Q4 2022 Armada Hoffler Properties Inc Earnings Call
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Speaker 1: Good morning, ladies and gentlemen, and welcome to the Armada-Hossler Fourth Quarter 2020 Welcome to the Armada-Hossler Fourth Quarter 2020
Speaker 1: Tuesday, February 14, 2023.
Speaker 1: I would now like to turn the conference over to Chelsea Forrest, Director of Corporate Communications and Investor Relations. Please go ahead. Good morning, and thank you for joining Armada Hochler's fourth quarter and full year 2022 Earnings Conference Call and Webcast.
Speaker 2: On the call this morning, in addition to myself, is Lou Hadd, CEO , Matthew Barnsmith, CFO , and Sean Tibbet's COO.
Speaker 2: The press really announced in our fourth quarter earnings, along with our earnings, guidance, and supplemental package, were distributed this morning.
Speaker 2: A replay of this call will be available shortly after the conclusion of the call through March 14, 2023.
Speaker 2: The numbers to access the replay are provided in the earnings price release.
Speaker 2: For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, February 14, 2023, and will not be updated subsequent to this initial earnings call.
Speaker 2: During this call, we may make four looking statements, including statements related to the future performance of our portfolio, our development pipeline, the impact of acquisitions and dissisitions, our mezzanine program, our construction business, our liquidity position, our portfolio performance and financing activities, as well as comments on our guidance and outlook.
Speaker 2: Not all of which are known and many which are difficult to predict and generally beyond our control.
Speaker 2: 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 and are pressed at least that we just showed you this morning and the risk factors just close in the documents we have filed with or furnished to the SEC.
Speaker 2: We will also discuss non-GAAP financial measures including but not limited to FFO and normalized FFO. Definitions of these non-GAAP measures as well as reconciliation to the most comparable GAAP measures are included in the quarterly supplemental package which is available on our website at ArmadaHoffler.com.
Speaker 2: We will start the call today by discussing our 2023 guidance. At this time, I'd like to draw your attention to our 2023 guidance presentation made available on our website. I'll now turn the call over to Low.
Speaker 3: Thanks, Jocelyn.
Speaker 4: Good morning everyone and thank you for joining us today.
Speaker 4: In addition to analysts and investors, there are many of the Armada Hoffler family and joint venture partners on the call.
Speaker 4: On behalf of our founder and chairman, Dan Hoffler, the Board of Directors and Executive Management, we sincerely thank you for being a part of our team.
Speaker 4: Through your hard work, dedication and expertise.
Speaker 4: We have brought about an accomplishment that I previously thought would only be attained a few more years in the future.
Speaker 4: The investment grade credit rating assigned to us by DBRS Morningstar represents an achievement many years in the making.
Speaker 4: We believe this rating to be a validation of our diversified business model, class A portfolio, multi-decade track record, and responsible fiscal management.
Speaker 4: This solid triple B designation.
Speaker 4: Because of access to additional capital sources and investors that only transact with investment grade companies.
Speaker 4: I encourage all who follow our company to read the rating reports.
Speaker 4: which could be found on the DBRS Morningstar website.
Speaker 4: It gives a thorough and unbiased assessment of a model hopper.
Speaker 4: As you have probably already seen, this morning we released record earnings for the fourth quarter.
Speaker 4: The 35 cents of normalized
Speaker 4: FFO per share for Steve's previous guidance.
Speaker 4: The primary drivers of this quarter is half the flow limit.
Speaker 4: We're increased NOI from office properties.
Speaker 4: Robust SameStore NOI and the early payoff of a preferred equity asset was triggered a minimum interest payment.
Speaker 4: This completes a full year that saw us grow earnings per share by 13% over 2021.
Speaker 4: The company is obviously firing on all cylinders.
Speaker 4: Today, I will focus my comments on our 2023 guidance presentation, which would release this morning and can be found on our Investor Relations website.
Speaker 4: Later in the call, Matt will give further details on the quarter and our financial metrics. Sean will wrap up our prepared remarks with comments on the current status of ongoing operations.
Speaker 4: and the development pipeline as well as portfolio highlights.
Speaker 4: Starting to page three of our guidance package.
Speaker 4: You'll see that we are forecasting a substantial increase in property NOI, resulting from organic growth in our same store portfolio. The lease-up and stabilization of recently delivered development projects.
