Armada Hoffler Properties Inc (AHH) 2024 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Armada Hoffler First Quarter 2024 earnings conference call. At this time, all lines are in a listen only mode. (Operator Instructions) This call is being recorded on Thursday, May 9, 2024. I would now like to turn the conference over to Chelsea Forrest, Director of Corporate Communications, and Investor Relations. Please go ahead.

Good morning and thank you for joining Armada Hoffler First Quarter 2024 earnings conference call webcast. On the call this morning, in addition to myself is Lou Haddad, CEO; Matthew Barnes Smith, CFO and Shawn Tibbetts, President and COO. The press release announcing our first quarter earnings, along with our supplemental package, were distributed this morning.

A replay of this call will be available shortly after the conclusion of the call through June 8, 2024. The numbers to access, the replay are provided in the earnings press release. For those who listen to the rebroadcast of this presentation, we remind you that the remarks made herein are as of today, May 9 , 2024, and will not be updated subsequent to the initial earnings call.

During this call we may make forward-looking statements, including statements related to the future performance of our portfolio, our development pipeline, the impact of our 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 of 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 this morning and the risk factors disclosed in documents that we have filed with or furnished to the SEC.

We will also discuss certain non-GAAP financial metrics, 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, Chelsea. Good morning and thank you for joining us today. As you can see from our earnings release, it was another strong quarter here at Armada Hoffler. We continue to see our portfolio produced robust operating metrics. This combined with new properties coming online gives us confidence in our earnings guidance as our operational success offsets the headwinds from higher interest rates. Before Shawn and Matt give you the details on the quarter and projections for the rest of the year.

I'll take a minute to reiterate our long-standing strategy with regard to capital allocation. As most of you know, management is the Company's largest active equity holder with a 12% stake. This alignment with external investors gives us a different perspective than that of most risk management teams and creates a strong aversion to dilution.

While portfolio growth is an important goal over the long term and capital market activity is an important component of that growth. You've seen us recycle numerous assets at prices well above the stock market's implied valuation. This is the most efficient way to raise capital when Armada Hoffler common equity trades at an unacceptable discount.

The current environment is just such a circumstance with as many as five new properties coming online over the next 12 months, any necessary equity capital will be primarily raised by selling a couple of assets with significant embedded profits. We expect these transactions to produce a substantial amount of cash and to be relatively neutral to earnings.

We recognize that leverage will remain elevated through the stabilization of the new properties, but with growing portfolio, NOI. and trophy quality assets, we are comfortable at these levels. We are confident about the quality of the developments, our initial underwriting, and the extensive expertise we have in market selection.

I'll now turn the call over to Matt to highlight a couple of quarterly metrics before Shawn for the business update.

Good morning, and thank you, Louis. Starting with earnings for the first quarter of 2024, we reported FFO of $0.4 per diluted share and normalized FFO of $0.33 per diluted share, representing a 10% increase over the same period last year. Affo per diluted share increased 17% year over year to $0.27 and property NOI for the first quarter increased 9.3% over the same period last year due to a combination of both same-store and acquisition based growth.

These year-over-year increases demonstrates our ability to drive consistent earnings growth, which supports a growing and well-covered dividend with a payout ratio of 75% of AFFO. I'll provide more details on performance as it relates to our guidance expectations later in my remarks.

Our balance sheet metrics remain consistent with last quarter as we deploy the concluding tranches of our financial commitments on our Harbor Point development and real estate financing projects stabilized portfolio debt to stabilized portfolio EBITDA is at 6.6 times with our debt service coverage ratio reporting 1.7 times. Our weighted average cost of debt remains fixed just above 4% until a portion of our derivatives mature in October of 2025.

As mentioned on previous earnings calls and earlier by Lou, our leverage will remain elevated until the current development pipeline matures. Our total debt to enterprise value today is about 54%, and we expect to eventually bring this into the 40% range we have a corresponding debt service coverage ratio in the 2.2 to 2.5 times range.

With respect to our financial performance in comparison to guidance, I'll walk through each category and our guidance table on page 4 of the supplemental financial package. Separately for the quarter, property NOI reported approximately 580 k better than expected. Strong commercial retenanting throughout the year, coupled with one-time multifamily expense savings will add an additional millions of NOI above the previously stated midpoint of the property NOI range.

Construction segment profit reported $4.1 million for the quarter, in line with our guidance expectations. The midpoint of this range remains at $13.75 million for the year, and we expect the quarterly construction segment profit in Q2 to be consistent with Q1 and lower in quarter 3 and quarter 4 . Our G&A expense recorded $5.7 million for the quarter and was marginally above our guidance due to timing variances.

