Armada Hoffler Properties, Inc.

Welcome to Armada Hoffler's second quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After management's prepared remarks, you'll be invited to participate in a question-and-answer session. At that time, if you have a question, please press star 1 on your telephone keypad. As a reminder, this conference is being recorded today, Tuesday, August 4, 2020. I'll now turn the conference over to Michael O'Hara, Chief Financial Officer at Armada Hoffler. Please go ahead.

Good morning, and thank you for joining Armada Hoffler's second quarter 2020 earnings conference call and webcast. On the call this morning, in addition to myself, is Lou Haddad, CEO. A press release announcing our second quarter earnings, along with our quarterly supplemental package, were distributed this morning. A replay of this call will be available shortly after the conclusion of the call through September 4, 2020. The numbers to access the replay are provided in the earnings press release. For those who listened to the rebroadcast of this presentation, remind you that remarks made herein are as of today, August 4, 2020, and will not be updated subsequent to this earnings call. During this call, we will make four looking statements, including statements related to the future performance of our portfolio, our development pipeline, impact of acquisitions and dispositions, our mezzanine program, our construction business, liquidity position, our portfolio performance, and financing activities, as well as comments on our guidance and outlook. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond our control, particularly in the light of the adverse impacts of the COVID-19 pandemic on the U.S. and global economies. 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 this morning and the risk factors disclosed in documents we have filed with or furnished to the SEC. We'll also discuss certain non-GAAP financial measures included 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 ahmadhoffler.com. I'll now turn the call over to Lou.

