Q1 2022 Armada Hoffler Properties Inc Earnings Call
[music].
Greetings and welcome to Armada Hoffler properties, Inc. First quarter 2022 conference calls.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Reminder, this conference is being recorded.
Now my pleasure to introduce your host.
ELC forests director of corporate Communications and Investor Relations. Thank you you may begin.
Good morning, and thank you for joining Armada hoffler, its first quarter 2022 earnings conference call and webcast on the call. This morning. In addition to myself is Lou Haddad CEO , Matthew Barnes Smith, CFO , and Sean Cabot's C O L dopa.
The press release announcing our first quarter earnings along with our quarterly supplemental package were distributed this morning.
A replay of this call will be available shortly after the conclusion of the call through June 3rd 2022.
The numbers to access the replay are provided in the earnings press release.
For those who listen to the rebroadcast of this presentation. We remind you that the remarks made herein are as of today may three 2022 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 the impact of acquisitions and dispositions, our mezzanine program, our construction business, our liquidity position our portfolio performance and financing activities.
<unk> as well as comments on 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.
These risks and uncertainties can cause actual results to differ materially from our current expectations and we advise listeners to review the forward looking statement disclosure in our press release that we distributed this morning, and the risk factors disclosed in the documents that we have filled with and furnished to SEC.
We will also discuss certain non-GAAP financial measures, including but not limited to <unk> and normalize at that though definitions of these non-GAAP measures as well as reconciliations of the most comparable GAAP measures are included in the quarterly supplemental package, which is available on our website at Armada Hoffler dotcom.
Now I'll turn the call over to Lou.
Thanks, Jessie most of you will get the chance to meet Chelsea in person. This June at NAREIT.
She has done a fantastic job for us over the past few years and building first class platforms for our marketing communications and ESG efforts.
Looking forward to similar results as we upgrade our investor relations function.
And as many of you are aware Michael Hara made his plans for retirement official last month resigning from the CFO role at that time.
Mike has been an outstanding member of our team for over 25 years as well as the close confidant and friend.
It will certainly be missed and his former capacity.
I am thrilled that he will remain at the company for the rest of the year with primary responsibilities to oversee the development progress at our major investments at Harbor point.
Okay.
Today Youll also hear from Matthew Barnes Smith, our new CFO , who has been mentored by Mike for the last 20 months in anticipation of this planned transition.
Matt is an experienced senior level executive.
Brings new energy and a fresh perspective to the organization.
During the past 20 months.
Matt has demonstrated to the board that he is the right person to lead our finance team and manage our balance sheet.
I look forward to working with Matt in the years to come.
My full confidence.
This morning, we reported 28 cents of normalized <unk> for the first quarter, which was above our previous projections.
More importantly, as you can see from our earnings release.
We have substantially raised our earnings guidance for the year.
This increase is primarily due to the sustained upward trend in virtually every leasing metrics across our portfolio over already robust levels.
Whether it's high single digit increases in same store NOI re leasing spreads and apartment trade outs or portfolio wide occupancy at 97%.
The pace of organic NOI growth from our properties is unprecedented in our 40 year history.
We believe that this is a result of our continued emphasis on a plus properties in each of our asset classes.
Whenever you see one of our properties you are likely looking at the newest and best in class in that sub market.
Be it the whole foods center in Delray Beach.
150 apartment units at the town Center of Virginia Beach.
The Exelon building at Baltimore's Harbor point.
We believe these types of assets, we own office retail or multifamily will outperform the competitive set through most any business cycle.
Nearly as important as rising rental income.
Has the ability to preserve earnings in the face of higher interest rates.
As those who have followed the company closely know our strategy of keeping our debt virtually 100% fixed or hedged has been a trademark of armada hoffler for many years.
Our expectation is that our net interest expense will be largely unaffected for the remainder of the year due to the fixed rate long term debt on many properties as well as the protection from hedging instruments, which effectively capped the expense on our floating rate loans well into 2023.
Matt will give you a bit more color on this topic later in the call.
These factors rising rents and stable debt.
And bind with an ability to raise inexpensive capital through the sale of premium quality non core assets.
Support our belief that 2022 earnings will eventually skewed towards the high end of the increased range.
Let's now go over a few highlights in our various sectors beginning with multifamily.
This segment continued its outstanding performance through the first quarter.
With occupancy at 97% and same store NOI topping 15% the assets continue to exceed all expectations.
