Q3 2021 Armada Hoffler Properties Inc Earnings Call
[music].
Greetings and welcome to the Armada Hoffler third quarter 2021 earnings conference call.
At this time all participants are in a listen only mode. After management's prepared remarks, you'll need that 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 Tuesday November 2nd 2021, I will now turn the.
Conference over to Michael O'hara, Chief Financial Officer at Armada Hoffler.
Can you. Please go ahead.
Good morning, and thank you for joining Armada Hoffler third quarter 2021 earnings conference call and webcast on the call. This morning. In addition to myself is Lou had our CEO.
The press release announcing our third quarter earnings along with our quarterly supplemental package were distributed this morning.
Replay of this call will be available shortly after the conclusion of the call through December 2nd 2021.
The numbers to access the replay are provided in the earnings press release.
Hello, So listen to the re proud cast. So this presentation remind you that remarks made herein are as of today November 2nd 2021 and 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.
Our development pipeline impact of acquisitions and dispositions our mezzanine program.
Construction business, our liquidity position.
Our portfolio performance and financing activities as well as comments on our guidance and outlook.
Listeners are cautioned that these statements are subject to certain risks and uncertainties.
Neither of which are difficult to predict and generally beyond our control.
In the light of Covid, 19, pandemic and any related economic uncertainty.
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 that we distributed this morning, and the risk factors 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 <unk> and normalized SFO.
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 amount of hoffler dotcom.
I'll now turn the call over to Lou.
Thanks, Mike.
And thank all of you for joining us today.
As you can see from this morning's earnings release, the positive momentum of the company continues to accelerate.
Leasing activity across all sectors of our portfolio is at the highest velocity, we've seen in years and occupancy in our stabilized asset stands at over 96%.
The development pipeline is well stocked and preceding rapidly.
Significant off market.
Acquisition opportunities are on the horizon.
Third party construction engagements are shaping up to become high volume contracts later this year.
And most importantly, we are in a strong cash position with access to additional capital from the potential disposition of noncore assets.
All of these factors have combined to enable us to again raise our full year guidance.
And as you saw from last week's press release, the board raised the dividend for the third time this year.
This performance as well as other opportunities arising in the near term give us confidence that the company's metrics will support an equity value at pre pandemic levels.
And not too distant future.
As most of you know ours is a diversified vertically integrated model.
This platform has served us well through 40 plus years in virtually every macroeconomic condition.
Well it has been instrumental in limiting the downside from the fibers recessions, we've navigated in that timeframe.
It is times like these when opportunities are bound in virtually every sector of our business that our company truly shows its value.
In particular mixed used plan development, which constitutes a large portion of our portfolio.
Have shown sustained growth coming out of each of the last several recessions.
Environments, where customers can live work shop, dine and be entertained without moving a vehicle.
To outpace surrounding assets.
And provide people with the occupational flexibility and so many desire coming out of the pandemic.
Our public private partnerships, most notably the town the Virginia Beach Town Center in Baltimore's Harbor point continues to thrive and expand.
Let's briefly discuss each component of our business model and the activity we're experiencing in each of them.
Apartment leasing and occupancy continue to exceed all reasonable expectations.
Our 'twenty 300 conventional multifamily units are now over 97% occupied.
The same store NOI increase of 12% on these properties only begins to tell the story of the desirability of these assets and their locations.
Rent increases in new leases signed in the third quarter averaged over 9%.
With a continued migration to high value properties and the sought after markets at the mid Atlantic coupled with a shortage of housing our expectation is that 2022 will be another strong year for these assets.
Retail leasing tells a similar story.
Last quarter, we reported that our expectation was that retail space percentage leased would be back in its traditional mid ninety's by early next year.
That target has already been achieved and.
And we expect further gains in 2022.
Since our last update we have leased nearly 45000 square feet.
Several new retailers are on their way to our flagship property. The town Center of Virginia Beach led by a new retail concept that is the first in the region.
It is important to note that many of our tenants the reported who report monthly sales eclipsed comparable 2019 sales through the summer.
Several of those report that they set all time records for the period.
Further supporting our thesis regarding the growth potential of high quality assets and mixed use environments.
As a new tenants occupy and begin to pay rent, we expect the retail portfolio will pass pre pandemic same store NOI levels sometime early next year.
As we've said on numerous occasions, there is no substitute for well located real estate, regardless of the asset class.
