Q4 2023 Armada Hoffler Properties Inc Earnings Call

Operator: Copyright 2020 Mooji Media Ltd. All Rights Reserved. No part of this recording may be reproduced without Mooji Media Ltd.'s express consent. Good morning, ladies and gentlemen, and welcome to the Armada Hoffler Fourth Quarter 2023 Earnings Conference Call. At this time, all lines are in the synonym. Following the presentation, we'll conduct a question-and-answer session. If at any time during this call you require any assistance, please press or seal for the operator. This call is being recorded on Thursday, February 22, 2024. I would now like to turn the conference over to Chelsea Forrest, Director of Corporate Communications and Industry Relations. Please go ahead.

Good morning, ladies and gentlemen, and welcome to the Armada Hoffler fourth quarter earnings Conference call.

At this time, well I finally found only mode.

Following the presentation, we will conduct a question and answer session.

At any time during this call jury grandmother. She can speak praised our seal for the operator.

Call is being recorded on Thursday February 22nd ranked anymore.

I will now like to turn the conference over to Chelsea Forest Director of corporate Communications and Investor Relations. Please go ahead.

Chelsea Forrest: Good morning, and thank you for joining Armada Hoffler's fourth quarter and full year 2023 earnings conference call and webcast. On the call this morning, in addition to myself, are Lou Haddad, CEO; Matthew Barnes-Smith, CFO; and Sean Tibbetts, President and COO. The press release announcing our fourth-quarter earnings along with our earnings guidance and supplemental package were distributed this morning. A replay of this call will be available shortly after the conclusion of the call through May 23, 2024. The numbers to access the replay are provided in the earnings process.

Good morning, and thank you for joining Armada hoffler at fourth quarter and full year 2023 earnings conference call and webcast on the call. This morning in addition to myself.

CEO, Matthew Brian Smith, CFO, and Sean <unk>, President and CEO al.

The press release announcing our fourth quarter earnings along with our earnings guidance and supplemental package were distributed this morning.

This call will be available shortly after the conclusion of the call through May 23 2020 for.

The numbers to access the replay are provided in the earnings press release.

Chelsea Forrest: For those who listened to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, February 22, 2024, 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, 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. Listeners are cautioned that any forward-looking statements are based upon management's 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, and many of which are difficult to predict and generally beyond our control.

For those who listen to the rebroadcast of this presentation. We remind you that the remarks made herein are as of today February 22024, 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 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.

Centers are cautioned that any forward looking statements are based upon management's beliefs assumptions and expectations taking into account information that is currently available.

Beliefs assumptions and expectations May change as a result of possible events or factors not all of which are known and 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 statements disclosure in our press release that we do.

Chelsea Forrest: These risks and uncertainties can cause actual results to differ materially from our current expectations, and we advise listeners to review the forward-looking statement disclosure in our press release that we distributed this morning, and the risk factors disclosed in the documents that we have filed with were furnished to the FDC. We will also discuss certain non-GAAP financial measures, including but not limited to FFO and normalized FFO. 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 armadahoffler.com. I'll now turn the call over to Lou. Thanks, Chelsea. Good morning, everyone, and thank you for joining us today.

Distributed this morning, and the risk factors disclosed in the documents, we have filed with or furnished to the SEC.

We will also discuss certain non-GAAP financial measures, including but not limited to <unk> and normalized <unk> 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.

Now I'll turn the call over to Lou.

Thanks Kelsey.

Everyone and thank you for joining us today.

Lou Haddad: In addition to analysts and investors, there are many of the Armada Hoffler family and joint venture partners on the call. 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 call. Later in the call, Sean and Matt will comment on our year-end results, as well as our 2024 guide. I will highlight two important actions that were taken by our board of directors last week. First,

In addition to analysts and investors there are many of the Armada Hoffler family and joint venture partners on the call.

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.

Later in the call, Sean and Matt will comment on our year end results as well as our 2020 for guidance.

I'll highlight two important actions that were taken by our board of directors last week.

First.

Lou Haddad: As you probably have already seen, We rate the dividend at a solid 5% to $0.205 per quarter. This increase brings the dividend into alignment with our longstanding coverage parameters of approximately 80% of AFFL. More importantly, it is indicative of management's confidence in the trajectory of our business model. Increased property NOI, strong leasing activity, and development income expected to come online in the fourth quarter all factor into our confidence in our core business and the sustainability of our current cash flow. The second board resolution was the promotion of Sean Tibbetts to the position of president.

As you probably have already seen.

We've raised the dividend a solid 5% to 25 cents per quarter.

This increase brings the dividend into alignment with our longstanding coverage parameters of approximately 80% of <unk>.

More importantly it.

It is indicative of management's confidence in the trajectory of our business model.

Increased property NOI strong leasing activity and development income expected to come online in the fourth quarter.

All factor into our confidence in our core business and sustainability of our current cash flows.

The second board resolution with the promotion of Sean pivots to the position of President.

Lou Haddad: Upon my retirement in the spring of 2025, we anticipate Sean will become CEO. Over the last five years, Shawn has shown remarkable business acumen, team-building skills, and leadership talent as a CEO who is nearing the end of his time in the top job. One of the most important duties is to find and mentor a likely successor. And if he does his job really well, he finds someone who has the potential to eclipse the accomplishments of his predecessors. We have found that person in shock.

Upon my retirement in spring of 2025, we anticipate Sean will become CEO.

Over the last five years, Sean has shown remarkable business acumen team building skills and leadership talent.

As a CEO who is nearing the end of his time in the top job.

One of the most important duties is defined and mentor a likely successor.

And if he does his job really well.

Find someone who has the potential to eclipse the accomplishments of his predecessor.

We have found that person in Charlotte.

Lou Haddad: This promotion is the first step in the succession plan approved by the board last year. The next phase will be our founder and chairman, Dan Hoffler,'s transition to Chairman Emeritus. He expects to remain on the board as of our annual meeting in June at that time.

