremendous additional long term value from the new development projects on the Regal parcels.
40 years of experience has taught us that quality real estate and strong market stands the test of time.
Regardless of the sector of our diversified platform in which it resides.
The development pipeline is described on page nine.
Beginning with our recently announced joint venture with BD development.
The 450000 square foot build to suit for T Rowe Price's World headquarters.
Which is adjacent to our other three assets at Harbor point on the Baltimore waterfront.
This trophy asset will bring some 1700 employees to this world class development.
As you can see the remainder of the development pipeline is heavily weighted towards multifamily assets.
We also have three additional projects in the pre development stage.
Projects are more fully described at the back of the deck.
On the bar graph to the right of this slide we've shown the value we expect to create through these developments using our target development spread of 20%.
With our historical average.
Page 10 covers our third party construction.
In other real estate services.
This division had one of its best years ever in 2020 with over $7 $5 million of gross profit.
This facet of our business model unique across the REIT universe gives us multiple advantages over our peers on.
So significant.
Third party fee income is perhaps the least important benefit of our construction company.
Aside from giving us the confidence and control to pursue our in house development and mezzanine strategies.
Construction contracting has brought us many new relationships with high quality developers that we may ultimately add to our circle of partners in new ventures.
Our expectation is that this year and for the foreseeable future.
Third party profit will return to their historical norm.
This is a conscious decision as we choose to reserve more of our resources to build upcoming in house projects, which do not recognize fee income, but more importantly add to our development value creation spread.
Page 11 shows our mezzanine investment program.
As most of you know this initiative allows us to provide development and construction expertise as well as our strong credit to trusted partners developing high quality projects and returned from most of the value creation.
As we have reiterated on many occasions.
Our intent is to gradually decrease the size of this program in order to use more of our capital for NAV accretion through our development platform.
As you can see by the trend line, we ultimately expect to stabilize the program in the $80 million range. One new project to note is soulless next in multifamily project.
Which is another engagement with our partners at to Willinger Pappas, how are the developers of the soulless interlock projects and our partners and soulless Gainesville as well.
So lets nextgen isn't the same fast growing submarket of suburban Charleston, as our next day marketplace lifestyle Center.
The assets are a short walk apart and will complement each other extremely well.
Stepping back to a macro look at the business. The top of page 12 shows the trajectory of our anticipated growth year over year as we returned to our historical levels of portfolio occupancy and build out the current development pipeline.
As you can see we anticipate a 25% increase in the total income of the company.
The combined mezzanine and b component decreases to less than 10% of the total.
We believe that this income combination solidifies, our free cash flow earnings base dividend coverage ratio and ultimately supports a substantial expansion of our multiple.
Now I'll turn it over to Mike to give some further detail on our guidance as well as some specifics on last quarter.
Thanks, Luke and good morning Hope all is well with you and your families with the continuing impact of the pandemic on our company.
We have been positioning the company for future growth and to take advantage of opportunities we are seeing.
On the fourth quarter, we reported <unk> and normalized <unk> of <unk> 25 per share for the full year <unk> was $1 six and normalized <unk> was $1 10 per share.
On the fourth quarter bad debt write offs with 200000, which is significantly less than the past two quarters on the full year total write offs of $2 8 million, which was one 6% of 2020 revenue.
These numbers include $1 million of write offs from the termination of the two Regal cinema leases.
As you can see on page 14 of the guidance that the portfolio performed well on the fourth quarter, but rent collections of 98% portfolio wide with 97% of January rent collected so far.
Since the pandemic started we have collected 94% of rent due to year end the rent collections at 88% and on.
At 100%.
As for multifamily the pandemic had very little impact on the performance of our portfolio on in 2020.
We believe it's due to our locations and mix of tenants on multifamily portfolio had occupancy in the mid 90% through 2020 with rent collections of 99%.
As an example of this performance in 2020, we wrote off only 73 basis points of revenue as bad debt versus 65 basis points in 2019.
As for the deferred rent the agreements with our tenants have scheduled installment payments through 2022.
