Q2 2022 Armada Hoffler Properties Inc Earnings Call
Greeting.
Welcome to the Armada Hoffler properties, Inc. Second quarter 2022.
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A question and answer session will follow the formal presentation.
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Thank you Floris.
Corporate communications and Investor Relations. Please go ahead.
Good morning, and thank you for joining Armada Hoffler second quarter 2022 earnings conference call and webcast.
On the call. This morning. In addition to myself Lou Haddad CEO , Matthew aren't Smith, CFO , and Sean Tibet C O O.
The press release announcing our second 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 September four 2022.
The number 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 August four 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 as well as <unk>.
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, 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 <unk> thought though.
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 I will now turn the call over to Lou.
Thanks Chelsea.
Good morning.
As you have probably already seen from our earnings release this morning the <unk>.
Second quarter reflected another strong performance from the company.
Results were above our expectations for the third consecutive quarter and we have once again raised our full year guidance.
Our midpoint of $1 18 is fully 10% above last year's results.
These increases are primarily due to the sustained upward trend in virtually every leasing metric across our diversified portfolio overall.
But we're already robust levels.
Whether it's high single digit increases in same store NOI commercial releasing spreads and apartment trade outs or portfolio wide occupancy setting another record of 97, 3%.
The pace of organic NOI growth from our properties continues to accelerate.
We believe that this is a result of our continued emphasis on a plus properties in each of our asset classes.
When you have premium properties amongst limited peer competition you.
We have the ability to sustain premium risk to virtually any macro economic backdrop.
Taking advantage of a flight to quality has always been central to our strategy.
We believe the types of assets, we own <unk> office retail or multifamily.
<unk> outperformed the competitive set through most any business cycle.
What we've seen over the last four decades remains true today.
High quality facilities and mixed use environments.
And desirable Submarkets stand the test of time.
This is why the Virginia Beach Town Center has had very little vacancy across all asset types for over 20 years.
Why global companies continue to flock to harbor point in Baltimore.
Real estate has always been a show me business where.
Where the results should speak for themselves.
We're very comfortable with that premise.
Put another way.
We expect our buildings to maintaining the highest rate and occupancy in every one of our core markets regardless of the asset type.
Later in the call Matt will give you some highlights of the quarter.
Details of our updated guidance and the new developments in our finance strategy.
I will use my time to rig counts the major events of the last few months as.
As well as our expectations going forward.
Let's review some of the statements we issued in our last earnings call.
We told you that in light of the continued undervaluation and our share price.
We have decided to sell a few non core assets to fund the remaining equity required for our active development pipeline.
We relayed our expectation that those properties would yield a four 5% cap rate on sale.
The transactions are now complete.
With gross proceeds of $177 million, the majority of which was from the sale of the residences at Annapolis Junction.
At a 415 cash cap rate based on trailing 12 months NOI.
Resulting in a total blended four one cap rate.
The execution of these dispositions in the midst of a very unsettled market.
In the case of sort of value contained in our portfolio.
Well not surprising.
Needless to say we are very pleased with these results.
As previously stated we have no further need for capital through the end of the year and beyond these low cost funds largely satisfy the remaining equity needs for our developments.
Collectively the projected return on cost of the new assets under construction is substantially higher than the cost of those funds as.
As a result.
Of the anticipated income from our development pipeline is expected to translate into future <unk>.
For future needs.
Equity markets for Reits remains unsettled, we will continue to fund our growth.
Through similar high value non core asset sales.
Last quarter, we told you to anticipate another high credit Global company, taking space and Wills Wharf at Harbor point.
Bringing the property to stabilization.
In June we announced that Franklin Templeton has leased 60000 square feet in the building, which will bring occupancy to 91%.
As we have said on multiple occasions the competition for space in our Trophy office properties is very robust.
We realize that the demand we are experiencing in our office portfolio is counter to the narrative surrounding major markets, where high value tenants have multiple options for class a space.
But the simple fact is that trophy buildings in our target market space limited competition.
Top tier tenants intent on using the workplace as a showcase for attracting and retaining talent.
Consequently, the most pressing issue facing us in the office portion of our portfolio.
The receivable future is accommodating our existing tenants with expansion plans.
Our asset management team is now fully engaged in re leasing a few anticipated 2023 and 2020 for vacancy.