Thanks, Mike. Good morning, everyone, and thank you for joining us today. As we all continue to fight the pandemic in our own ways, we express our gratitude to those who are battling for us on the front lines and pray for all who have been affected by COVID-19. We are grateful that the health and well-being of our employees and their families remain largely unaffected by the virus and that our company remains strong and optimistic about our future. Obviously, we must all remain diligent in our activities and stay prepared for potential setbacks. As you saw from our earnings release this morning and the various press releases we've issued over the last few weeks, we've been extremely busy at the company over the last few months. Our activities have been consistent with the formula we've employed during the last four recessions that the company has endured. Strengthen the balance sheet, work with your tenants, cut expenses, and most importantly, be ready to outperform your peers in the subsequent recovery. After my remarks, Mike will relay to you how we've bolstered our liquidity position to pre-pandemic levels, maximized rent collections to nearly normalized levels, and reduced expenses. Prior to that, I will focus on the last and most important facet of our strategy, positioning the company for growth and a subsequent recovery. Although the improvement in the economy has been uneven to date and most probably will still incur some setbacks, we believe that the most likely case to be a slow, bumpy climb back to normalcy over the next 18 to 24 months. We believe that with our multiple property types and operating divisions, we will thrive in such an environment, much as we have done in the past. Today we reported earnings of 29 cents of normalized FFO for the quarter. This result, combined with 32 cents from the first quarter, gives us the highest earnings during any six-month period in our history. Although the second half will not be quite as strong, primarily due to over $100 million of asset sales and, to a lesser extent, bad debt assumptions, we are confident in our guidance for the year in the range of $1.09 to $1.13 per share. Although there remains a material amount of uncertainty surrounding the effects of the virus on the economy, as a company that has a hard-won reputation for transparency, we think that it is important to offer guidance based on the information we have available to us and our best projection of our company performance for the remainder of the year. Our guidance reflects the proactive measures we've taken to strengthen the balance sheet as well as taking into account the various effects the pandemic may have on our company, tenants, and clients. As Mike walks you through the components of our guidance later in the call, please know that this level of performance is only made possible through the efforts of a seasoned, dedicated, and motivated group of professionals who have risen to the occasion under extremely adverse conditions to stabilize our operations. On behalf of our board of directors, our heartfelt thanks to our team for the passion, determination, and excellence they continue to display. While we are extremely proud of accomplishments to date, we are most excited about the moves being made to position the company for a return to growth with the eventual upswing in the economy. Long before the pandemic, we embarked on a long-term disciplined rotation out of much of our older non-core retail centers into higher quality multifamily and mixed-use assets, both through development and acquisition. The seven-asset sale completed in the second quarter was a major step in the continuation of this process. As a part of this strategy, we intend to continue the disposition process with a few smaller retail assets. These dispositions include a strong cash position, the anticipated payoff of three mezzanine loans, and measured use of the preferred stock ATM give us the capital to potentially restart the development process and pursue additional acquisitions later this year. To that end, we are proceeding with the acquisition of the Edison apartment complex in Richmond, Virginia, as previously disclosed in our original 2020 guidance. This 174-unit asset was developed by a company in partnership with an experienced Richmond-based multifamily developer. As such, current ownership includes several members from our management team and board of directors. The building could not be acquired until this year due to the historic tax credit structure of the entity. The complex is within sight of the state capital and has achieved high occupancy and increasing rents for several years. We will be acquiring the asset at a 675 cap rate, which equates to a $25 million purchase price, with a $7.5 million of equity paid in the form of OP units priced at $12, in keeping with our track record of selling units at a premium to the current stock price. We appreciate our 40% joint venture partners' vote of confidence in our company by taking units priced at a meaningful premium to the current market price of our common stock. With our increased focus in the multifamily sector, we've created a new division internally to manage the operations, growth, and opportunities we are seeing in this asset class. This group will focus on a rapidly expanding portfolio and targeted acquisitions, combined with a robust pipeline of high-quality apartment developments taking shape. The new division is comprised of seasoned individuals with considerable multifamily experience who have been selected from existing development, construction, and asset management personnel to spearhead all aspects of this initiative. With this increased focus on multifamily, we expect this piece of our business to expand at a faster rate than the office and retail segments, while we strive to grow the portfolio as a whole. To be clear, Mixed-use assets, CBD office, and high-quality grocery-anchored retail will also continue to be significant drivers of growth and value for the company. The key to our 40-year track record of success has been the strength of our diversified platform and the flexibility it affords us to adapt and capitalize on the ever-changing landscape of commercial real estate. Over the next few months, we expect to establish a timeline for the ramp-up of the previously halted development pipeline as well as new opportunities that have come our way. Our expectation is that we will be able to enhance the return on cost of new developments that break ground over the next several months due to our construction division's ability to procure lower subcontractor pricing than was previously estimated. Meanwhile, we have delivered the last two projects from our previous pipeline. Some in place one of two student housing complexes in Charleston, South Carolina, is now open and stands at 98% pre-leased for the upcoming 12 months. This asset, along with Hofler Place, which is fully leased, gives us two high-quality assets on the historic Charleston Peninsula. And combined with our asset at Johns Hopkins University, our student housing portfolio stands at over 95% pre-leased. We've also delivered the Wills Wharf Office Building at Baltimore's Harbor Point. This trophy office building is nearly 50% leased after the rework termination, and we are in negotiations with two high credit tenants that would fill the rest of the vacancy. Despite the slower pace of lease negotiations due to the pandemic, with the encouraging amount of activity in this submarket, we are hopeful of having new leases in place by year end. Turning to the construction business, we continued to collect third-party fees at a very brisk pace. As most of you know, this substantial income generator is uniquely ours across the REIT universe. You'll recall that we entered the year with one of our largest third-party contract backlogs ever. As you can see, we ended the quarter with nearly $200 million in remaining contract values. a total that will take us well into 2021. In addition to adhering to all local pandemic guidelines, we have initiated protocols for temperature testing, protective procedures, and safety gear at all of our construction job sites. Our construction group has maintained this high rate of production and profitability despite the difficult conditions. This performance is no different than what we have come to expect from these professionals. and we greatly appreciate their dedication to the company. Assuming no change in government guidelines, we expect this division to earn around $7.5 million of gross profit, which is in line with our previously disclosed estimates. And as I said earlier, we look forward to using the unique advantage this division gives us by tightening budgets and schedules on our upcoming development projects. The mezzanine lending program is also yielding very robust income. This aspect of our business, made possible through long-term relationships with seasoned developers and the steady influence that we enjoy through our construction division, will contribute over $17 million of net income for 2020. In keeping with the optionality that this structure provides us, we expect three of these loans will be retired over the next several months. One, through a pre-negotiated discount purchase price, for the Nexton Square Lifestyle Center in the Charleston area. One is on the market, the Delray Whole Foods Center. And lastly, Annapolis Junction, where we hope to negotiate a purchase. We believe that our ability to create a favorable tax and earn-out structure for our partner will prove to be more advantageous to him than taking the property out to market. With these three payoffs, and only the interlock loans active in 2021. We expect this aspect of our business to diminish over the next few years. This is in keeping with our previously stated goal of using more of our capital and human resources on our own projects to more quickly grow net asset value. Six months ago, we were on the cusp of achieving one of our long-term goals, financial metrics consistent with supporting a share price in excess of $20, and we were well on our way to a $2 billion market cap. Even with those lofty achievements, we recognized then that to sustain and ultimately eclipse that level of performance, we would need to incrementally refine our business model over the subsequent several quarters. The adjustments entail decreasing the percentage of traditional retail in our portfolio while enhancing our commitment to the multifamily and mixed-use sectors. Also underway is the planned reduction of the mezzanine loan component of our income, coupled with the overall reduction in leverage. Although we could not have foreseen the subsequent disruption caused by the pandemic, and we certainly don't want to downplay its horrific human cost, it has enabled us to accelerate these initiatives in a meaningful way. As the company's largest equity holder, Management believes the current share price does not come close to representing the value of our diversified, high-quality portfolio in our construction and development businesses. Over the next few quarters, we believe that investors will recognize the demonstrable strength of our diversified model and the quality of our portfolio. We expect investors will reward the company in much the same way as they have in previous years. As most of you know, through 2019, we more than tripled the returns of the REIT index over the preceding five years. Before I turn it over to Mike, I'd like to thank our board for the swift action in reinstituting our dividend. We believe that it was very prudent to suspend the dividend in early April with so many unknowns surrounding our industry. Although we are far from sounding the all clear, we believe that our strong results and even stronger prospects for growth over the next couple of years merit a reinitiation of the payments with an eye towards a measured ramping of the dividend level. Mike?