To date, we have collected $1 4 million of deferred rent.
Which is 93% of the amount is there is an additional $1 $8 million of deferred rent, which we expect to collect $1 5 million this year and the remaining in 2022.
These numbers do not include the agreed upon deferred rent from the two restructured Regal cinema leases.
Our core operating portfolio occupancy for the fourth quarter was strong at 94% with office at 97 retail at 95 and multifamily at 93.
As Lou discussed we have seen a lot of leasing activity with 90000 square feet of signed leases since the last earnings call.
Another 46000 square feet of leases out for signature.
This does not include re signing 100000 square feet of Regal leases, we're making good progress in gaining occupancy back to pre pandemic levels, but until these tenants in place and paying rent.
Oh, why EBITDA will be lower which will temporarily had a negative impact on our leverage metrics.
And so this impact on NAV.
Please see our NAV component data on page eight of the supplemental package.
There is a section on the bottom left of this page with information on management's estimate of the land value.
Development rights from new Regal leases.
On the vacant space as of December 31.
The 90000 square feet of vacancies listed all have signed Loi's, along with the estimated rent them out.
We believe these have real value and should be considered when evaluating our NAV.
During the fourth quarter, we closed on the acquisition of the two multifamily properties Annapolis junction and yet Essen.
Which combines as close to 600 units to our portfolio, giving us a total of over 2600 units.
As Lou discussed these acquisitions, continuing our plan of increasing the percentage of our multifamily NOI and our property portfolio.
Later this month, we expect to close on the acquisition of the Delray whole Foods Center.
This is another high quality grocery anchored center being added to our portfolio.
During 2020, we took multiple steps to increase our liquidity position on strengthening the balance sheet.
But our common stock trading at this kind of levels. During most of 2020, we utilized other sources to raise capital.
In the past year, we have sold nine unencumbered retail assets for a total of nearly $100 million.
And in August we raised $86 million by reopening our original issuance.
Shifting series a preferred stock.
We believe preferred stock share count for no more than 15% of our capital stack.
We do not anticipate issuing any more preferred stock for the foreseeable future.
In total since the pandemic started we have raised a total of nearly $200 million through asset sales and preferred stock issuance.
In addition, during the first quarter the stock trading at relatively higher levels. We currently issued stock through the ATM raising $12 5 million at an average price of $11 five.
To conclude our repositioning effort, we anticipate closing on a disposition of a Kroger anchored center in the second quarter for gross proceeds of $5 $5 million.
But the capital raised in 2020.
We are well positioned to find out on development projects, including the T Rowe price headquarters project.
But most of the projects beginning later this year early 2022 as is the case on the T Rowe price project.
These capital requirements in 2021 are modest in addition.
We've already funded the land acquisitions for the current development project.
And as is typical of a ground up development capital requirements ramped up ramp up over an extended period of time.
Please see page 13, the guidance deck for some information on our debt, including fixed charge coverage.
Weighted average maturity and interest rates.
As you can see the 2021 debt maturities have been refinanced with the exception of the Southgate Center, which we expect to close this quarter.
Please see page four the presentation of our 2021 guidance ranges and assumptions.
Now I'll turn the call back to Louis.
Thanks, Mike.
Prior to taking your questions I'd like to take a moment to draw your attention to our ongoing sustainability initiatives.
Many of you are aware that we have been a leader in corporate responsibility arena for over 40 years.
Last year, we published our first sustainability report, which is prominently displayed on our website.
I'm excited to announce that our second report will be posted in early April.
In addition to our continued focus on ESG.
We'll highlight the enhancements that have taken place over the next last year.
We're happy to answer any questions you may have regarding these important aspects of our business.
Operator, we'd now like to take any questions.
At this time, we'll be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is on the question queue. You May Press Star two true move your question from the queue from participants using speaker equipment.
It may be necessary for you to pick up your handset before pressing the star keys.
While we poll for questions.
Our first question comes from the line of Dave Rodgers with Baird. You May proceed with your question.
