Q3 2022 Armada Hoffler Properties Inc Earnings Call

Good morning, and welcome to Armada Hoffler properties, Inc. Third quarter 2022 conference call all participants will be in a listen only mode.

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After todays presentation, there will be an opportunity to ask questions.

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I would now like to turn the conference over to Chelsea Forest.

Please go ahead.

Good morning, and thank you for joining Armada Hoffler third quarter 2022 earnings conference call and webcast.

On the call. This morning. In addition to myself is Lou Haddad CEO , Matthew Barn, Smith, CFO and Sean hit at T O L.

The press release announcing our third quarter earnings along with our quarterly supplemental package were distributed this morning, a replay of the call will be available. Shortly after the conclusion of the call through December eight 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 November eight 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 comments on our guidance and outlook.

The caution 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.

He will also discuss certain non-GAAP financial measures, including but not limited to <unk> and normalized <unk> 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'll now turn the call over to Lou.

Thanks Kelsey.

Since becoming public nine years ago, we've been extolling the virtues of mixed use assets the diversified portfolio.

The advantages of self performing development in construction and a strong emphasis on company culture.

The benefits of these attributes to become even more apparent in unsettled times.

Although our business model might require a bit more analysis to fully grasp the typical REIT.

Our results remain very clear and compelling.

Our third quarter earnings release, as a further illustration of our inherent advantages versus our peers.

After raising our guidance for a third consecutive quarter, our new midpoint of $1 19 per share represented a 11% increase over full year 2021 earnings.

Which has supported the 18% increase in the dividend this year.

Although we are not ready to release guidance for next year our.

Our expectation is for earnings and dividends to continue to rise in 2023.

This is wholly consistent with the data included in our initial guidance presentation from earlier this year, where.

Where we projected that NOI would increase by 45% over 2021 levels over the next few years as our development stabilize.

With two multifamily development deliveries this year.

A large mixed use development expected to enter service next year.

<unk> 2024 deliveries of the T Rowe price global headquarters and 300 more luxury apartment units.

We are right on track with that forecast.

The rapid lease up of our development deliveries and stellar performance and third party construction are important factors in our steadily increasing results.

However.

The largest source of the upward trajectory has been the continued high occupancy and rent growth in our stabilized properties.

These increases are primarily due to the sustained upward trend in virtually every leasing metrics across our diversified portfolio over already robust levels.

Continued increases in same store NOI commercial releasing spreads and high single digit apartment tradeoffs.

Become the norm for 2022.

We believe that this is a result of our continued emphasis on a plus properties in each of our asset classes.

When you have prime properties amongst limited peer competition.

You have the ability to sustain premium rents through essentially any macroeconomic backdrop.

Taking advantage of a flight to quality has always been central to our strategy.

We believe the type of assets, we own PVA office retail or multifamily.

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 located in desirable Submarkets stand the test of time.

Put another way.

We expect our buildings to maintain the highest rate and occupancy and every one of our core markets regardless of the asset type.

To that end.

I'll reference our two most recent press releases.

First you'll recall that last quarter, we reported that we expected another high credit lease to replace the soon to be vacated Johns Hopkins space that same street wharf at Harbor point.

Yesterday, we announced that Morgan Stanley has leased the entire 46000 square feet.

Perhaps more importantly.

<unk> extended the term on their initial 195000 square feet to 2035.

With the recent addition of Morgan Stanley 's wealth management group and 35000 square feet in our adjacent Wills Wharf building.

Morgan Stanley will have a presence of over 275000 square feet at Harbor point well into the next decade at a minimum.

This commitment combined with a long term leases of the corporate headquarters of constellation Energy group.

T Rowe Price's global headquarters Transamerica, RBC, <unk> and many others.

Should validate to all our years old believes at Harbor point is the top destination for class eight companies between DC and Philadelphia.

These trophy office buildings.

Complemented by what will ultimately be nearly a thousand luxury apartments and some specialty retail.

All surrounding our five acre waterfront Park my.

Meg Harbor point, the premier destination for the top demographic and each of those asset classes.

The story of the town Center of Virginia Beach is much the same.

With occupancy across retail office and multifamily in the high nineties RF.

Our asset management team began working on the few potential vacancies expected to occur over the next couple of years.

