Armada Hoffler Properties, Inc.

Welcome to Armada Hoffler's fourth 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 call is being recorded today, Thursday, February 11, 2021. I would now like to turn this conference over to Mr. Michael O'Hara, Chief Financial Officer at Armada Hoffler. Please go ahead, sir. You may begin.

Good morning, and thank you for joining Armada Hoffler's fourth quarter and full year 2020 earnings conference call and webcast. On the call this morning, in addition to myself, is Lou Haddad, CEO. The press release announcing our fourth quarter earnings along with our quarterly supplemental package and our 2021 guidance presentation were distributed this morning. The replay of this call will be available shortly after the conclusion of the call through March 11th, 2021. 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 the remarks made herein or as of today, February 11th, 2021, will not be updated subsequent to this initial earnings call. During this call, we will make four looking statements including statements related to the future performance of our portfolio, our development pipeline, impacts 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. The risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review the forward-looking statement disclosure in our press release this morning and the risk factors we have disclosed in documents we have filed with or furnished to the SEC. We'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 amadahoffler.com. We will start the call today by discussing our 2021 guidance. At this time, I'd like to draw your attention to our 2021 guidance presentation that we published this morning. I'll now turn the call over to Luke.

Thanks, Mike. Good morning, everyone. and thank you for joining us today. This month, we will mark the 42nd anniversary of the founding of our company. We take a great deal of pride in achieving that milestone, one not often seen in the commercial real estate business. Over the years, we've earned a reputation for integrity, consistency, and professionalism, traits that are at the foundation of our success. This past year has seen our company intensely tested in several ways. While the struggles brought on by the pandemic were certainly not unique to us, to some, our approach to the crisis may seem somewhat counterintuitive. As this is the fifth major recession we've managed the company through, we've developed strategies that have seen us survive and ultimately thrive through multiple cycles over the decades. Some facets of this plan are fairly obvious. Conserve your cash, work with your tenants, reduce operational expenses, and most importantly, take advantage of new opportunities. Less visible to onlookers is our dedication to staff in tough times. Despite the pay reductions volunteered by our board and executives, all other members of our team received their yearly pay increases on time early last fall. They have also recently received their full year-end bonuses and several earned promotions throughout the year. Their performance throughout this difficult year has been nothing short of remarkable, and that performance must be rewarded. We also escalated our outreach activities to support our community throughout the crisis. We've learned over the years that the best time to build employee, customer, and brand loyalty is during tough times, when others often abandon those principles. This posture is the main reason why our staff retention has always been stellar. That long-term institutional knowledge and staff dedication has been key to our ability to outdistance our peers after each of the last four recessions and why we believe this one will be no different. In addition to analysts and investors, there are many employees and joint venture partners listening in on the call today. 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. I'm proud to be associated with each one of you. While the focus of my comments today will be on our 2021 guidance as presented in the release this morning, I'll first offer a few thoughts on the fourth quarter and 2020. As you can see from our earnings release, we've been extremely active at the company. Over the last few months, we've announced three new development projects, purchased two high-quality multifamily assets and made solid progress on releasing COVID-related vacancies. Perhaps most importantly, 2020 saw us maintain high occupancy portfolio-wide and collect 94% of scheduled rents since the beginning of the pandemic. These factors, combined with the continued strength we anticipate in our markets, have encouraged our Board to declare a 36% increase to our common dividend. as you may have seen in our press release earlier this week. We appreciate the confidence the Board has shown to the management team, both in this action and their solid support throughout the crisis. 2021 is a year where our focus is to substantially increase NAV through our leasing initiatives, improved quality of NOI, and exciting development starts. In short, we anticipate that our activities over the course of 2021 We'll build a solid case for expansion of our multiple and ultimately lead to significantly higher earnings and dividends over the next several years. As the company's largest equity holder, management remains committed to generating long-term value for all shareholders. Turning to our guidance presentation. As you can see by the earnings range on page four, the midpoint of our per share guidance is right at a dollar. As we have relayed to you over the last few quarters, we anticipated a moderate decrease in earnings per share for 2021. While a portion of the decline is due to the temporary effects of the pandemic, the major reason is the repositioning of the company for higher quality earnings over the next several years. This was a conscious decision made in mid-2019, and as you'll see in the subsequent slides, one that sacrifices short-term earnings but is on track to produce long-term growth and value. Specifically, as you may recall, prior to the pandemic, we detailed a plan to reduce the percentage of NOI contributed from retail properties through disposition of older centers, increase the percentage of multifamily NOI through development and acquisition, while also decreasing the volume of mezzanine loans thereby allowing us to allocate more resources to portfolio growth and ultimately decrease leverage ratios over the medium to long term. We believe this results in a qualitatively stronger income stream and higher per share asset value. However, it does reset earnings during the transition. We believe the tradeoff is well worth it. These factors, combined with the return to normal construction profit levels from all-time highs last year and the pandemic-related pause in new development deliveries are the main drivers in this year's earnings range. Hopefully you all feel, as we do, that these intentional moves are part of a longer-term strategy that positions the company for even greater returns than those enjoyed by investors for the five years preceding the pandemic. Before I walk you through the other highlights of our presentation, I'm going to reiterate a fact that many who follow our company have correctly pointed out, that we do not fit neatly into the standard REIT box. In addition to a high-quality diversified portfolio, third-party construction profits, bill-to-suit asset sales, and mezzanine interest income, give our platform a unique complexity that can't be wholly measured by traditional REIT metrics. That said, while these ancillary income streams augment earnings and decrease the need for external capital. The end goal of monetizing development spreads in this fashion is to enhance growth in our portfolio income through