Hey, Lou Mike Good morning, and thanks for all the color on 2021 outlook.
I wanted to dive in maybe on the office front it sounds like retail with active in multifamily development or taken off again, but on the opposite side can you talk a little bit more about the conversations you're having maybe particularly either at 10 try on to firm up some on the leasing there as well as at Wills Wharf to backfill we work.
Thanks, Dave and good morning.
So we're seeing.
Basically the green shoots of office leasing starting to come back.
Our partners at the interlock in Atlanta.
We have conducted a number of tours with active tenants in that market as you probably know.
West Midtown Atlanta is is is really a hot market. Microsoft just took a half a million square feet a few blocks away from us.
So we our anticipation is that that is going to lease up very quickly.
At 10 try on we are still working on a program and a starting day. So we really haven't started actively marking marketing there beyond the anchors debt that we've already put out there.
At Wills Wharf again activity is starting to pick up more tours.
We are still engaged.
With the two anchors that we talked about we've been talking about for months.
Again things are slow to return.
To normalcy.
But everybody is anticipating getting back in.
Interestingly.
What we're seeing as you know day, though our office portfolio is pretty much full.
We're starting to see a lot of people pick dates for return full return to the office.
I'd say the vast majority of our office tenants are now in some sort of combination of work from home in the office.
But it looks like people will be fully back sometime in the spring for the most part.
Thanks for that Lou in your guidance you also discussed the sale of one non core asset I did give it the krogers the one kroger store in the past you've talked about maybe selling more on using that to funds. Some of the growth I guess can you talk about your appetite today to continue to sell non core assets and then maybe be at.
Tight in the market to receive those assets.
Well right now, it's a bit of a mismatch I mean, the market cap rates have really compressed.
Great time to be a seller.
When you have credit tenants, whether its retail or multifamily.
Or office for that matter.
But we are we're pretty much through with what we had planned on selling.
In order to to turn over the portfolio.
That doesn't mean that an opportunity won't come up.
But as Mike described were really strong capital position at this point.
And don't have any any outsized needs that said never say never like I said, it's a great market to sell.
So we will still be on the lookout for opportunities, but I wouldn't look for anything of any wholesale size from us anytime soon.
Great last one from me if we could turn to the mezzanine business I was curious on the $82 million that you have as a placeholder for your estimate going forward.
It is a good number because it starts to come down from where you've been but I guess talk about how you kind of get to that is the right spot for the next kind of three to five years, let's say for Armada is that on a percentage of income contribution is it just a percentage of the balance sheet that you are comfortable with and I guess as you scale. The company I mean, how do we think.
That is as a percentage of some metric that you might be comfortable with.
David It is.
Almost all of the above with the with the additive factor of surveying our current partners and what they've got lined up.
Over the next several years, what Theyre thinking.
As a as Mike has put out there earlier.
We're looking to do shorter or smaller.
Quicker term projects.
That don't take a take quite as long to get to maturity.
So that.
That works out to what is most comfortable both problem.
A volume standpoint, and a risk standpoint.
And as you said.
In relation to the balance sheet, we need.
We're never going to apologize for making money.
Through our construction operations and our ability to leverage that into making additional money on development deals that we otherwise couldn't participate in but for the Mezz program. We're going to continue doing that that's a huge advantage for in our model.
We just don't need it to grow.
That's why we have illustrated that it's going to stay relatively stable, while the portfolio growth.
As you as everybody on the phone well knows.
Highest multiple is based on the highest quality portfolio and not necessarily ancillary income but.
That said, we're not going to give it back.
I agree 100% thanks for all the color on loop.
Our next question comes from the line of Rob Stevenson with Janney You May proceed with your question.
Hey, good morning, guys Lew just to follow up on Dave's question. So is solus nextgen a loan to own our loan to make 10% or whatever type of deal for you guys.
Is there a purchase option I appreciate the question Rob it's.
This was an interesting one.
It was originally set up a much like the Gainesville project, where we ultimately would be the owner.
