Armada Hoffler Properties, Inc.

Welcome to Armada Hoffler's second quarter 2021 earnings conference call. At this time, all participants are in a listen-only mode. After management's 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, Tuesday, August 3rd, 2021. I will now turn the conference call over to Michael O'Hare, Chief Financial Officer of Armada Hoffler. Please go ahead.

Good morning, and thank you for joining Armada Hoffler's second quarter 2021 earnings conference call and webcast. On the call this morning, in addition to myself, is Lou Haddad, CEO. The press release announcing our second quarter earnings, along with our quarterly supplemental package, were distributed this morning. Replay of this call will be available shortly after the conclusion of the call through September 3rd, 2021. The numbers to access the replay are provided in the earnings press release. For those who listened to the rebroadcast of this presentation, I remind you that the remarks made herein as of today, August 3rd, 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, 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. typically in the light of COVID-19 pandemic and any related economic uncertainty. 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 distributed 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 including but not limited to FFO and normalized FFO. Definition 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 Luke.

Thanks, Mike, and thank all of you for joining us today. For the last few quarters, we relayed to you the strategy we've successfully employed to see us through this, the fifth major economic downturn in our corporate history. While I won't rehash the conservative aspects of that plan, which saw us through the worst of the crisis, I do want to emphasize the part of our formula that is of the most interest to investors, the goal of outperforming our peers in the subsequent recovery. This morning's announcement of a healthy increase in our guidance for the year is but the first of what we expect to be a number of positive announcements on the horizon. Leasing activity across all sectors of our core portfolio is at the highest velocity we've seen in years. The development pipeline is well-stocked and proceeding rapidly. An ample supply of off-market acquisition opportunities have been uncovered. Third-party construction engagements are shaping up to become high-volume contracts later this year. And most importantly, we are in a strong liquidity position with access to additional capital sources from the potential disposition of non-core assets. At some point, we would expect to see these near and long-term growth prospects to be reflected in our stock price, just as it was in the five years leading up to the pandemic. For now, our team is happy to continue putting the building blocks in place to demonstrate superior, if not game-changing, performance. This morning, we posted second quarter results of 29 cents of normalized FFO per share, which was ahead of our expectations. More importantly, as you see in our earnings release, we have raised full year guidance by 4% to $1.02 to $1.06. A close look at the components of our guidance reveals the increase is almost entirely due to an increase in our property NOI, as all other components remain virtually unchanged. This forecasted NOI increase is mainly due to accelerated leasing in both retail and multifamily, as well as the off-market acquisition of two high-volume retail centers this month. Let's briefly discuss each component of our business model and the activity we're experiencing in each of them. Apartment leasing and occupancy continue to trend upward at a rapid pace. Our 2,300 conventional multifamily units are 97% occupied. The cash same-store NOI increase of 12% on these properties only begins to tell the story of the desirability of these assets and their locations. New leases signed in the second quarter have an average rate increase of over 7%. With a continued migration to high-value properties in the sought-after markets of the Mid-Atlantic, coupled with a shortage of housing, our expectation is for these trends to continue for some time. Retail leasing tells a similar story, with an additional 37,000 square feet leased since our last update. Included in that total are several new retailers that are on their way to our flagship asset, the Town Center of Virginia Beach. With occupancy approaching our traditional mid to high 90s percentage occupied, and as the new tenants begin to pay rent, we expect the retail portfolio will eclipse pre-pandemic NOI levels sometime early next year. As we have said on numerous occasions, there is no substitute for well-located real estate regardless of the asset class. High-volume retail centers are no exception to this rule. As most of you know, our stabilized office portfolio is essentially fully leased with very little in the way of lease expirations this year and next. The only meaningful vacancy is at Will's Wharf, the office building we delivered at Baltimore's Harbor Point at the onset of the pandemic. Last quarter, we reported the tenant activity was starting to accelerate as COVID restrictions lifted. We announced two substantial leases with Transamerica and RBC. Currently, we are at lease with another full-floor credit tenant and have an abundance of prospects for the remaining space. In fact, we have more space proposed to potential tenants than we have space available in the building. We expect to announce further leasing later this year. Although the full impact on earnings of new office and retail leases, as well as the rise in multifamily rents, won't be fully reflected until well into 2022, the trajectory of our core portfolio should be easily recognized. The last factor contributing to our increased guidance is the off-market acquisition of two high volume retail centers, which we alluded to last quarter. These centers will have been acquired partially through the redeployment of capital from the early payoff