Our solid Gainesville project came online in late January with 223 units.
These apartments are already nearly 70% leased and we expect the asset will reach full occupancy by year end.
Next up will be Chronicle mill outside of Charlotte North Carolina. This.
This 244 unit mixed use asset will begin pre leasing later this quarter with delivery by end of summer.
Based on the occupancy levels present in that sub market, we expect another swift efficient Lisa.
As we've said on numerous occasions, our growing multifamily portfolio is a tremendous source of value that is yet to be recognized by the market.
And oversight, we expect will be corrected over time.
We continue to see strong demand for our office properties with occupancy at 97% and little rollover over the next 12 months. Our biggest challenge. This year is accommodating the tenants that are looking to expand.
What we've seen over the last four decades remains true today.
Quality buildings and mixed use environments located in desirable sub markets stand the test of time.
By way of example.
Wills Wharf the office building, we brought online at Baltimore's Harbor point at the outset of the pandemic has signed several high quality tenants, including Transamerica E Y Morgan Stanley in RBC.
Currently we are negotiating two leases with credit tenants that would bring the building to over 90% leased.
At the adjacent Thames Street Wharf, we're also in lease negotiations with a top flight company to substantially backfill that 2023 lease exploration of the Johns Hopkins space.
Even further evidence of the state of the market at Harbor point is the recent announcement that T. Rowe price has increased their lease commitment for their global headquarters to 550000 square feet from the original program of 450000.
That project broke ground as scheduled early last month and is scheduled to deliver in the spring of 2024.
This new headquarters represents a significant increase to T. Rowe Price's current footprint in Baltimore.
Retail tells much the same story.
At 97% leased and little anticipated turnover, we look through positive leasing spreads for continued growth.
This quarter spread of 12% is ample evidence of the NOI growth in our retail properties.
Our expectation is that moderate increases in renewals will continue to be the case through the end of the year.
With the overall portfolio are performing at an extremely high level.
And the debt on those stable assets are comfortable five six times EBITDA.
We anticipate continued moderate growth in portfolio income over the next few years.
As most of you know the remainder of our debt is primarily funding our development and mezzanine activities.
We view these commitments as relatively short term.
Another way.
If we were to sell our development projects at cost and the mezzanine loans were paid off the remaining core company would be levered at virtually the same mid five times EBITDA than it has been for the past few years.
Later in the call, Matt will explain as clarification and other enhancements to our supplemental financial package.
Speaking of development.
The primary driver of what we believe will be superior earnings growth will come from what is now the largest development pipeline in our history.
Let's review some notable changes in those projects.
First as I mentioned previously the T Rowe price global headquarters has grown by over 20%.
This has necessitated an increase in our equity commitment to $42 million in order to maintain our 50% JV interest.
Additionally, we have decided to increase our stake in the adjacent 300 unit apartment asset to.
The 90% requirement, a total investment of $74 million.
This project combined with a 400 units, we currently own and the option to construct the second tower on the site will.
They'll give us nearly 1000 waterfront apartments at Harbor point.
All located on the same campus as 10 acres of parks and open air plazas over 100000 square feet of retail space and over 3500 employees.
These investments combined with the previously disclosed projects, bringing our development book to over $700 million.
The vast majority of which is multifamily assets in a plus locations.
We believe these additional investments will further support the forecasted 50% rise in company NOI at pipeline stabilization that was included in our guidance presentation last quarter.
As we all well know NOI growth, while important becomes largely meaningless if it doesn't translate to increases in NAV and earnings per share.
And our position as the largest active holder of the company's equity.
Management is ever mindful of the cost of capital necessary to fund our activities.
And the effect it will ultimately have on our profitability as well as the need to minimize equity dilution.
To that end, we are making appropriate adjustments in our game plan to take full advantage of current market conditions, while maximizing long term shareholder value.
But we still intend to acquire two small grocery anchored centers on an off market basis.
The vast majority of the previously earmarked acquisition funds will instead be used to satisfy the increased equity requirements at harbor point that I just described.
More notably.
We intend to fund the remaining equity requirements of our development activities with proceeds from selling additional non core assets.
Two factors have led to this decision.
First and foremost with the stock trading at a level far below what we believe to be true value.
We have no desire to sell any equity at anywhere near these prices.
Secondly.
We have nearly $200 million of noncore assets that we believe will bring premium prices in the current market environment.
