Armada Hoffler Properties, Inc.

Good morning. Ladies and gentlemen, welcome to the Armada-Hoffler fourth quarter earnings conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If any, at time during this call, you require immediate assistance, please press star zero for the operator. This call is being recorded on Thursday, February 20, 2025. Before we begin, We'd like to note the management team is currently experiencing a severe winter storm in the region. We appreciate your patience and understanding if any technical difficulties arise during today's call. I would now like to turn the conference over to Chelsea Forrest. Please go ahead.

Good morning, and thank you for joining Armada Hossler's fourth quarter and full year 2024 earnings conference call and webcast. On the call this morning, in addition to myself, is Sean Tibbetts, CEO and President, and Matthew Barnsmith, CFO. The press release announcing our fourth quarter earnings, along with our earnings guidance and supplemental package, were distributed yesterday afternoon. A replay of this call will be available shortly after the conclusion of the call through March 20, 2025. 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, February 20th, 2025, and will not be updated subsequent to this initial earnings call. During this call, we may make forward-looking statements, including our 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 any forward-looking statements are based upon management's beliefs, assumptions, and expectations, taking into account information that is currently available. These beliefs, assumptions, and expectations may change as a result of possible events or factors, not all which are known and 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 yesterday and the risk factors disclosed in the documents that we 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 will now turn the call over to Sean.

