Q2 2023 Armada Hoffler Properties Inc Earnings Call
Good morning, Ladies you gentlemen, and welcome to the our mother Hoffler second quarter of 2023 earnings Conference call. At this time all lines are not listen only mode. Following the presentation Liberal.
If at any time during this call you require immediate assistance. Please press zero for the operator.
Good morning, and thank you for joining your amount of Hofler second quarter of 2023 earnings conference call and webcast on the call. This morning in addition to myself.
C L Matthew Barney Smith.
And Sean.
Oh.
The press release announcing our second quarter earnings along with our supplemental package registering at it this morning.
A replay of this call will be available shortly after the conclusion of the call through September 3rd 2023.
The numbers to access the replay are provided in the earnings press release.
The lesson to the rebroadcast at this presentation, we remind you that the remarks are made here in our as of today August 3rd 2023 and will not be updated subsequent to this initial earnings call.
During this call we may make forward looking statements, including statements related to the future performance of our portfolio our development pipeline.
Active acquisitions, and desperate attention or mezzanine program or construction business or liquidity possession, our portfolio performance and financing activities as well as comments on our guidance an outlet.
Listeners are cautioned that any forward looking statements are based upon management beliefs assumptions and expectations taking into account information that is currently available these beliefs assumptions and expectations may change as a result of possible events or factors not all of which are known in many which are difficult to predict and genuinely beyond our control.
Today, we reported earnings for the second quarter of 32 cents per share in.
In line with our expectations and consistent with our full year guidance.
As you can see from our press release the portfolio continues to deliver positive growth in the same store sales and releasing spreads.
While maintaining a company wide occupancy over 97%.
We continue to prove their best and market properties yield impressive results in most any economic climate.
Sean and Matt will give you the details on the quarter as well as the current state of operations and financial metrics.
I'll give you an overview of a few longer term initiatives, we intend to pursue over the next 18 to 24 months.
For years, we've been describing the advantages of our business model.
Vertical integration of the development process asset class diversification.
Mixed use environments and best in class properties.
Are all important factors in our platform as well as our value proposition.
This approach to real estate 44 years in the making.
Has produced substantial growth over the last 10 years.
Since our I P. O in 2013, we have increased our asset base over five times.
Expanded our market cap nearly four times.
Doubled our earnings per share.
And perhaps most importantly to investors outperformed the REIT index on a total shareholder return basis over the same period.
All this despite the challenges of the pandemic and the current disfavor of the commercial real estate sector.
Which has impacted property values, consequently, reducing or multiple and undervalued or equity.
While this may be viewed as respectable performance by many.
It's by no means satisfactory to us.
Our goal remains to demonstrate the true worth of superior assets, both property and human.
In return the equity value to its previous highs and beyond.
Regardless of the macro environment.
Oh and the next one to two years in addition to continuing measurable growth and earnings and dividends we.
We intend to make strategic moves that should drive significant outperformance over our peers.
As well as reinforce the flexibility.
<unk> and foundation of strength of our diversified platform.
How about a half where it has a well established history of telling the market we intend to accomplish.
Executing.
And reporting back the positive results.
We expect similar performance going forward.
We took an important step in this process last month on our board authorized the limited stock buyback program.
This initiative is predominantly men to give us a headstart on retiring our preferred equity shares which are callable next spring.
It is our intent to eventually fully extinguish the entire series.
Around this time next year, we will complete all current construction projects at Harbor point on the Baltimore waterfront.
T Rowe price will begin their movie and process and the adjacent ally departments will start the lease up-phase.
Shortly thereafter, we intend to begin marketing some combination of our joint ventures, and or selected wholly owned assets within the development.
Make no mistake, we believe strongly in the viability and growth prospects for all the uses that Arbor point.
In fact, we intend to continue developing their alongside our longtime partner redevelopment group.
That said.
With four Premier quality office buildings, featuring many fortune 500 companies on long term leases.
And a 700 luxury apartments.
Selective disposition of some of the trophy assets in the development will significantly reduce our capital allocation.
