Armada Hoffler Properties, Inc.

Welcome to Armada Hoffler's third quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After management's prepared remarks, you will 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. As a reminder, this conference call is being recorded today, Thursday, November 5th, 2020. I will now turn the conference call over to Michael O'Hara, Chief Financial Officer at Armada Hoffler.

Good morning, and thank you for joining Amada Hoffler's third quarter 2020 earnings conference call and webcast. On the call this morning, in addition to myself, is Lou Haddad, CEO. The press release announcing our third quarter earnings, along with our quarterly supplemental, were distributed this morning. The replay of this call will be available shortly after the conclusion of the call through December 5th, 2020. The numbers to access the replay are provided in the earnings press release. For those who listened to the rebroadcast of this presentation, we remind you that the remarks made herein or as of today, November 5th, 2020, will not be updated subsequent to this initial earnings call. During this call, we'll 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, our 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 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 and our press release this morning, and the risk factors disclosed in documents we have filed with or furnished to the SEC. They'll 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 amadahoffer.com. I'll now turn the call over to Luke.

Thanks, Mike. Good morning, everyone, and thank you for joining us today. As we all continue to work through the pandemic in our own ways, we express our gratitude to all those who are making a positive impact in the fight and pray for those who have been affected by COVID-19. We are thankful that our employees have remained healthy throughout the pandemic and pray our good fortune continues. We continue to be pleased with the resilience of the company and our tenants and vendors during this uncertain year. While Mike will update you on our results and financial metrics, I'm going to use my time today to update you on the progress of our repositioning plan and the long-term value that we intend to create. As many of you know, last fall we embarked on a multi-year strategy featuring several key initiatives that were designed to increase equity value, create higher quality earnings in NAV, and ultimately move a then current share price of $18 or so meaningfully higher by the end of 2022. Although we could not have foreseen the intervening disruption and precipitous drop caused by the pandemic, the plan as well as the timeframe and end goal remain the same. While we abhorred the human and economic cost of the virus, it has enabled us to accelerate several aspects of our plan. Let's take the various facets of our strategy one at a time. beginning with the goal of reducing our retail segment to less than one-third of property NOI. This process is well underway, beginning with the sale of seven of our older retail centers last spring and the planned disposition of a few more in the coming several quarters. Selling quality centers that have performed well through the pandemic has been and will continue to be a significant source of balance sheet strength with a large portion of the net proceeds likely to be redeployed into new development opportunities. These dispositions notwithstanding, we expect the retail segment of our business to remain an important and growing component of our business model that we believe will increase in value with the market's eventual recognition that quality retailers in prime locations are a durable source of future income. Also, As you saw by our recent press release, we have terminated our two Regal Cinema leases and intend to proceed with mixed-use developments that will feature a large component of multifamily units on these well-positioned sites. As we have mentioned on several earnings calls, these properties were designated for redevelopment for quite some time. While we would have been fine with letting the leases run to completion, the terminations enable us to move much more quickly to capture the true value of this prime real estate. We believe that the underlying raw land in both these locations is worth more than that of the previously leased assets, not to mention the ultimate value creation of the new mixed-use apartment communities planned for both sites. These redevelopments from older retail into new multifamily assets will meaningfully accelerate the rotation we desire into higher-quality assets. We're already in the preliminary design phase for these properties and expect to commence construction on both by the end of 2021. This brings us to our second goal, increasing the contribution of our multifamily sector to over one-third of property NOI. With the off-market acquisitions of the Edison Apartments and Annapolis Junction, we've added nearly 600 units of stabilized apartments, bringing our portfolio to over 2,300. exclusive of our student housing assets. This total, combined with the development of the Gainesville apartments and several other sites in pre-development, including the former Regals, virtually assures us of achieving this goal. In fact, our expectation is that the apartment portfolio will grow to over 3,000 units in the next few years. We are extremely fortunate that our markets are included in the areas of the country, specifically the Mid-Atlantic and Southeast, that continue to experience strong population growth and an influx of economic activity. For example, in the third quarter, Atlanta alone had absorption of over 8,000 units. One need only look at the high occupancy and financial performance of our apartment portfolio for validation of our belief in these regions. Next, we outlined last fall our intention to reduce the size of our mezzanine lending program over a 24-month period. While we have great faith in the program and its results to date, this reduction is in keeping with our stated intent to allocate more of our investment capital to equity positions on future ground-up development projects. I'm pleased to report that by year end, the only outstanding mezzanine loans will be at the Interlock in the heart of West Midtown Atlanta. These two loans will run through 2021 to allow for completion and stabilization. With this position planned for the first half of 2022, It is unlikely that we could bring those projects on balance sheet, given the low cap rate prevalent in that market. However, if for some reason our partners cannot achieve full value for these mixed-use and multifamily trophy assets, we would be glad to acquire them at a discounted price. This flexibility, made possible only through a diversified model, has already allowed us to acquire two top-quality assets, Nexton Square and Annapolis Junction. As for the last remaining loan, we have a signed letter of intent to purchase the Delray Beach Florida Whole Foods at a significant discount to pre-pandemic value. Although the decreased mezzanine book should still yield some $15 million of interest income next year, both the size of the program and the income will be meaningfully less than the 2020 levels. For the payoffs of the interlock loans slated for the first half of 2022 and our desire to only use the mezzanine program on smaller, shorter-term assets, this sector should produce interest income in the mid-70s figures that year and probably thereafter, thereby providing a meaningful yet lower-risk adjunct to our development and construction activities. Perhaps the most important component of our strategy is the commencement of a pipeline of new development projects. As most of you know, the primary driver of growth in our company has been and will continue to be the