Armada Hoffler Properties, Inc.

Greetings and welcome to the Amarda Hoffler's third quarter 2021 earnings conference call. At this time, all participants are on 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 one on your telephone keypad. As a reminder, this conference is being recorded today, Tuesday, November 2nd, 2021. I will now turn the conference over to Michael O'Hara, Chief Financial Officer at Armada Hoffler. Thank you. Please go ahead.

Good morning, and thank you for joining Armada Hoffler's third quarter 2021 earnings conference call and webcast. On the call this morning, in addition to myself, is Lou Havad, CEO. The press release announcing our third 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 December 2, 2021. The numbers to access the replay are provided in the earnings press release. For those who listened to the re-broadcast of this presentation, remind you that the remarks made herein or as of today, November 2, 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, particularly 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 statement disclosure and 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. 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 AhmaudHoffler.com. I'll now turn the call over to Lou.

Thanks, Mike, and thank all of you for joining us today. As you can see from this morning's earnings release, the positive momentum of the company continues to accelerate. Leasing activity across all sectors of our portfolio is at the highest velocity we've seen in years, and occupancy in our stabilized assets stands at over 96 percent. The development pipeline is well stocked and proceeding rapidly. Significant off-market acquisition opportunities are on the horizon. Third-party construction engagements are shaping up to become high-volume contracts later this year. And most importantly, we are in a strong cash position with access to additional capital from the potential disposition of non-core assets. All these factors have combined to enable us to again raise our full-year guidance. And as you saw from last week's press release, the Board raised the dividend for the third time this year. This performance as well as other opportunities arising in the near term, give us confidence that the company's metrics will support an equity value at pre-pandemic levels in the not-too-distant future. As most of you know, ours is a diversified, vertically integrated model. This platform has served us well through 40-plus years and virtually every macroeconomic condition. While it has been instrumental in limiting the downside from the five recessions we've navigated in that timeframe, it is times like these when opportunities abound in virtually every sector of our business that our company truly shows its value. In particular, mixed-use plan development, which constitutes a large portion of our portfolio, have shown sustained growth coming out of each of the last several recessions. environments where customers can live, work, shop, dine, and be entertained without moving a vehicle, continue to outpace surrounding assets, and provide people with the occupational flexibility that so many desire coming out of the pandemic. Our public-private partnerships, most notably the Virginia Beach Town Center and Baltimore's Harbor Point, continue to thrive and expand. 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 exceed all reasonable expectations. Our 2,300 conventional multifamily units are now over 97% occupied. The same store NOI increase of 12% on these properties only begins to tell the story of the desirability of these assets and their locations. Rent increases in new leases signed in the third quarter averaged over 9%. With the continued migration to high-value properties in the sought-after markets of the Mid-Atlantic, coupled with a shortage of housing, our expectation is that 2022 will be another strong year for these assets. Retail leasing tells a similar story. Last quarter, we reported that our expectation was that retail space percentage leased would be back in its traditional mid-90s by early next year. That target has already been achieved, and we expect further gains in 2022. Since our last update, we have leased nearly 45,000 square feet. Several new retailers are on their way to our flagship property, the Town Center of Virginia Beach, led by a new retail concept that is the first in the region. It's important to note that many of our tenants who report monthly sales eclipsed comparable 2019 sales through the summer. Several of those report that they set all-time records for the period, further supporting our thesis regarding the growth potential of high-quality assets in mixed-use environments. As new tenants occupy and begin to pay rent, we expect the retail portfolio will pass pre-pandemic same-store NOI levels sometime early next year. As we've said on numerous occasions, there is no substitute for well-located real estate, regardless of the asset class. Moving on to office, as most of you know, our stabilized office portfolio is essentially fully occupied at nearly 97%, and we have very little in the way of lease expirations through 2022. The first material expiration is the 46,000-square-foot lease expiring at the Tame Street office building in April of 2023. We already have a handful of prospects and expect to seamlessly backfill the space in relatively short order. The only meaningful current vacancy is at Will's Wharf, the office building and lease up that we delivered at Baltimore's Harbor Point at the outset of the pandemic. Last quarter, we reported that tenant activity was starting to resume as COVID restrictions lifted. We announced two substantial leases with Transamerica and RBC. Today, we are pleased to