new development projects and off-market OP unit acquisitions. Illustrative of this point, as you can see by the information at the top of page five, we expect our portfolio NOI to climb by over 40% from 2020 levels when the current development projects are fully stabilized. We believe the FFO per share from this additional NOI will be meaningfully higher due to the millions of dollars earned from mezzanine activity and construction income that we reinvest into the company, thereby reducing the need for outside capital. Also of note on this page, as we have been projecting, the pie charts showing the NOI contribution or various property types continues to adjust with concentration moving from retail into multifamily and office. While the non-retail assets that are being added to the portfolio through development and acquisition are of trophy quality and offer significant long-term growth, I'd like to emphasize that we are also very bullish on all components of our retail portfolio. Neighborhood grocery centers, regional discount chains, and mixed-use retail all dominated by stable, viable tenants will remain as a high occupancy and growing sector of our business. Turning to page six, you can see that we've also been very successful in diversifying our portfolio on a geographic basis. Upon stabilization of the current pipeline, over half of our property NOI will come from outside of Virginia, much of it from high-growth southeast markets. This increased geographic diversification is the results of years of goodwill and strong relationships built with strategic partners in these dynamic markets. Later in the call, Mike will detail the performance of the portfolio in terms of maintaining both high occupancy and a sustained level of rent collection. I'll first mention some important statistics on our leasing efforts. What we've learned over the years is that a solid, high-quality portfolio not only stays full during recessions, but also quickly releases at market terms when space becomes available. Our office and traditional multifamily sectors have to maintain mid-90s occupancy and near 100% rent collection, performance that is indicative of the strength of our assets and their respective markets. However, as you might expect, the retail portfolio did experience some additional vacancies through the pandemic. That said, Our retail assets have shown remarkable resiliency as evidenced by our 88% retail rent collection rate during the pandemic. Last quarter, I reported that we already had over 60,000 square feet of new LOIs on COVID-related vacancies. And with many additional prospects, we hoped to significantly add to that number. I also mentioned that we were working with Regal and Bed Bath & Beyond to find mutually beneficial solutions to expiring leases in a handful of locations. Page 7 illustrates the value of having well-located real estate when the economy is down. I'm pleased to report not only that all of those LOIs are now executed leases, but in total, we have leased 90,000 square feet since our last update, net of the regal leases. We're also nearing execution of another 46,000 square feet of retail leases. In fact, our expectation, as seen on page 8, is that we will be nearly back to our retail sector historical norm of approximately 95% leased within the next 12 to 18 months. Back to page 7. The four individual assets listed on this page had recent lease terminations scheduled that would have left us with a large amount of vacancy had they not been in top locations. As you can see, both of the Regal Cinemas have been re-leased to Regal as is, and even more importantly, we've secured development rights to enhance returns on these parcels with additional mixed-use assets. The Wendover Bed Bath & Beyond was released in its entirety on an as-is basis. And we are in negotiation with a credit tenant to take the entire space vacated by Bed Bath at North Point. In all, we expect significant upside from the new leases in the short term and tremendous additional long term value from the new development projects on the Regal parcels. 40 years of experience has taught us that quality real estate and strong markets stands the test of time. regardless of the sector of our diversified platform in which it resides. The development pipeline is described on page nine, beginning with our recently announced joint venture with BD Development for the 450,000 square foot build-to-suit for T. Rowe Price's World Headquarters, which is adjacent to our other three assets at Harbor Point on the Baltimore waterfront. This trophy asset will bring some 1,700 employees to this world-class development. As you can see, the remainder of the development pipeline is heavily weighted towards multifamily assets. We also have three additional projects in the pre-development stage. These projects are more fully described at the back of the deck. On the bar graph to the right of the slide, we've shown the value we expect to create through these developments using our target development spread of 20%, consistent with our historical average. Page 10 covers our third-party construction and other real estate services. This division had one of its best years ever in 2020 with over $7.5 million of gross profit. This facet of our business model, unique across the REIT universe, gives us multiple advantages over our peers. Although significant, third-party fee income is perhaps the least important benefit of our construction company. Aside from giving us the confidence and control to pursue our in-house development and mezzanine strategies, construction contracting has brought us many new relationships with high-quality developers that we may ultimately add to our circle of partners in new ventures. Our expectation is that this year and for the foreseeable future, Third-party profits will return to their historical norm. This is a conscious decision as we choose to reserve more of our resources to build upcoming in-house projects, which do not recognize fee income, but more importantly, add to our development value creation spread. Page 11 shows our mezzanine investment program. As most of you know, this initiative allows us to provide development and construction expertise as well as our strong credit to trusted partners developing high-quality projects in return for most of their value creation. As we have reiterated on many occasions, our intent is to gradually decrease the size of this program in order to use more of our capital for NAV accretion through our development platform. As you can see by the trend line, we ultimately expect to stabilize the program in the $80 million range. One new project to note is the Solus Nexton Multifamily Project, which is another engagement with our partners at Terwilliger Pappas, who are the developers of the Solus Interlock Project and our partners in Solus Gainesville as well. Solus Nexton is in the same fast-growing submarket of suburban Charleston as our Nexton Marketplace Lifestyle Center. In fact, the assets are a short walk apart and will complement each other extremely well. Stepping back to a macro look at the business, the top of page 12 shows the trajectory of our anticipated growth year over year as we return to our historical levels of portfolio occupancy and build out the current development pipeline. As you can see, we anticipate a 25% increase in the total income of the company, while the combined mezzanine and fee component decreases to less than 10% of the total. We believe that this income combination solidifies our free cash flow, earnings base, dividend coverage ratio, and ultimately supports a substantial expansion of our multiple. Now I'll turn it over to Mike to give some further detail on our guidance, as well as some specifics on last quarter.