Speaker 4: and anticipated acquisitions.
Speaker 4: We also anticipate another record year in construction as we continue to work through over $600 million in third-party contracts over the next couple of years.
Speaker 4: This year, we will realize the impact of the good work Matt and our finance team.
Speaker 4: have done to further move the balance sheet towards more unsecured longer term fixed rate debt.
Speaker 4: and our planned reduction of the Mezzanine program.
Speaker 4: All these factors combined to result in a healthy 2.5% increase in bottom line per share earnings.
Speaker 4: Regarding our target of $100 to $200 million of acquisitions.
Speaker 4: We have identified a few potential off-market, accretive opportunities.
Speaker 4: with a possible component of OP unit equity.
Speaker 4: All told, we are pleased to continue the upward trajectory of our earnings and anticipation of further growth as our development projects deliver and stabilize.
Speaker 4: Turning to page 4.
Speaker 4: You'll see an illustration of this trajectory.
Speaker 4: This chart shows that the company has been a model of consistency.
Speaker 4: coming out of the pandemic and that we expect that steady growth to continue for the foreseeable future.
Speaker 4: As the portfolio income continues to climb, you see that mezzanine income decreases as we eventually stabilize the program at the $80 million level that we established as a target some time ago.
Speaker 4: Construction fee income is expected to eventually return to the historical range of $4-7 million dollars after a few years of elevated profits.
Speaker 4: Please note the continuous rise in portfolio in a lie.
Speaker 4: Despite the disposition of over $300 million of non-core assets over the last year or so.
Speaker 4: Turning to page 5.
Speaker 4: The table at the top reiterates the expected dramatic increase in NOI, and the pie charts illustrate the various sectors in our property portfolio.
Speaker 4: While all sectors will continue to grow on an absolute basis,
Speaker 4: We expect to continue rebalancing the portfolio.
Speaker 4: We project that retail will continue to be our largest sector.
Speaker 4: but less of the total on a percentage basis.
Speaker 4: Multi-family will grow the fastest.
Speaker 4: simply by virtue of developments in the pipeline and a full year of the newly stabilized apartment communities.
Speaker 4: We expect the office percentage to remain relatively stable.
Speaker 4: with the addition of the office portion of Southern Post as well as new tenants coming online in our existing portfolio.
Speaker 4: Our current forecast contemplates exiting the T-Row price joint venture upon completion.
Speaker 3: 8-6
Speaker 4: Summarizes the consistent and sustained growth our team has already achieved in the future growth that we expected deliver this year.
Speaker 4: Whether it's NLI, EBITDA or normalized FFO, each of these important financial measures has incrementally increased and is projected to grow over the three-year period measures here.
Speaker 4: Perhaps as important, we have every reason to believe that this chart, inclusive of the dividend rate, will continue the trend after we add 2024 to the data.
Speaker 4: The underlying fundamentals of our portfolio, occupancy, renewal spreads.
Speaker 4: weighted average lease terms, tenant diversification and credit quality are stronger than ever.
Speaker 4: producing healthy NLI growth in each of our asset classes.
Speaker 4: and record bottom line per share earnings.
Speaker 4: We understand this runs against the drum beat of news in some real estate sectors.
Speaker 4: especially office.
Speaker 4: Particularly if your focus is on gatedly markets.
Speaker 4: on the contrary.
Speaker 4: We are seeing record demand and consequently have the ability to drive rental rates across our properties and submarkets.
Speaker 4: Given the economic history of resilience this portfolio has demonstrated, we see no reason for this to change.
Speaker 4: The biggest challenge we are facing in accommodating tenant demand and expansion in a portfolio at capacity.
Speaker 3: In short,
Speaker 4: to group up together with the office rates facing major structural issues.
Speaker 4: is to ignore the strength, quality, and performance of our office properties.
Speaker 4: And even more importantly...
Speaker 4: more importantly, this inaccurate characterization.
Speaker 4: would overlook the other 70% of our portfolio and free income sources.
Speaker 4: All of which are operating at record levels of profitability.
Speaker 5: And now over to Matt. Good morning and thank you, Lou. What a year. I'm extremely proud to be part of the Armada Hochler team that continues to outperform all expectations.