Moving on to office as most of you know our stabilized office portfolio is essentially fully occupied at nearly 97%.
And we have very little in the way of lease expirations through 2022.
The first material exploration is the 46000 square foot lease expiring at the same time Street office building in April of 2023.
We already have a handful of prospects and expect to seamlessly backfill the space in relatively short order.
The only meaningful current vacancy is at Wills wharf.
Office building in lease up that we delivered at Baltimore's Harbor point at the outset of the pandemic.
Last quarter, we reported that tenant activity was starting to resume as COVID-19 restrictions lifted.
We announced two substantial leases with transamerica in RBC.
Today, we are pleased to announce that Morgan Stanley wealth management is leased 35000 square feet in the building.
This brings wills wharf to 70% leased with good prospects for the remaining space.
We hope to announce further leasing later this year.
You may recall that we terminated the 70000 square foot lease with we work prior to opening the building.
Since then we have backfill that space with Transamerica, and Morgan Stanley with better than previous financial terms and better credit.
We believe that this activity.
Along with the commitment from T Rowe price to adjacency locate their world headquarters.
<unk> Harbor point of true mixed use master planned community as the premier location destination in the region for top tenants.
These developments along with the continued strength of our town Center office locations.
Further evidence of the view, we maintain our quality tenants and secondary markets will continue to seek out top quality buildings in prime locations with access to residences and services.
It's been our experience that vibrant mixed use environments will continue to sustain office occupancy over the long term.
Although the full impact on earnings of New office, and retail leases as well as the robust rise in multifamily rents won't be fully reflected into well into 2022.
We're very encouraged by the trajectory of our portfolio.
Turning to development we.
We continue to execute on our $470 million pipeline, despite the well documented supply chain and labor challenges.
This circumstance emphasizes the considerable advantages of having in house development and general contracting capability.
As well as season joint venture development partners.
By way of example.
Two multifamily projects currently underway remain on their budgets and ahead of their scheduled delivery dates.
Current projections have both projects delivering about 30 days earlier than previously committed.
Solus Gainesville began pre leasing last month and the first move ins are now scheduled for January.
Ah Chronicle mill delivery has been accelerated to late summer of 2022.
Based on the activity in these submarkets, we anticipate faster than normal lease up at both of these facilities.
These assets when combined with our new apartment development in Harrisonburg, Harrisonburg, Virginia that will commence next spring we will soon add some 700 units to our traditional multifamily portfolio.
Bringing the total count to over 3000 units.
Additionally, we have development control and Optionality with respect to our town Center Regal property.
Another prime apartment site.
We believe that this sector of our platform alone has a value of over $1 billion. We.
We also believe that investors will ultimately reap tremendous growth and value from this very significant portion of our diversified business model.
This leads me to our three student housing properties.
As we have said on several occasions, we view these assets as noncore.
And they will ultimately be used as a ready source of inexpensive capital to fund development and acquisition opportunities.
Occupancy at these properties was significantly impacted during COVID-19 and thus we don't expect full re stabilization to occur for at least another school year.
That said the assets are now over 90% occupied.
Over 97% occupied albeit at lower than pro forma rents.
However, given the attractiveness of today's cap rates, we have opted to transact on these properties and ultimately exit this category.
Our expectation is that the Johns Hopkins facility will be sold later this month.
The two college of Charleston assets are on the market and we would expect to transact early next year.
Secondly, we expect a modest gain in total.
More importantly, we expect to recycle this significant amount of capital and better yielding higher growth opportunities that we have identified and intend to transact on in the near future.
The balance of the announced development pipeline the mixed use southern post in Roswell, Georgia, and the joint ventures at Harbor point on the Baltimore waterfront continue on track to break ground around year end.
In addition to the T Rowe price World headquarters the program for the companion building a substantially settled.
This building will feature 300 departments 15000 square feet of retail space and 1300 parking spaces.
So the pipeline is robust as I previously mentioned, we continue to receive many new prospective engagements.
The amount of activity in our markets coupled with our 40 year track record have you.
And many more opportunities for high value projects across our diversified platform.
We will continue to evaluate these for selective inclusion in our pre development process.
This brings me to our construction company.
Most of you know this division of our company, primarily serves to lower costs and shorten schedules on our development properties.
That said the division contributes meaningful fee income with third party engagements.
It had dropped as perhaps its best year ever in 2020 was $7 $7 million in third party gross profits. This.