Although the existing Hampton University space is leased through 2023.

We negotiated a buyout and signed a new lease for 18000 square feet with old Dominion University to locate their school of data science and cyber at town Center.

This adds a new source of patrons to the wide variety of apartment residences and entertainment retail in the complex.

These assets collectively continue to be the top destination in the entire $1 8 million person MSA.

As I've said repeatedly.

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 <unk>.

Turning to the narrative surrounding major markets, where high value tenants have multiple options for class a space.

But the simple fact is the trophy buildings in our target market space limited competition for top tier tenants intent on using the workplace as a showcase for attracting and retaining talent.

Consequently, the.

The most pressing issue facing us in the office portion of our portfolio for the foreseeable future is accommodating our existing tenants with expansion plans.

Our retail portfolio tells much the same story.

As most of you know retail is the largest component of our asset base and grocery anchored shopping centers make up the majority of that sector is NOI.

With occupancy at an all time high robust re leasing spreads and same store NOI growth.

We anticipate very little turnover and increasing revenues for the foreseeable future.

Some of you have inquired about the status of our two Regal cinema properties.

Please remember that both of these properties sit on what we consider to be <unk>.

Multifamily acreage.

Adjacent to the town center the other in the heart of downtown Harrisonburg.

That said, we will continue to operate the theaters and is not interested in relinquishing either property at this time.

Nor do we have any interest in renegotiating rental rates.

We will keep you posted of any new developments on either of these properties.

The multifamily sector continues to perform at a very high level with sustained high occupancy and apartment trade outs in same store NOI in the high single digits.

Most exciting in this area.

Is the delivery of our Chronicle mill apartments in the Charlotte area market.

Although delivery of the first units occurred only last month the.

The property is already nearly 70% leased as of yesterday.

Although the pace of the apartment leasing traditionally show slows over the winter season.

We expect the property to still stabilized during the first quarter of 2023.

And our last report we told you that our Gainesville development in the greater Atlanta area was the fastest multifamily lease up in our history at just under seven months.

Chronicle mill may well eclipse that record.

On the construction front, we continue to realize record profits and expect this division to produce its best year ever in 2022.

And with over $525 million in third party contract backlog, we expect this trend to continue through the entirety of 2023.

While third party construction profits continue to grow the percentage of earnings attributable to fee income will continue to diminish relative to portfolio NOI.

With respect to the interlock project in West Midtown Atlanta.

We are now projecting our loan to be outstanding well into next year, given the current unsettled capital markets.

As I mentioned earlier this.

This property is over 90% leased and cash flow enhancing way.

With our priority position, which which requires all net income to be applied to our loan balance we are happy to remain patient until the environment is more favorable for our partners to transact at a meaningful profit.

Alternatively so.

So the opportunity ever arise to acquire this trophy property at a significant discount we remain.

Favorably disposed to that option.

Earlier this year, 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.

Those transactions achieved a blended four one cap rate in year with gross proceeds of $177 million.

The execution of these dispositions in the midst of a very unsettled market indicates the sort of value contained in our portfolio.

While 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 this year and beyond the low cost funds from the dispositions largely satisfy the remaining equity needs for our developments.

Collectively the projected return on cost of the new assets in development is substantially higher than the cost of those funds as.

As a result much of the anticipated income from our development pipeline is expected to translate into future <unk>.

In addition.

We are evaluating a number of other development opportunities the majority of which are in the multifamily sector.

I am on acreage, we already own some 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 COO Shawn Tibbets is here to answer any questions. You may have on our development activities and what we are seeing in the marketplace.

Combine all of the factors I, just mentioned with retail NOI in multifamily rental rates at all time highs.

Come to understand the continued rise in our topline numbers.

Of course.

In order to see those bonds 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 amount of hardware for many years.

As Matt will detail later in the call.

We expect our net interest expense to be largely unaffected by rising rates through 2023.

This was due to the fixed rate long term debt on many properties as well as the protection afforded by our hedging instruments, which effectively capital expense on our floating rate loans until the latter half of 2024.

This action along with strong topline growth and strategic debt Paydowns go a long way to assuring the upward trajectory of our earnings continues.

Across all operations and our business model our team continued to produce at an extremely high level.