Thereby enabling us to expand and hire Grove southeast markets.
Mitigate concentration risk and further deleverage the balance sheet.
By utilizing all the tools in our toolbox.
Construction capacity preferred equity mezzanine lending and season development partners.
We expect to achieve significant portfolio expansion with minimal strain on the balance sheet, while continuing to release the value created by our development activities.
Sean will update you later in the call on new multifamily opportunities that we are executing.
Unrelated note, although we don't anticipate exiting any assets at town Center of Virginia Beach, we.
We have decided against expanding the multifamily counts at the complex at this time.
Instead after we received the adjacent bed Bath and beyond sight back. We will proceed with returning and expanding the property with new retail tenants.
This decision affords us a much greater return with significantly less capital commitment.
And further enhances the retail and entertainment options for our patrons.
This also allows us to redirect additional funds for multifamily investment and higher growth areas.
Sean will comment on these details as well.
This ability to pivot our emphasis among asset classes and Submarkets is an advantage that is enhanced our profitability for over four decades.
With the continued strength of the portfolio robust fee income.
The lease up of new properties R.
Our expectation is for continued growth in earnings and asset value next year.
Additionally, we believe that the strategic moves that I've described today, we're meaningfully accelerate year over year increases in virtually all our financial results in 2025 and beyond.
Now I'll turn the call over to Sean.
Thank you.
Teams throughout our organization remain highly focused on disciplined execution in all areas of our business.
Our modern authors approach to value creation is bolstered by our commitment to company values, which in turn drive our actions and focus on achieving our goals even in this tough economic environment.
We are operating efficiently with continued high levels of occupancy healthy releasing spreads and a substantial third party construction backlog.
We believe that best in class performance throughout the portfolio.
Safe and reliable construction services combined with seamless execution of high quality development projects will continue to create sustained shareholder value for years to come.
The supplemental package contains a recap of our operating highlights I would like to call. It a few of the noteworthy metrics that are contributing to our continued growth and sustained high occupancy across the portfolio.
2023 quarter two year over year same store NOI was positive in all segments and.
And was 4.8% on a gap basis, and 2.9% on a cash basis mulch.
Multifamily was 4.3% on a gap basis, and three 6% on a cash basis.
Office was one 3% on a gap basis, and 2% on a cash basis.
Retail with seven 5% on a gap basis, and 3.1% on a cash basis.
2023 quarter, two year over year, releasing spreads on the commercial portfolio were positive, 8.9% on a gap basis and 7.3% on a cash basis.
Or multifamily sector is growing consistently at mid single digits on par with our forecast for 2023.
We are focused on optimizing both revenue and expense management as we look to grow the residential portfolio within our geographic footprint over time.
The retail segment is also experiencing sustained elevated levels of Lisa at 98.2% across are nearly 4 million square feet.
In terms of office performance, we remain well least at $96, 2% inclusive of the NOI acquisition, which contained a small amount of agency.
On that note a portion of our team has been relocated within the our motto Hofler tower here at town Center.
K P. M. G has subsequently taken possession of their new space and we expect them to be in by the end of the year.
His flight to quality has again increase the percentage of office space leased it town centre, which currently sits at 99.4% of the nearly 800000 square feet.
As a result of the high occupancy and continued demand we are discussing future office needs with our tenants.
These ongoing discussions create alignment and also provide insight into opportunities that may exist to accommodate additional tenants looking to relocate and to tell sir.
Retail performance remains strong and we are capitalizing on the momentum.
We recently signed a long term lease with Lego for Prime retail space had our town Centre, Virginia Beach.
This is yet another example of a high credit Senate seeking out space in our flagship development.
We are excited about this new to market retailer in a positive effect. The Lego following will have on traffic within our ecosystem.
But tell us on our watch list remained materially similar to last quarter. Our focus has been on the opportunistic next steps for our two bed bath and beyond store locations.
Conversations with new tenants are continuing for the Durham, North Carolina space, We expect a positive outcome and we'll update you as soon as possible and.