We expect to have further news on those efforts by our next call.
Next up.
We previously reported that our apartment project in Gainesville, Georgia with leasing up much faster than anticipated and that we expected it to hit stabilization by summer's end.
This satellite city in the greater Atlanta region.
Seen tremendous growth over the last decade.
Our project is located in the heart of a thriving downtown.
Today, we're pleased to report that the project is 98% leased.
So the time frame of six months from start to finish.
This may have been the fastest multifamily lease up in our history.
Accordingly.
This asset along with the Wills Wharf office building.
It's been moved off of the active development page of our supplemental information package.
Please note that the remaining active projects in development are predominantly comprised of properties or office space committed to credit tenants on long term leases.
In addition, we are evaluating a number of other development opportunities.
The majority of which are in the multifamily sector.
Tom on acreage we already own.
Tom brought to us by development partners.
Only those projects that meet our criteria for long term growth and profitability will make it through our underwriting and onto the active development list.
Our CLO, Sean pivot here to answer any questions you may have on our development activities and what we're seeing in the marketplace.
Combined all of the factors I, just mentioned with retail NOI and multifamily rental rates at all time highs.
We come to understand the continued rise in our topline numbers.
Of course in order to see those funds filter through to <unk>.
Control of expenses and debt service must remain a priority.
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.
Last quarter, we told you that we expected our net interest expense would be largely unaffected by rising rates for the remainder of the year.
Due to the fixed rate long term debt on many properties as well as the protection afforded by our hedging instruments, which effectively capped the expense on our floating rate loans into early 2023.
As Matt will detail later in the call by employing a blend and extend strategy with our existing derivatives we.
We have now capped our exposure to interest rates interest rate volatility until 2024.
This action along with strong topline growth and strategic debt Paydowns will go a long way to assuring the upward trajectory of our earnings continues.
Today's report marks an important milestone in the evolution of our company.
With the upward revision in our guidance.
We now anticipate that 2022 earnings per share will eclipse 2019 levels.
Perhaps as important this represents a double digit increase over 2021 levels.
Long time investors may recall that at the outset of 2020.
We unveiled an ambitious plan to better position the company for long term growth.
After significantly outperforming the REIT index for five years and with the share price at all time highs nearly reaching $20.
We decided to take several incremental steps to further strengthen the company for the new decade.
Reducing the percentage of NOI derived from older retail centers, reducing the contribution from mezzanine interest income.
Increasing multifamily sector revenue.
Increasing the percentage of rent derived from high credit office tenants.
And ultimately, adding liquidity to the balance sheet.
These were the major objectives detailed in the plant.
At that time, we thought that these actions could lead to a year or two are fairly flat earnings and a somewhat stagnant share price in the high teens.
We obviously did not factor in a two year worldwide pandemic.
After taking the necessary measures to successfully steer the company through an unprecedented period of disruption and uncertainty.
We were determined to see the initiatives through despite the upheaval.
Having navigated through several previously previous major downturns over the course of 40 years.
We believe that staying the course with our strategy was the best way to position the company for the next cycle and beyond.
With management being the largest active equity holder of the company.
Long term perspectives are always the norm for our group.
With the close reading of the detail offered in our supplemental package investor.
Investors can readily discerned that at this point, we have essentially achieved all of those goals, we set out to accomplish.
More importantly.
The company is well positioned to selectively pursue new investment opportunities and continue to thrive even in the face of another economic correction.
Along with record earnings credit quality and liquidity are higher than at anytime in our history.
Although we will continue to refine our model as circumstances dictate.
We feel confident about our growth trajectory for the foreseeable future.
Earlier in the year, we told you that we would continue to responsibly ramp our quarterly dividend back towards pre pandemic levels.
Last week, the board of directors voted to increase the dividend payout by 12%.
Now standing at <unk> 19 per quarter.
We appreciate the board's steadfast support of the company and their endorsement of the strategies that have brought us to this point.
And speaking of our board, you've probably seen that we've added Dennis Gartman.
A longtime publisher of the Gartman letter as another prominent independent director.
Dennis is capital markets expertise and financial acumen, we have great benefit to the company in the years to come.
To sum it up.
Good companies survive downturns, great companies use downturns to make the adjustments necessary to excel in the subsequent cycles.