Quarter 1 always trends high, and we expect to achieve the midpoint of our previously stated G&A expense range. Interest income reported roughly 300 k more than expected for quarter 1 due to higher interest on overnight deposits. For the year, we have reduced our interest income range by $1.5 million due to our partners intend to exit one of the real estate financing projects sooner than anticipated.

Interest expense for the quarter reported in line with our guidance expectations. We have, however, increased our interest expense range midpoint by $2 million, primarily due to higher interest rates than previously forecasted. Finally, based on refinancings, expected strategic dispositions of assets and the realization of capital from one of our real estate financing projects we are no longer modeling any material equity capital markets activity for the remainder of the year.

These details taken in aggregate result in our FFO guidance per diluted share range remaining at $1.21 per share to $1.27 per share. Before I pass over to Shawn, I would like to bring everyone's attention to a couple of updates we have made to the supplemental financial package.

On page 10 and page 16, we have added a credit profile and a portfolio profile, respectively. These two dashboard pages represent a range of metrics presenting valuable details on the company's performance. There are several new and revitalized metrics that we believe will assist you with your evaluation of our company's performance over the short.

Thanks, Matt, and thank you all for joining us to review the quarter. I would like to start out by revisiting our 2024 guidance to ensure that we are all aligned on what is and what is not included in our unchanged guidance range of $1.21 to $1.27. I will walk you through the high-level components to add color to what Matt has just gone over.

As Lou said, the first significant change is the removal of any material equity capital market activity, given the current conditions. And that refers to not just our discounted stock price, but also what we are finding to be an aggressive and relatively deep bid for multifamily across several of our markets. Our assumptions now reflect capital being sourced primarily through an asset disposition later in the year.

Specifically, we are modeling the disposition of a multifamily asset in the fall, had cap rates significantly more attractive than where the market is currently pricing. Our equity, our shareholders own embedded value, and we intend to prove it across all of our sectors. The portfolio is performing well as evidenced by 95% occupancy. This is slightly ahead of expectation through the first quarter.

Therefore, the analog component of our guidance remains consistent with last quarter. That said, you should expect the year to be front-loaded from an earnings perspective for three reasons. First, the construction profit component of our income stream will be higher in the first half of the year and then will reduce for the third and fourth quarters, ultimately resulting in a targeted midpoint of $13.75 million of construction gross profit.

The second relates to our mixed-use development Southern post in Roswell, Georgia, unchanged in our guidance is the fact that while lease up of Southern post occurs through 2024 the carry cost associated with leasing up such a development will not be a positive earnings benefit realized in 2024. We do, however, expect that 2025 results will benefit handsomely from the asset's performance.

In a few moments, I will review the leasing of this highly anticipated development, which is progressing well across office retail in multifamily and finally, our partner has signaled the intent to pursue a sale of one of the assets in our real estate financing portfolio sooner than anticipated.

As a result, we are forecasting a reduction in interest income for the second half of 2024. A sale would also result in our capital and accrued interest on that project returning in mid-summer, although we would have slightly less interest income than previously anticipated. We are pleased that our partners are contemplating an early sale transaction sale of a pre-stabilized apartment project at a mid-five cap rate in a market thought to be oversupplied demonstrate the strength of this asset class in our target markets.

This potential sale demonstrates our partner, deep capability in the space. The strength of our real estate financing program and our collective ability to execute on successful preferred equity investment. We do expect to deploy a portion of the return capital into another preferred equity investment opportunity with the same partners, we are targeting a very attractive project located in another high-growth Southeast market.

This investment is fully entitled and should commence in the fourth quarter. We anticipate funding a portion of this year and the balance in 2025, which will provide some offsetting interest income in 2024 and interest income in 2025 and into 2026.

Now as a reminder, I'll touch on what was not included in guidance. Specifically the we work income projections approximately $2 million of annual income associated with the work location in Atlanta was removed as of December 31, 2023, and was never included in 2024 guidance. While leasing activity on this vacant space is unlikely to materially affect 2024, it will be a significant opportunity for 2025 and beyond.

The Durham location, we were able to renegotiate a reasonable set of terms that keeps we work remaining in the property. We work will retain both floors in Durham for the remainder of the year, and we'll receive a discounted rent. In 2025, we work will vacate one of the floors and return to market rent on the remaining space. This is now our only we work lease currently representing less than 1% of portfolio ABR and going to less than 0.5% in 2025.

Let me spend some time walking through our fundamentals across the sector in our commercial properties, value creation is realized through consistent leasing activity, re-leasing space and increase rents and market leading occupancy statistics. In addition to the daily management of over 700 tenants, we signed 24 commercial leases, including new extensions and options for a total of 115,000 square feet at re-leasing spreads of 11.5%, while maintaining an overall commercial occupancy of 95% through the first quarter.