Selling these properties at cap rates in the four 5% range is by far the cheapest cost of capital available to us and should have little if any impact on earnings.
These cost effective funds should virtually fulfill the remaining equity required to complete the current pipeline and further ensure our development spreads.
Thereby allowing more of that projected dramatic increase in NOI to flow through to the bottom line.
For four decades, we've been extolling the virtues of mixed use assets, a diversified portfolio and the advantages of self performing development and construction.
For the five years preceding the pandemic.
Investors embrace this approach, which presumably lead to our company tripling the returns of the REIT index over that period.
We believe that faith was more than justified and we are fully prepared to prove out our thesis once again with performance over the next five years.
Now I'll turn the call over to Matt for some additional detail on the quarter.
Good morning, and thank you lose it is a distinct privilege and honor to serve as the CFO of the organization that Mr. Hoffler and you created a truly appreciate the confidence that you and the board have placed in me and I look forward to working together to grow our company in the years to come we have some exciting updates to share with us.
Strong performance this quarter the perfect starting point to this new chapter.
For the first quarter of 2022, we reported SSO or 31 per share and normalized <unk> of <unk> 28 per share.
As <unk> stated our outperformance in and SSO issue to virtually every core real estate metrics across the portfolio continuing to trend positively.
We have therefore increased our guidance range accordingly to $1 15 to $1 19 per share from our previous midpoint of $1 13 with multiple increases across the entire organization.
Before I jump into the details surrounding our financial performance I'll take a minute to discuss this quarter's supplemental financial package, which we released this morning and can be found on our website.
Similar to previous years this quarter, we have embarked on our annual refresh of the supplemental package, specifically looking to provide additional transparency with our leverage metrics.
Please bring your attention to page 12, where you will see an updated debt to EBITDA page.
Here, we have broken this metric into three separate and distinct buckets.
Firstly as Liv alluded to earlier the bar on the left illustrates our stabilized portfolio debt to EBITA ratio at five six times. This is consistent with the average over the last three years, highlighting the conservative posture of our balance sheet.
The bridge in the middle demonstrates our temporary leverage with all ancillary activities inclusive of mezzanine lending and development spend.
Final segment also adds a preferred stock, bringing our total debt plus preferred to EBITDA to eight five times.
In other sections of the supplemental package our team is condensed and simplified much of the information that you are all used to reading.
The comprehensive details can be found in the appendix, where we've provided a wealth of information to evaluate our business performance.
Moving on to our first quarter results, our strong operating performance across all segments can be measured with our robust operating metrics for the first quarter, we achieved 97% occupancy across each segment of the stabilized operating portfolio, resulting in an all time high portfolio wide.
In April we have completed the sales about two Charleston student housing properties exiting the student housing asset class.
Taking advantage of the value of our strong occupancy pre leasing activity and favorable market conditions allows us to recycle this low cost capital from our non core assets as alluded to earlier by Lee.
The disposition of our last remaining student housing assets, coupled with the disposition of Johns Hopkins village last quarter cement saw financing strategy deploying capital surgically and the highest and most advantageous prices.
For quarter, one our overall same store NOI growth was seven 3% on a GAAP basis, and nine 4% on a cash basis, demonstrating our healthy leasing growth portfolio wide and strong releasing spreads.
Multifamily was significantly positive at 15, 2%.
We continue to see this segment of our business outperform and anticipate increasing renewal rates given the high quality of our portfolio commercial releasing spreads were also positive for the quarter at 11, 7% GAAP and three 3% cash.
As Lou referenced in his remarks, the combination of our loan maturity ladder to include our hedge positions average interest rates and debt service coverage results in our fixed charge coverage ratio of two six times, we are very comfortable with our debt levels.
As interest rates continue to rise we will continue to monitor the environment to ensure we layer a new hedge positions when our current set of physicians mature. These caps as illustrated on page 13 of the supplemental will roll off throughout 2023.
With respect to the $175 million of floating rate debt secured by the Exelon building acquired at the beginning of the year, we entered into a hedging corridor effectively capping this notional amount at 100 basis points as.
As we continue to experience market volatility and federal bank rate assertions, we have confidence in our company stable position with 100% of our debt fixed or hedged.
Looking forward to 2023, we are starting to work with our lenders to secure refinancing of two notes maturing in the opening months of next year.
The progress of our development pipeline and our liquidity position coupled with current market conditions.