Alongside our chairman and founder Dan Hoffler.
I've had the privilege to lead this great company for many years.
Often overlooked amongst all the performance metrics of the company as.
Is the strength of our management team.
While it's great to have sought after properties in great markets.
Performance only happens when you have a top flight asset management team that are passionate about their work.
State of the art buildings that are a source of pride for the communities and tenants we serve.
Only happen with the season construction group that prioritize quality in everything they do.
We understand that this is a skill set uniquely hours across the REIT universe.
Combined those attributes with a nimble solution oriented finance team and a high end high character professionals in virtually every other aspect of our business.
And you have the key to our 40 plus years of success.
Since coming public nine years ago.
<unk> been extolling the virtues of mixed used assets a diversified portfolio the advantages of self performing development in construction.
And a strong emphasis on company culture.
The benefit of these attributes become even more apparent in unsettled times.
We look forward to continuing to demonstrate outperformance in all aspects of our business model.
Now I'll turn the call over to Matt for some additional detail on the quarter.
Good morning, and thank you Luke.
It's a pleasure to be here this morning, and afford us the opportunity to report on another productive quarter.
For the second quarter of 2022, we reported <unk> 31 cents per diluted share and normalized <unk> of <unk>.
Diluted share.
Another quarter above our expectations.
As <unk> touched on our outperformance in normalized <unk> is due to virtually every core real estate metric across the portfolio continuing to trend positively correspondingly.
Correspondingly for the second successive quarter, we have increased our guidance range with normalized Ssi now at $1 16 to $1 20 per diluted share, which represents a 10% increase over 2021 results. If achieved 2022 will be the best earnings year in our model.
<unk> history outperforming all 2019 earnings high with materially less reliance on fee income.
A blend and extend extend that strategy that Lou mentioned resulted in sacrificing a penny of earnings this year in exchange for extended rate protection into 2024.
Later on the call I'll discuss our debt management efforts and a little bit more detail.
Speaking to our robust operational metrics I am pleased to report the stabilized operating property occupancy increased by 20 basis points to 97, 3% this quarter.
The combination of our strong asset management teams lease up efforts, coupled with the high quality Trophy assets located in strategically selected Submarkets continue to produce winning results.
Although all sectors increased the standout segment this quarter as our office portfolio at 97, 9% occupied.
Portfolio wide same store NOI was up 6% for the quarter on a GAAP basis, and seven 4% on a cash basis with our multifamily segment, posting 12, 5% growth in both GAAP and cash same store NOI.
Our commercial re leasing spreads continue to remain strong with the office segment at 13, 1% in the retail segment at nine 9% on a GAAP basis and both are positive on a cash basis.
Similarly in the multifamily segment, we are seeing unit trade out metrics at eight 1%.
However, leasing spreads coupled with our operational focus has enabled the team to drive efficiencies and reduce expenses on a per unit basis across the multifamily segment, resulting in a high NOI growth statistics.
Leasing activity continues to outperform expectations across all our property types.
Along with 450000 square feature for Newell's, we have leased over 150000 square feet since the beginning of the year, an impressive feat against already historically high occupancy levels.
As you are all aware above expectation operational performance needs to be supported with sound fiscal management.
For the second quarter of 2022, our stabilized portfolio debt to stabilized portfolio adjusted EBIT leverage reduced to five and a half times. This reduction is a result of the continued implementation of our overarching financing plan that deploys capital in the most optimized way, giving us the ability.
<unk> to self fund our exciting development pipeline.
As stated last quarter, we aim to keep our stabilized portfolio leverage in the five and a half times range.
Continuing the topic of our balance sheet in early July we implemented a blend and extend hedging strategy with $285 million, a 50 basis point strike rate caps that were maturing at the beginning of 2023.
Using the potential future upside of these caps, we were able to place the hedging corridor on the same notional amounts effectively capping the $285 million at 100 basis points and extending the terms to mature throughout the first half of 2024.
With the anticipated renewal of our swap contracts on the term loan portion of our credit facility. We are now confident that our debts will be 100% fixed or hedged well into 2020 for reducing the risk of uncertainty in this rising interest rates economic cycle.
As we continue to unencumber assets, such as a whole foods center in Delray Beach, Florida, Our Red <unk> shopping center and hilltop marketplace here in Virginia Beach and place specific hedges on our new floating rate construction lines, we are able to allow a $100 million cap that matures in February 2023.