development of high-quality assets at a wholesale cost to be delivered into our portfolio at a retail value. Last spring, we were poised to begin a new pipeline when the pandemic hit. In fact, we had already closed on three parcels of land for those announced projects. We prudently paused those developments but preserved the ability quickly restart the process at a more appropriate time. With the groundbreaking of the Solis Gainesville Apartments, we have initiated new development activity, which, assuming conditions continue to improve, we intend to ramp up over the next several months. This will entail our previously announced projects and perhaps one or two more. These assets are predominantly multifamily in nature, with the balance being office and a small amount of retail. All are located in high-growth submarkets in the southeast. Also, as I mentioned on our last call, our expectation is that our construction group will ultimately be able to achieve more advantageous pricing than was anticipated prior to the pandemic. These lower costs have been the case coming out of the previous four recessions, and preliminary data shows a slight but measurable positive impact this time around. This should only add to already healthy development spreads. Another aspect of our plan was to reduce our exposure to potentially unstable business models, particularly in the retail space. Fortunately, the vast majority of our tenants have proven to be fully capable of surviving the pandemic to date. Obviously, it's too soon to sound the all-clear. However, as you've seen by our 96% rent collection rate in both the third quarter and in October, Along with the collection of nearly all the deferred rent due under payment plans through October, our tenants are adapting quite well to the current environment. That said, the termination of the two Regal leases, two Bed Bath leases, as well as WeWork at Will's Wharf, substantially mitigates potential material threats to property NOI within the portfolio. In addition, our partner is closing in on the reduction of the WeWork space at the NOI. Assuming the economy continues to heal at a slow but reasonable pace, we anticipate strong portfolio performance to continue and ultimately improve through 2021. Additionally, based on the encouraging amount of activity around nearly all of our new vacancies, we are optimistic about fairly rapid backfill of second-generation space. In fact, several letters of intent are in negotiation now that we expect will turn into over 62,000 square feet of new leases in the near term. Back-filling these vacancies will demonstrate the strength of our retail portfolio and be a good source of increasing earnings. We also anticipate substantial progress on the lease-up of World's War over the next 12 months. Although the 2020 capital plan that we envisioned last year is largely complete, the future components will likely accelerate in their implementation. As Michael described to you a bit later, the results today have put the company in the strongest liquidity position in our history as a public company, with $200 million of cash and availability under our credit facility. That said, we continue to evaluate options to further increase liquidity and fortify the balance sheet in order to fund future growth. Once again, our position as the company's largest equity holder governs the critical decision of how best to source new capital, While we are pleased with the outcome of raising over $100 million in our preferred offering this past summer as a bridge over the pandemic, we do not intend to issue any more of these preferred shares, at least until the value of the common shares return to 85% to 90% of the whole capital stack. Likewise, we are not interested in selling any substantial amount of common stock at these discount prices. with the possible exception of a relatively small amount of activity on our ATM. Not only is our diversified business model and portfolio a key differentiator amongst our peers, it provides us with flexibility to take advantage of rapidly changing market conditions and identify alternative and cost-effective sources of capital. First and foremost, we feel confident in our ability to sell enough high-quality non-core assets upon the majority of our 2021 capital needs. We will be finalizing our 2021 disposition plan over the next few months, and we are evaluating several assets, inclusive of student housing, office, and a few more retail centers. Secondly, we will continue our longstanding practice of teaming up with trusted partners for joint ventures on some of the pipeline projects. The development and construction expertise we bring to a partnership adds considerable value in excess of a simple equity position. Perhaps most importantly, the influence we can exercise on the ground through our operating divisions gives us the confidence to assume a non-controlling interest in some cases, which provides even more balance sheet flexibility. As we have said on many occasions, a management team that is so well vested in the per share value of our company has no desire to expand the size of our asset base without creating significant equity value. Although recycling capital may slow the pace of our growth, the growth that does occur through our development spreads and profits reached from low cap rate dispositions will meaningfully contribute to NAV expansion and should allow for steady increases in the dividend over the coming few years. In short, we believe that our emphasis on value creation over growth will serve investors well in both the short and long term, much as was the case in the five years preceding the pandemic when our total returns more than tripled those of the REIT index. As we have seen over the last four decades, real estate is a long-term proposition. While quarter-to-quarter results may get headlines, long-term value creation produces durable returns. As I said, We expect that by the end of 2022, much of the development pipeline will be delivered, the existing portfolio stabilized and upgraded, and consequently, core debt to core EBITDA should fall to pre-pandemic levels. The makeup of our NOI and ultimately our earnings will be much more resilient to economic volatility and poise for further growth. In totality, these activities set up 2021 as a transition year for our company and will have a meaningful effect on 2021 FFO. However, we expect temporary drag will be once again partially offset with significant third-party construction income as our construction company continues to perform at an extremely high level. Although some temporary effects of our strategy negatively affect earnings, our responsible approach will yield several positives, even in the short term. With our liquidity position at an all-time high, Our fixed charge coverage ratio will continue to be very healthy, and dividend coverage will be robust with room for potential increases. We believe these metrics should give investors the confidence to align with management while we substantially increase the value of the company, much as they have done over the last several years leading up to the pandemic. To recount a little bit of our corporate history, After the recession caused by 9-11, we emerged as one of the strongest commercial real estate concerns in Virginia. Following the Great Recession of 2008, we emerged as one of the strongest commercial real estate firms in the Southeast. We feel strongly that once the current downturn is behind us and we again demonstrate our abilities, we will be recognized as one of the country's strongest small-cap REITs. In all, this will be the fifth severe economic disruption that our leadership team will navigate, and I expect the same long-term positive results that we produced in the first four. Now I'll turn it over to Mike.