This promotion is the first step in the succession plan approved by the board last year.

The next phase will be our founder and chairman, Dan Hoffler transition to Chairman Emeritus.

We expect to remain on the board as of our annual meeting in June.

At that time.

Sean Tibbetts: Assuming shareholder approval, I will become both chairman and CEO for an interim period expected to be approximately one year, after which we expect to promote Sean to CEO. Dan and I are excited to start this transition to a new generation of management while continuing to guide the company to further growth and prosperity. I now turn the call over to Sean. Thank you, Lou.

Assuming shareholder approval I.

I will become both chairman and CEO for an interim period expected to be approximately one year.

After which we expect to promote Sean to CEO.

Dan and I are excited to start this transition to a new generation of management, while continuing to guide the company to further growth and prosperity.

I'll now turn the call over to Sean.

Thank you Lou and I appreciate the Con words and confidence you have placed in me to lead the company into the future.

Sean Tibbetts: And I appreciate the kind words and confidence you have placed in me to lead the company into the future. As Lou stated, we concluded a challenging and successful year in 2023 and are looking forward to continuing to put in place the foundational elements necessary to further expand the company and bolster growth. This morning, I'll be focusing on performance during 2023, followed by our guidance for 2024, in addition to sharing commentary about our projections into 2025 and beyond. Matt will also follow up with more detail.

As Lew stated we concluded a challenging and successful year in 2023 and are looking forward to continuing to put in place the foundational elements necessary to further expand the company and bolster growth.

This morning, I'll be focusing on performance during 2023, followed by our guidance for 2024.

In addition to sharing commentary about our projections into 2025 and beyond Matt will also follow up with more detail.

Sean Tibbetts: We released earnings for the fourth quarter and the full year 2023 earlier this morning. Quarter 4 ended at $0.31 NFFO per share, while the year concluded at $1.24 NFFO per share. This outperformance represents a growth of 16% since the pandemic reset in 2021. Our 2023 earnings results were yet another record for our 43-year-old company, and amid significant headwinds, the earnings were consistent with our guidance. I want to take a moment and thank all of the talented and dedicated Armada Hoffler team members for their tremendous efforts and results while actively managing the challenges presented by the real estate and broader market. As you recall, we were awarded an investment grade credit rating of BBB from Morningstar DBRS in January of 2023. To bring you up to date, and as you may have seen in our press release, Morningstar DBRS has reaffirmed its BBB rating effective January 2024.

We released earnings for the fourth quarter.

And the full year 2023 earlier this morning.

Quarter four ended at 31.

And <unk> per share while the year concluded at $1 24, and <unk> per share.

This outperformance represents a growth of 16% since the pandemic reset in 2021.

Our 2023 earnings results were yet another record for our 43 year old company and amid significant headwinds the earnings were consistent with our guidance.

I want to take a moment and thank all of the talented and dedicated Armada hoffler team members for their tremendous efforts and results while actively managing the challenges presented in the real estate and broader markets.

As you recall, we were awarded an investment grade credit rating of Triple B from Morningstar D. Brs in January of 2023 to bring you up to date and as you may have seen in our press release.

Star D. Brs has reaffirmed the triple B rating effective January 2024.

Sean Tibbetts: We are proud of this accomplishment and remain optimistic that we will be able to leverage the rating to place private debt when the time is right. Matt, we'll touch on this a bit later; please refer to the supplemental package to review our detailed portfolio highlights. In addition to our organic Same-Store Portfolio NOI growth, we purchased the Interlock in West Midtown Atlanta.

We are proud of this accomplishment and we remain optimistic that we will be able to leverage the rating to place private debt when the time is right Matt.

Matt will touch on this a bit later please.

Please refer to the supplemental package to review our detailed portfolio highlights.

In addition to our organic same store portfolio NOI growth, we purchased the Interlocken West Midtown Atlanta.

Sean Tibbetts: As you recall, we were the construction firm and mezzanine lender on that project. This was a significant win for our company's loan-to-own program and for our expansion more deeply into the southeast markets surrounding Atlanta. While on the theme of our real estate financing program, we have since selectively backfilled the mezzanine and preferred equity allocation with three additional high-quality multifamily projects. We now have five high-quality multifamily deals strategically located throughout growth markets in Virginia, North Carolina, and Georgia. We look forward to owning one or more of these assets should the opportunity present itself. Turning now to the office. Although the macro office market has been grappling with occupancy issues, this is not the case for all office buildings. Our office portfolio is comprised of trophy assets, which are highly leased at 95.3%. Therefore, differentiation should be recognized when applying an earnings multiple.

As you recall, we were the construction firm and mezzanine lender on that project.

This was a significant win for our company's loan to own program and for our expansion and more deeply into the southeast markets surrounding Atlanta.

While on the theme of our real estate financing program, we have sense selectively backfill de <unk> and preferred equity allocation with three additional high quality multifamily projects.

Now have five high quality multifamily deals strategically located throughout growth markets in Virginia, North Carolina and Georgia.

We look forward to owning one or more of these assets should the opportunity present itself.

Turning now to office.

Although the macro office market has been grappling with occupancy issues. This is not the case for all office buildings are.

Office portfolio is comprised of trophy assets, which are highly leased at 95, 3% in <unk>.

Therefore differentiation should be recognized when applying an earnings multiple.

Sean Tibbetts: As you know, our office products are best positioned in their respective submarkets and are integral to robust and active mixed-use ecosystems. These factors have resulted in Armada Hoffler's portfolio benefiting from the continued flight to quality evidenced by elevated occupancy and leasing activity, as well as establishing their own superior market rents that defy trends in the office space overall. We expect relative outperformance of the competitive set to not only continue but accelerate over time as employers prefer highly amenitized Class A assets in mixed-use environments. An opportunity for leasing was recently created from our intentional removal of WeWork from the Interloch asset in Atlanta. We are not willing to impair our trophy asset with a long-term punitive lease, and therefore, we're not willing to accept the terms we work needed to stay in the building.