To expire without renewal and still maintain 100% fixed or hedged strategy.
Final piece of our long range financing strategy is to surgically over time move to a more unsecured balance sheet. The first step in this process is to recast our credit facility that we started at the end of this last quarter.
Can we have our diverse lender base, we are looking to increase both the term loan and revolving credit facility by $100 million, each giving the company additional flexibility and liquidity and our capital stacks.
Represents an initial step to reduce the secured segment of the balance sheet from roughly 75% to 50%.
We aim to close the credit facility recast by mid to late August .
The last part of the balance sheet I will touch on are the remaining maturities in 2022 and 2023.
As previously indicated the final 2022 note maturity on hilltop market price will be paid off next month.
Going forward throughout 2023 explorations Nexen square was refinanced this quarter. The three town centre lines will be repaid at maturity and $14 five points will be moved to the unsecured debt under our credit facility recast. This takes care of all of our explorations through the end of 2023.
As Lew stated earlier to ensure that our fantastic topline numbers translate through to earnings we need to control and de risk our debt service expense. The pan outlined above we will continue to ensure that we are largely unaffected by the interest rate volatility that the economy is currently experiencing.
We believe our robust financing strategy will guide the organization through the next 24 months of market uncertainty setting us up a prime platform for superior future earnings growth.
New detailed in his remarks, the sales of our non core assets for gross proceeds of $177 million at a blended cap rate of four 1%.
This only further strengthens our liquidity position, which stood at over 140 million before the Annapolis junction transaction.
As stated last quarter any excess funds over that of the equity requirements and our development pipeline will be deployed surgically and the highest and most advantageous prices.
Adding high quality tenants in prime locations through opportunistic acquisitions will supplement our portfolio and steadily add NOI to the earnings base, whilst we work through our development pipeline.
As you all heard operational excellence continues to be the key theme in lou's remarks, and better than expected performance as anticipated throughout the remainder of the fiscal year, which is reflected by the increase in our guidance range. The.
The strength and speed of lease up in our Gainesville multifamily assets, coupled with our high occupancy and strong releasing spreads are the main drivers of this projected increase.
Both specific assumptions affecting our guidance range. Please turn to page five of our supplemental package, which is available on our website.
Our results speak for themselves. We believe it's only a matter of time before the market fully appreciates now Tony the significant value that this management team has already delivered this year, but also the significant future value creation in store in the years to come.
I will now pass it back over to Lou for his closing comments before the question and answer session.
Thanks, Matt.
One more note before Q&A.
Although <unk> office is less than one third of our portfolio, we've gotten a lot of questions regarding office usage of late.
Theres a statistic out there that has developed from key fobs wipes.
Additionally.
This activity was down as much as 70% as compared to pre pandemic levels.
As most of you know on its own this is a fairly meaningless statistic as it gives a little insight into how companies are thinking about their current and future needs.
We take a hands on approach with <unk>.
Stay in regular contact with our tenants.
Our 2 million square foot office portfolio is concentrated in two areas.
Point in Baltimore and town Center in Virginia Beach, both of which are the top addresses in their respective regions with an abundance of walkable amenities on site.
At Harbor point, our largest tenant constellation is a fortune 500 clean energy company occupying over 440000 square feet and the excellent building.
This showcase asset one of the largest LEED platinum facilities in the country.
As constellation's National headquarters and is indicative of their long term commitment to the city of Baltimore.
Elsewhere at Harbor point.
RBC just expanded.
Morgan Stanley just expanded.
T Rowe price just expanded their size commitment.
And then another group is poised to expand into the soon to be vacated Johns Hopkins space.
This is what's happening a trophy locations in our score Mark in our core markets.
And Virginia Beach, our asset management team recently met with over 35 of our largest town center office tenants.
Representing nearly 600000 square feet.
Hoping to find someone willing to relinquish some space to accommodate other tenants expansion plans.
We found two companies, who may be willing to shrink their footprint in 2023.
The vast majority of our standing Pat and cited the mixed use environment as key to their recruiting and retention efforts.
We also found seven more tenants who are hoping we can accommodate future expansion plans.
