Armada Hoffler Properties, Inc.

Welcome to Armada Hoffler's fourth quarter 2021 earnings conference call. At this time, all participants are in listen-only mode. After management's prepared remarks, you will be invited to participate in question and answer session. At this time, if you have a question, please press star 1 on your telephone. As a reminder, this conference call is being recorded today, Thursday, February 10, 2022. I will now turn the conference call over to Michael O'Hara, Chief Financial Officer at Armada Hoffler. Please go ahead.

Good morning, and thank you for joining Armada Hoffler's fourth quarter and full year 2021 earnings conference call and webcast. On the call this morning, in addition to myself, is Lou Haddad, CEO, and Sean Tibbetts, COO. The press release announcing our fourth quarter earnings along with our quarterly supplemental package and our 2022 guidance presentation were distributed this morning. Replay of this call will be available shortly after the conclusion of the call through March 10th, 2022. The numbers to access the replay are provided in the earnings press release. For those who listened to the re-broadcast of this presentation, we remind you that the remarks made herein are as of today, February 10th, 2022 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, the 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 the 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 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. 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, amadahoffler.com. We'll start the call today by discussing our 2022 guidance. At this time, I'd like you to draw your attention to our 2022 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. In addition to analysts and investors, there are many of the Armada Hoffler family on the call, including joint venture partners. On behalf of our founder and chairman, Dan Hoffler, board of directors, and executive management, we sincerely thank you for being a part of our team. Though the last two years have been challenging to say the least, your hard work, dedication, and expertise have seen us through our fifth recession. As has been the case following the previous four, your efforts have poised us for significant growth and additional profitability. Similar to the five years preceding the pandemic, I feel certain that investors will soon recognize the trajectory of our company and reap the rewards of our growth. I'm proud to be associated with each one of you. The primary focus of my comments today will be on our 2022 guidance deck released this morning. Later in the call, Mike will go over our fourth quarter and full year results. As you can see from our earnings release, and the other announcements we've made in recent weeks. Our company has been extremely active. For the last few months, we've acquired a $270 million trophy property, signed several new leases, and strengthened the balance sheet with non-core dispositions and capital market activity. As we forecasted six months ago, all three of the asset classes in our stabilized portfolio are now over 95% leased. This activity, combined with near-term development deliveries make us extremely bullish about 2022 and beyond. A quick word about 2021. The fourth quarter was very strong with normalized FFO of 27 cents. The full year normalized FFO of $1.07 represents a 7% increase from the midpoint of our original 2021 guidance. Record NOI from our multifamily properties combined with robust leasing in the office and retail sector, as well as off-market acquisitions, all played a role in this outstanding achievement. As happy as we are about our recent performance, the true excitement in our company centers around the current quality of our NOI and the future trajectory that we expect will fuel the substantial growth in the net asset value of the company. As you may recall, our goal for 2021 but to substantially increase NAV through our leasing initiatives, improved quality of NOI, and exciting development starts. The continuation of this theme will become self-evident as we walk through the components of our guidance. Please see our guidance presentation that was released this morning. Page 4 outlines the components of our earnings guidance. Compared to 2021 results of $1.07, Our 2022 normalized FFO guidance midpoint of $1.13 represents a solid 5.6% increase. Turning to page five. 2022 is a year in which we will continue to focus on increasing the quality of portfolio NOI, accretive acquisitions, and multifamily development deliveries. In short, we anticipate that our activities over the course of 2022 We'll build a solid case for expansion of our multiple while we continue to ramp earnings and dividends over the next few years. As you can see by the data on the top of this page, we expect significant increase in 2022 NOI from 2021 levels. This increase is driven by the acquisition of the Exelon building, the lease up of Willsworth, and the leasing activity at our retail properties, which are expected to yield a material increase in NOI. Even more important is the dramatic rise we anticipate in our future NOI once our current development projects stabilize. While all of our property segments are expected to exhibit healthy increases, the main driver is the 75% increase in multifamily NOI through development deliveries. The majority of the funds