As you know our office products, our best position in their respective Submarkets.

<unk> are integral to robust and active mixed used ecosystems.

These factors have resulted in Armada hoffler portfolio benefiting from the continued flight to quality evidenced by elevated occupancy and leasing activity as.

As well as establishing their own superior market rents that defy trends in the office space overall.

We expect to maintain relative outperformance of the competitive set.

To not only continue but accelerate overtime as employers prefer highly <unk> class a assets and mixed use environments.

An opportunity for leasing was recently created from our intentional removal of we work from the interlock asset in Atlanta.

We're not willing to impair our trophy asset with a long term punitive lease and therefore, we're not willing to accept the terms we work needed to stay in the building.

Sean Tibbetts: As a result, we canceled the lease and simultaneously reduced our forward exposure to the tenant while maintaining earnings consistent with our guidance target in 2023. While this created a temporary blip in same store office NOI. Given the quality and location of the interlock, we are confident that this space will be quickly released with creditworthy long-term tenants. We have seen significant activity since the announcement and look forward to updating you on our progress. As you may know, WeWork is in the second round of renegotiating with landlords, and we continue to work with them on a solution for our Durham, North Carolina, asset. We will keep you apprised of the results. However, we are close enough to closure to say that we are confident a solution will be found that ultimately results in a deal within the market rent range. Apartments began to experience pressure in 2023, specifically on a relative basis when compared to 2022.

As a result, we cancelled the lease and simultaneously reduced our foreign exposure to the tenant while maintaining earnings consistent with our guidance target in 2023.

While this created a temporary blip in same store office NOI.

Given the quality and location of the interlock. We are confident that this space will be quickly released with credit worthy long term tenants.

We are seeing significant activity since the announcement and look forward to updating you on our progress.

As you May know, we work as in the second round of renegotiating with landlords.

And we continue to work with them on a solution for our Durham, North Carolina asset we.

We will keep you apprised of the outcomes. However, we are close enough to closure to say that we are confident our solution will be had that ultimately results in a deal within market rent range.

Apartments began to experience pressure in 2023, specifically on a relative basis when compared to 2022.

Sean Tibbetts: Our residential products perform well, meeting our projected low to mid-single-digit expectation. We recognize that supply has increased, but household formation continues to grow while single-family home production remains constrained. As a result, we believe that available supply will be absorbed, and the projects now in development will benefit from delivery into a supply-constrained market. Regardless, our product type and location are intentional as we aim to be in the best location and, therefore, have the most desirable asset in the submarket. We continue to see relative outperformance due to our long-term stress-tested strategy at the higher end of the market. Shifting to 2024, we are focused on excellence in our operations, discipline execution, and meeting or exceeding our KPI targets. As you will often hear me say, we will focus on running our playbook as we believe that best-in-class operations throughout the portfolio, Safe and Reliable Construction Services, combined with the seamless execution of high-quality development projects will continue to create sustained shareholder value for years to come.

Our residential product perform well.

Meeting our projected low to mid single digit expectations.

We recognize that supply has increased however household formation continues to grow while single family home production remains constrained.

As a result, we believe that available supply will be absorbed and the projects now in development will benefit from delivery into a supply constrained market.

Regardless, our product type and location are intentional as we aim to be in the best location and therefore have the most desirable asset in the Submarket.

We continue to see relative outperformance due to our long stress tested strategy at the higher end of the market.

Shifting to 2024, we're focused on excellence in our operations disciplined execution and meeting or exceeding our kpis targets.

As you will often hear me say, we will focus on running our playbook as we believe that best in class operations 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.

Sean Tibbetts: Let's take a few minutes to review the highlights of our 2024 guidance presentation, which was released this morning and can be found on the investor relations page of our website. On page 3 of the guidance package, you will notice that we have taken a conservative approach to our guidance range, which I will elaborate on as we walk through each of the components.

Let's take a few minutes to review highlights of our 2024 guidance presentation, which was released this morning and can be found on the Investor Relations page of our website.

On page three of the guidance package you will notice that we have taken a conservative approach to our guidance range, which I will elaborate on as we walk through each of the components.

Sean Tibbetts: Our earnings range midpoint of $1.24 represents 16% growth over the post-pandemic 2021 earnings results and 19% growth assuming we achieve the high end of the range at $1.27. Coupled with the dividend increase, the targeted earnings per share represents healthy growth in total shareholder return in an otherwise challenging real estate environment. Income is growing steadily, primarily driven by increased rents, cost controls, strengthening portfolio NOI, incremental income from development projects, and consistent fee income. As you can see on page four, the upward trajectory of property NOI continues this year at an increase of 5% over 2023, net of the impact of WeWork. Specifically, we wrote off nearly $2 million of accrued rent in 2023 and canceled nearly $2 million of annual rent on a going forward basis.

Our earnings range midpoint of $1.24 represents 16% growth over the post pandemic.

'twenty, one earnings results and 19% growth, assuming we achieved the high end of the range at $1 27.

Coupled with the dividend increase the targeted earnings per share represents healthy growth in total shareholder return in an otherwise challenging real estate environment.

Income is growing steadily primarily driven by increased rents cost controls strengthening portfolio NOI incremental income from development projects and consistent fee income.

As you can see on page four the upward trajectory of property NOI continues this year at an increase of 5% over 2023 net of the impact that we work for.

Pacifically, we wrote off nearly $2 million of accrued rent in 2023, and cancel nearly $2 million of annual rent on a go forward basis.

Sean Tibbetts: Our construction team continues to produce record results as we manage the nearly half a billion dollar third-party backlog remaining at the end of 2023. We look forward to another record year in construction, producing a target gross profit of over $13 million as we continue to build for strategic partners and deliver high-quality assets destined for our own portfolio. G&A expenses were held flat for 2024 guidance as a result of diligent planning and savings by our team.

Our construction team continues to produce record results as we manage the nearly half a billion dollar third party backlog remaining at the end of 2023.