Describe our direction with the three town Center of Virginia Beach retail notes that mature in August of 2023.
As previously mentioned when I discuss the supplemental package refresh we expect to maintain our stabilized operating portfolio leverage at or around five five times debt to EBITDA. This.
This metric was five six times for quarter one.
Any additional temporary upticks for our ancillary activities will be included in the ancillary debt to EBITDA ratio, which is seven four times for quarter. One over time as these temporary activities finalize those components of our ancillary leverage will move into our stabilized operating portfolio debt to EBITDA.
At appropriate levels.
One of the key themes over the last 12 months has been the rebalancing of our portfolio with a reduction of our mezzanine book strategically selecting projects that we would like to <unk> and that require an investment of preferred equity in the region of $15 million to $30 million.
One of these such projects Solar City Park closed in March where we transacted on a preferred equity operating agreement with our strategic partner to will it gets past us.
We are committed to contribute roughly $20 million to this 250 unit $62 million multifamily development outside of Charlotte North Carolina.
On the interlock in West Midtown Atlanta, our largest mezzanine investment we still anticipate the sale of this asset later this year or early next.
Our liquidity position continues to be strong at over $120 million more than sufficient to cover our 2022 cash requirements for our development pipeline projected acquisitions and preferred equity projects.
This combined with the potential sales of noncore assets places the organization in a great position to earnings growth per share as noted in updated guidance.
Finally to close the loop on our increasing guidance, we expect our strong operational performance to continue through the fiscal year, particularly in the multifamily segment.
I'm confident that quarter, one financial results, our strategic hedging plan and fiscally responsible use of capital sets us up for a superior 2022 performance.
I will now pass back over Saturday.
Thanks, Matt Operator, we would now like to begin the question and answer session.
Thank you.
Ladies and gentlemen at this time, we will be conducting a question and answer session.
I'd like to ask a question you May press star one on your telephone keypad.
If you'd like to remove your question from the queue you May press star two.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
One moment, while we poll for questions.
Our first question comes from the line of Rob Stevenson with Janney.
Please proceed with your question.
Hey, good morning, guys.
What are the 10 try on plans.
At this point the supplement is still TBD.
And when do you expect to break ground is that a late 2022.
Stock is at a 23 at this point, how should we be thinking about.
When and what Youre going to build there these days.
Yeah.
Yes.
Good morning, Rob.
Thanks for the question as I've mentioned, a couple earnings calls ago.
<unk> was originally cast as an office building.
With a lot of spec space.
With a publix grocery store down below and a parking garage.
As I mentioned.
Again, a few quarters ago, we arent comfortable coming out of the pandemic with new office space in that area. This is a great example of why.
While we are diversified and have development and construction capability.
I'll, let Sean answer the question specifically on what our new plans are yes. Thanks Lou.
Yes.
<unk> point, we we pivoted away from the office product in that market for good reason and.
But want to keep the publix grocery component of that project in play so.
So we're working with public and we're also working with the adjacent land owners to put the right solution in place as it relates to.
The product site there so.
We will have more to report we think next quarter, but we certainly like to get in the ground. This year and start that project moving forward, but I think the best way to answer that question is we've reinvention that where the publics and alongside the adjacent property owners with the right product type there and we'll have more to report over the next.
Yeah.
Market supportive of high rise apartments.
It is.
And that probably end up going to end up being a factor it's going to be a mix.
Mix mix of uses as we typically do.
We're just going to weighted more towards one or the other property types again. There are there are adjacent departments that are doing quite well and we're and as John mentioned, we're in conversation with those adjacent landowners to come up with the right solution and price points.
Okay.
And then operationally I mean, you guys seem to be.
Doing well at this point, but just casting into the future as you start to backfill the pre development pipeline and look for other acquisitions.
Et cetera, how are you and the board look thinking about your exposure to Baltimore is specifically your desire to start new projects there beyond the T Rowe and the various related developments in and around that same area.
We're hearing one of the key factors prohibiting some people from return to work is safety concerns and crime and obviously Baltimore gets a lot of bad press on that standpoint, how do you think about the risk mitigation to one market specifically.
The Virginia Beach area and then how are you guys thinking about how much capital you would want to invest in any given market or most of your future development is going to wind up being in some of your other markets.
Down at Inner Harbor Harbor East Harbor point Fells point.
We've had great success.
With the security of the area.
