Armada Hoffler Properties Inc (AHH) 2014 Q1 法說會逐字稿

Welcome to Armada Hoffler's first-quarter 2014 earnings conference call. At this time all participants are in a listen-only mode. After management's prepared remarks you will be invited to participate in a question-and-answer session. (Operator Instructions). As a reminder, this conference call is being recorded today, Tuesday, May 13, 2014. I will now turn the conference over to Julie Loftus Trudell, Vice President of Investor Relations at Armada Hoffler.

Good morning and thank you for joining Armada Hoffler's first-quarter 2014 earnings conference call and webcast. With me this morning are Lou Haddad, CEO; and Mike O'Hara, CFO. In addition, Eric Smith, our Vice President of Operations, will be available for questions.

The press release announcing our first quarter earnings, along with our quarterly supplemental package, was distributed this morning. A replay of this call will be available shortly after the conclusion of the call through June 13, 2014. The numbers to access the replay are provided in the earnings press release. For those who listen to a rebroadcast of this presentation, we remind you that the remarks made herein are as of today, May 13, 2014, and have not been updated subsequent to this initial earnings call. During this call we will make forward-looking statements including statements relating to the current and future performance of our portfolio, our identified development pipeline and future pipeline, our construction business, our portfolio performance and financing activities as well as comments on our outlook.

We will also discuss certain non-GAAP financial measures including but not limited to FFO, core FFO and core EBITDA. 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 www.ArmadaHoffler.com. 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 risk factors discussed in our press release this morning and in documents we have filed with or furnished to the SEC.

I would now like to turn the call over to our Chief Executive Officer, Lou Haddad. Lou?

Thanks, Julie. Good morning and welcome to our first-quarter call. We are pleased with our solid start to the year. This morning we reported FFO per share of $0.20 and core FFO per share of $0.22, which was better than our expectations. The winter weather had less of an impact on our construction business than we had anticipated and our general and administrative costs were positively impacted largely due to timing.

We are encouraged by the attractive array of opportunities in our development pipeline and are excited by the volume of leasing activity that we are experiencing not only in Town Center but broadly across our portfolio. Mike O'Hara will comment in detail about our financial results in a few minutes. Before I hand it off to him, I want to offer some additional color on recent development pipeline announcements, leasing activity at Town Center and our third-party construction business.

Let me start with our next-generation pipeline. We are seeing a high number of opportunities that are 100% occupied build-to-suits with high credit quality tenants that are fully stabilized upon completion and grocery-anchored shopping centers that have historically been the foundation of our stable cash flow. Such projects increase our spreads as we are developing these attractive return on cost metrics, and these types of assets command lower market cap rates once completed.

In fact, this morning we announced two new projects in our next-generation development pipeline. We will develop two administrative office buildings for the Commonwealth of Virginia in Chesapeake and in Virginia Beach for a total of 47,000 square feet. The properties are 100% leased with 12-year leases for both locations. We expect both projects to be completed in early 2015.

In April we announced that we will develop Lightfoot Marketplace, a grocery-anchored shopping center in Williamsburg, Virginia, as part of a joint venture partnership in which we are the majority partner. We expect completion of phase 1, consisting of approximately 88,000 square feet, in early 2016. We have signed a 20-year lease with Harris Teeter to anchor this is center. We expect to begin construction in the third quarter of 2014.

Phase 2 represents an opportunity to develop another 42,000 square feet in the future. Such projects exemplify the development opportunities that result from deep and long-standing relationships in both the public and private sectors. The next-generation pipeline is filling in nicely with the addition of these three projects combined with the Oceaneering project that we discussed on our last call.

Now, I would like to spend some time on our $175 million identified development pipeline. The projects are on budget and progressing as expected. We kicked off the year with our January close of the Liberty Apartments acquisition. And we remain on track to deliver the remaining four development projects this year. The rollout at Liberty Apartments continues on track and currently we have about 35% of the units rented, and about half of the retail space either leased under letter of intent or in negotiation.

The delivery of 4525 Main Street here in Town Center will occur in early June, which is faster than our original timeline of late July. This accelerated delivery date is evidence of the benefits of having our own captive general contractor. We are pleased with this progress and believe these projects will ultimately generate NOI of $13 million to $14 million on annual basis. This would represent NOI growth in excess of 30%.

We continue to employ all of the tools at our disposal to maintain the wholesale-to-retail spread on development projects. These tools include structuring land acquisitions, managing the design process, acquiring municipal support through public-private partnerships, managing the construction process, and overseeing the timing and terms of the leasing process.