We look forward to another record year in construction producing a targeted gross profit of over $13 million as we continue to build for strategic partners and deliver high quality assets destined for our own portfolio.

G&A expenses were held flat for 2024 guidance as a result of diligent planning and savings by our team.

Sean Tibbetts: The inflation effect on G&A has been largely mitigated this year as we look forward to continued process excellence and refinement across our company. However, interest expense remains a focal point as the cost of money has increased over 2022 levels, which has obviously had an impact on our per share growth. Matt will talk to you in more detail about this and other financial metrics; however, I would like to commend Matt and his team on their performance this year while managing the interest rate challenges and creating capacity with which to finance our investments. The graph on page 4 illustrates our continued growth in income, allocated by source. The NOI growth across our properties is complemented by fee income streams that will remain relatively constant in 2024.

Sean Tibbetts: Please note the introduction of JV income in 2024 and growing into stabilization. Portfolio NOI continues to grow despite the decision to eliminate WeWork at the interlock, as discussed previously, and placement of a few tenants on bad debt. On page 5, we have illustrated the current portfolio composition, as well as the evolution of the NOI makeup, inclusive of the JV income.

And used to grow despite the decision to eliminate we work at the interlock as discussed previously and placement of a few tenants on bad debt.

On page five we have illustrated the current portfolio composition as well as the evolution of the NOI makeup inclusive of the JV income.

Sean Tibbetts: The organic growth of the portfolio, the stabilization of the development pipeline, and the opportunity cost of the JV income create a significant growth opportunity for our company. Although we have remained conservative in our underwriting for 2024, we are bullish on our continued earnings growth given the significant opportunities in 2025. Finally, on page 6, we have summarized the consistent growth and trajectory that our team has sustained over the past few years. NOI, EBITDA, and NFFO trends are included here as some of the key financial metrics that continue to grow over time, and we expect that we will continue this growth into 2025 and beyond. As stated in previous conversations, we understand that our narrative is inconsistent with that of the broader market.

The organic growth of the portfolio the stabilization of the development pipeline and the opportunity cost of the JV income create a significant growth opportunity for our company.

Although we have remained conservative in our underwriting of 2024, we are bullish on our continued earnings growth given the significant opportunities in 2025.

Finally on page six we have summarized the consistent growth and trajectory that our team is sustained over the past few years.

NOI.

<unk> and F. F. O trends are included here as some of the key financial metrics that continue to grow over time <unk>.

And we expect that we will continue the trend into 2025 in the future.

A stadium in previous conversations we understand that our narrative is inconsistent with that of the broader market.

Sean Tibbetts: That said, our product is robust, high quality, and primarily trophy class. We will continue to leverage the quality of the portfolio to create continued and increased shareholder return with an expectation that the market values the earning stream and underlying real estate with the quality multiple it deserves. Finally, we continue to look for opportunities to grow as we work through 2024 and prepare for significant growth into 2025 and beyond. Thank you to our greatest asset, our employees, for continuing to invest the time and energy which results in our outperformance. I'll now turn the call over to Matt. Good morning, and thank you, Sean.

That said our product is robust high quality and primarily trophy class.

We will continue to leverage the quality of the portfolio to create continued and increased shareholder return with an expectation that the market values the earnings stream and underlying real estate, but the quality multiple it deserves.

Finally, we continue to look for opportunities to grow as we work through 2024 and prepare for significant growth into 2025 and beyond.

Thank you to our greatest asset our employees for continuing to invest the time and energy which results in our outperformance.

I will now turn the call over to Matt.

Good morning, and thank you sure once again the team of produced another strong quarter financial results in line with our guidance and analysts expectations.

Matt: Once again, the team have produced another strong quarter of financial results in line with our guidance and analyst expectations. As Sean indicated, for the final quarter of 2023, we reported FFO at 13 cents per diluted share and normalised FFO at 31 cents per diluted share. The difference between the two numbers being the negative $16 million unrealized change in fair market value of our derivatives due to the updated declining forward yield curve, The fourth quarter also produced a robust set of operating metrics across our portfolio, achieving exactly what we committed to our shareholders, whilst absorbing the WeWork The fourth quarter also produced a robust set of operating metrics across our portfolio, achieving exactly what we committed to our shareholders, whilst absorbing the WeWork, For the full 2023 fiscal year, we achieved FFO of $1.02 per diluted share and normalized FFO of $1.24 per diluted share, achieving the midpoint of our guidance and outperforming our 2022 fiscal year earnings high by just under 2%.

As shown indicated for the final quarter of 2023, we reported F F 13.

Sure a normalised et cetera.

Two one cents per diluted share.

The difference between the two numbers being the negative $16 million unrealized change in fair market value of all derivatives due to the up dated declining forward yield curve.

The fourth quarter also produced a rescue robust set of operating metrics across our portfolio achieving exactly what we committed to our shareholders whilst absorbing the <unk> web leases.

For the full 2023 fiscal year, we achieved F. F. One dollar and two cents diluted share a normalised FFI of one dollar and 24 cents per diluted share achieving the midpoint about guidance and outperforming of 2022 fiscal year earnings high by Jeff.

Under 2%.

Matt: This is a remarkable achievement for the team, against a backdrop of the highest interest rate environment in a decade, executing on Armada Hoffler's largest ever development pipeline and navigating through the tough office leasing market. Shaun highlighted our portfolio's operational performance, and our supplemental financial package provides additional insight if required. Over the last year, we have spoken at length regarding our balance sheet transformation towards long-term, fixed-rate, unsecured debt. We are pleased to report that we continue to make progress executing our fiscal strategy and have retained our BBB credit rating from Morningstar DVRS. For the fourth quarter of 2023, the ratio of our Stabilized Portfolio Debt to Stabilized Portfolio Adjusted EBITDA was 6.5 times.

This is a remarkable achievement for the team against the backdrop with the highest interest rates environments in a decade executing on a model hospitalist largest ever development pipeline and navigating through the tough office leasing sentiments.