In the midst of that negotiation is when the whale landed the T Rowe price commitment.
So we were looking for way to to minimize the stress on the balance sheet and our cash outlay.
Fortunately, we've got a trusted partner, there who knows what they're doing so it ends up being a traditional mezz loan a second piece of that.
Is that at the kind of cap rate that that's going to bring with the Walkability next to our lifestyle Center.
Very difficult for us to buy that at a discount and still have it be accretive all that said.
At the end of the day.
It wouldn't be shocking to see that end up.
As a project that we get to keep but right now it's not slated as such.
Okay, and when Youre thinking about the mezz portfolio going forward that sort of $82 million is that largely I mean, what is your feeling there do you want that to be sort of loan to own or is that just going to wind up being sort of funding and making.
Some sort of return on it.
Again, it's a.
Yes, we'd love to we'd love to loan to own on all these things because all of these projects the way we underwrite it and we don't take them on on unless they're projects that we'd like to own at some point.
At the same time.
Particularly on multifamily cap rates continue to compress our partners can make a lot more money by selling them on the open market. So.
Probably not going to go in with predisposed notions of how it's going to go.
If we really have our hard set on something we will lower the.
The rates and then.
Negotiate it.
An option to purchase at a discount later.
But again as I think everybody has seen particularly on multifamily. We are now talking about cap rates that cracked five like it was standing still and now they are in the mid fours and a lot of these markets.
Very difficult to compete with that particularly with the agency money that's out there now.
<unk>, 90%, 95% loan to value, that's very difficult for us to compete net market and we don't need to we can just take our profit and go home and develop our own our own stock.
Okay and then.
On the the Regal on the bed Bath.
So with the with the Regal when do they actually start paying rent again and what is the development rights that you guys have with those two assets.
Can you get a little bit more detail there.
Sure two different cases, Rob.
Parison Berg.
They started paying rent again already as it turned out we might have mentioned this on the last.
On the last earnings call that movie Theater in Harrisonburg is the only movie theater for a 100 mile radius.
And so when we terminated at least Regal was anxious to be first in line to get back in.
And so we're letting them in it's going to be a ramped lease.
Obviously, giving them some time to get fully open hopefully in the spring.
But the biggest part of that negotiation was the ability as you see in that picture on page seven in the presentation.
Being able to take five of those acres and turn it into a high quality multifamily asset.
And sharing parking with with the Regal.
Back to adhere.
Here at town Center, it's a little bit of a different case.
We basically are have a very advantageous to them rental rate that will start up this spring as they get slowly open that deal only goes through the end of the year.
Then we mutually we'll decide with Regal, whether it makes sense for them to go back to a full boat.
Rent and business as usual.
Or whether they don't.
Don't need to site in which case it'll end up being phase two of our redevelopment of that project, but basically what we've negotiated the ability to take advantage of the additional land surrounding the property, we're not sure which way. We go right now we've got alternate plans both for more more retail.
<unk> as well as multifamily.
And then with bed Bath, there the tenants at Wendover village, but it's going to go to somebody else at North point Center.
Yeah, well no bed Bath.
Sure.
We terminated both of those bed Bath leases, we got a significant payment in return.
It was the.
The window, where lease went to that's alright, and then really it's released to a different user.
Who took it as is.
And actually we ended up on a net basis, having a better leased than we've got than we had with bed Bath.
At the same thing with North point that is a different credit tenant debt, we are getting close to landing there.
That's what I was trying to emphasize in my comments and what we've seen over four decades.
Good real estate is good real estate.
And and you hate to see vacancy you hate to see people have trouble, but at the same time, the real estate survives and re leases quickly.
In these cycles and that's that's what we're illustrating.
And the is the.
Are the two bed baths, the same tenant or are they going to be different tenants.
Two different tenants.
Okay and that hasn't been disclosed as of yet as to who the wendover villages.
No.
We'll put that out quickly we'd really want the tenants as you know these tenants like to make their own announcements.
And then one for you Mike in the guidance so the guidance at the.