Facts are facts and the fact is the flight to quality thesis continues to be proven by the outperformance of our office assets in Baltimore's Harbor point in Virginia Beach Town Center.
Not surprisingly, our retail and multifamily assets in these locations are performing similarly.
The synergistic aspects of our mixed use environments create a hole that is greater than the sum of the parts.
Operator, we would now like to begin the question and answer session.
Yes.
Thank you Paul.
Ladies and gentlemen.
Yeah.
A question one quick question.
We would now call for question.
It's only one well.
A confirmation tone will indicate your line.
As in the question queue.
If you would like to maybe a question for me.
Co participants using speaker equipment, it may be necessary.
Okay.
The first question is from Dave Rodgers from Bob Go ahead.
Yes, good morning, everybody, maybe first question for Sean.
And lose comment that you are still working on a development pipeline on.
Owned land, mostly multifamily with some partners as well I'm curious I think you took out maybe the extra page in the supplement that kind of detail that future development pipeline and some of the additional projects you might be pursuing so Sean maybe we could get an update on kind of where you are pursuing what that pipeline looks like and any expected development starts here maybe over the next six to 12 months.
Sure Dave we appreciate that I think what Youre seeing there is on page 17 of the supplemental the active development projects are just active.
And we wanted to reflect our conservative posture here of being judicious with the capital that we have frankly, the number of opportunities. If you will and what you are referring to that that pain or that piece of the page I was removed we kind of pull that back because there are so many of them under review and so many opportunities.
As we sit here and look at these and we want to make sure that we can deploy this capital in the most opportunistic and the most.
That creates the most value creation, we did not want to list tens and tens of projects out there because frankly, we're under review taking a look at these things and there are tons of deals out there. So we thought it was best to represent whats in motion currently and as we can.
Come closer to deciding on the next move will convey that to the market.
That's helpful is there anything in the near term that would restrict you from moving forward with those projects either anything youre seeing economically construction loan financing just trying to get a sense for how near term that that next level pipeline might be for you.
I think it's got to be deal dependent right and <unk>.
Lou mentioned in his comments and Matt as well we have.
Capital available financing is not an issue as we said today the question becomes what what fits within our strategic kind of core.
Crosshairs number one and number two what's the yield look like as Youre well aware of this kind of an inflationary background also is affecting construction, but we feel we're best situated to handle that but when we bake all those things together, we were kind of want to want to watch and see and take a very again.
Disciplined approach to underwriting these and trying to understand what this next couple of months looks like in terms of volatility all of that said we were in a good position, we just want to make sure that we do.
Dot every I and cross every T.
Great. Thanks, John I appreciate that and then Lew maybe turning to the.
Mezzanine portfolio I think you are down to three major loans in there.
Interlock being the largest and thats in the guidance to be kind of paid off later. This year can you give us an update on interlock, one and kind of do you get paid off what's that process look like what are the other possible outcomes and then the second part of that would be you had anticipated having some outstanding on the Mezz program going forward is that.
That's still the case do you expect it to be smaller or larger than where you were previously.
Thanks, Dave and good morning.
For those of you who don't know.
<unk> is a large mixed use asset located in the heart of West Midtown Atlanta.
Perhaps one of the hottest submarkets in the country.
We were the contractor as well as the mezzanine lender on that project.
The building is currently 90% leased and the developer S. GIC ventures is now accepting offers to purchase.
The base case in our guidance as you mentioned, Dave is that the sale will close later this year with a full payoff of our loan returning another $80 million or so to the balance sheet.
Okay.
We will gladly accept the cash.
Make no mistake, we would love to own this asset long term.
And if cap rates have widened enough that we can make the purchase at a number that works for us.
Won't hesitate to make an offer to our partner.
But as I said.
The base case.
With regard to the program going forward.
As we've mentioned numerous times on these on these calls we were looking to.
To reduce.
To reduce debt mezzanine program.
With this payoff and we anticipate another early payoff.
The first part of next year on the on the <unk> project.
Our expectation is that we will redeploy some of that capital into the Mezz program.
Our construction company is now at an all time high on backlog of third party clients.
Party contracts and.
It would seem that.
Just one or two of those may well turn into mezz opportunities with us controlling <unk>.
Controlling costs through.
The construction side, so my expectation would be that that program.
We will have.
A couple of smaller additions next year as we said earlier.