In Virginia Beach. The decision is based on an opportunity cost equation with an emphasis on the best long term value creation for the six acres.
Ultimately the outcome of our due diligence exercises points to a high end high quality retail focused redevelopment site.
We have narrowed the list of potential tenants to a preferred shortlist of suitors.
The program will likely involve modifications to include one or two major high credit retailers with a very limited amount of high end small shops supplemented by a strategic out parcel user.
We intend to continue our relationship with Regal, However, should the opportunity arise we would love to redevelop pays to as a supplement to the bed Bath and beyond site that provides for a natural flow of town centre expansion to the east.
As you May recall, our initial redevelopment plans included potential for inclusion of multifamily units we.
We have determined that the capital earmarked for multifamily will be best invested outside of town centre, given that we already own the trophy assets and the sub market and the retail opportunity sat being negotiated will provide better returns.
Our analysis is that multifamily investment outside of town center combined with the focus on a retail driven program at the bed Bath and beyond sight ultimately results in yielding the highest overall return on shareholder equity the best use of the property a more diverse geographic footprint in the southeast and a greater contribution to niv.
As you can see our portfolio comprised of state of the art properties and superior locations continues to operate consistently well throughout economic cycles.
The complimentary property types and trophy assets and spirit locations combined to outperform the competitive set.
The T Rowe price Global headquarters project to Harbor point is continuing to take shape and is on track for turnover in the summer of 2024.
The adjacent 312 unit Allied apartment tower is also one plan for delivery in the third quarter of 2024.
At Southern post in Roswell, GA, we are making significant progress toward the initial delivery early next year. So.
Since our last earnings update the retail space has moved to 86% leased or under LOI.
As we noted last quarter, we are working through lease arrangements with a high credit tenant who is targeting approximately 40000 feet of office acquainting to 40% of the office space.
Chandler residences, the recently named multifamily component at Southern post.
Is a high quality offering and a market with a limited supply of leasable residential units.
Programming and marketing efforts for the project had been very well received and we expect considerable success and speed and the Lisa.
Additionally, I would like to elaborate on a few noteworthy strategic topics. Some previously mentioned by <unk>.
Last quarter, we discuss strategic growth initiatives underpinned by both acquisition and development of high quality well located throughout the real estate.
As you know we had our motto Harper create value for shareholders through leveraging both our construction and development expertise as well as our extensive partnership network to manufacture and acquire well located trophy assets.
Additionally, we are fortunate to be able to leverage those partnerships created along the way that provide access to high quality assets on and off market basis.
Last quarter, we focused on the acquisition approach while transaction on the airlines.
<unk>, writing that our strategy continues to produce results.
We are settling into the management of this trophy asset while studying opportunities to create upside beyond the NOI acquired in the transaction.
We look forward to updating you on our initiatives as they come to fruition.
To continue the theme of sourcing high quality real estate the existing relationships one of our largest opium unitholders.
Philly, it's a venture Realty group presented us with a unique opportunity to invest in the development of a new 280 unit class a multifamily apartment community.
The allure Edinburgh.
The transaction requires minimal upfront capital and provides us both their preferred return on investment and the ability to acquire the asset upon completion and stabilization and a future O P unit transaction.
But the average and median household incomes and the Zipcode within Chesapeake, Virginia are the highest among all the markets in which we invest including Atlanta and Charlotte and.
Insistent what their overall investment thesis we are excited about the potential to earn what will be the best asset and a growing secondary market with strong fundamentals at an attractive going in basis and yield.
We have source two additional high quality multifamily projects that will fill our preferred equity and mezzanine platform allocation.
Soulless Kennesaw and soulless Peach Street corners are both located in a sub market outside of Atlanta.
These developments will be executed by our trusted partners at <unk>.
Together these opportunities allow us to continue increasing exposure to the greater Atlanta markets.
And may ultimately yield the opportunity to own either of the assets, thereby creating additional concentration in these high growth markets.
Finally, thank you to the talented colleagues that amount of Hofler, who are manufacturing and managing high quality assets within our portfolio.