Turning now to Town Center, as many of you recall, we have been working to bring a block of retailers to Town Center who will be unique to the region. Along those lines we have been holding vacant space off the market with a vision that, when coupled with 20,000 square feet of retail space at the new 4525 Main Street office tower, we could accommodate a host of strong national retailers with co-tenancy requirements who will further elevate Town Center as the premier address in the region.

To this end, I am pleased to announce that we have signed a lease with Anthropologie for approximately 9000 square feet at 4525 Main Street with an expected grand opening in the fourth quarter of 2014. For those not familiar with this retail concept, Anthropologie is Urban Outfitters' strongest specialty brand. This will be their first and only store in southeastern Virginia. In addition, negotiations continue with the other tenants that comprise their retailing plan in Town Center. However, since we are working with national chains with multiple co-tenancy requirements, we reiterate our expectation that some of these leases will not be finalized until later in 2014.

It is important to note that if we had been quick to fill the vacancies at Town Center, we would not have been able to secure Anthropologie and the complementary not-yet-announced cotenants. We look forward to upcoming announcements of other new exciting retailers.

Turning to construction, we had an exciting development in the third-party construction business this quarter. We executed approximately $166 million of new construction contracts. In April we announced that we had entered into a contract to build Harbor Point, a 900,000 square-foot tower in Baltimore, Maryland. This contract was the combination of a two-year predevelopment effort. The reputation and experience that we have earned in Baltimore's Inner Harbor over the last two decades led to this important win.

The Harbor Point project will be a 20-story mixed-use development for Exelon Corporation, located on Baltimore's waterfront adjacent to Harbor East. Construction is underway with completion expected in the spring of 2016. The size and scope of this project helps to assure our construction division's annual gross profit contribution for the foreseeable future. However, the first phase of any construction project prior to going vertical always carries the most risk from a timing standpoint. So, we will not the changing our 2014 parameters for this segment of the business today.

While we are pleased to be off to a solid start this year, we know that we have a lot of work ahead. Execution will remain our focus this year and we know that our success in 2014 will be based on our ability to execute on the goals that we set for ourselves at the beginning of the year. To reiterate, these goals include maintain stable portfolio occupancy in the mid-90s, delivering our development projects on time, execute new leases for our pipeline projects, execute on strategic and opportunistic acquisitions, manage our balance sheet to ensure appropriate leverage metrics and position the Company for continued FFO growth and execute contracts for third-party construction work with consistent segment profit.

We have made meaningful progress on some of these fronts, as you have heard in my comments today. And we look forward to sharing future updates on all of these execution metrics as the year progresses.

With that, I will ask Mike to walk you through some of the key financial and portfolio metrics contained in the first quarter supplemental package, and then we will take questions you may have about this discussion during Q&A. Mike?

Thank you, Lou, and good morning. FFO for the first quarter was $0.20 per share and our core FFO was $0.22 per share. The first quarter came in better than anticipated, primarily due to the timing of G&A expenses and the fact that the winter weather had less of an impact on our construction business than we anticipated.

We report core FFO, as we believe that core FFO is a more meaningful statistic in analyzing our business. Core FFO excludes certain items including but not limited to non-cash stock compensation expense and the effects from non-stabilized development projects. We add back non-cash stock compensation expense for those shares that were initially allocated from our public offering. Our adjustments from FFO to core FFO are illustrated on page 11 of the supplemental. And as you can see, the first quarter includes an FFO lease up drag of $260,000 from Liberty Apartments.

During the first quarter we executed 8000 square feet of new leases and lease renewals of 50,000 square feet. Office re-leasing spreads were higher by $5.63 per square foot on a GAAP basis and higher by $0.70 per square foot on a cash basis. These office re-leasing spreads reflect the latest renewal at Town Center.

The retail re-leasing spreads were higher by $0.43 per square foot on a GAAP basis and lower by $0.64 or square foot on a cash basis. Same-store NOI for the quarter was flat on a GAAP basis and negative $200,000 on a cash basis. Largest effect on cash same-store NOI was in office. The primary reason was three months' free rent included in the 15-year lease for the renewal and expansion of the 40,000-square-foot tenant at Town Center. This is the tenant we have discussed for the past couple of quarters. The free rent was included for the construction period of this space.

During the first quarter our portfolio occupancy increased slightly to 94.5% from 94.4% at December 31, 2013. On the construction front we reported a segment gross profit in the first quarter of $1.25 million on revenue of $19 million. We executed approximately $166 million of new contracts. The largest of the new contracts is the Harbor Point tower in Baltimore, as we discussed earlier.

At the end of the first quarter, the Company had total construction backlog of approximately $193 million.