The midpoint is a bulk of normalized <unk> for 2021, how should we be thinking about the cadence throughout the year or is it. Some of these leases that are non income paying debt. It drops here in the first quarter and then starts building up back to the year on.
Are there other points in time during the year, where there is some vacancy issues or free rent or whatever that winds up dropping the.
The <unk> down.
What's a good way to be thinking about the cadence throughout 2021.
Yes. Good morning, good morning, Rob, it's going to be pretty pretty even its going to start a little lower than the.
'twenty four 'twenty five.
At the end of year and ramp to it.
2500, 25 towards the end of the year.
Okay Alright.
Alright, Thanks, guys I appreciate it.
Thanks, Rob.
Our next question comes from the line of Bill Crow with Raymond James You May proceed with your question.
Thanks, Good morning, Mike.
Pick up there on the guidance just looking at page nine excuse me 12 of Euro.
Guidance book.
Youre showing 2022 income increased 2021 levels.
Should we read into that you think there could be a positive inflection in <unk> per share or will fund raising results and.
If I look at every number I see out there.
Consensus is pointing toward a down year in 2022 <unk> per share how should we think about growth.
Good morning, Good morning Bill.
Yes.
Now the way, we're looking at things going going forward is what's going to be the timing of the re leases how does it kind of command and the timing and capital needs as we get into 'twenty, two and 23 as you can see here, we're showing it's going to be pretty pretty flat for 'twenty, one and 'twenty two.
So things really start ramping up in 'twenty three as.
As the development projects start to deliver.
We don't.
We don't anticipate going backwards.
Bill.
I'm not sure why that sets and peoples models.
But it is going to stay fairly flat until until the developments kick in until these leases.
Kick in.
On the vacancies.
Whether that happens in 2022 or pushed out till 2023.
You can see what we're saying is going to happen when things stabilize and we're going to work as quickly as we can to make that sooner rather than later.
But we don't anticipate going backwards next year and the other thing you can see here Bill is the mix is changing we've got less fee income going forward and net better NOI. So the quality income is going to improve.
Perfect perfect.
I think we're all trying to figure out what's going on office.
In response to Covid.
Densification day, Densification et cetera, any changes going on at your as you design out the T Rowe space.
Reflect some of those.
Current current.
Considerations.
We're just we're just getting into that so.
Whether it's T Rowe or other office space that we're looking at I think one thing that debt.
I think as a trend we're going to we're going to see we're starting to see a little bit of it is the.
The big clerical bullpen I think are going to be a thing of the past.
And particularly with the ability of debt.
That staff level being able to alternate work from home on occasion, I think we're going to see a lot less of the typical type style.
Development.
It's too early to tell whether people were talking about smaller offices or bigger offices and the like.
With T Rowe price as you mentioned.
They are basically coming out of the same amount of square footage that they are going into so in their mines and we don't have those designs yet on their space, but.
And their mindset.
Kind of business as usual.
But we will say is it's going to be interesting going forward.
Where.
We've got a good sampling here are around at 100 office tenants here and hopefully we will start seeing some trends and some chatter.
But we haven't quite we haven't seen it yet what I have what I have seen over the last.
For big recession, shake ups is that.
Overtime things often returned to the centerline and usually when people were projecting wholesale changes they're wrong.
But who knows maybe this is maybe.
Maybe this is the one that's not the case.
Okay.
If I could just get your opinion on Baltimore in General Youre Wills Wharf area is doing very very well.
And if you can just picture on your head what the CBD area will look like after T. Rowe moves out I mean is that.
Are we kind of going down this negative so the circle here.
A decline in the CBD of Baltimore, how do you how do you think about it going forward.
Bill.
It's interesting.
Yeah.
<unk>.
With people.
You have to realize and it's not unique to Baltimore is that cbd's migrate they expand they can track and they creep over time.
Yeah. It's a great example is where we are in Atlanta now.
At West Midtown.
10 years ago West Midtown wasn't it wasn't a market.
So.
In Baltimore the way, we're looking at it is it's a migration of a mile or so.