We are performing well. However is Lou previously stated we are not satisfied with our equity value and as a result will remain laser focused on our mission of leading in the right space by consistently creating long term value for our shareholders.
I will now turn the call over to Matt.
Good morning, and thank you shop at.
Another compelling performance by our team continuing to deliver consistently strong results across all operating metrics.
We reported <unk>, a 35 cents per diluted share and normalized at best buy a 32.
I do to check in line with guidance and slightly above analyst consensus we maintained our guidance range Accordingly, and normalized FFI of one dollar and 23 cents to one dollar and 27 cents per diluted share.
Stabilized leverage metric remains in our target range at five five times.
<unk> that is included leverage has risen to 71 times slightly elevated from last quarter.
This metric will temporarily increase over the next few periods until the assets in our development pipeline stopped producing cash flow.
Leverage is anticipated to decrease back into our target range is EBITDA continues to Greg.
Service coverage ratio fixed charge coverage ratio was 2.7 times and 2.3 times, respectively, demonstrating our team's ability to manage and execute a balance sheet strategy in the adverse market conditions. We are all experiencing liquidity position continues to be strong at roughly 100.
Immediate more than ample to cover the 2023 cash requirements for our remaining development pipeline and the preferred equity investments that she'll mentioned area.
This combined with a well structured debt maturity ladder means that we can continue to grow earnings while supporting the team and achieving uprights objectives.
For reference as stated last quarter, we have no debt maturities in 2023, and we expect a small amount of debt maturities in 2024, and 2025% to be paid off and maturity, adding these previously secured assets to an incumbent borrowing base.
As interest rates continue to fluctuate we will monitor the environment to ensure we Eva convert the variable rate debt to loans have fixed rate debt and the private placement markets or leather in new hedge positions when our current setup positions mature.
Blue discussed our growth strategy earlier on the coal and we continue to strengthen our balance sheet to support these efforts and Jane we started the process of increasing the capacity of all revolving credit facility that came to add $100 million through the accordion feature.
We're excited to report that we have had over 75% of the funds committed to date.
In addition to our establish lending great, we're adding Barclays bank as a new lending relationship.
Attracting top talents whether that be internal colleagues on the team or external support from our partners is key to driving success.
Adding this full service financial institution, clearly demonstrates our capacity to grow and execute the strategy New described as we look ahead over the next 18 months the funds from plan disposition, coupled with our expected capital markets activities are anticipated to be split between growth in the southeast.
And deleveraging all balance sheets.
Another item of note this quarter was attracting an additional partner to a unsecure term life. He used to fund the interlock acquisition.
This additional $20 million allows us to pay down the capital that we used from a line of credit at closing.
As you will recall, we swapped the whole $100 million at a noel and fixed rate of $4, 70%, which is very competitive in today's environment.
Continuing the theme of a derivative program in early July we made two transactions that limited the exposure of interest rates remaining higher for a longer period than was initially anticipated both transactions involve setting accardo positions and using the proceeds to buy down the right on the swaps to $3 for.
4%.
The combined notion of $250 million is the same notional amount is the initial cargoes and we will have the same maturity schedule.
Whilst these derivative transactions do not have a material effect in 2023, we anticipate a lower cost of that the 2024 as a result of these transactions.
Some of our derivatives mature in early 2024, and we would leave a convert the variable rate debt to long term fixed rate debt and the private placement market or lie or a new hedged positions.
I will now pass the call back over to the operator for the question and answer session.
Thank you ladies and gentlemen.
The question and answer session.
Question.
Followed by the number one on your Touchtone phone.
You would acknowledge.
Knowledge and your request.
Would like to cancel your request.
Clark.
If you're using a speaker phone before.
Your first question.
Comes from the line of Rob Stevenson.
Now open.
Good morning, Lu I know you said you aren't going to be moving forward with another apartment development of town Center right now, but you have call. It rough numbers 800000 square feet of office a town center. That's basically fully occupied is incremental demand there for another tower there and how are you thinking about office a town center today.