Speaker 5: As Lou indicated, for the final quarter of 2022 we reported FFO of 33 cents per diluted share and normalised FFO of 35 cents per diluted share. For the fourth consecutive quarter we produced a robust set of operating metrics across our portfolio achieving exactly what we committed to our shareholders.
Speaker 5: For the full 2022 fiscal year, we achieved FFO of $1.21 per diluted share and normalized FFO of $1.22 per diluted share. Our performing are original guidance by 8% and our performing our pre-pandemic earnings high with materially less reliance on fee income.
Speaker 5: Shilmore discussed our preferred equity and fee income strategy later on the call, reporting on our operational performance and providing additional insight. Last quarter, I spoke at length regarding our balance sheet transformation towards long term fixed rate, unsecured debt.
Speaker 5: and I'm pleased to report that we've made strong progress over the last few months continuing to execute our fiscal strategy.
Speaker 5: As you have seen in the press release from early December , partnering with one of our preferred lenders, we closed on a $100 million unsecured term load, mirroring the terms and conditions of our primary credit facility. This SOFA plus 130 basis point load was immediately swapped at an all-in rate of 4.8%.
Speaker 5: and we utilise the funds to pay off secured debt. The term loan facility has another $100m accordion feature that we will look to utilise this year to convert our remaining secured construction debt once the applicable projects from our development pipeline have reached stabilisation.
Speaker 5: Taking advantage of the favorable derivative market in early December , we also executed another swap for the national amount of $100 million at the all-in rate of 4.73%.
Speaker 5: This swap was placed on the term loan funds that we recast back in August , replacing the $100 million cap that expired earlier this month. As we transition the balance sheet, we'll endeavour to maintain our variable rate debt is 100% hedged.
Speaker 5: For the fourth quarter of 2022, the ratio of our Stabilized Portfolio debt to Stabilized Portfolio adjusted evidar remained consistent at 5.3 times. Our Stabilized leverage range between 5 to 5.5 times is a result of the continued implementation of our overarching financing plan.
Speaker 5: deploying our capital in the most optimized ways. As Luno said earlier, that financing approach, as part of our overarching diversified business strategy, was rewarded this month with a triple B credit rating, providing broader access to capital markets at a lower cost of funds, and the opportunity to further our balance sheet transformation.
Speaker 5: The team worked exceptionally hard over the last year to ensure that we were well positioned for this rating and I'd like to take this opportunity to thank everybody at a Marda Hoffler who was involved.
Speaker 5: The EBRS Morningstar identified a number of strengths supporting our investment grade rating, including our market leading positions in the Mid-Atlantic and Trophy Assets in Baltimore, our high degree of diversification across asset classes within our commercial tenant base that mitigates exposure to cash-rovalatility.
Speaker 5: and our historical event-dark interest coverage that has been strong for several years.
Speaker 5: Whilst we're in no hurry to enter the private placement market, we will monitor market conditions and look to transact when the environment is favourable.
Speaker 5: in the fourth quarter.
Speaker 5: Our weighted average cost of debt remains low at 3.6%, illustrating the success in maintaining that our debt is 100% fixed or hedged and reducing the risk of uncertainty in this rising interest rate economic cycle. Assuming the forward yield curve stays reasonably consistent with the current projection.
Speaker 5: Our expectation is that our weighted average cost of debt will be below 4% for 2023 and 2024.
Speaker 5: As mentioned last quarter, we refinanced the gains for the apartments with a $30 million loan, price significantly below the construction note. This means that we do not have any debt maturities in 2023 and the small amounts of secured debt maturing in 2024 will be paid off at maturity.
Speaker 5: As you can tell, the execution of the balance sheet transformation is going exceptionally well. We have strong leverage metrics competitive with our peers, a low cost of debt and no maturities in the next two years. That coupled with maintaining our strong liquid position means we are intentionally structured for our investment team's opportunistic acquisitions. As Lune mentioned.
Speaker 6: eye standpoint and it's 43 year history.
Speaker 6: That said, we are now focused on 2023 targets and the teams that are monoppler remain hyper-focused on execution and operational excellence.
Speaker 6: to ensure that the positive trend continues. And that value creation remains top of mind.
Speaker 6: We believe that best in class execution throughout the portfolio, safe and reliable construction services.
Speaker 6: Combined with seamless execution of high quality development projects.