Now turning to our balance sheet, we continue to execute on our balance sheet strategy to provide the flexibility to fund our growth objectives in the most efficient and cost-effective manner while managing upcoming loan maturities. As for loan maturities, we have one loan maturing in 2014 with the balance of $1 million and two in 2015 with combined balances of less than $10 million. So over the next two years we have very little exposure.

Now turning to our development projects, during the quarter we closed on a construction loan to fund the Oceaneering project. The loan is for four years at LIBOR plus 1.75%, interest only for two years. On March 31 we bought out the minority partner in the Sandbridge Commons by issuing 30,000 OP units valued at approximately $300,000 in exchange for their 15%.

As discussed earlier, we purchased Liberty Apartments on January 17 for $30.7 million. The purchase price consists of issuing approximately 700,000 OP units, the repayment of the $3 million mezzanine loan, and the assumption of approximately $20.9 million of debt that bears interest at 5.66% with 30-year amortization and maturity in 2043. The total consideration for this acquisition was $1.2 million less than originally anticipated in our prospectus, due to the value of the OP units issued as part of the consideration.

In April we closed on the Lightfoot Marketplace project. We plan on funding this project with a combination of a construction loan and our credit facility. This is the joint venture project with a preferred return on our equity.

At the end of the first quarter we had total outstanding debt of approximately $317 million including $80 million outstanding on the credit facility. Our core debt to annualized core EBITDA multiple at quarter end was 6.9 times. Our weighted average maturing interest rate is 3.6% and our average loan term to maturity is 9.7 years. Approximately 46% of our debt was fixed at March 31, but taking into account interest rate caps, approximately 83% of our debt was fixed or hedged.

As discussed in the past, we have been evaluating swap locks and purchasing additional caps for our variable-rate loans. In March we purchased a three-year, $50 million LIBOR cap at 1.25%. With this new cap, we now have in place $118 million of LIBOR caps at or less than 1.5%. We believe that using interest rate caps limits our exposure to rising rates while giving us flexibility at a reasonable cost. Our goal is to maintain a balance sheet with an appropriate degree of flexibility to fund our growth strategies. Maintaining a balance sheet with adequate capacity and flexibility will allow us over time to facilitate access to a variety of capital sources at the most advantageous terms.

That said, we remind you that the relative size of our portfolio and the development pipeline as well as our financing model may result in short-term fluctuations in the leverage metrics but should not incorporate the upside equity creation in our business.

Now, let me give you an update on our thoughts for the remainder of 2014. We continue to expect our full-year 2014 core FFO to be in line with full-year 2013 FFO. Once again, when analyzing our business we focus on core FFO, which excludes, among other items, the impact of non-stabilized development projects. Our core business is comprised of our stable properties and our construction business. This core business is a solid foundation for sustained growth.

We remain on track to deliver four development pipeline projects this year which will be excluded from our core FFO results. These projects include 4525 Main Street, Greentree Shopping Center, Encore Apartments, and Whetstone Apartments. Using history as our guide, we anticipate an 18-month stabilization period for multifamily. And therefore, the two multifamily projects, along with Liberty Apartments, will have a negative impact on 2014 FFO results. Conversely, our shopping centers, retail -- office and retail properties are immediately accretive on FFO basis due to the amount of pre-leasing we require as part of our underwriting criteria. Non-stabilized projects for 2014 are expected to negatively impact FFO by approximately $1.5 million, which will exclude some core FFO. We expect the Liberty Apartments' impact on the second quarter to be approximately $300,000, which should be excluded from core FFO.

Among other things I want to point out as it relates to the second quarter, as you can see on page 23 of the supplemental, we expect substantial office, TI, and leasing commissions for leases effective in the second quarter of 2014, which will impact AFFO. We continue to expect G&A for the full year 2014 to be approximately $7.8 million. The first quarter G&A came in lower than expected because of timing of expenses and did not change our expectations for the full year.

And now construction -- with the new Harbor Point project in our current backlog, we expect the third-party construction business to generate segment profit of approximately $4 million for the full-year 2014. As Lou mentioned, the first phase of any construction project prior to going vertical always carries the most risk from a timing standpoint. This may influence the construction schedule and, therefore, the pace of profit recognition.

And finally, our dividend -- yesterday we announced that the Board of Directors declared a cash dividend of $0.16 per share for the second quarter of 2014. The dividend will be payable in cash on July 10 to stockholders of record on July 1.

I will now turn the call back to Lou.

Thank you, Mike. And thank you all for your time this morning and your interest in Armada Hoffler. Operator, we would like to begin the question-and-answer session.