Sean highlighted our portfolios operational performance and our supplemental financial package provides additional insight if required.

Over this last year, we have spoken at length regarding our balance sheet transformation towards long term fixed rate unsecured debt.

We are pleased to report that we continue to make progress executing our fiscal strategy and have retained our trip will be credit rating from Morningstar DVR S for.

For the fourth quarter of 2023, the ratio of stabilized portfolio that to stabilize portfolio. Adjusted EBITDA was six five times.

Matt: This is elevated from our stabilised leveraged target range of between five and five and a half times and predominantly due to our self-funding of our development pipeline whilst equity prices were suppressed. We anticipate our leverage to reduce back towards its target range once we enter the ATM market, sell our positions in one or both of our joint ventures, and realize the funds from our preferred equity projects in our real estate finance business. Morningstar DBRS identified several strengths supporting the reaffirmation of our investment grade credit rating, including our market-leading positions in the Mid-Atlantic and trophy assets in Baltimore, and our high degree of diversification across asset classes within our commercial tenant base that mitigates exposure to cash flow volatility. We will monitor market conditions and look to transact in the debt private placement market when the environment is favorable. In the fourth quarter, our weighted average cost of debt remained at 4%.

This is elevated from our stabilized leverage target range between five to five and a half times and predominantly jus to our self funding of our development pipeline, whilst equity prices was suppressed we.

We anticipate our leverage to reduce back towards its target range. Once we enter the ATM market set all positions in one or both of our joint ventures and realized the funds from our preferred equity projects and our real estate financing book.

Morningstar GPRS identified several shrank supporting the reaffirmation of our investment grade credit rating, including our market leading positions in the mid Atlantic and Trixie assets in Baltimore, a high degree of diversification across asset classes within our commercial tenant base that mitigates exposure to cash.

Volatility we.

We will monitor market conditions and look to transact in the that private placement markets when the environment is favourable.

In the fourth quarter weighted average cost of that remained at 4% illustrating the success and maintaining our debt is 100% fixed or hedged.

Matt: Illustrating the success in maintaining our debt is 100% fixed or hedged. Due to interest rates being high for longer, we proactively replaced our expiring derivatives, achieving a cheaper cost of debt in the short term when compared to the debt private placements. Ultimately, in the medium term, we expect to reduce our reliance on derivatives, transitioning to long-term fixed rates, while assuming the forward yield curve stays reasonably consistent. Current Projections; our expectation is that our weighted average cost of debt will stay consistent around 4% for 2024 and 2025. This is higher than what our cost of funds were in the previous. Please review page 12 in our Supplemental Financial Package for details on our debt and insurance. Our debt remains well laddered with a small amount of expirations in 2024 and 2025 being paid off at maturity. The two construction loans that we hold have extension options, but we expect to transition these to unsecured financing using the free capacity on our term loans with a lower cost of debt. As you can tell, the execution of the balance sheet transformation continues to go well.

Due to interest rates being high for longer we proactively repriced are expiring derivatives, achieving a cheaper cost of that in the short term when compared to the that private placement market ultimately in the medium term, we expect to reduce our reliance on derivatives transitioning to long term fixed rate debt.

Assuming the forward yield curve stays reasonably consistent with current projections. Our expectation is that are weighted average cost of debt stay consistent around 4% for 2024 and 2000 2005. This.

This is higher than what's our cost of funds were in the previous two years.

Please review page 12 in our supplemental financial package for details on our debt management.

All that remains well added with a small amount of explorations in 2024, and 2025 being paid off at maturity. The two construction lines that we hold have extension options. However, we expect to transition the unsecured financing using the free capacity on alternate items with a lower cost of debt.

As you can tell the execution of the balance sheet transformation continues to go well, we have solid leverage metrics competitive with our peers, a low cost of debt unlimited maturity's in the next two years <unk>.

Matt: We have solid leverage metrics competitive with our peers, a low cost of debt, and limited maturities in the next two years. Coupled with our strong liquidity position, we're intentionally structured to achieve our growth strategy, as Sean mentioned in our guidance slides, ready to support our projected business growth well into the future. I will now turn the call back to Mr. Haddad for his closing remarks. Thank you, Matt, as we reflect on our performance throughout the fourth quarter and the year. I'm proud of our team's dedication and resilience, which has translated into exceptional results.

Coupled with our strong liquidity position, where intentionally structure to achieve a growth strategy is shown mentioned in our guidance slides ready to support our projected business growth well into the future.

Now turn the call back to Mister <unk> for his closing remarks.

Thank you Matt.

As we reflect on our performance throughout the fourth quarter and the year.

I am proud of our teams dedication and resilience, which is translated into exceptional results.

Lou Haddad: Best in market properties in healthy markets give us the ability to continue adding to earnings and dividends while we wait for the market to recognize superior performance. I'll now turn it over to the operator for the question and answer. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the number 1 on your telephone keypad. If you want to enter your question, please press start. If you are using a speakerphone, please lift the handset before pressing any key.

Best in market properties, and healthy markets give us the ability to continue adding to earnings and dividends.

While we wait for the market to recognize superior performance.

I will now turn it over to the operator for the question and answer session.

Mmm. Thank you.

Ladies and gentlemen, we will now begin the question and answer session showed.

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Operator: One moment, please, for your first question. Your first question comes from Rob Stevenson from GANY. Please go ahead.

One moment. Please for your first question.

[noise]. Your first question comes from Ralph Stevenson from Jenny. Please go ahead.