Speaker 6: We'll continue to create sustained shareholder value for years to come.
Speaker 6: Please refer to the supplemental package to review our operating portfolio highlights. I would like to call out a few of the noteworthy operational metrics.
Speaker 6: 2022 full year same store NLI for the portfolio was 5.6% on a gap basis.
Speaker 6: and 6.7% on a cash basis.
Speaker 6: with multi-family coming in at 10.2% on a gas basis.
Speaker 6: 4-year 2022 releasing spreads on the commercial portfolio were positive 8.4% on a gap basis and 2.9% on a cash basis.
Speaker 6: As you can see from the performance, our asset management team is extremely diligent in execution of our operations.
Speaker 6: Our team remains intimate with the overall performance of these assets, as well as the property management teams that act as an extension of our management.
Speaker 6: This focused approach enables our team to not only react to trends and issues at the asset level, but also to forecast and prevent issues that would otherwise affect NLI at the With the Property.
Speaker 6: One example of this diligence is the continued refinement of our post-COVID era commercial tenant watch list.
Speaker 6: This process, the useful indicator focused on our tenants who are or who may be potentially at risk due to various economic factors in the market.
Speaker 6: Two of the higher profile tenants inhabiting the watch list are bed, bath, and beyond and regal cinemas.
Speaker 6: Bad bath and beyond has been a focal point given recent financial challenges. However, neither of the two stores in our portfolio are targeted for closure.
Speaker 6: As a result of the strength of the stores in our portfolio, we have elected not to reserve against them at this time.
Speaker 6: Following recent news on Bad Bath & Beyond, the Patterson location in Durham, North Carolina, has received an unsolicited inquiry from a popular credit tenant who would like to fill the space should it be vacated.
Speaker 6: In our Virginia Beach location, the store is a strong performer amongst its peers. That said, we hope this space becomes available in order to take advantage of our long contemplated redevelopment plans by adding apartment units at town center.
Speaker 6: We also have two regal cinema locations within the portfolio. The Harrisonburg location is a strong performer. However, it sits on approximately 10 acres that represents a prime redevelopment opportunity.
Speaker 6: In Virginia Beach, the regal sentiment is adjacent to the aforementioned bedbath and beyond site and is ideal for redevelopment into multi-family community at town center.
Speaker 6: We are not concerned about any other properties on the watch list given the strength of their locations.
Speaker 6: In terms of office, we remain highly leased at 96.7% with a high quality roster of tenants.
Speaker 6: As DBRS Morningstar recently stated, the office occupancy rate continues to remain stable in the high 90% range.
Speaker 6: And the company is facing issues with tenant expansion requests given the lack of available space.
Speaker 6: We are working with one high credit tenant who we expect to take space at some point in 2023. This will result in yet another high quality global firm located at Town Center in Virginia
Speaker 6: Our residential portfolio continues to thrive. We are now seeing rent growth moderate to a single-digit pace as we have previously forecasted and underwritten. As a result of our conservative approach.
Speaker 6: are well positioned in terms of portfolio rent growth and yields for multifamily units currently in the development pipeline.
Speaker 6: Our portfolio is resilient and its diverse makeup continues to provide stability and predictability in the company's overall performance.
Speaker 6: The diversity can be characterized in a couple of ways. First, we have robust diversity and property type, which is certainly beneficial over time.
Speaker 6: Secondly, at DBRS Morningstar States, the asset quality of our multi-family portfolio and the quality and diversification of our commercial tenant base support a high degree of credit rating.
Speaker 6: Additionally, and more likely the case during times where market conditions increase competition, our mixed use assets help perform the competitive set.
Speaker 6: These competitive advantages give us the ability to remain the beneficiary of the flight to quality and maintain steady earnings growth over time.
Speaker 6: Our construction and development projects are progressing according to schedule as we approach the spring months.
Speaker 6: They have significant value creation underway and most importantly the projects are being executed in a manner that is consistent with the underwriting.
Speaker 6: As we reported last quarter, our Gainesville project leased up in record time and is now operating in a stabilized state.
Speaker 6: We couldn't be happier with the performance of the asset developed in conjunction with our partners at Tuwurliger Pappas.
Speaker 6: Our Chronicle Mill asset in Belmont, North Carolina continues to outperform expectations.