We have come to expect nothing less from these great people and we look forward to continued success in 2023 and beyond.

And now I'll turn the call over to Matt.

Good morning, and thank you Dave It is a pleasure to be here. This morning to once again report on another strong quarter performance.

Third quarter of 2022, we reported <unk> 26 cents per diluted share and normalized <unk>.

<unk> thousand nine cents per diluted share in line with our expectations for another consecutive quarter, we produced a robust set of operating metrics across our portfolio.

<unk> and an increase to our guidance range now with normalized Ssi at $1 18 to $1 20 per diluted share.

This represents an 11% increase over 2021 results if achieved 2022 will be the best earnings year in our motto office history outperforming all 2019 earnings high with materially less reliance on fee income.

Starting with our operational metrics I am pleased to report the stabilized operating property occupancy once again came in above 97% and 97, 1% this quarter.

The combination of our strong asset management teams lease off axis, coupled with high quality Trophy assets located in strategically select sub market continues to produce winning results. The standout segment. This quarter is our retail portfolio and 98% occupied.

Portfolio wide same store NOI was up 3% for the quarter on a GAAP basis, and two 7% on a cash basis with our multifamily segment, posting six 5% and 7% growth in GAAP and cash same store NOI respectively.

Our commercial releasing spreads continue to remain strong with the retail segment at 10, 7% and the Oxford segment at three 3% on a GAAP basis lease.

Leasing activity continues to outperform expectations across all property types, new discussed our fantastic news with respect to Morgan Stanley at all Times Street property income.

Increases of this significantly <unk>, our asset management team has executed nearly 1 million square feet of renewals and new leases since the beginning of the year.

To put this into perspective, a historically high occupancy levels, we are continuing to maximize our market exposure and surpassed all of the leasing objectives, we set for ourselves at the beginning of the year.

In the multifamily segment, we are seeing new lease trade out metrics on nearly 9%.

Releasing 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.

Last quarter I spoke about how our operational performance needs to be supported with sound fiscal management and I'm pleased to report that we have started to implement and execute our fiscal strategy with great success.

Working with our diverse lender base, we closed on our credit facility recast in August increasing both our term loan and revolving credit facility by approximately $100 million H HUD displays go into market 18 months early to ensure that we secured the most optimized times we were able.

To maintain our favorable pricing, whilst extending the revolver and the time portions of the facility out to 2027 and 2028, respectively.

The additional flexibility and liquidity allows us to both be mindful of the current environment and also take the meaningful step in our transition to an unsecured balance sheet.

For the third quarter of 2022, our stabilized portfolio debt to EBITDA leverage reduced to four nine times. This reduction is a result of the continued implementation of our overarching financing plan to deploy capital in the most optimized way.

In August as stated earlier this year, we paid off our last 2022 maturity, adding the hilltop marketplace to our unencumbered asset pool.

You will recall that this is a third asset this year, we've paid off at maturity.

As noted earlier.

And at length last quarter, our long range financing strategy is to surgically over time move to a more unsecured balance sheet.

<unk> on this path. We are currently working with our preferred lenders to advance another unsecured term loan of $125 million with an accordion feature rising to $200 million.

We expect this 51 months unsecured lines to close at the end of November and be utilized to convert all secured construction debt on the Wills wharf asset and secured construction debt on our clinical new asset to unsecured bonds Lena pricing.

We will also look to transfer a couple of a higher interest rate smaller properties to this timeline, therefore further reducing our cost of debt.

For the third quarter, our weighted average cost of debt was two 9% illustrating the success in maintaining that all debt is 100% fixed or hedged and reducing the risk of uncertainty in this rising interest rates economic cycle.

Assuming the full yield curve stays reasonably consistent with the current projection or expectation is that our weighted average cost of debt will be the light 4% for 2023.

We are also looking to close our final refinancing of the year I'd like to this month with a $30 million loan to the Gainesville apartments price significantly below the construction.

As indicated on last quarter's earnings call. We have now not only taking care of all of our 2022 debt maturities, but with the recast of the primary credit facility and the closing of our new unsecured term loan. We are also taking care of all of our explorations through the end of 2023.