Knox and.
An indictment on the CBD itself, but that these things will go where they're going to go we developed a number of buildings on the waterfront and Georgetown.
On the waterfront and Georgetown.
Downtown D. C. As you May recall was a wasteland 20 years ago.
And now now it's a hotbed so.
I think.
I think people need to pull back and not be too concerned about which blocks are doing what but the fact that a company like T Rowe price.
Born and raised in Baltimore stays in Baltimore is a huge win for the city.
Yep.
Okay I appreciate the comments thank you.
Our next question comes from the line of Jamie Feldman with Bank of America Merrill Lynch. You May proceed with your question.
Thank you and good morning, I just wanted to follow up on a comment you made before you said, you're starting to see tenants pick dates for the full return to the office on the spring.
Can you talk about what dates that were talking about and what they are facing those decisions on.
The earliest.
I can't tell you what's going on in People's heads.
I can tell you that the earliest that I've seen is march 1st.
And I've seen may I've seen in June.
And not.
Not in this area, but we've all read reports about people, saying, we will see you in 2022.
That hasnt been the case here My guess, Jamie is that with markets like ours, which are basically Joe drive to drag to the office to get out of your color on go up to your building.
It's different than what's happening with where you gotta do use major commuting lines and mass transit.
So.
Uh huh.
I think based on what we're seeing it seems like sometime in mid summer.
People will be at full strength.
At least here in Virginia Beach.
And Oh.
We'll have to see what happens in the rest of the markets, but I think I think it's really a mistake to paint it all with the same brush that you might be seeing in the major metropolitan areas.
Okay.
And in terms of the March 1st one can you give more color on what kind of company and is that how large.
And are they asking you to do anything special in terms of preparing the building for them to come back.
No it's.
It's an engineering company, we have we have a lot of architects and engineers here.
We're gearing up.
As you see that those are the first guys to see force people to see.
Economic activity.
So one of the firms is bringing folks back March one, but but all of them have worked through the pandemic.
At a minimum our worst staggering people in the office very difficult too.
Design infrastructure buildings completely remotely.
Yeah that makes sense, okay, but you haven't heard any like when you talk to some of your tenants either real estate people are Ceos.
They are not saying we want.
Herd immunity or we learned vaccines for X percent of our population or if theres no.
Just trying to get a sense of what's going on.
What they are even based on decisions on.
Yes.
I mean, we're just not we're not privy to it havent havent really heard.
On the criteria or ourselves.
Right now we are we're roughly our construction company is fully.
Fully working.
A lot of the clerical people were still working from home on.
Our accounting group was working from home our development group is working in the office I mean, there is there is a lot of basically what we've done is a model that a lot of people are doing which is basically giving you the option of working from home and following the rules. When you hear on the office and of course, we our expectation is people are following the rules everywhere.
But in terms of the social distancing the masking.
No no gatherings, no big meetings, and all that sort of thing.
That still has to be prevalent and so far knock on wood things have worked out pretty well.
Okay.
And then I think I heard you I heard Mike say that you guys hit the ATM in the quarter can you talk more about day did I hear you correctly and B can you talk more about that decision given where the stock is and is this something you'll continue to do going forward.
Yes, good morning, Jimmy Yes, we raised $12 5 million and 11 $11 five a share.
Yes, Unfortunately, we find ourselves in.
New.
Jeremy.
Stock is trading obviously lessen in the 11.
We got up over 11, when we decided to sell some in order to enhance our liquidity.
Now, what's going to happen in the future, especially as we're doing this and where the economy was going one liquidity, but just to give.
Give you an idea.
Moving to raise that and we've said we brought on wastewater was like $13. So the difference on what we raised between $11 and $13. A share is a 170000 shares. So that's pretty small vs outstanding shares of $80 million.
Okay.
Okay. Sorry go ahead go ahead Jamie.
Sorry.
I'll stop go ahead please.
I don't know I was just going to say so.
How should we be thinking about this going forward do you think you'll kind of continue to.