Speaker 6: both in the form of rent and lease up schedule.
Speaker 6: This unique rehabilitation project has been a resounding success and was over 93% least at the end of quarter four 2022 with construction being material complete on the site.
Speaker 6: The highly anticipated solar post asset in Roswell, Georgia is proceeding as planned. The mixed use project will become the trophy asset in the submarket.
Speaker 6: with high barriers to entry.
Speaker 6: Construction on T-Row prices global headquarters is well underway on schedule and proceeding as planned.
Speaker 6: This project is unique. Is it situated next to our Will's work asset and adjacent to our constellation asset?
Speaker 6: We are best positioned to construct and develop this project, given our understanding and familiarity with the harbor point market and deep experience constructing a significant portion of the waterfront and Baltimore. We are excited that this building is coming to fruition.
Speaker 6: This built-to-suit project is expected to achieve initial occupancy and simultaneous stabilization in the third quarter of 2024.
Speaker 6: Next door, construction of the Allied apartment at Harbor Point is also well underway.
Speaker 6: We are bullish on this project given our knowledge of the apartment sub market in location adjacent to our trophy 1405 point street multi-family asset.
Speaker 6: This project is on schedule and like T-Rote price, it's also expected to be ready for initial occupancy in the third quarter of 2024.
Speaker 6: Our partners at the Williger Pappis repaid the entire Solace Next and Loan balance on the last day of 2022, resulting in a 30% return on investment in less than two years.
Speaker 6: This is a great example of the types of preferred equity investments we look for.
Speaker 6: multi-family apartment projects and growing markets.
Speaker 6: In the Southeast, at a manageable investment size with priority in the equity stack, significant spread over basis
Speaker 6: All of which virtually assures our return and creates a true lower risk higher return opportunity.
Speaker 6: So this city park and Charlotte and Gainesville 2 and Gainesville, Georgia are also preferred equity arrangements with to royaler pappis.
Speaker 6: Both projects are well underway with initial occupancy expected in the third quarter of 2023 and the second quarter of 2024 respectively.
Speaker 6: As with the rest of our preferred equity portfolio, we would love to own one of these assets if the opportunity arises.
Speaker 6: The interlock developed by our partners at SJ Collins continues to perform well at 90% occupancy.
Speaker 6: The mixed-use asset located at Maine and Maine and West Midtown Atlanta is expected to trade for a healthy profit.
Speaker 6: As Lou mentioned earlier in the call, we intend to strategically acquire accretive assets in 2023.
Speaker 6: The interlock is certainly a potential candidate.
Speaker 6: We are closely managing the fee income portion of our business, both in construction and preferred equity.
Speaker 6: From a construction perspective, our income has increased temporarily, given the incredible opportunity to construct and partnership with T-Row Price, their global headquarters.
Speaker 6: The experience of our management team combined with the focus on shareholder value creation is a key element driving the success at Ramada Offler.
Speaker 6: These congruon objectives are embedded as a result of the significant ownership state held by our management team.
Speaker 6: This alignment ultimately results in mutual interest with our shareholder base and are therefore appropriately guided in every one of our business decisions.
Speaker 6: The Armada Houghworth team continues to exceed expectations.
Speaker 6: especially, as Lou mentioned, outperforming the guidance during each quarter of this past year.
Speaker 6: I would like to say thank you to our incredible team members throughout the organization for performing at the highest levels. We look forward to an increasingly successful year in 2023. I will now turn the call back over to the operator for questions.
Speaker 1: Thank you, sir.
Speaker 1: Ladies and gentlemen, we will now begin the question and answer session.
Speaker 1: If you would like to ask a question, please press star followed by the number one on your telephone keypad.
Speaker 1: If your question has been answered and you would like to withdraw from the queue, please press star followed by the number 2.
Speaker 1: And if you are using a speaker phone, please lift the handset before entering any keys.
Speaker 1: Please stand by for your first question.
Speaker 1: your first question comes from Dave Rogers of Baird. Please go ahead.
Speaker 7: Yeah, good morning everybody and congratulations on the debt rating. I know you've been working on that for a while. Maybe start with Lou and Sean with respect to the acquisition pipeline and the OP units you'd want to use. A couple thoughts there or questions. First, can you give us a little bit more detail maybe on what you're seeing? Is this more distressed out of the private side, more traditional relationships that you have?