Program is going to top out around $80 million in total.
Of course, we couldnt achieve that goal until until you're going to resolve itself.
Thanks, a lot I appreciate that.
Yes.
Thank you next question.
Ladies and gentlemen.
<unk>.
Hey, good morning, guys.
Just following up on Dave's question, so on the Mezz.
Preferred investments given the rising.
Cost of your capital, where does underwriting need to be on a rate perspective today.
For you guys in order to do with new investment can you still legitimately do.
11, 12 or does it need to be higher and where is the market. These days for these types of projects that you would want to provide financing on.
Yes for us Rob again.
Program is going to be deemphasize, but we're looking for a double digit spread versus our cost of capital.
The interest rate.
And so.
That was that afforded us to do loans in the 12% 13% range earlier.
Now thats going to creep into the mid teens.
And as you might expect other than multifamily in really healthy markets.
The developers aren't going to be able to access that capital.
So.
It's going to be a kind of a self regulating situation.
But that's that's where it ends up unfortunately.
There are a number of or a number of opportunities where it seems like.
Be able to get the money deployed.
Okay.
And then if I take a look at the development pipeline now you guys are still I think $30 some billion odd.
Excuse me.
Some odd million left to fund on the owned and then $85 million of equity.
It looks like on the on the JV are 139, so when you take a look at what you need to spend on the four existing projects versus what you now have after the apartment sale and the out parcel sales what more do you need to raise capital wise.
Doug complete those four projects.
And then how are you guys thinking about any of the incremental starts in the back half of the year is that still going to just be.
At this point additional sales do you have enough in the near term to fund any.
Second half 2022 development starts on hand.
Our model shows.
Rob that where we basically have everything we need.
To fund the remainder of the projects through the year and well into next year as I mentioned.
Our expectation again is that theres going to be significant payoff of the mezzanine loans over the next six to eight months.
The resolve themselves in some form or fashion.
Those on their own would complete everything and then some.
But.
But obviously there could be another case, we don't anticipate at this point.
Any further sales necessary map everything we're thinking to add to that.
No specifically as I mentioned on the earnings.
Call remarks, we have $140 million just under of liquidity today.
That does not include the <unk>.
Jay Seo so when you add the net proceeds in from that you also added the two mezzanine financing the envelope that we believe will come back later this year.
Early next year.
For the Nexgen mezzanine financing that total was another $100 million of capital coming in plus a few strategic refinance is that we are doing.
<unk> care of all the capital requirements that.
We have yes.
Yes.
Expand on that real quick Ralph that's something.
As you might expect.
We're pretty proud of.
With those dispositions combined with the ones earlier in the year and the payoffs that we're talking about as well as the $140 million worth of liquidity on the balance sheet.
We're looking at for closing in on $5 billion coming back in.
Over the course of 2022 and therefore.
Not only will be funding the entire development pipeline, but we believe that we're going to be an opportunistic purchaser.
Particularly if.
If the current market conditions caused some disruption in cap rates on on high quality assets.
We're excited about where we're headed with this with this liquidity.
Okay, and then last one for me. So you noted in the release that the third party construction backlog was the highest in the company's history, just under $550 million or so.
Where are you in terms of capacity.
In that business I mean from a personnel standpoint, and a capacity standpoint is this pushing the upper limit is there still capacity.
Two additional projects or are you sort of topped out at this point until some of these get delivered and you can reallocate resources.
Yes.
The answer is a little bit of both there Rob I. Appreciate the question give a little bit more color on what's going on there.
It is the highest backlog in our history.
Which is ultimately going to lead to one of our best years.
History as far as third party construction fees and probably the same for next year as well.
In terms of personnel. The fortunate part is two pieces. One is that there are a few projects that end.
For the end of the year, but perhaps more importantly.
A huge concentration of that backlog.
Is at Harbor point with the T Rowe price building.
And the accompanying infrastructure contract so that is where our.
As you know we have a satellite office there with some 30 people in it and so it makes for easier management.
Although my guys would be quick to correct me on that there is nothing easy about construction.
But.
But we are we're still also actively recruiting what we don't want to do is expand the construction operation much beyond where it is now.
We've been really fortunate and they've got a collection of really high quality clients on the development side predominantly multifamily.
Theyre doing multiple projects for these folks.