Use it to top off to keep your leverage low if theres certain there is a moment in time that you're you just need a little bit of capital or was that more of a one timer.
Jamie I think it's kind of all of the above.
We're seeing a tremendous amount of opportunities in the market.
And obviously, we don't we can't act on all of them because as you've heard me say AD nauseum as the largest shareholder we're really careful about dilution.
At the same time.
Yes, we'd love to see that the stock price goes right back to $19 and then and then we're all fine.
But between now and that time.
We will have some need for equity.
And we're gonna be very prudent about how we do it and when we do it.
I don't expect we don't have an expectation of some.
Some large capital raise with some judicious use of the ATM throughout the year.
<unk> is probably going to be the better part of valor.
Okay and to be clear I think you said youre kind of done with the retail asset sales right. So.
Pretty much it.
Again.
The only caveat to that is like I said cap rates have really compressed, particularly on high quality well anything of high quality, whether its retail office or multifamily so.
We're not going to turn our noses up.
If it looks like we can we can reap some benefit on our non core asset, but thats not slated right now that's not what we're thinking we actively wanted to sell those nine centers.
For a number of different reasons.
The aging.
The what we believe was peak value on.
Fortunately the pandemic caught us and so we didn't get as much money as we would have liked.
But in our long term plan of turning over the portfolio, it's still made sense and we didn't mind picking up the $100 million worth of liquidity.
Okay.
And then.
Going back to your.
To your point or your comment that youre, not seeing tenants kind of changed their space usage.
But are they talking at all about how many more will work from home I know you mentioned T. Rowe's clinical staff, but just generally like do you think theres going to be have you seen any announcements among your tenants or.
Any body language of how theyre going on at least changed the way people work.
Hi.
The chatter is that.
Flexibility will be the watchword going forward right now people are really just talking about until the pandemic is over.
So we're not seeing people, saying, here's the way, it's going to be from here on in at least not yet right now they're just trying to talk about 2021 and how they see the return to office, but.
But ultimately I know ourselves included and we're going to have to come out with some sort of a policy on on flexi.
<unk> flexibility going forward, but I think there's a hesitancy to put anything out there until people see the pandemic behind us.
Okay Alright.
Alright, thank you.
Okay.
Our next question comes from the line of Dave Rodgers with Baird. You May proceed with your question.
And just one follow up for me in on on Michael Lou feel free on the dividend. It was a nice increase after the fairly sharp cut last year and I think it all made sense, but on the increase you mentioned on the call needing some capital and you've also mentioned trying to delever over time. So I just wanted to kind of put in context, where the dividend is relative to taxes.
<unk> com and why not try to just keep a little bit more of that as much as you can going forward.
On the taxability of the day, we put out the press release last week I think we are at 65%.
Was taxable the other one is return on capital. So we're in good shape from from that standpoint, actually putting new buildings in place certainly helps with depreciation all of that from a taxability standpoint.
Okay.
So again in terms of.
The level of the dividend Dave.
You know what we what we said.
Back as soon as we realized debt.
Werent staring into the precipice.
And we started bringing it back we said it would ramp is going to ramp how quick that ramp is we'll just we'll just have to see.
Obviously, theres a theres a lot of our a lot of disparate.
Wants and needs that people have.
Obviously, we'd love to hold on to more of the cash at the same time, we have a responsibility to shareholders. So.
We're gonna be judicious with it.
We've got a pretty significant pretty low payout ratio.
Going forward at least that's our forecast for 2021.
So theres room.
At the same time.
I think all of our shareholders want to see that long term value creation more than a couple of cents.
In any given quarter, so just got to keep balancing that.
Balancing that act.
Alright, thank you.
Ladies and gentlemen, we have reached the end of today's question and answer session I would like to turn this call back over to Mr. Lou Haddad for closing remarks.
All right. Thanks, Thanks for your attention this morning.
We appreciate your interest in the company and we look forward to putting out further updates and everybody have a great day.
Thank you for joining US today. This concludes today's conference you may disconnect your lines at this time.
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