Thanks, Thanks Robin good morning.
Yes, there continues to be strong.
A strong desire for more office space here account center.
We are actually looking to.
Shoehorn in a couple of more tenants in the remaining space hopefully we can get some space back from a couple of folks that might be downsizing.
At this point in time, we're not inclined to launch a new tower.
That would take a significant anchor at a much higher rent.
And I think is the.
The market's willing to bear at this point so.
Continue to sit here with and raised rents a sustained level with full buildings.
Okay. That's helpful and then Sean any known move out from the office of retail portfolio of consequence at this point that popped up.
There is very little to speak up I was actually looking at this yesterday, Rob the we've got a couple of.
Folks were negotiating on a renewal basis, but no. We don't we don't expect any of consequence to move out.
Right and then the last one for me Lou.
You talked on the prepare comments about taking out the it's 675 preferred I understand doing that when that was.
Call it for something percent, but in the current environment and given that it never has to be repaid in is it treated as at least quasi equity what's the thought process here, especially with these interest rate caps burning off next year and the current interest rate environment.
Again, Rob will have to walk to see what.
With next spring brings in terms of rates and whether that still makes sense currently with the with the preferred trading at a discount.
We'd actually repurchasing back it basically an 8% rate.
So.
That was the reason for the authorization of the buyback.
Or whatever we can get it at a discount we're gonna take and then we'll see what we'll see is the market gives us next.
Next may when.
And we could get some more.
Alright, Thanks, guys I appreciate the time.
Your next question comes from the line of West.
Your line is now open.
Good morning, everyone wanted to go back to the Virginia Beach bed Bath location. I think you mentioned you might do some high end retail just wondering what kind of a halo effect. You may get are you looking at bringing in maybe a tesla Apple and it just kind of build up the whole area.
There are some very prominent tenants that are.
That are eyeing that site.
What remains to be seen.
Will actually which will actually transact on remember we've got it.
Got an entire ecosystem here west and what we're looking for is things that will add to the mix as opposed to more of the same.
And so there there is a couple of unique tenants that that may be better fit.
But hopefully by the end of the year will be able to make an announcement or two on what's coming but it's it's very exciting.
Here for town Center.
Okay and then.
We started it.
Somewhat resilient.
And it just kind of curious what you're seeing on the ground and you talk to a lot of the developers you provide a lot of financing you get the sense that those are going to start to fall off pretty dramatically.
Again.
From a macro level perhaps.
A market by market level, where we're in the highest growth markets that people continue to migrate to.
So the developers, we're dealing with predominantly in Charlotte Raleigh, Atlanta Charleston.
Are still seeing unprecedented growth.
At some point that you would imagine that that would change, but we continue to read the headlines about being 5 million housing units short.
In particular in the markets that I was talking about so.
For now it's.
It appears to still be all systems go.
As you know cap rates widened a bit on multifamily.
But not so much to dissuade.
People from executing on top quality sites.
Got it and then maybe just one more big picture question for the portfolio, you're gonna you're kind of mixing moving more to the southeast maybe taken down leveraged little bit how does this look maybe three years from now it's gonna be a dramatic shift is going to be at the margin, maybe five or 10 per cent geographical location change and then leverage maybe down a half turn to return and how should we think over.
Both of your view.
Yeah, I'll take the last part of that first.
Look for leverage to go down between a half and a full turn.
Basically what we want to do is move the.
Move the portfolio further south.
On an incremental basis.
We loved the properties that we own in Baltimore.
But we want to redeploy some of that capital of down South and so you're probably looking at a at a 10% move maybe as much as 20.
Okay. Thanks, everyone.
Two.
Your next question comes from the line of.
<unk>.
Your line is now open.
Yes. Thank you you mentioned 10 minutes is interested in about 40 per cent of the office space <unk> post.
Just wanted to ask you about overall demand for the rest of that space potentially kind of what you're seeing on the ground there.
How many crossbows to have on the overall components Sir.
As a pretty healthy prospect list and now that the buildings are are.