This year.
Due to a delay in construction starts as many of our clients postponed projects until later in the year, we anticipate ending the year at the low end of our historical range.
Fortunately all of those anticipated projects are now moving forward.
The effect of the delays has simply been to move more work in place and therefore profits into next year.
This activity coupled with new engagements that should be solidified later in the year, we'll probably we'll most probably see the division back to the high end of our normal range, if not beyond and 2022.
As we relayed to you with our guidance presentation from last winter. We believe that 2021 is a year when our activities would substantially increase NAV.
Through our leasing initiatives improve.
The improved quality of earnings exciting development starts.
And a de emphasis of the mezzanine program.
In short, we anticipate that our execution will build a solid base for higher earnings and dividends over the next few years and ultimately lead to a significant expansion of our earnings multiple.
We believe that we are well on our way towards delivering on those goals.
Although there are too many factors that remain unsettled to offer exact guidance for 2022.
Our expectation is that with the exception of the mezzanine program as previously stated.
Actually all segments of our business will show healthy increases next year.
We expect these trends combined with off market acquisition opportunities, we are targeting could lead to higher earnings next year.
As the company's largest active equity holder.
Management remains committed to generating long term value for all shareholders.
And I will turn the call over to Mike.
Thanks, Luke this was another strong quarter for the company starting with the earnings <unk> 27 per share and normalized <unk> of <unk> 26 per share.
Our stabilized operating portfolio occupancy for the third quarter was 96%.
Opposite 97 retail at 95 and multifamily, including student housing was 97.
Student housing occupancy is back to pre pandemic occupancy levels, which exceeds our expectation of 92%.
Same store NOI numbers reflect the momentum we are seeing in leasing as Lou discussed.
Overall same store NOI was positive 10, 5% on a GAAP basis, and eight 7% on a cash basis.
Multifamily continues its amazing performance with same store NOI, including student housing positive, 19% on a GAAP and cash basis.
Leasing spreads for the quarter were positive 12, 6% on a GAAP basis, and seven five cash with retail positive 13, 3% GAAP and eight 4% cash.
As for office. It was 100 4800 square foot renewal during the quarter and only 5500 square feet year to date.
With an office portfolio over one 3 million square feet. This metric is not a true reflection of this segment.
Okay.
We have seven development projects in various stages of development.
Wills Wharf, which is complete with only tenant build out remaining.
Two under construction and foreign pre construction as is the case of the T. Rowe price headquarters this building and the associated mixed use projects are structured is 50 50 joint ventures.
With this structure growth projects will be non consolidated joint ventures, and thereof, therefore off balance sheet.
But the JV also being a construction loan borrower.
Our current estimate of our equity requirements for the two projects at $60 million, but we're expecting this to increase as the design is being finalized.
The share of the cost of the seven development projects is $467 million.
Cost incurred as of September 30th were 184 million, leaving $283 million to complete.
We expect to fund this through expected construction loans of $191 million and $92 million through the credit facility.
The projects in pre development and are expected to start construction late this year and early next year. Therefore, the cash funding requirements around through the end of 2022.
With our current liquidity position along with the expected proceeds from the <unk> student housing sale. This month.
We will be in a strong liquidity position to fund these projects.
In addition.
The extended ramp of cash requirements together with the strategic use of the ATM program, we are well positioned to fund these activities.
As we have demonstrated in the past we may continue to sell non core assets, including the potential sale of the two Charleston student housing properties to fund our growth.
This past quarter, we financed the Thames Street office building, which was the largest 2022 maturity the new loans for five years with a fixed interest rate at 235%.
Other 2022 maturities of two shopping center loans totaling $20 million.
We intend to pay off these loans and has the properties to the credit facility borrowing base.
Our debt is a mix of fixed and variable interest rates with 58% fixed and 42% variable.
As discussed in the past, we maintain variable rate debt on multiple properties. So we have the option to recycle and sell assets to raise capital when necessary.
As you know once a property has fixed rate debt prepayment penalties can be punitive and materially affect of property value.
That said, we have a hedging program as insurance if interest rates increase.
Currently we have LIBOR interest rate caps are 50 basis points for 96% of our variable rate debt.
Our average interest rate on our debt is 3% fixed rate debt has an average maturity of seven years at an average interest rate of three 5%.
But the performance of the company, including occupancy and leasing activity, we have increased our 2021 guidance for the second consecutive quarter.