Lou Haddad: Good morning, guys. Sean or Lou, how are you guys thinking about, you know, how we work, in terms of near term and longer term, I mean, the company's tenuous future at best, you know, keeping them and maybe, you know, punting and having to possibly retenant this thing two years down the road when it may be a better or worse office leasing environment versus just ripping the Band-Aid off and retenanting this space Is there not, you know, how are you guys characterizing demand for these assets? And, you know, how are you guys thinking about, you know, having to answer questions about how we work for the next few years? Thanks for the question, Rob, and good morning. As Sean mentioned on the call earlier, we took the proactive measure of taking them to a cash basis, which reduced our 2023 results by a couple million dollars, and they'll be going forward on a cash basis in the Durham space. I'll let Sean comment on what's happening in Durham as well as our comp. Sure, yeah, I think we'll break it down by location, and thanks for the question, Rob, and good morning. In Atlanta, we said the risk-adjusted posture should be removal, and that's what you saw us do.

Good morning, guys.

Schoener Lou how did you guys thinking about you know we were you know.

In terms of near term longer term I mean, the companies tenuous future at best.

Keeping them and maybe you know punting and having to possibly Retennant. This thing two years down the road when it may be a better or worse office leasing environment versus just ripping the band-aid off and returning this space now is they're not you know how are you guys characterizing demand for these assets and you know how.

Are you guys thinking about having to answer questions about we work for the next few years.

Thanks for your question Robin Good morning.

So I mentioned on the call earlier we.

We took the proactive measure of taking them to a cash basis, which reduced our 2023 results by a couple of million dollars.

And they'll be going forward on a cash basis in Durham space.

Sean comment on on what's happening in Durham, as well as our confidence in the Atlanta space sure. Yeah, I think let's let's let's break it down by location and thanks for the question, Rob and good morning.

In Atlanta, we said the risk adjusted posture should be removal and that's what you saw is do we think that was the most prudent and conservative approach I'll say, we have approximately 10.

Sean Tibbetts: We think that was the most prudent and conservative approach. I'll say we have approximately 10 deals, different kinds of areas of formation from LOI to a couple of smaller leases that are close to done. A lot of activity, as I said, in that space, but we couldn't be more excited about that given the, you know, 10 prospects that we're trading paper with currently. That's Atlanta, so to your point, we feel good about releasing that space. Absolutely the right move, certainly dampening the 23 results and the 24 outlook, but we think that's the right move long-term for the company and for the shareholders. In Durham, the location is healthier. We think that, as I said, we're very close. As a matter of fact, I was on the phone with WeWork yesterday afternoon.

Deals.

Different kind of areas of formation from LOI too.

A couple of smaller leases that are close to done a lot of activity as I said in that space, but we couldn't be more excited about that given the 10 prospects that were trading paper with currently.

<unk> to your point, we feel good about releasing that space.

Absolutely the right move certainly dampened twenty-three results in the twenty-four outlook, but we think that's the right move long term for the company and for the shareholders in Durham. The location is healthier we think that as I said, we're very close as a matter of fact I was on the phone with we work yesterday afternoon.

Sean Tibbetts: We're very close to a deal there that makes sense for us that we believe puts us back kind of to the market rent range. You may see that deal structurally a little bit different than it looks today, and we think that that is a good bet. That being said, again, the fundamentals of that particular location are actually much better than Atlanta, so we feel good about it in that. They have some strong, they have some strong tendencies down there, Rob, and our expectation, www. ArmadaHoffler.com isn't able to do that because of the tenancy base.

<unk> very close to a deal there that makes sense for us that we believe puts us back kind of to market rent range, you may see that deal structurally a little bit different than it looks today and we think that that that is a good bet.

That being said again, the fundamentals of that that particular location are actually much better than the Atlanta. So we feel good about it in that in those terms. They have some strong grab some strong tendency down there and our expectation is dead.

That's going to fortify their ability to pay rent there and if in fact they ultimately.

Aren't able to do that the tendency basically will speak for itself.

Sean Tibbetts: So, try to quickly convert those into leases for our own landlords. Are they going to keep all of the Durham space under the current negotiations, or are they going to give back a little bit? Yeah, ultimately, it's going to shrink. And so it will be a much more manageable size for us. But our expectation is that we're not going to... Once that happens, I'll be back. Thanks.

Try to quickly convert those into leases for our own.

We're around the landlord.

Are they gonna keep all of the Durham space under the current negotiations or are they gonna get back a little bit yeah.

Ultimately is going to shrink.

And there'll be a much more manageable size for us, but our expectation is that we're not going to Miss a beat.

Once that happens.

Okay.

Lou Haddad: Okay. How should we be thinking about the GC pipeline beyond the current projects? I mean, you guys have talked for a couple of years about the, you know, sort of great level of activity. And I think it varies with the time of cautioning people not to just straight line this and grow going forward. But, you know, are we really going to see a material slowdown in 25 or thereafter? I mean, it seems like there's this much business in a world with little office and modest retail development. Is this the new sort of run right going forward? Is there anything that you guys see, you know, going forward that would really temper things other than some sort of, you know, major economic collapse?

How should we be thinking about the G. C pipeline beyond the current projects. I mean, you guys have talked for a couple of years about the sort of great level of activity and I think at various points in time caution people not just straight line this and grow up going forward, but you know are we really going to see a material.

Slowdown in twenty-five or thereafter, I mean, it seems like there's this much business in a world with little office and modest retail development.

Is this the new sort of run rate going forward is there anything that you guys see you know.

Going forward that would really temper things other than some sort of.

Major economic collapse.

Lou Haddad: So, Rob, we. Our expectation is that there will be, for us, a slowdown at some point in time. Every year, we say it's probably going to go back to the center line in the not-too-distant future, and every year, it seems to outperform. That's partially because I think that may be unique to us. Maybe not completely unique, but unique from the standpoint of being in business for the last 45 years

Rob.

Our expectation is that there'll be for us.

Slow down at some point in time every year, we say it must it's probably gonna go back to the center line and not too distant future every year it seems to outperform.

That's partially because I think that may be unique to us maybe not completely unique but unique from the standpoint of being in business for the last 45 years and.

Lou Haddad: The markets that continue to experience growth have led to the development of a number of really strong relationships with well-heeled parties. We wouldn't want people to underwrite $13 million with a construction profit for the next 10 years. But we don't really see a material slowdown. Luke, if I can, Rob, just the number, if you think about it this way, to Luke's point, is somewhat...