Are at a point, where they can start to be towards we're seeing a lot of activity.
We've got another lease for about 7000 square feet.
So and then.
As you know the office.
Okay, I'm sorry, the retail.
Almost completely spoken for at this point, we're seeing good activity Peter.
It's a it's a small amount of office and a very hot Submarket with limited opportunities for any kind of space.
We're very excited about with southern posters go ahead do in terms of earnings and.
2024.
Okay, and then more question on kind of the macro here I guess since your last call. The the possibility of the software and being in a quicker recovery become the prevailing narrative.
Any sense of how tenants are thinking in terms of.
Their behavior on the officer retail Saturday, noticing any changes and I'm, feeling more optimistic and and more willing to take to take on more space I guess any any impact your seeing in terms of their decision making.
I haven't seen a whole lot of difference the.
In terms of retail that the sales have been off the charts.
I don't want to generalize too much but I would say the predominant amount of tenants in our facilities have well surpassed 2019 levels in terms of sales.
And I think the largest issue that is facing them as staff.
Everybody's still hunting for staff.
On the office side as you might expect a lot depends on what business you're in we are heavily weighted to architecture and engineering as well as financial services and those folks all seem to be pretty bullish.
You remember earlier this year.
Re up to 250000 square feet with Morgan Stanley on it for 12 more years at Baltimore.
And we continue to see T Rowe price expanding into all of his face that they thought would be for additional growth.
With their new layouts. So it it seems folks are are pretty optimistic.
And and we're right with them it's interesting.
And our prior lives as private real estate developers.
We love this kind of environment.
With unemployment at all time low.
Since we became a right.
And we want the economy to keep chugging, along and we're gonna keep expanding.
Sure and then one last one for me kind of Big picture here. So.
[noise] Harbor point.
Do you think about the future do do you see opportunities to do sort of development on that scale.
You see the opportunity to do that in other places and is that something you want to do or is it kind of more a.
A case of blocking and tackling on just the one off things you see in the portfolio in your market says that you are doing with the opportunities right now.
It's.
It's a it's an interesting question, obviously, we'd love to do more Mega development and a growing sub market in in a location.
Those opportunities are few and far between but we're always have our eyes out for them I think more naturally what you're going to see is the kind of thing that we're doing in southern post and a satellite cities around the major metropolis.
Atlanta's on like the.
The satellite cities are presenting a lot of opportunities for mixed use developments.
In revitalizing older Downtowns, where people were.
Where the population is growing pretty significantly so I think you'll see <unk>.
More town centre ish type development, but it's going to be on a smaller basis in selected cities.
Got it so it's helpful Thankfully.
<unk>.
Your next question.
Okay.
Search your line is now open.
Hi, Good morning, I had a question on.
An office occupancy it looks like it take down a per cent. This quarter I wanted to get your idea of what were the drivers there and how do you guys see uhm occupancy rates in your guidance 2023.
I.
John answered specifically, but I think there is only one factor that contributed there.
Yeah, we we feel good about the office occupancy actually we feel great about it as I mentioned in the comments.
When we acquired the interlock last quarter and there was some bacon see some upside vacancy that came along with it which.
<unk> added to the denominator on our on our total square footage. So we've been rather consistent and if you look at the renewals and they're releasing we've done well there just hasn't been much activity because there hasn't been much change so for us we feel good about that and again, we've got upside to lease up to 2000 730000 feet down in Atlanta.
And we're active in that space. So again that'll just add to the to the overall income.
Chris I think if you if you took.
And a lock out of the equation and you'd be right back to that 98% office. So that again that was pretty much the entirety of the change.
Okay. Thanks for that and then.
It looks like interest income and your guidance has.
Picked up about 2 million or so from from last quarter, what what's driving that increase.
Cause I was one of the <unk> and then the other two subsequent to two quarter Rendina is July .
Okay. Thanks.
There are no further questions at this time please continue.
Thanks very much we appreciate your attention. This morning stay tuned for for more announcements and not too distant future. Thanks, very much take care.
And gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
Yeah.