Our 2021 normalized <unk> per share earnings guidance is raised to $1 five to $1 seven per share.
Please see page six of the supplemental package for details of our 2021 guidance ranges and assumptions.
For some insight into 2022, we are expecting normalized <unk> earnings to increase due to a combination of.
Higher NOI from 2021 leasing activity during the year lease.
Leasing and tenants occupying Wills wharf.
Full year impact of acquisitions development project deliveries and higher construction profits.
Operator, we would now like to start the question and answer session.
Thank you the floor is now open for questions. If you would like to ask a question. Please press star one on your telephone keypad at this time.
Confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys once again Thats Star One to register a question at this time.
Our first question today is coming from Dave Rodgers of Baird. Please go ahead.
Hello, Mike Good morning, and thanks for all the information during the prepared comments I wanted to ask first about the acquisition pipeline I think Lew both in the press release as well as in your comments you mentioned several times the off market pipeline really growing for you guys. So I guess the thought there.
Or can you give us your thoughts sorry.
Regarding kind of that pipeline how quickly you can close and maybe how deep that is for you guys.
Sure. Thanks, Dave.
So as I think everybody knows we have two property types that lead lead the way for us.
One is our mixed use assets, particularly in these planned community developments as well as grocery anchored and discount anchored shopping centers.
Right now.
That pipeline is full.
I mentioned that we we look to be transacting on all three of the student housing facilities.
Redeploy those as those funds pretty quickly.
We're seeing we're seeing great activity in that Dave and again, it's a result of.
Being around for a very long time, having a number of people that we've done business with over the years.
And people wanting to.
To be part of the team so.
Our expectation is that between now and the end of the year, you'll see an announcement or two.
On both the acquisition and disposition front.
Okay.
Where is pricing for retail assets, I guess versus pre pandemic and I guess, maybe a second one to that is it doesn't sound like you really need to do 10 31. So are you really funding the acquisitions directly with the asset sales or should we think about that is somewhat fungible.
Yes, I don't think we need to do 10 to 30 ones with what we're talking about for dispositions like I said, most probably we're looking at a modest gain amongst those three properties.
On the whole.
The cap rates for retail as.
As well as you're probably all well know multifamily have compressed meaningfully.
Okay.
Across the board in terms of high volume retail centers.
I'm not sure what might be happening in malls or for.
Power centers, but in the types of assets that we look at.
High volume grocery anchored centers are.
At a premium.
Versus pre pandemic.
Even office space office with long term leases and desirable locations those cap rates are compressing as well.
No.
It is a challenge on one hand and on the other it's a great opportunity.
Great. Thanks for that last for me is can you update us on and maybe this is Mike I don't know, but maybe the interlock both the asset itself the progress there as well as kind of your investment and anticipated payoff there.
Yeah, I'll start and then.
Mike can give you a little bit of the statistics. So the asset is open and operating.
It's doing great, particularly on the retail side great sales.
The assets.
Over 75% leased at this point.
And so our partners are evaluating right now the best method of.
Maximizing their profits and that may be.
Sale sometime in the back half of 2022.
In which case, most probably our loan will be outstanding until then.
The way they might go is to refinance and partially pay us off.
In order to buy more time to get more stabilization and particularly some trailing.
Data on the parking garage, there, which is a huge moneymaker.
A big part of the story so.
We suspect that they will they'll make that call over the next 60 days or so.
And then we will be better able to forecast what it looks like as you know.
We are.
We really can't meaningfully resize that mezzanine program until that loan comes out of it.
But our expectation is one way or another it's going to be significantly shrunk if not all the way it paid off sometime in 2022.
Alright, Thanks Luke.
Thank you. Our next question is coming from Rob Stevenson of Janney Montgomery Scott. Please go ahead.
Good morning, guys, just a follow up on Dave's question.
Okay.
What are you guys looking at today in terms of incremental Mezz investments I know that you guys want to sort of shrink that business, but.
Are you guys contemplating making some.
Investments in the <unk>.
In the interim here, especially if youre looking like Youre going to get paid back on interlock, how should we be thinking about as we head into 2022 as to how that book of business would either decline if interlock, it's paid off all or a part.
And your guys' ability to backfill.
Or desire to.
Yeah, well as we've said in the past.
We're targeting limiting that program to about $80 million.
Obviously, there needs to be some overlap in order to have it be.