And as you might expect.
Savvy developers are reticent to change horses in an environment like this are guys come through over and over again.
Obviously inflation is out there.
It hits us as well, but we think and our clients think on the third party side that we're best positioned to mitigate those effects.
Okay, I guess, what I was sort of alluding to was are you having to turn away business with previous clients et cetera that you ordinarily would have done because of harbor point or because the overall size of this or you still have the capacity to do good deals when they come through the door with.
With long term partners.
Again, good deals with long term partners, we're always going to find room for.
What we are not willing to do at this point is expand that client base.
In any meaningful way.
Again.
Our clients have been very loyal to us.
And so we want to be loyal to them and make sure they get service first.
And we are not interested in just hiring personnel to do projects.
That doesn't work in our industry, we have built a reputation over 40 years of client service and Thats why people hand us work as opposed to having to go bid for it.
The minute that you start to break that trust and that relationship goes away, but I. Appreciate the question and the opportunity to expand on that a little bit Ralph Okay. Thanks, guys I appreciate the time.
Thank you ladies and gentlemen.
Gary I Wonder if you would like to ask a question.
No.
The next question.
Feldman from Bank of America.
Great Thanks, and good morning.
I just wanted to talk more about your thoughts on leverage I know you said your goal is to keep net debt to EBITDA of around five five times, which I know is your stabilized number but the actual numbers kind of 83.
You're talking about adding more loans to the portfolio may be doing some opportunistic buying can you just talk us through.
How you think that might deviate from your that $5 five target. If you do put more capital to work or now you can actually do it by.
Staying on track at five five.
Thanks, Jamie and good morning, good morning, I'll, let Matt answer that specifically, but.
We are not interested in taking that leverage metric up.
When we say our target is five and a half.
Might be five three it might be $5 six but.
<unk>.
We will be adding properties.
If and when we can keep that metric the same.
Discipline has been our story for a.
A very long time and.
It's important.
We obviously.
Our main Avenue of growth is through development development by its nature no matter. How good you are at it and we think we're pretty darn good.
It is a risk business and so therefore, we're not willing to take risk and our base portfolio.
And Thats why those those metrics need to stay the same and Thats why we insist on high credit and corrosive Trophy properties.
Let me expand on where that yes. Thank you Jamie.
I appreciate the opportunity I enjoy getting to talk about our leverage metrics here. So yes.
As Lou said, we manage to that five and a half times and what that means is as we kind of work through the portfolio we unencumbered.
Assets when we strategically fill that is that as appropriate we use the kind of optimize that capital use and leverage up on our development pipeline and Thats, where you can see that seven two times.
<unk> debt.
We use that for the best cost of capital for them when we bring it back into the stabilized portfolio.
We kind of re leverage that to get to the five and a half times as I stated we off.
Moving through from a secured balance sheet to a more unsecured model, we are increasing the credit facility by a couple of hundred million that so.
That also allows us access to cheap.
Cheap kind of cost of debt.
Through that we don't we don't anticipate as Lou said that leverage number.
Too much out of that five five times range and we make sure that we derisk the portfolio by managing to that leverage that leverage metric the eight three times number.
You alluded to includes our preferred equity.
No not something that we look at <unk> is that the way it may be you as an analyst would.
The best way, we see as these three buckets.
<unk> pace. This is the portfolio that we that we operate and then the ancillary debt to adjusted EBITDA, which includes the mezzanine book of business.
The development pipeline <unk> made a very good comment on our last earnings call said set a different way if we record all of our mezzanine loans or we sell boulevard development projects at cost or leverage metric would be five five times.
Okay. Thanks, but I guess, if you are let's just say you ramped up the <unk>.
The Mezz book.
Sounds like you would use the capital coming in from the Mezz book to fund the rest of your development pipeline you are saying I guess you just wouldn't go beyond what you have what you would have excess capital.
Correct.
Are you having to raise more capital in some other fashion, if you find enough opportunity.
Probably not Jamie again.
We're not interested in selling cheap stock.
So.
Never say never if there is some unbelievable opportunity that was out there it just couldn't pass up.
Have to look at that target.
Right now we want to stay in our lane.
Brian a steady growth trajectory.
The properties that are coming through the pipeline Gainesville, being one and you'll see the results. There Chronicle mill, we're expecting similar results and then later on in 2023 southern postal come online.