necessary for these projects has already been secured. The remainder will be satisfied in the least dilutive manner possible. As the company's largest active equity holder, management remains committed to generate long-term value for all shareholders. Our primary goal is to increase NAV and turn a substantial amount of this growth into FFO. Turning to page six, you'll see the same NOI totals in bar chart form with the overlay of our anticipated fee income. Notable here is our projection that third-party construction fee income will remain near the top of its historical range for the foreseeable future. Our contract backlog for this division will soon be at an all-time high. And, as we have been stressing for several quarters, our lending program will continue to be de-emphasized as we deploy more of our capital on hard assets. Thus, The fee side of the business will soon become a single-digit percentage in a pool of rapidly growing income. This was a conscious decision made in 2019 and one that sacrifices short-term earnings but is on track to produce substantial increases in NAV. Let's now take a closer look at the property segment composition of this NOI, starting with page 7. The multifamily segment performance has been nothing short of spectacular. Every 2021 metric listed here registered the highest increases in year-over-year results that we've experienced in our history. Perhaps the most important statistic shown is the future 55% growth in the number of units delivered through our development pipeline and the expected dramatic rise in NOI over the next few years. We believe that the current and increasing value of our multifamily properties is underappreciated by the market, and we hope that the true value of our multifamily portfolio will soon be recognized. These are recently built best-in-class assets that we believe would receive sub-four cap rates on the open market. Page 8 is a snapshot of our office segment, again showing very impressive occupancy same-store NOI, and releasing spreads. As we have said for a number of years, top-quality office buildings in mixed-use environments outperform the general market over the long term. Also noteworthy, we have very little in the way of lease expirations over the next few years. Inclusive of the Exelon acquisition, a quick look at our top 10 tenants will confirm that roughly one-half of our office NOI is derived from investment-grade tenants in trophy class buildings. The next page details our retail assets. As we predicted, occupancy has fully recovered from the pandemic, and same-store NOI and releasing spreads have been robust. As we have only a small amount of retail in the pipeline, we are anticipating reliable growth in this segment, primarily through continued rent increases and acquisitions. Page 10 details our development projects. All projects are well underway, with the exception of the Harrisonburg Apartments, which we expect to commence construction this spring. Our Chief Operating Officer, Sean Tibbetts, is on the call if you have specific questions regarding any particular development. I'll call your attention to the bar chart to the right of the page. You'll see that we are anticipating the value creation to be larger than our traditional target of 20%. This increase is primarily due to the compression in multifamily cap rates. As I said earlier, apartments make up the majority of the pipeline. We anticipate announcing at least two additional projects later this year. Page 11 shows our recent acquisition activity. Over the past 14 months, We acquired six properties totaling over $500 million, adding a total of $35 million in NOI. The acquisitions include 500,000 square feet of retail, 450,000 square feet of office, and nearly 700 multifamily units. We intend to continue with these types of opportunistic acquisitions in 2022 and beyond. While the total of over a half a billion dollars in recent acquisitions is impressive in and of itself, it's important to recognize that each of these purchases were off-market transactions. This approach requires patience and long-term relationships. We believe that we could sell each of these almost immediately at a meaningful profit. The full NOI impact of the assets listed here will be in place for virtually the entire year. Our 2022 guidance includes additional purchases of $100 million in the second half of 2022 as we prepare to receive the proceeds from our partner's sale of the Interlock project in West Midtown Atlanta early next year. On page 12, you can see that our core markets span from Baltimore to Atlanta with the highest concentration in Maryland and Virginia, the locations of our two master plan communities. On pages 14 to 17, you can see the magnitude of Baltimore's Harbor Point and the town center of Virginia Beach. Both of these master plan communities are multi-decade partnerships with municipalities and represent best-in-class mixed-use developments that continue to thrive and expand through multiple phases. Additionally, we are seeing a tremendous number of opportunities in our other markets of the Carolinas and Georgia. and expect that we will continue to grow in those areas as well. The remainder of the deck consists of a detailed description of the Exelon purchase, which Mike will speak to, and individual pages on each of our development projects. Now I'll turn the call over to Mike.