announce that Morgan Stanley Wealth Management has leased 35,000 square feet in the building. This brings Wills Wharf to 70% leased with good prospects for the remaining space. We hope to announce further leasing later this year. You may recall that we terminated the 70,000 square foot lease with WeWork prior to opening the building. Since then, we have backfilled that space with Transamerica and Morgan Stanley, with better than previous financial terms and better credit. We believe that this activity, along with the commitment from T. Rowe Price to adjacently locate their world headquarters, confirms Harbor Point, a true mixed-use master plan community, as the premier location destination in the region for top tenants. These developments, along with the continued strength at our town center office locations, are further evidence of the view we maintain that quality tenants in secondary markets will continue to seek out top-quality buildings in prime locations with access to residences and services. It's been our experience that vibrant mixed-use environments will continue to sustain office occupancy over the long term. Although the full impact on earnings of new office and retail leases as well as the robust rise in multifamily rents, won't be fully reflected until well into 2022, we're very encouraged by the trajectory of our portfolio. Turning to development, we continue to execute on our $470 million pipeline, despite the well-documented supply chain and labor challenges. This circumstance emphasizes the considerable advantages of having in-house development and general contracting capability as well as seasoned joint venture development partners. By way of example, the two multifamily projects currently underway remain on their budgets and ahead of their scheduled delivery dates. In fact, current projections have both projects delivering about 30 days earlier than previously committed. Solus Gainesville began pre-leasing last month, and the first move-ins are now scheduled for January. At Chronicle Mill, delivery has been accelerated to late summer of 2022. Based on the activity in these submarkets, we anticipate faster-than-normal lease-up at both of these facilities. These assets, when combined with our new apartment development in Harrisonburg, Virginia, that will commence next spring, will soon add some 700 units to our traditional multifamily portfolio, bringing the total count to over 3,000 units. Additionally, We have development control and optionality with respect to our town center Regal property, another prime apartment site. 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. This leads me to our three student housing properties. 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. 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, the assets are now over 90% occupied, over 97% occupied, albeit at lower than pro forma rents. However, given the attractiveness of today's cap rates, we have opted to transact on these properties and ultimately exit this category. Our expectation is that the Johns Hopkins facility will be sold later this month. The two College of Charleston assets are on the market and we would expect to transact early next year. Collectively, we expect a modest gain in total. More importantly, We expect to recycle this significant amount of capital in better yielding higher growth opportunities that we have identified and intend to transact on in the near future. 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 T. Rowe Price World Headquarters, the program for the companion building is substantially settled. This building will feature 300 apartments, 15,000 square feet of retail space, and 1,300 parking spaces. Though the pipeline is robust, as I previously mentioned, we continue to receive many new prospective engagements. 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 pre-development process. This brings me to our construction company. Most of you know this division of our company primarily serves to lower costs and shorten schedules on our development properties. That said, the division contributes meaningful fee income with third-party engagements. It had perhaps its best year ever in 2020 with $7.7 million in third-party gross profits. This year, due to a delay in construction starts as many of our clients postpone projects until later in the year, we anticipate ending the year at the low end of our historical range. Fortunately, all of those anticipated projects are now moving forward. The effect of the delays has simply been to move more work in place and therefore profits into next year. This activity, coupled with new engagements that should be solidified later in the year, will most probably see the division back to the high end of our normal range, if not beyond, in 2022. As we relayed to you with our guidance presentation from last winter, we believe that 2021 is a year when our activities would substantially increase NAV through our leasing initiatives, improved quality of earnings, exciting development starts, and a de-emphasis of the mezzanine program. In short, we anticipate that our execution will 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 goals. Although there are too many factors that remain unsettled to offer exact guidance, for 2022, our expectation is that, with the exception of the mezzanine program as previously stated, virtually all segments of our business will show healthy increases next year. We expect these trends, combined with off-market acquisition opportunities we are targeting, should lead to higher earnings next year. As the company's largest active equity holder, management remains committed to generating long-term value for all shareholders. And I'll turn the call over to Mike.