The markets that continuing to experience growth.

Have led to the development of a number of really strong relationships.

Well heeled partners that continue to produce.

We wouldn't want people to underwrite $13 million with a construction profit for the next 10 years.

But we don't really see a materials slow down anytime soon.

Okay.

Just the number if you think about it this way to lose point is somewhat.

Sean Tibbetts: Somewhat enlarged or insulated by the T-Row price, 50% JV. And so if you think about it, to Lou's point, on a consistent basis, if we net that out, the number drops down a little bit, but we feel good about staying relatively consistent net of that large piece of that bubble. Okay, and are you guys the general contractors on all five of the Mez apartment projects? Not all of them, no.

Somewhat enlarged or inflated by the T Rowe price, 50% J V and so if you think about it to lose point on a consistent basis. So we know that al the number drops down a little bit, but we feel good about staying.

Staying relatively consistent none of those of that large piece of that bubble if you will.

Okay and are you guys. The G C on all five of the men's department projects.

Not all of them no.

Sean Tibbetts: A couple of them are modular type construction that has a proprietary, well, okay. And then how should we be thinking about those five projects today? Are you viewing any of these as likely purchases for the REITs? And do you get a prepayment penalty if they refi early? Because it seems like the completion date for the construction is much closer to the expiration of the debt. And I would assume that they'd want to refinance at more modest rates. If rates come down, then you're at 13 to 15%. Well, to start with your first question, we'd love to own all of them, but our eyes are a bit bigger than our stomachs.

A couple of them are modular type production that has has a proprietary system.

Where are we.

We won't be performing in construction.

Okay, and then how should we be thinking about those five projects. Today are you viewing any of these is likely purchases for the Reed and do you get a prepayment penalty if they refi early cause it seems like that the completion date for the construction is.

[noise] closer than the expiration of the debt and I would assume that they'd want to refi you know it more modest rates of rates come down then you know you're 13% to 15%.

But.

To start with your first question, we'd love to own all of them, but [laughter].

But our eyes are a bit bigger than our stomach.

Sean Tibbetts: So the expectation is that, as Sean mentioned, at least one of these will end up on our balance sheet. They do carry a minimum interest line, so that we have protection against an early refund. So that's going to be a great avenue for us. www.larryweaver.com Okay, and then speaking of the development process, do you guys anticipate starting any new on-balance sheet developments in 2024? At this point, we anticipate starting a redevelopment of the bed and breakfast site that we've been talking about for a while. Right now, developments don't pencil with our cost of capital.

The expectation is that as John mentioned at least one of these will end up on our on our balance sheet.

They do carry a minimum interest line so that we have protection against an early refinance.

So that's that's going to be a great Avenue for us to continue to add to the portfolio.

Without having the drag of.

The development process.

Okay, and then speaking of the development process, you guys anticipates, starting any new on balance sheet developments in 2004.

At this point, we anticipate starting a redevelopment of the bed Bath site that we've been talking about for awhile.

Right now developments don't pencil pencil with our with our cost of capital.

Lou Haddad: That's why we're going to be reliant more on the preferred equity and the MES platform in order to grow the portfolio. But right now, construction costs have not come back in line, interest rates remain elevated, and you don't have a ton of rent. Ironically, where we would have the most room is in office space, but obviously, because we're completely full in the locations that we have.

That's why we're going to be relying more on the preferred equity and the best platform in order to grow the portfolio.

But right now construction costs have not come back in line interest rates remain elevated.

And you don't have a ton of rank growth.

Ironically that where we would have the most room as an office space, but obviously because we are completely full in the locations that we have.

Lou Haddad: And under normal circumstances, you'd be launching new offices. Obviously, that's not going to be the case right now, and we'll, as we wait to see how the office market on a macro... Okay, and one last one for me for Matt.

And under normal circumstances, you'd you'd be launching new office with anchor tenants are.

Obviously, that's not going to be the case right now and we will as we wait to see how the office market on a macro level shakes out.

Okay, and one last one for me for Matt.

Matt: How should it be thinking about the 1.7 million in JV property income dragged from Allied Harbor Point this year? Is that going to be significantly larger than that in the first half of the year? And as that comes online, goes to zero, and then closer to positive territory? Is that rotable throughout most of the year?

How should I be thinking about the 1.7 million of GB property income drag from Allied Harbor point. This year is that gonna be significantly larger than that in the first half of the year and is that comes on line goes to zero and then closer to positive territory is that ratably through <unk>.

Matt: How should that be you think about timing as it impacts earnings? Yeah, good. Good morning, Rob.

Most of the year I should that'd be thinking about timing as it impacts earnings.

Yeah good morning.

All of that negative drag all.

Matt: All of that negative drag or income, depending on what JV you're looking at, whether it's T-Row or parcel for the Allied, comes in in the last quarter of 2024. So that's a very, very small portion. Obviously, the T-Row price will occupy and be nearly 100% for renting there, so we'll get income or our share of the income on day one. And then obviously, as we go lease up through stabilization on the Allied, there'll be a negative drag that is upset. So as Sean mentioned in the guidance presentation, we expect that to be positive in that last quarter, to the extent of roughly around a million dollars. For more information, visit www.fema.gov. Okay, so all in the fourth quarter; nothing earlier in the year.

Or income depending on what JV, you're looking at wherever it's T rival.

Also for the Allied comes in in the last quarter of 2024. So that is a very very small portion obviously T. Rowe price will will occupy and b.

100% full.

Four four renting there so I will get income or Sheriff income, Taiwan, and then obviously as as we go the sultry stabilization on the Allied there'll be a negative drag that is upset. So is shown mentioned in the guidance presentation, we expect that to be positive and that last quarter to the.

And Ah roughly around a million dollars worth of.

Fr.

