Armada Hoffler Properties, Inc.

And welcome to our Mother Huffler Properties, Inc. Third Quarter 2022 Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the Start key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you must press Start and 1 on your telephone keypad. To withdraw your question, please press the start and choose. Please note this event is being recorded. I would now like to turn the conference over to Chelsea Forrest.

Please go ahead. Good morning, and thank you for joining Armada Hoffler's third quarter 2022 earnings conference call and webcast. On the call this morning, in addition to myself, is Lou Haddad, CEO, Matthew Barnsmith, CFO, and Sean Tibbitt, COO. The press release announcing our third quarter earnings along with our quarterly supplemental package were distributed this morning. A replay of the call will be available shortly after the conclusion of the call through December 8, 2022. 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 are as of today, November 8, 2022, and will not be updated subsequent to this initial earnings call. During this call, we will make forward-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. 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 the documents we have filed with or furnished to the SEC. We will 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 armadahoffler.com. I'll now turn the call over to Lou.

Thanks, Kelsey. Since becoming public nine years ago, we've been extolling the virtues of mixed-use assets, a diversified portfolio, the advantages of self-performing development and construction, and a strong emphasis on company culture. The benefits of these attributes become even more apparent in unsettled times. Although our business model might require a bit more analysis to fully grasp than the typical REIT, our results remain very clear and compelling. Our third quarter earnings release is a further illustration of our inherent advantages versus our peers. After raising our guidance for a third consecutive quarter, Our new midpoint of $1.19 per share represents an 11% increase over full year 2021 earnings, which has supported the 18% increase in the dividend this year. Although we are not ready to release guidance for next year, our expectation is for earnings and dividends to continue to rise in 2023. This is wholly consistent with the data included in our initial guidance presentation from earlier this year. where we projected that NOI would increase by 45% over 2021 levels over the next few years as our developments stabilize. With two multifamily development deliveries this year, a large mixed-use development expected to enter service next year, and the expected 2024 deliveries of the T. Rowe Price Global Headquarters and 300 more luxury apartment units, we are right on track with that forecast. The rapid lease-up of our development deliveries and stellar performance in third-party construction are important factors in our steadily increasing results. However, the largest source of the upward trajectory has been the continued high occupancy and rent growth in our stabilized properties. These increases are primarily due to the sustained upward trend in virtually every leasing metric across our diversified portfolio over already robust levels. Continued increases in same-store NOI, commercial releasing spreads, and high single-digit apartment trade-outs have become the norm for 2022. We believe that this is a result of our continued emphasis on A-plus properties in each of our asset classes. When you have prime properties amongst limited peer competition, you have the ability to sustain premium rents through essentially any macroeconomic backdrop. Taking advantage of a flight to quality has always been central to our strategy. We believe the type of assets we own, be they office, retail, or multifamily, will outperform the competitive set through most any business cycle. What we've seen over the last four decades remains true today. High-quality facilities in mixed-use environments located in desirable submarkets stand the test of time. Put another way, We expect our buildings to maintain the highest rate and occupancy in every one of our core markets, regardless of the asset type. To that end, I'll reference our two most recent press releases. First, you'll recall that last quarter we reported that we expected another high credit lease to replace the soon to be vacated Johns Hopkins space at Tame Street Wharf at Harbor Point. Yesterday, we announced that Morgan Stanley has leased the entire 46,000 square feet. Perhaps more importantly, they've extended the term on their initial 195,000 square feet to 2035. With the recent addition of Morgan Stanley's wealth management group in 35,000 square feet in our adjacent Wills Wharf building, Morgan Stanley will have a presence of over 275,000 square feet at Harbor Point well into the next decade at a minimum. This commitment, combined with the long-term leases of the corporate headquarters of Constellation Energy Group, T. Rowe Price's global headquarters, Transamerica, RBC, EY, and many others, should validate to all our years-old belief that Harbor Point is the top destination for Class A companies between D.C. and Philadelphia. These trophy office buildings, complemented by what will ultimately be nearly 1,000 luxury apartments and some specialty retail, all surrounding a five-acre waterfront park, make Harbor Point the premier destination for the top demographic in each of its asset classes. The story at the town center of Virginia Beach is much the same. With occupancy across retail, office, and multifamily in the high 90s, our asset management team began working on the few potential vacancies expected to occur over the next couple of years. Although the existing Hampton University space is leased through 2023, we negotiated a buyout and signed a new lease for 18,000 square feet with Old Dominion University to locate their School of Data Science and Cyber at Town Center. This adds a new source of patrons to the wide variety of apartment residences and entertainment retail in the complex. These assets collectively