Speaker 4: So, as I mentioned previously in the call, we've identified a few opportunities that basically are from long-term relationships.
Speaker 4: folks that own properties that we'd be very interested in acquiring. Again, off market at the right number with the opportunity to increase NOI.
Speaker 4: As Sean mentioned, the interlock is a possibility, as I've said, for several quarters. If there is an opportunity to transact on that at a discount, that would be one. There are a few others. Obviously, we don't want to go too far into particular names there.
Speaker 4: It's the sort of thing that you've seen us do time and time again over the years using OP unit prices at premium levels for properties that would be immediately accretive.
Speaker 4: We put that wide range in there because we're not sure who's actually going to meet our criteria.
Speaker 4: As far as methods of financing, as Matt mentioned, we're at or near an all-time high on liquidity. We're also looking to deploy OP units.
Speaker 4: and obviously there could be some construction debt as well as the private placement market when the time is right.
Speaker 4: seguridad of
Speaker 1: Hello. My apologies. Our last caller has been removed from the queue. Your next question will come from Peter Abramovitz of Jeffries. Please go ahead.
Speaker 8: Yes, thank you. I just wanted to ask in terms of the growth trajectory for 23 that's implied in the guidance. Could you give a little bit more detail on what's kind of assumed in terms of change or growth I would imagine. It's it.
Speaker 8: probably flatter negative on office, given the move out, but positive elsewhere. But just any more color you can give around that.
Speaker 8: flat or negative on office, given the move out, but positive elsewhere. But just any more color you can give her on that.
Speaker 4: Good morning, Peter, and I'm not sure where you're picking up the negative. Our projection is that office will continue to...
Speaker 4: be positive on the same store basis. I'm not sure there's a move out, but there's already a move in beyond that as well as significantly a growth across the sector.
Speaker 4: So bottom line is all sectors are forecasted to be positive in St. store growth. We think that as Sean mentioned.
Speaker 4: Multi-family is going to moderate into the low single digits. So it's historical range. Retail is going to continue to outperform as well office. And then the biggest part of that NLI growth is a full year of the two newly stabilized apartment properties that we brought online last year.
Speaker 4: And lastly, the stabilization of Will's War, which again, we'll have a four-year this time around.
Speaker 8: Okay, got it. And what's the timing of the leases that you have in place to back over and J.H.U. medicine move out?
Speaker 4: Yeah, that's being back to it by Morgan Stanley and I think it doesn't come online until the first of the year. We can get that answer for you.
Speaker 6: Do you have that, John ? Yeah, rent commencement is the beginning of 25. So January 25. And we'll get you a little more detail on that. But yeah, the rent commencement dates 1, 1, 2, 5. That coincides well with the JGU expiration.
Speaker 4: So, yeah, I think where your head is, there's a gap there, but it's totally washed over by the increase in NRI from the other tenants moving in as well as the rest of the office portfolio.
Speaker 8: Okay, make sense. And then just in general, can you talk about sort of the private real estate market? Yeah.
Speaker 8: And he signs of things kind of going out there and
Speaker 8: convergence and more activity between fire and solar expectations as well as that.
Speaker 8: and more activity between fire and solar expectations as well as the financing side.
Speaker 4: Yeah, I think in terms of acquisitions, dispositions and the like, I think people are still searching for what true cap rates are. We don't think that's really going to settle out until...
Speaker 4: later in the year hopefully. So price discovery is an issue. That's why frankly we're not interested in looking at anything that's out on the market, but are hoping to transact privately with some close relationships that we already have.
Speaker 4: In terms of financing, I think everybody is of the same mind, banks are a bit more cautious about deploying capital across all property types. Our long-time partners in the multi-family side are seeing that construction loans are now
Speaker 4: Angling towards only 50% where as everybody knows a few short years ago we were talking 75 and 80%. So obviously the need for equity is more than ever and we're getting many more opportunities than we possibly can.
Speaker 4: can transact on. So we're basically in a position in Cherry Pick, the right assets that with potential ownership, either on a Mezzanine, preferred equity, or ground up basis.
Speaker 9: Got it. Let's all from me. Thank you.
Speaker 1: Your next question comes from Rob Stevenson of Janney. Please go ahead.