Okay. So all in the fourth quarter nothing earlier in the year Alright. Thanks, guys. Appreciate the time this morning.

Rob Stevenson: All right. Thanks, guys. Appreciate the time this morning. Thank you, www.TheBusinessProfessor.com.

Hello.

[noise] mhm. Thank you.

Operator: Ladies and gentlemen, as a reminder, should you have a question, please press star 1. Your next question comes from Camille Bonnell from BMO. Please go ahead.

Decent human as a reminder shows you have a question. Please press start one.

Your next question comes from <unk> from BMO. Please go ahead.

Andrew Berger: Hi, this is Andrew Berger on behalf of Camille Bunnell from Bank of America. Just wanted to touch real quick on guidance. If you could maybe give some more color on the part about funding a new real estate project in the second half of twenty twenty four, I guess. You know, what are you seeing today in the market? What you know, where would your preference be?

Hi, This is Andrew Burger on behalf of Camille <unk> from Bank of America, just wanted to touch real quick on guidance. If you could maybe get some more color on the the part about finding a new real estate project in the second half of 2024 I guess.

What are you seeing today in the market what what.

Where would your preference be.

[noise] sure. Thank you for the question.

Sean Tibbetts: Sure, thank you for the question. So, let's start with the preference. Our preference would be, as we have been in the multifamily space, in a growth market in the Carolinas or in Georgia.

So this.

This or practical to start with the preference our preference would be as we have been in the multifamily space and a growth market in the Carolinas.

Or in Georgia, So we have a couple of prospects we're in discussions with with our partner.

Sean Tibbetts: So, we have a couple of prospects we're in discussions with, with our partner, and our intent would be to ladder these in. As you can imagine, one, the oldest deal, is closer to rolling off. We expect a sale of that deal, and therefore a payback of our principal and, obviously, the interest. And our intent would be to redeploy that capital in order to keep consistent fees coming in the door and also keep our program at the size that we've committed to, roughly $80 million outstanding. So, again, probably similar to something you would see on the other five deals. If you could imagine just copying and pasting one as one disappears, we would add another back. So, that's our intent. We've seen a lot of high-quality deals out there and a lot of interest in our program given the constraints of the kind of senior market.

And our intent would beat a ladder. These in as you can imagine one the oldest deal is closer to rolling awfully expect a sale of that deal and therefore, a payback of our principal and obviously the the interest in our intent would be to redeploy that capital in order to keep consistent fee.

Coming in the door and also keep our program at the size that we have committed to roughly $80 million outstanding So again, probably.

Probably similar to something you would see on the other five deals if you could imagine just copying and pasting one as one removes off we would add another back. So that's that's our intent. We've we've seen a lot of high quality deals out there and a lot of interest in our program given the constraints and the and the kind of senior markets.

Sean Tibbetts: Gotcha. That's very helpful. Thank you. And then, I guess, turning to the piece on the ATM program, just wondering any color there, maybe what we should expect from a timing standpoint, if you're able to talk about that. Yeah, good morning, Andrew.

Gotcha. That's that's very helpful. Thank you and then I guess turn into the piece on the ATM program. Just wondering any color there maybe what we should expect from a timing standpoint, if you're able to talk to that.

Yeah. Good morning, Andrew we anticipate as soon as we come out of a blackout period here and we and we file the 10-K that we will go into the ATM, obviously, the equity prices not exactly where we wanted to base that we will be.

Matt: We anticipate as soon as we come out of the blackout period here and we file the 10k, we will go to The ATM. Obviously, the equity price is not exactly where we want it to be, so we will be somewhat conservative with that, but in order to grow, we need to add some equity to the model, and we anticipate doing that throughout the whole of the. Got it. Thank you. And if I could just squeeze in one more, turning to the debt side. So, I know you discussed replacing the derivatives as they expire. It looks like there's a pretty big one, I think 200 million coming up in March. Just wondering, you know, how is the cost of replacing these slops and caps, maybe versus, say, six months ago or a year ago?

Somewhat conservative with that thoughts in order to survive we need to add some equity to the model, we anticipate doing that throughout the whole of this year.

Got it thank you and if I could just squeeze in one more just turning to the that side. So I know you've discussed replacing the derivatives as they expire I. It looks like there's a pretty big one I think 200 million coming up in March just wondering you know how is the cost of replacing these swaps.

In caps, maybe versus call at six months ago or a year ago.

Matt: Yes, great question. We have, in fact, replaced all of those derivatives. So if you look on our debt management page, page 12 of the supplementary, you will see that we are over 100% hedged. So that one in March has already been replaced. We replaced those in October or November of 2020. What we have done, as I've said, is our weighted average cost of debt across the whole portfolio is now 4%, and we expect that to remain consistent through 2024 and 2025 when those sets of derivatives expire in the latter half, last quarter of 2022.

Yes, Great question, we have in fact replaced all of those derivatives. So if you look on all.

That management page 12 of the supplements you will see that we are 100% hedged so that one and marches has already been replaced we replace those in October or November of 2023, well, what we have done as upset as all weighted average cost of debt across the whole portfolio is now 4% and we.

Spect that to remain consistent 324, and 25 when they set of derivatives.

Matt: Great, thank you very much. Please see the complete disclaimer at https://sites.google.com or at www.google.com. Thank you. There are no further questions at this time. You may proceed. Thanks very much. Thanks for all your time and attention this morning. Please stay tuned for further announcements as we backfill that WeWork space, as well as some other leases that are on the horizon. Have a great website, www.larryweaver.com. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Thank you.

Expiring in the latter half last quarter of 2025.

Great. Thank you very much.

I appreciate it thank you.

Mmm. Thank you.

There are no further questions at this time you may perceive.

Thanks, very much thanks for all your time and attention. This morning. Please stay tuned for further announcements as we as we backfill that we work space as well as some other leases that are on the horizon.

Have a great day.

So you're saying you mean this concludes our conference call for today, we thank you for participating and ask that you. Please disconnect your lines. Thank you.