Contiguous.
Such that we are we are now looking at a couple of smaller multifamily projects with partners that we've done business with over and over in the past and so our expectation is that we'd be we'd be deploying some mezzanine money some time through the first half of <unk>.
2022.
But right now it.
It appears we will be able to succeed in getting the program to the size that we like and again.
We still love the program.
We chose to downsize it because we wanted to use more of our capital for building NAV and our own properties, but at the same time, given the development expertise our construction company.
And.
And the fees that come out of it we're going to continue on with the program, albeit at a smaller level.
Okay.
When does the new Morgan Stanley lease in Baltimore commence and what will that take your current three 4% of ABR too.
For them.
Unconvinced till late next year, right and find the lease so it's going to be a good six months before there.
They are in and I don't know the calculations on our hands on the AVR.
But they will be substantially your largest tenant at that point in time was they already are right.
Correct, Yes. This is a different group.
But yes it is.
Obviously, it's the same company, but but this is where we're excited about Morgan Stanley bringing more.
Divisions to our asset for sure.
And then what are you guys thinking about the Regal space of Columbus village stay.
Stay in movie theaters that stay with Regal is that a redevelopment play at this point with that lease expiring next month.
Yes.
Well, we know that it is a redevelopment play.
So it's not a question of of here with a question of when.
And then the bigger question there is whether we want to wait until we also get back the bed Bath parcel, which is adjacent.
And a little over four years.
If we can put those two together, we've got 10 acres for a major multifamily development.
So.
Rob we're debating whether it makes sense to go ahead and do a mid rise next year on the on the Regal portion or to wait until we get both parcels back.
I can tell you.
Obviously, you're in a cat bird seat any other way Regal wants to continue operating.
It seems like Theyre doing fine.
And so right now we have a month to month lease that either of us can cancel.
And.
I think we're just going to let it float like that until until we make the call we are anxious.
To add to the multifamily totals here at town Center.
Yeah.
And we can do that in one of three sites the regal being one of them.
Actually we could do all three obviously, but.
The decision will be which one comes first.
Just don't have that decision yet.
Okay, and then last one for me.
Given your comments about selling the student housing assets and looking at.
Some potential.
Retail.
Acquisitions, how should we be thinking about the way that the.
That you guys and the board are thinking about the sort of retail office apartment mix going forward today, I mean pre Covid you guys had a pretty sort of defined targeted goal for where you wanted to take those mixes, especially with the development pipeline delivering et cetera is that at all changed given pricing and what you guys are seeing the <unk>.
Opportunity in sort of rebound in retail.
Are you willing to go higher percentage than you were 18 months ago in terms of the portfolio mix in retail it's not changed at all and its just how you get there et cetera, how should we be thinking about that and how you guys are debating that internally.
Sure.
<unk>.
So one I just want to emphasize that we've never been formulaic and our approach its been more opportunistic.
We put the general guideline out there that we wanted to reduce the percentage of retail was which at that time was roughly half of the portfolio.
We wanted to bring that back into a third or so.
And Thats Thats still our thinking but at the same time.
Every every grocers that we deal with is in expansion mode and are showing record sales. So.
I wouldn't be opposed to and we're actively talking about whether or not we want to expand that grocery portfolio at the same time and I want to emphasize this.
We've seen once again like I said earlier. This is our fifth recession, we've seen once again, how mixed use assets come through these recessions.
And.
We think it's only going to only accelerate.
Now that people are much more conscious about times, they spend commuting or or in worst case actually commuting on public transit.
Versus being able to do multiple things with their lives in the same location. So I'd say.
Rob that we are more focused on additional mixed use assets.
Both from a development pipeline standpoint, as well as an acquisition standpoint.
So.
That should end up yielding the mix roughly in that third a third and a third.
But we certainly arent going to just try and hit a target artificially.
Rather than be opportunistic.
Okay. Thanks, guys I appreciate the time.
Thank you.
Thank you. Our next question is coming from Jamie Feldman of Bank of America. Please go ahead.
Great. Thank you and good morning, I was just hoping you could provide some more color just on Baltimore office demand.
What do you think in terms of the pipeline for the remaining space you have and then maybe just more broadly across the different submarkets there.
In terms of our remaining space Jami.
We're looking forward to Wills wharf leasing effort being concluded here in fairly short order.
What's left is basically two floors in the building.