This coupled with ensuring that we're able to self fund our development pipeline set the organization up with a sound financial infrastructure to perform well through the potential market downturn with enhanced flexibility and liquidity for went opportunistic acquisitions or developments present themselves.

As you heard for the third straight quarter operational excellence continues to be in a model of a key competency and our better than expected performance is anticipated to continue throughout the remainder of fiscal year.

This is reflected by the increase in our guidance range.

The strength and speed of lease up in our Gainesville, and Chronicle mill multifamily assets, coupled with our high occupancy continued expense management strong releasing spreads and better than expected performance and offset party construction pipelines are the main drivers of this projected increase.

So the specific assumptions affecting our guidance range. Please turn to page five of our supplemental package, which is available on our website.

Our results and the execution of our financial strategy speak for themselves. We believe it is only a matter of time before the market fully appreciates not only the significant value that this management team has already delivered this year, but also the foundation for future value creation that will be harvested in the years to come.

Operator, we're now ready for the question and answer session.

Thank you.

We will now begin the question and answer session.

A question you May Press Star then one on your telephone keypad.

The next speaker phone please pick up your headset.

Thank you Nikki.

To withdraw your question please.

Alright, thank you.

And the first question comes from Dave Rodgers with Baird.

Right.

Yes. Good morning, everybody look I just wanted to ask from a high level perspective, obviously not seeing it in your results to this point, but as you have discussions with customers and tenants across the board are you seeing any or do you anticipate seeing any impacts from the tighter credit markets overall, just from an operational standpoint.

Thanks, David and good morning.

We're not seeing much there at this point.

More what's on People's minds is getting more employees.

Both on the office side and in particular on the restaurant side.

That seems to be the order of the day right now people are be able are able to move prices.

In accordance with their input cost.

And.

We're just not seeing any signs of.

That letting up.

Okay. That's helpful. I appreciate that and then maybe shifting to the investment sales market I know you've got it looks like an acquisition setup for the fourth quarter, but maybe more broadly, especially in apartments and retail can you talk about the investment sales activity that youre seeing broadly in the market and what you might be seeing in terms of <unk>.

<unk>.

Over the course of the year.

Sure.

You might expect.

The velocity of sales has slowed meaningfully.

We're seeing some deterioration in cap rates.

Which frankly is welcome.

It puts us more in play for being able to afford the types of properties that wed like to acquire.

I think as rates continue to rise youll.

Youll see.

Particularly on the retail side cap rates starting to move materially.

Already moved fairly materially on multifamily.

As I said earlier, we sold the Annapolis junction property at a four one cap rate on trailing 12 month NOI I doubt, we could achieve that today.

And with our multifamily partners, what we're hearing as well six months ago, we were looking at sub four cap rates and now Theyre Lucky to get sub five.

I think things are normalizing.

In that side of the business.

Okay and in the retail side, you said you anticipated them to move more aggressively maybe in the future.

Haven't seen as much of that to date.

Haven't seen much yet, but I'm sure we will.

We've kind of we've seen we've seen this movie before a few times over the decades.

As you know where we're strongest in grocery anchored shopping centers those are dominated by the long term lease on the grocer and those are historically very flat and so.

You already have an underpinning there of not rapidly increasing NOI and so when rates go like they are going naturally cap rates have to have to watch.

And I think the opportunity is going to be there to pick up some really high quality properties.

At at a cap rate that's 100.

150 basis points higher than what it was just at the beginning of the year.

Great last one for me on the interlock it it sounds like you've got good cash flow coverage on your loan is there a construction loan that would be senior to you or any type of capital event before the sale of that from a timing perspective that you're watching where we should be watching.

Yes, we're watching there is there is a construction loan.

It's got a couple of years of extension.

Thats the sponsor can can achieve by achieving.

A debt service coverage.

That's commensurate with the loan.

Our loan follows that construction loans, so assuming they meet that coverage middle of next year.

They could stay in another year.

I don't believe that is their intent.

They would really like to transact in 2023, we certainly agreed with their decision not to not fully market the facility right now.

As you know, it's just not a great time for people to deploy a lot of capital.

Great. Thanks Lew.

Thank you.

Our next question comes from Robert over time with Janney.

Hi, good morning, guys.