of the SOLUS interlock mezzanine loan, which included the full year's interest income that was in our previous guidance. The first, located in Asheville, North Carolina, is anchored by the number one TJ Maxx in the state. And the other, in Chesapeake, Virginia, is anchored by the number one Kroger in the state. Both are acquired on a negotiated basis and immediately accretive, while one contains value-add opportunities. Since the fall of 2019, we have made clear the goal of balancing the percentage of our NOI that is derived from our various asset classes. Just as clear has been our commitment to expand the retail sector of our business, both through the development and acquisition of high quality grocery and discount anchored centers. It is gratifying to see that investors are starting to recognize the value of these types of high traffic retail assets. That said, Ultimately, the portion of NOI from retail will decrease relative to our other sectors due to the predominantly multifamily and office makeup of our development pipeline. Speaking of development, the two multifamily projects currently underway remain on their scheduled budget and completion dates. The Gainesville project is scheduled to begin pre-leasing by the end of the year with delivery of the first units in the first quarter. Chronicle Mill is scheduled for delivery at this time next year Based on the activity in those Atlanta and Charlotte satellite markets, we anticipate faster than normal lease up at both of these assets. Together with the 2022 commencement of our new apartment development adjacent to the Regal Cinema in Harrisonburg, Virginia, we will soon add nearly 700 units to our conventional multifamily portfolio, bringing the total count to over 3,000 units. We believe that this sector of our platform alone has a value of over a billion dollars. We also believe that investors will ultimately reap tremendous growth and value from this very significant portion of our diversified business model. We are seeing even more opportunities to develop additional assets in this sector. This leads me to our three student housing facilities. As we have said on several occasions, we view these assets as non-core, and they will ultimately be used as a ready source of inexpensive capital to fund development and acquisition opportunities. Economic occupancy at these properties was significantly impacted during COVID, and thus we don't expect full restabilization to occur for at least another school year. That said, at today's cap rates, we may opt to transact sooner rather than later, as even at less than maximum value, this significant amount of capital may be better deployed elsewhere in light of the abundance of growth opportunities coming our way. The balance of the announced development pipeline, the mixed-use Southern Post in Roswell, Georgia, and the joint ventures at Harbor Point on the Baltimore waterfront continue on track to break ground around year-end. In addition to the 450,000-square-foot T. Rowe Price World Headquarters, the program for the companion building is substantially settled. This building is expected to feature 300 apartments, 15,000 square feet of retail space, and 1,300 parking spaces. Though the pipeline is already robust, we continue to receive many new opportunities. The amount of activity in our markets, coupled with our 40-year track record, have yielded many more opportunities for high-value projects across our diversified platform. We will continue to evaluate these for selective inclusion in our next wave of development. This brings me to our construction company. As most of you know, this division of our company had perhaps its best year ever in 2020, with $7.7 million in third-party gross profits. This year, we have seen a lag in new construction starts as many of our clients delayed projects until later in the year. However, we still expect to end the year at the low end of our historical range. With these anticipated projects commencing soon, the effect of the delays simply moved more work in place and therefore profits into next year. This shift coupled with new engagements that we expect to be solidified later in the year, will most probably see this division back to the high end of our normal range, if not beyond, in 2022. On numerous occasions, we have discussed that our mezzanine lending program will be gradually reduced to a principal amount of approximately $80 million. We had anticipated that the two major projects in this program would have loans outstanding well into 2022, thereby reducing our ability to meaningfully resize the program until that time. We still project that the interlock commercial loan will be outstanding for that duration. However, due to favorable market conditions and the rapid pace of unit absorption, our partners at Terwilliger Pappas decided to sell the SOLUS interlock asset earlier than was previously contemplated. Our mezzanine loan was paid off in early June. The return of $33 million of capital inclusive of nearly $10 million of stipulated minimum interest, enhanced our flexibility to take advantage of the shopping center acquisitions that I previously mentioned. These actions are totally consistent with our stated goal of using more of our capital to build a top quality core portfolio. As we demonstrated to you with our guidance presentation from last winter, 2021 is a year where our focus is to substantially increase NAV through our leasing initiatives, improved quality of earnings, exciting development starts, and resizing of the mezzanine program. In short, we anticipated that our activities over the course of 2021 would build a solid base for higher earnings and dividends over the next few years and ultimately lead to a significant expansion of our earnings multiple. We believe that we are well on our way towards delivering on those commitments. As the company's largest active equity holder, management remains committed to generating long-term value for all shareholders. Now I'll turn the call over to Mike.