We've got four tenants right now that we're actively engaged with.
So our expectation is to have another announcement by the end of the year.
If you're familiar at all with that with that market.
You know that the <unk>.
Waterfront.
Is where that migration is going to.
In particular harbor east as well as hardware point.
That's going to continue to be healthy the firms that make Baltimore home want to stay in Baltimore.
The city also has considerable efforts underway in order to attract more people to the city and if they come there'll be coming.
Waterfront. It's also significant to note something that happened a couple of quarters ago that the governor announced that they were going to be bringing 3300 employees into downtown to take up some of the old CBD space, that's well over 1 million square feet, it's going to be occupied by state employees.
While that won't directly affect our development. It certainly helps the entire sub market. So we're very bullish on Baltimore and in particular at Harbor point.
We're looking forward to.
More office more retail and more multifamily.
Alright. Thank you that's helpful. And then as you think across your property types can you just talk about where you are pushing rents. The most where do you think you have the most pricing power and.
And I guess you can include the concessions.
On the Opex side.
Sure on the.
But right now it is far and away it's on the multifamily side.
Basically we are.
I think the last report I looked at last week had is at 98% leased.
And as I mentioned earlier, averaging a 9% increase over the last quarter.
In new leases, so that's where you have the most pricing power.
In our assets this isn't.
I assume that Susan nationwide, but in our markets.
That's what's on fire in terms of office.
We're seeing good increases.
Again, we don't have much space available.
But for instance, the one vacancy we've got coming up.
If you can say that 18 months from now is coming up.
We are talking with several tenants and our expectation is that we're going to refill that space.
Tim Street office at a fairly in a fairly significant increase over the current rate.
So.
Again, I don't it's probably not.
Not the conventional wisdom out there, particularly with folks that are dealing with great gateway cities.
Then in our markets the best assets seem to be continuing to attract the top tenants and if you think about it. It makes sense. If you do need office space and I think we all recognize that footprints are going to be somewhat reduced.
But if you are a top tenant that is looking to attract top staff and you do need office space, It's got to be in a good location or else youre going to fall behind and so that's why we're going to stick with the a locations in the top quality buildings.
Okay. Thank you and then I guess finally for me. So you still have we work as your third largest tenant and in our supplemental and office.
What do you think changes with them going forward in your portfolio do you think they shrink over time, you're going to grow over time.
Then.
Do you think they just from a competitive.
<unk> is there some overlap with what Youre trying to do for your tenants with what Theyre trying to do.
Again, we've only got one tenant.
We work lease and Thats in Durham, North Carolina, and then as you know.
Just went public and they seem to be doing doing fine.
We think that and again, we're not any more pressure than anybody else but.
Before the pandemic people were thinking that high single digit or low double digit amount of class a office space was going to be co working space.
Personally we believe that once the pandemic.
Thank God will be in the rearview mirror whenever that happens.
That percentage probably is true I think people will continue to look for the flexibility of short term leases I think a lot of people that are working from home will want to have an office to go to on occasion.
So I think it's going to be it's going to have.
Our niche in the marketplace.
We have we have another co working.
Entity here at town Center.
And about 30000 square feet.
It's wonderful.
They've attracted four companies that hopefully that are trying to get.
Initialized in the area and once they do hopefully will be a candidate for office space in one of our buildings. So I think it can work hand in glove.
But again, it's just not going to be a major piece of our portfolio that we work lease.
As I recall with a 15 year lease so it expires sometime in the next decade.
So it's really not not on our radar screen.
Okay, I mean do you think.
To create your own.
Flexible lease product.
It is in your portfolio you'd rather outsource.
Yes, I think we'd rather outsource it Dave.
Our model is complicated enough without having to report on Howard.
How we're doing on a monthly basis with.
With single a single user tenants.
No that would.
If we if we continue to add to that it would be with an operator, who does that for a living.
But again I look for it to be.
Mid single digits.
Of any of any healthy portfolio.
Okay alright, thank you.
Thank you.
Thank you. Our next question is coming from Peter Abramowitz of Jefferies. Please go ahead.
Okay.
Alright. Thank you most of my questions have been asked but just had one on development here.
Noticed you had looks like an increase too.
To your investment at Harrisonburg.
Multifamily development there.
Anything that was driving that and is there anything related to cost increases or is it just kind of a change in the scope and scale of the project.
Yes, Peter.