Good morning, and thank you for joining us to review Armada Hoffler's 2024 results and the path forward for 2025. We have turned the page to the next chapter at Armada Hoffler, and I'm honored to be leading the company into the future as we work toward achieving our long-term objectives. Since the last call, we've made significant advances in leasing, delivered developments, and executed asset dispositions. I will now walk through the details. I reiterate that we remain committed to our core goal, improving the income stream and balance sheet quality. Our short-term strategy is centered on positioning the company for sustainable growth while maintaining financial strength in an evolving market. We will remain highly focused on continuous improvement of the company's quality as our value proposition, being surgical and intentional with enhancements to our income stream and balance sheet. We had an impressive fourth quarter, delivering normalized FFO of 27 cents per diluted share and FFO of 29 cents per diluted share. Leasing remained very strong with sustained tenant demand across all three of our asset classes. Our team transacted on over 5% of the commercial portfolio during the quarter, executing accretive new leases on nearly 200,000 square feet and renewing over 125,000 square feet at positive releasing spreads. While fourth quarter multifamily tradeouts were slightly negative, 2025 year-to-date tradeouts have since turned positive as competing new supply in the Atlanta and Charlotte markets is absorbed. We released our 2025 guidance yesterday afternoon with a range of $1 to $1.10. We recognize that on the surface, this range might be viewed as a step back from where we ended last year. That said, we believe that the underlying decisions that led to this range simply reflect our intentional actions to improve quality. Additionally, the range includes market dynamics and challenges we are navigating, specifically relating to construction delivery delays, interest expense, and one-time transaction fees recognized as income in 2024. We are focused and committed to positioning the company for consistent long-term growth. We are taking a prudent approach to investments, emphasizing disciplined capital allocation, and continuing to optimize our portfolio. Matt will walk through specific details to bridge from 2024 to 2025. Before discussing the quarter in more detail, I would like to remind you of the steps we have been and will continue taking to position the company for long-term success. will continue to focus on recycling stabilized assets where value has been maximized given limited growth upside and where we feel that institutional interest is willing to pay up the ability to make this choice and then to capitalize on better long-term opportunities that may arise is one of the benefits of having options within the multiple sectors within our current footprint so In the fourth quarter, we capitalized on the heightened demand for Southeast U.S. retail assets, selling two of our non-core, fully stabilized retail assets at a blended cap rate in the low 6% range. The $82 million aggregate sales price represents more than a 20% profit spread over cost, proving out the company's initial development thesis. We are finalizing the development assets at Harbor Point. The T. Rowe Price Global Headquarters is nearing completion, and we look forward to having their 2,500 employees join the community. Similarly, we are excited about realizing the full value of the Southern Post NOI in the coming periods. The mixed-use community is thriving, with retail tenants successfully opening their doors and receiving an overwhelmingly positive response from residents and visitors alike. It has been a fantastic start, and we're excited to see the continued growth and collaboration within this ecosystem. At the same time, we are committed to investing in the right assets, particularly in the multifamily and mixed-use sectors, which we believe offer significant potential for growth. As part of this strategy, we are focused on further strengthening our balance sheet by reducing leverage and enhancing our financial flexibility. At the end of 2024, we disposed of two resale assets that, while diluting earnings, allowed us to prudently decrease debt. While the current cost of capital presents challenges, we are confident in our ability to continue refining our business model and pursuing redevelopment opportunities that add significant value. As you recall, in September, we successfully executed $109 million common equity offering that reduced leverage and positioned us to add approximately 900 units across four high-quality assets over the next year, resulting in a 37% increase in multifamily door count. We are in the process of bringing that increased multifamily door count to reality and look forward to updating you along the way. We believe that real estate is all about spread investing and appropriate leverage. Although the markets remain in flux, we believe a more stabilized rate environment will allow us to enhance the quality of our debt with an eye toward longer term fixed rate instruments. Let's quickly walk through the fundamentals across the property sectors. Consistent commercial leasing activity and rent growth have been key drivers of value creation for the company. Our ability to secure high quality tenants across our portfolio combined with our focus on maintaining competitive rental rates, has significantly contributed to long-term stability. Our office assets and mixed-use environments are commanding around 15% premium above the competing central business districts in the region. The ongoing leasing momentum, coupled with double-digit releasing spreads, strengthens our income stream and enhances the overall value of our assets. Our office product continues to perform exceptionally well, with occupancy currently at 97% with limited near-term rollover. Importantly, 95% of our office ABR is located in mixed-use communities, which create dynamic ecosystems that provide ideal environments for employers to attract top talent. This has driven sustained demand for our premium office spaces. Notably, we successfully backfilled most of the former WeWork space at the interlock. Additionally, we completed a significant 12,000 square foot lease with Trader Interactive at Town Center of Virginia Beach. This floor was previously occupied by our own team, and to meet the demand, we were able to consolidate and set a new benchmark for office rent per square foot in the submarket. Although near-term office rollover is low, we proactively identify early renewal opportunities and existing tenants or potential backfill candidates for space that we anticipate recapturing. For example, just last month here at Town Center of Virginia Beach, we proactively negotiated long-term extensions with two existing office tenants occupying over 120,000 square feet of space that involved the simultaneous downsize of one in order to accommodate the expansion of the other. renewing both tenants at positive spreads. Favorable office demand dynamics in Town Center and Harbor Point result in consistent high occupancy and shorter downtime. While others in the sector are seeing incremental progress toward the high 80s and low 90s in occupancy, our biggest challenge continues to be accommodating the growing demand for tenant expansion space given our limited available inventory. And while we've released the former WeWork space at the interlock, one floor of WeWork space at one city center is scheduled to expire in the second quarter of this year. As the single largest near-term office exploration, the team is focused on finding the appropriate long-term solution for this space. Our retail portfolio had a strong performance with 95% occupancy. We executed new leases, extensions, or options covering approximately 195,000 square feet. We recently executed a large and impactful new lease at the interlock with the Gathering Spot, a market-leading membership-only gathering hub for professionals. The 10-year-old Atlanta-based organization will be moving their headquarters to our building, taking 13,000 square feet on the rooftop and an additional 21,000 square feet of office formerly occupied by WeWork. Furthermore, We completed two significant new retail leases at Columbus Village in the town center of Virginia Beach with a national name brand grocer and specialty sports retailer who are projected to open by the end of 2025 and rental income will be realized in 2026. These two credit tenants will backfill substantially all of the space previously occupied by Bed Bath & Beyond. In the 18 months since Bed Bath & Beyond closed, our team has now backfilled both spaces previously occupied by the retailer, having also released the former Bed Bath & Beyond space at Patterson Place to another National Credit tenant. Overall, we are seeing strong demand from retail tenants looking for space in a supply-constraining market. That said, we have not lost sight of the renewals and releasing required to remain at this level of occupancy. We want to acknowledge the impact of store closures within the retail sector specifically. The recently completed or announced store closures for Kahn's, Home Plus, Party City, and Joanne Fabrics. Combined, these three retailers represent over 115,000 square feet of space in our retail portfolio, or 1.5 million of ABR. Fortunately, we've already received unsolicited inbound interest from potential backfill tenants on all of this space, demonstrating the continued demand for well-located retail centers. As we continue to monitor these developments, we remain focused on mitigating any risk to our portfolio. The multifamily portfolio continues to operate well at 95.3% occupancy. The rent growth in our markets, such as Baltimore and Virginia Beach, continue to create lift, and we stand by our thesis. well-located, amenitized, and high-quality assets outperform the competition within the submarkets. As you know, there is some evidence that supply pressures may be easing, and we have started to recognize the start of this effect in our southeast submarkets. This should result in improvement in rents as supply incrementally absorbs over 2025 and into 2026. Earlier this year, residents began moving into Allied at Harbor Point. This property stands out as the premier multifamily asset in the area, offering stunning waterfront views and a range of top tier amenities. Allied is already receiving positive feedback, and we're confident it will continue to be a highly sought after destination for residents seeking an exceptional living experience in this vibrant location. We have taken intentional steps to focus our investments on the right assets that align with our strategic long-term objectives. While the current cost of capital remains a challenge, we are committed to refining our business model and staying disciplined in how we deploy capital. We remain confident in the long-term value of our portfolio, particularly as we continue to unlock redevelopment opportunities within our existing assets. These projects are poised to drive meaningful value and enhance returns for our shareholders. We believe these development opportunities will position us for future success as market conditions evolve. I will now turn the call to Matt.