Follow up on Dave's question can you talk about when pricing was determined on the $26 million retail center acquisition was that before the big upward move in cap rates or after and how you evaluated buying this asset versus potentially buying back your stock at 10, 11 box and paying off some debt.

Sure.

That that acquisition was was locked in.

After cap rates had moved somewhat.

We've got it.

We've got a cap rate in the high sevens on that acquisition.

And it.

When we're not.

Quite ready to announce it but you'll see it makes perfect sense for a grocery anchor that we'd like to see as well as proximity to other assets in the area.

That.

We're typically we're not going to be.

A buyer of our stock.

This is a growing concern that that has all the opportunities in the world to add to NOI.

So the short term.

Boost that you might get through shrinking the company.

Is not in keeping with our long term strategy.

So.

We're always going to look for accretive acquisitions, as well as developments and with the with Matt having the balance sheet in its best shape ever.

Having all the liquidity we need to fully.

<unk>, what we have going on.

We're going to sit back and wait and watch as the opportunities come our way I'd say.

It's going to be a wonderful time to be a buyer as well as a developer.

Once the once a little bit more pain is present in the market.

Okay and then.

With the Annapolis junction sale, where are you today in terms of the retail office multifamily NOI breakdown and where does that go when the current development pipeline stabilizes now.

It's still pretty consistent with our original guidance from February if you want to pull that out.

We can send it to you, but youre going to youre going to.

Round out around 40% retail.

35% or so office and wherever whatever the remainder 25% and multifamily.

Big Big Big ticket, there being T Rowe price coming online.

Okay.

And then did Regal Miss any payments with the parents bankruptcy filing and do they owe you any deferred rent still.

They still owe us deferred rent from the pandemic, which they had been paying steadily down.

And our expectation is that they will continue.

I don't believe there was ever a missed payments.

There was a pause when they were getting approval from the bankruptcy court.

I don't believe we've we've missed any payments and they continue to make good.

On their lease and we'll see what happens in the future is as we've said for the last year and a half.

We're somewhat anxious to get those properties back because it's a great time to launch a multifamily property projects.

Projects in those two markets.

At the same time.

They have leases and they are willing to honor them. So that we will sit tight.

Okay, and then last one for me, Matt the guidance range for fourth quarter's implied 31% to 33 versus <unk> 29 in the third quarter that you did.

You listed a few things that were driving that what are the one or two biggest.

Things that are going to be responsible for that 2% to <unk> sequential jump, especially given the sale of Annapolis junction.

Yes, good morning, Ralph the two bigger ones the interest income from the interlock asset not being sold this year. So we continue to clip that mezz through the end of the year, Oh, sorry, the acquisition of the Pembroke grocery anchored retail asset class.

Last Friday was another another slight tick off of that.

Also going to be a stroke is also going to be a stronger construction quarter.

For the fourth quarter.

Okay. Thanks, guys I appreciate the time.

Yes, one other thing Rob remember, we've delivered two multifamily properties. This year and there is not a full year of having that.

Income in and so the trend is going to continue to be upwards and then of course next year be a full year.

Alright.

Great. Thank you.

Thank you.

Next question comes from Bob <unk> with <unk>.

Bank of America.

Hi, Good morning. Thank you for all thank you good morning Ali.

Only one question from me.

You mentioned expense management being a key focus going forward just looking at your same store NOI. It seems like much of the Cosco is driven by higher real estate taxes, particularly within your multifamily portfolio were there any regions driving this increase and how should we be thinking about this heading into 2023.

Good morning Camille.

Yes, certainly so the there was a reassessment of real estate taxes in the Baltimore area say some of that is due to timing some of that is due to as those assets.

The hub point development come online.

We are working with the with the local authorities.

<unk> asset management team is doing a great job to kind of make sure. Those assessments are coming in on track and they are in the additional increases updated seem to off guidance going forward, but we often see this as developments come online and increase in those real estate taxes when those assets are reassessed.

Please me Dave.

This concludes our question and answer session I would like to turn the conference back over to Luke for any closing remarks.

Thanks, very much I appreciate everybody tuning in.

This morning.

Our expectation is to have more news out between now and the end of the year.

And we look forward to a very successful 2023 as well.

For your attention and.

We will talk to you soon take care.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

[music].

Yeah.