Actually I appreciate the question gives us a chance to Crow about our team. We've got a we've had a crack development team on the multifamily side and they've been working and working and working and found a way to include.
A significant number of extra units on the property.
So.
What was it Mike $40 228 units to 266 units.
Current designs they.
So we picked up 38 units there. So we're very excited about that.
Got it.
Any change and how that impacts.
Impacts your development yields.
And then any general commentary on how Canada.
The current environment.
In terms of cost pressure.
Is impacting your underwriting.
Well.
Obviously, there are cost pressures out there.
And this is another reason why we're so excited about what our team did there because we're adding 38 guiding 15% more units with exactly the same land costs.
So it takes the staying out of some of the some of the construction increases.
Again, we're not any more pressure than anybody else, but what we're seeing seems to be a stabilization, albeit at a high level.
Are starting to stabilize.
Instruction materials and labor.
And hopefully that hopefully that will hold I don't know that anything is going to be retreating anytime soon.
Which again.
It makes us even more bullish on development because as you know replacement costs are going to be going through the roof.
Sure that's helpful. Thank you.
Yes.
Thank you. Our next question is coming from Bill Crow of Raymond James. Please go ahead.
Hey, good morning, I wanted to follow up on Jamie's question.
About Baltimore.
Investors tend to take markets with a broad brush and not necessarily breaking into submarkets.
I think the best Baltimore is thought of as neutral.
And I'm just wondering how much more capital you could see putting into the market.
No we intend to fully build out harbor point over time.
And consolidate our investments there.
Yes.
It's very similar to what we're doing in Virginia Beach, I don't think Virginia Beach is.
Is on the top 10 list of investment for for investors nationwide by any stretch at the same time the extremely label extremely stable historical location.
As is Baltimore.
Always going to have a strong tenant base.
And if you have the a location with the top assets, they're going to stay full and continue to grow we've seen that over 20 years here at town Center in Virginia Beach.
We've seen it over the last.
Practically 20 years at Baltimore's Inner Harbor, and we don't have any reason to believe that's not going to kind of continue the one caveat I would I.
I would say to that is you've got to be careful about adding too much space.
Because you can't confuse full buildings with more demand coming from the outside and so Fortunately both.
Both at Harbor point as well as town Center of Virginia Beach, We control the available land and so theres not going to be a danger of overbuilding.
You are very good for instance, right now we have two tenants that are asking us as well as the city of Virginia Beach to launch another high rise development here at town Center.
We may do it.
But we're not going to do it until we feel comfortable that the remaining space.
As opposed to that anchor.
<unk> is going to be filled.
At an advantageous rate for us.
We have no desire to gross base up in the air only to discount it later.
We've been really good and diligent about doing that in the past, we're going to continue doing it here as well as in Baltimore, and I think youll see that those buildings with Stifel.
Could you Erik must be made though that investing more in Baltimore at town Center, and you say that the market Center.
Off the radar screen for most investors does not necessarily lead to the best cost of capital going forward.
Investors May not award you for what you're doing in those markets as much as maybe some other markets.
Or more geographic diversification.
Sure again.
Bill we want to keep the boat in the middle of the channel and that's why we have strong efforts going on in Charlotte and Raleigh and Atlanta.
As well as a couple of a couple of others.
And so we want to keep that balance at the same time, we want to take advantage of our strengths and our strengths are these are these master planned communities.
We're all three asset types feed on one another the best thing I can say there and again, it's it's.
Its my belief more than anything else and it's something that the board and our chairman, Dan Hoffler, and as well as our executive team all share.
Is that investors are not going to be able to argue with the results.
And the results are increasing rents, increasing NOI, increasing earnings and increasing dividends.
And as long as we can keep that story front and center.
I think they will recognize at least I would like to think that they will recognize.
That we know what we're doing in those markets that we are that we are well versed in.
Alright, Thanks, guys I appreciate it.
Thank you Bill.
Thank you at this time I would like to turn the floor back over to management for any additional or closing comments.
Okay.
Everybody. Thanks, very much for your attention this morning.
We hope that you'll take the time to go through our supplemental.
Out of our results and what's going on at the company.
And we also to be back in touch before the end of the year with more exciting announcements. Thanks, again and have a great day.
Ladies and gentlemen, we thank you for your interest in Armada Hoffler properties. You may disconnect your lines of log off the webcast at this time and enjoy the rest of your day.
Okay.
Sure.
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