Our trajectory is fairly fairly cemented obviously, there is always things that could happen.
And so we don't want to.
We're not about to start being Cowboys.
And see what else, we can do unless it really fits fits in our wing.
Okay.
Alright, thank you.
Thank you.
Thank you.
The last question.
Jesse.
Yes. Thank you.
Just wanted to ask about some of the construction cost increases.
It looks like you have on your development disclosure.
Could you just talk about potentially the.
Impact of yields.
How youre thinking about.
And quantifying kind of how that impacts your underwriting.
Sure.
Thanks, Steve.
I'll, let Sean answer that specifically immersed in an all things development at this point, but.
I'll start from a from a macro level.
Should understand the way we underwrite these things again, we've been doing this for a very long time.
And so both on a cost in the income side, our underwriting before we pull the trigger is extremely conservative.
We will underwrite current construction costs with a factor for what we think escalation may be obviously that escalation factor is pretty.
Alright current rents.
And that is as.
<unk> proven to be an extremely conservative posture and has led to a lot of pleasant surprises and we expect it's going to lead to the pleasant surprises again, it helped mitigate that.
Those increases as those projects go through the pipeline. So that's that's where it starts.
Again, we're a development oriented REIT we're extremely.
Risk averse.
And that that pays dividends really through or whatever market might be and Sean you want to expand on what's going on out there sure sure. Thank you Lou for setting that up.
I think at the end of the day Lou's comment about conservatism needs to be kind of repeated.
The projected return on cost is as a result of us conservatively underwriting. These deals still remains substantially higher than the cost of the funds that are being deployed to support these projects right. So I think we're in good shape, there again that conservatism.
It's tried and true.
That being said on southern post for instance, we saw about since the last update you had seen about a four 5% four 4% increase in construction costs. There and that's we think that's relatively mild given the macroeconomic backdrop that being said we underwrote. This.
Months and months ago, 12 months ago, if you will and we have multifamily rents growing there we have rents in general.
Growing narrow, but we also have an interesting dynamic on that particular deal, which is a high barrier to entry you can't build apartments in Roswell, Georgia.
Except for the ones that we're building. So we feel very very good about that position that kind of a moat around our around our apartments around our deal there that next year's deal so to lose point as a result of conservative underwriting and as a result of our agility and ability to.
Kind of control and be agile in the construction space, we feel like we've got a good handle on that on the T Rowe price deal.
I mean, I think the easiest way to say that in the best way to characterize that as the yield is fix there is an equation there. So as the total cost of the project moves so move our rent payments.
I'll leave it at that but just understand that is a function in equation and thats.
That's a deal that essentially has a fixed yield so we feel okay about that with our partners at T. Rowe parcel for there are a couple of different dynamics. There, yes, we've seen an increase.
About $25 million hour since last update.
A lot of that has to do with construction costs. Some of that has to do a sunk cost for us preserving the right to do a phase II in other words infrastructure cost.
But in the same regard we have.
Not trended rents there either just to give you an idea that's about a 12, 5% increase on cost in the last 30 days trade out in our building next door and other advantage. We have we have a real market data. The 30 day trade out and are building next door was about 13, 5%. So.
Dan.
Costs are moving but rents are moving so as we update our pro forma we feel that the yield is largely unaffected.
Because of the conservatism upfront both in terms of underwriting the income Andy and the cost numbers.
Okay got it.
That's helpful color and then my second question is just on the multifamily portfolio do you track.
Rent to income among your residents.
Kind of where it's at today.
Can get an idea.
And how tenants in your portfolio or kind of equal to two.
To absorb these rent increases.
We don't track that specifically.
<unk>.
I mean, obviously were.
Our properties are at the top of the market are largely white collar.
Users.
Do we have any kind of factor Matt on.
Our rent collection.
Yes.
We had very very limited amount of bad debt again for full Q2.
$138000 of bad debt for the quarter in the multifamily segment that is.
Round about half a percent of revenue and around about 1% of NOI, we've actually seen a downtick in our trending numbers. When you look at them on a percentage of revenue, but to have bad debt in the in the multifamily segment of around a half half a percent to revenue is very very low numbers.
Yes from a collections standpoint, we monitor this and we are not worried today until with ice trends.