Speaker 4: Good morning guys. Lou, I think in your comments you indicated that you're too excited to exit the T-Row Pride JV upon completion. Is that a 2025 transaction for you guys?
Speaker 4: Well, the property will be occupying in a third quarter of 2024. So we have to look at market conditions whether that's going to be a day one disposition or hold until early 25. And of course, you've got a significant marketing effort as well. So.
Speaker 4: And Rob is always want to make sure it's clear that that's our current thinking and skills really.
Speaker 4: We love the venture, we love the building, obviously we're going to own everything around it. We're just a little concerned about the concentration as well as we love to get that capital back and redeploy it. Again, assuming that cap rates settle out where trophy building can transact at a reasonable level.
Speaker 10: Okay. And then I think you and Sean both talked a little bit about redevelopment. Can you talk about what the sort of near term redevelopment plans are, especially in the portfolio, especially if you don't get the bed bath or the regal stuff back in the near term? Where else is there opportunities for you guys?
Speaker 10: and when are those type of, wouldn't the timeframe for start and or completion of the opportunities that you have in the portfolio today?
Speaker 4: Thanks Dave, I'll let Sean answer it more specifically, but as far as redevelopment, those are the only properties that we have that we'd be looking to take down and change uses. And we're frankly anxious to kind of sitting in the cathode, we're collecting a ton of déf right now.
Speaker 4: but at the same time, long-term we'd love to see a multi-family in both of those locations.
Speaker 6: with regard to ground up development. Sean, are you looking at an awful lot of stuff? Sure, yeah, I think there's no shortage of opportunities out there, as you would imagine. And so we're seeing a lot of deal flow. To lose point back on the redevelopment, we are happy to collect rent and watch construction prices.
Speaker 6: you know, kind of stabilize or come down. That helps, obviously, the yield and helps our business case. In terms of ground-up development, here in Town Center, we have, as you know, Rob, an opportunity for a site here, should the opportunity arise, to develop a mixed-use building. We've been calling that parcel our Block 2.
Speaker 6: And in Baltimore as well, we have the opportunity to, if we want, to elect to build more multi-family units subsequent to the Allied units that are there today or being built today. Our partners across the spectrum continue to bring deals. I mean, we looked at three deals last week.
Speaker 6: in the multi-family space. So we're seeing strong deal flow there. We just, we're setting, we've been very diligent and discerning about which opportunities to pull the trigger on. So I think, you know, from our perspective, yes, there are redevelopment opportunities, but probably in the shorter term, there are actual ground up development opportunities that make more sense for us, assuming that the rent continues to come in.
Speaker 10: in specific quarters at this point.
Speaker 5: Today, good morning Rob, today in our guidance, where the time has been, we've spread it roughly even, there is a potential opportunity for one of our preferred equity deals, like Solus Nexton came early in 2022, potentially Solus City Park.
Speaker 5: could be sold and come early in 2023, but we have not put that in the base case of guidance that would be potentially upside. But yeah, you know, we feel that, yeah, we fairly evenly spread throughout the quarters and we will see kind of as Lu and Sean talked about the potential acquisitions that we're placing.
Speaker 10: investment or two throughout the year.
Speaker 10: That's just a three that are active right now. Okay, so anything in addition to that on a net basis would push guidance up at that point.
Speaker 10: that are active right now. Okay, so anything in addition to that on a net basis would push guidance up at that point.
Speaker 5: Rob, there is one additional mezzanine preferred equity deal with our preferred partners, TP, Solar's canisar, that is in the model. Hopefully that will close in the first quarter of this year to replace the Solar's next and the transacted early.
Speaker 1: Okay, that's helpful. Thank you very much. Your next question comes from Dave Rogers at Baird. Please go ahead.
Speaker 7: Hey, sorry about earlier, but thanks for the answer to that first question. Followed for me, Lew on the construction side of the business added quite a bit of the backlog in the fourth quarter. Curious about just what you're seeing kind of in construction overall, including maybe some cost increases that you're still seeing. But I guess with regard to the backlog, are you just seeing an acceleration of development with this just unique Darmada?
Speaker 4: and we're the beneficiary of that and will continue to be so for the next couple of years. In terms of pricing, things have moderated. We're still putting escalations in contracts, but not nearly to the extent that we were at this time last year and through the spring. We're not really seeing, and I don't think anybody is expecting that there's gonna.