As well as.
New residents coming in virtually.
Unmatched pace, which is which is why we're continuing to build there beyond the two buildings that that we've talked about that are in the pipeline. There is one premier site left on Harbor point.
That's going to be held in reserve by by our partner BD development.
Till the right users come along.
But and we will take a look at it Dan as to whether we want to whether we want to participate in that my guess is we probably will.
That submarket has proven to be exceedingly strong as I mentioned in my previous remarks.
The demand has been off the charts be it office retail or multifamily and I think as evidenced of what's going on there.
They are at the waterfront in Baltimore.
Is also underway a lot of new.
New plans with regard to the old CBD.
The Governor has announced moving 3300 state employees and to the old CBD.
The original inner Harbor building has just changed hands.
Developers planning on a re.
Rehab of that facility.
Just a tremendous going on.
This amount going on in that market remember this is a greater Baltimore was a $3 5 million person area.
Is 35 miles from DC and.
Corporations are finding it to be a low cost alternative to trying to locate in northern Virginia or in Washington D. C. So we're still very bullish on the area I'm not sure that we will be investing much much beyond what we're doing now.
But we're very comfortable with what we have.
Beyond that.
As you know Rob we are looking to expand the town Center, Virginia Beach.
We are again bursting at the seams there as well.
And we're also.
We're also very bullish on the rest of our markets, we're looking at new opportunities in Charlotte and Atlanta.
As well as Charleston, and so.
We've been we've been blessed with with with everything that's going on in virtually every market that we're that we're dealing with with regard to restocking the pipeline we want to digest this three quarters of $1 billion.
First but.
At this point, it's really just selecting from the opportunities that are that are presented to us.
We don't have a marketing staff, we don't need a marketing staff.
In terms of sourcing new opportunities our partners in those various markets are extremely active.
I'm very bullish on what's going on.
Alright, and then last one for me the 25% to $35 million of grocery anchored retail acquisitions has that been identified or is that a placeholder for later in the year and can you talk about what you guys are seeing in terms of cap rates both on the buy and sell if you were to sell some of your assets versus what's out there in the marketplace.
If anything materially has changed given the the material rise in interest rates.
We haven't seen any movement in high quality assets, particularly with long term leases with credit tenants.
The what we've identified in terms of those off market acquisitions.
About four or five candidates and we're going to pick the best two or one or three.
That present themselves.
As.
As I think we mentioned.
We really want to focus on grocery anchored.
With good credit on the grocery side and not a lot of small shops, which is a hallmark of our of our portfolio.
Yes at some point, we would expect that cap rates would moderate even on the highest quality stuff.
As you might expect the the high leveraged buyer.
Is exiting the market.
However institutions are still very very bullish on long term credit in multifamily so.
That's what I had mentioned earlier, we're going to take full advantage of that.
We expect that we're going to transact.
Well below 5% on a few of the assets that will basically provide the funds to to support the pipeline.
Okay. Thanks, guys I appreciate the time.
Thank you Rob.
Our next question comes from the line of Chris Sakai with singular research. Please proceed with your question.
Hi, good morning.
Just a question on <unk>.
Were the main drivers on the same store multifamily NOI increase.
It's.
I'll ask Matt to take a look at the specifics but.
It really is.
The board, Chris, whether it's Virginia Beach or.
Or.
Or Baltimore.
We're seeing healthy trade outs in the high single or low double digits.
Increases when those things turnover.
And as far as the people that are that are staying.
It's a double digit increase I really can't.
We really can't distinguish Matt is there.
Is there anything that jumps out.
Two areas that we really saw the kind of jumped out.
For this quarter was in the multifamily segment, we had very strong increase in occupancy, adding and increasing rates and those releasing spreads.
Really across the board both in our Baltimore area and here in Town Center, Virginia Beach also in the office space. We we performed very well in our Baltimore segment as well that was more due to our operational performance some reduction in real estate taxes Onyx.
On expenses there Chris.
Chris If you would like some some really high level specific details you want to set up a call with us. After the fact, we're more than happy to go through the the fine details with you.
Yeah.
Okay, Great and then.
Occupancy at Wills Wharf.
Back to the 90% in Q2.
We expect that those leases will be signed.
Signed this quarter.
Again with.
<unk>.
With the state of.
One moment, ladies and gentlemen.
Ladies and gentlemen, we are sorry for the technical difficulties.
This does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.