continue to be the top destination in the entire 1.8 million person MSA. As I've said repeatedly, the competition for space in our trophy office properties is very robust. We realize that the demand we are experiencing in our office portfolio is counter to the narrative surrounding major markets where high-value tenants have multiple options for Class A space. But the simple fact is that trophy buildings in our target markets face limited competition for top-tier tenants intent on using the workplace as a showcase for attracting and retaining talent. Consequently, the most pressing issue facing us in the office portion of our portfolio for the foreseeable future is accommodating our existing tenants with expansion plans. Our retail portfolio tells much the same story. As most of you know, retail is the largest component of our asset base, and grossly anchored shopping centers make up the majority of that sector's NOI. With occupancy at an all-time high, robust releasing spreads and same-store NOI growth, we anticipate very little turnover and increasing revenues for the foreseeable future. Some of you have inquired about the status of our two Regal Cinema properties. Please remember that both of these properties sit on what we consider to be prime multifamily acreage, one adjacent to Town Center, the other in the heart of downtown Harrisonburg. That said, Regal continues to operate the theaters and is not interested in relinquishing either property at this time, nor do we have any interest in renegotiating rental rates. We will keep you posted of any new developments on either of these properties. The multifamily sector continues to perform at a very high level with sustained high occupancy and apartment tradeouts and same-store NOI in the high single digits. Most exciting in this area is the delivery of our Chronicle Mill apartments in the Charlotte area market. Although delivery of the first units occurred only last month, the property is already nearly 70% leased as of yesterday. Although the pace of apartment leasing traditionally slows over the winter season, we expect the property to still stabilize during the first quarter of 2023. In our last report, We told you that our Gainesville development in the greater Atlanta area was the fastest multifamily lease up in our history at just under seven months. Chronicle Mill may well eclipse that record. On the construction front, we continue to realize record profits and expect this division to produce its best year ever in 2022. And with over $525 million in third-party contract backlog, we expect this trend to continue through the entirety of 2023. While third-party construction profits continue to grow, the percentage of earnings attributable to fee income will continue to diminish relative to portfolio NOI. With respect to the interlock project in West Midtown Atlanta, we are now projecting our loan to be outstanding well into next year, given the current unsettled capital markets. As I mentioned earlier, this property is over 90% leased and cash flowing handsomely. With our priority position, which requires all net income to be applied to our loan balance, we are happy to remain patient until the environment is more favorable for our partners to transact at a meaningful profit. Alternatively, should the opportunity ever arise to acquire this trophy property at a significant discount, we remain favorably disposed to that option. Earlier in this year, We told you that in light of the continued undervaluation in our share price, we had decided to sell a few non-core assets to fund the remaining equity required for our active development pipeline. Those transactions achieved a blended 4.1 cap rate and yielded gross proceeds of $177 million. The execution of these dispositions in the midst of a very unsettled market indicates the sort of value contained in our portfolio. While not surprising, Needless to say, we are very pleased with these results. As previously stated, we have no further need for capital through the end of this year and beyond. The low cost funds from the dispositions largely satisfy the remaining equity needs for our developments. Collectively, the projected return on cost of the new assets in development is substantially higher than the cost of those funds. As a result, Much of the anticipated income from our development pipeline is expected to translate into future FFO. In addition, we are evaluating a number of other development opportunities, the majority of which are in the multifamily sector, some on acreage we already own, some brought to us by development partners. Only those projects that meet our criteria for long-term growth and profitability will make it through our underwriting and onto the active development list. Our COO, Sean Tibbetts, is here to answer any questions you may have on our development activities and what we are seeing in the marketplace. Combine all of the factors I just mentioned with retail NOI and multifamily rental rates at all-time highs, you come to understand the continued rise in our top-line numbers. Of course, in order to see those funds filter through to FFO, control of expenses and debt service must remain a priority. As those who have followed the company closely know, our strategy of keeping our debt virtually 100% fixed or hedged has been a trademark of Armada Hoffler for many years. As Matt will detail later in the call, we expect our net interest expense to be largely unaffected by rising rates through 2023. This is due to the fixed rate long-term debt on many properties, as well as the protection afforded by our hedging instruments. which effectively kept the expense on our floating rate loans until the latter half of 2024. This action, along with strong top-line growth and strategic debt pay-downs, will go a long way to assuring the upward trajectory of our earnings continues. Across all operations in our business model, our team continues to produce at an extremely high level. We have come to expect nothing less from these great people, and we look forward to continued success in 2023 and beyond. And now I'll turn the call over to Matt.