Speaker 1: follow-up. Your next question comes from Camille Bonnell of Bank of America. Please go ahead.
Speaker 11: Hi, good morning and nice job on the investment grade credit rating. It sounds like from this call you have a number of potential investment opportunities this year. Can you just elaborate a bit more about the plans, sources and uses of capital just in the context of your medium term leverage targets?
Speaker 4: That's right.
Speaker 4: Sure. Camille, the...
Speaker 4: Right now we've got a number of sources of equity and we're staring at a lot of opportunities to pick up some really good properties on an off-market basis. Like I mentioned before, using the company's stock at a premium price. So we're excited to get that done.
Speaker 4: Matt's got a lot of arrows in the quiver. And of course we've now added the private placement market. Plus we have the ability to expand our credit line through an accordion feature as well as liquidity we have on balance sheets. And so we're feeling that with acquisitions we'll stay in that range that Matt has...
Speaker 4: over 14 months. We still have non-core assets that we can use if necessary for a ready source of capital. Plus I mentioned the T-rope price exit is a potentiality. So there's a number of different ways we can go, but our expectation is that we're not gonna get out of that range that Matt had mentioned.
Speaker 4: Also, important to note is that it is in our guidance that the interlock will transact, irrespective of who buys it, that $80-some million will not be outstanding come the end of the year, is our forecast. Thank you. I appreciate the call over.
Speaker 11: And many of my questions have been answered already, so just one follow-up as I wanted to make sure I caught your earlier comments on the same store outlook, as you're expecting at OIK increase next year. So are you saying your expectations for occupancy will remain positive or improve in 2023, even factoring for any?
Speaker 4: and then move out in your office or retail portfolio? Sure. Well, understand improvement is relative. We're starting from a base of 98% occupied. So there's not a lot of extra space to lease. As Sean mentioned, we're essentially trying to shoehorn one more tenant into town center here in our office space.
a global organization as well. Our expectation is that we're going to stay at or near or slightly above that 98 percent level in office and retail. We are projecting that that multi-family will moderate again back to historical norms of being in the mid-90s.
with single-digit increases as opposed to what we've all seen the last couple of years.
Okay, thank you. Your next question comes from Chris Sakai of Singular Research. Please go ahead.
Hi, good morning. Can we talk about the main drivers for the normalized funds from operations, growth and guidance?
Yeah, I think if you look at the guidance package,
The main drivers are really twofold on page three of the guidance.
The guidance deck. Portfolio analyze is the biggest increase, and that again is basically two factors. One being same store sales being up across the board in each of our sectors, as well as a full year newly stabilized properties.
which obviously on a year-over-year basis gives a pretty significant boost. We're also forecasting pretty substantial increase in construction income based on that $600 million backlog that was...
that we mentioned. Our guys, I'll take a second to say our guys are doing a phenomenal job. If you can imagine, we basically doubled our historical backlog that a lot of large complex projects and they're running full out.
doing a great job for. And lastly, the moderating effect of both of those on the negative, if you will, side is that we're projecting interest income to go down from 2022 levels.
as I mentioned, as part of our free program, to decrease our reliance on that free income and use more of our capital for our own portfolio.
and put it all together, it's a pretty healthy increase. Okay, all right, thanks for that. I suppose this question is for Matt. For 2023, how should we be looking at rental expenses? Should it be roughly the same or increasing from current levels?
Yeah, good morning Chris.
We believe that our margins on the NLI will be fairly consistent with what we've seen in 2022. So, you know, we will see a uptick in rental expenses, but our NLI is growing.
that will be kind of contrite by the increase in rental revenue. Okay, thanks for those answers. Yeah, Chris, it's all so worth noting that in the commercial side of the business.
a portion of those expenses are also reimbursable or pass-through paid for by our tenants.
Okay, thanks.
Ladies and gentlemen, at this time there are no further questions, so I will turn the conference back to Lou Haddad for any closing remarks.
Thanks for all your time and attention this morning. We are proud of our results. I appreciate your interest in the company and look forward to further announcements coming soon. Thank you.
Ladies and gentlemen, this does conclude your conference call for this morning. We would like to thank you all for participating and ask you to please disconnect your lines.