The office segment signed two lease renewals for a total of 18,000 feet at an average re-leasing spread of 14.2%. The retail segment executed 19 renewals and three new leases for a total of 98,000 square feet. The average re-leasing spread was 10.7%. The weighted average lease maturity of the commercial portfolio is 6.7 years with minimal short-term lease maturities.

We believe that proactive tenant relationship management is key to maximizing NOI and property values. The multifamily portfolio beat our projections at over 95% occupancy. We expect this level of performance to sustain throughout the year. Our multifamily asset management team partners with property management firms who are experts in their respective submarkets, resulting in strong leasing and therefore sustained occupancy rates in the high 90s, the office product continues to produce superior occupancy results at 94% well above the high end of the broader peer set.

This level of relative success is a direct result of the location of our assets in mixed use ecosystem, 97% of our office space has walkable mixed-use environments. We intentionally place our buildings, which are generally newer in their respective markets and provide top-tier amenities that create demand from investment grade tenants who prefer our properties over anything else in the market.

In most cases, our office properties are in a class of themselves in each market with no real competition. This strategy continues to underpin the future growth of our company, most notably in southern post and Harbor Point development projects. Our construction business continues to produce record results while working through a $343 million current backlog the first quarter yielded profit results consistent with the targeted projections included in our 2024 guidance.

The partner firms using our construction expertise continued to identify and execute on opportunities that allow us to demonstrate our capabilities and collect market data for our internal underwriting of further development and construction opportunities.

The development platform continues to also produce results consistent with guidance. And we expect delivery of three projects through the end of this year, setting us up to realize the embedded earnings growth into 2025. Although we forecast leasing to continue to accelerate, as I mentioned earlier in the call, we will experience carried cost during lease up in the second half of 2024 as we approach stabilization into 2025.

As I mentioned, leasing has been robust at the southern post project, especially in the commercial space, demonstrating the strong demand in this new soon to be trophy asset in downtown Roswell, Georgia only 14 miles due north of bucket. We are now 71% leased in the commercial space at rents running ahead of pro forma levels. Similarly, the apartment rents are slightly above pro forma underwriting and move-ins recently commenced.

The apartments are 15% leased, and we expect this momentum to continue given the limited supply of high-quality product in the submarket. And as we approach the historically active spring and summer months, T. Rowe Price global headquarters project is looking great as we approach anticipated move in later this year. The trophy built-to-suit project is well situated among our assets on the peninsula and will bring thousands of professional workers to the site.

We are looking forward to the continued flight to quality that will be experienced by top-tier credit tenants and having our ecosystem at Harbor Point, the Allied apartment project is also progressing nicely, and we will be nearing completion in the months to come. This 312 unit high-rise apartment building sits at the top of the market and its parking garage component also complements the T. Rowe Price project, its views and amenities are virtually Baltimore's best, and we look forward to this complementing our other trophy apartment project at 1405 Point Street.

Finally, given our performance, asset quality, value creation machine and continued focus on shareholder returns. We believe that our firm is well positioned for the future. We believe our equity is trading at a discount to NAV, and we will take any steps necessary to realize that value for our shareholders, including asset sales to provide growth equity at the stock market for real estate remains undervalued. Operator, we are ready for the question and answer session.

Thank you. (Operator Instructions)

Rob Stevenson, Janney.

Good morning, guys. Shawn, thanks for the detail. I guess one question on the leasing side. How should we be thinking about occupancy in the office and retail portfolios ebbing and flowing throughout the year? Are there substantial move outs of consequence that is going to cause it to dip.

And then the new leases signed, bringing it back up, is it relatively sort of tit for tat in terms of trade outs, et cetera. How should we be thinking about that as we work on our models throughout the year?

Yes, I think Guy, and thanks for the question, Rob. Thank you for being here this morning in the retail, I would to use your term characterize it as tit for tat. There are some 10 and 20,000 foot move out and then so backfills, we have a lot of activity in the space, which we are excited about, I would say in the office, the main driver of the occupancy at least sitting where it is today, is that law. So we work or the removal of we work that intentional removal in Atlanta. So we lost 40,000 feet there.

Good activity there. As I said in the comments, I'm not certain that we'll get that done this year, but we certainly have some activity down there. So we'll see how that plays out. So we should view that as relatively consistent in the office in the multifamily space. It's a little misleading.

We have actually 41 units down at the end of the quarter. That number has shrunk to more like 30, 28 units, somewhere in that range due to water issues and a flood down in North Carolina. So the adjusted occupancy by the way we kept those in the denominator, the adjusted occupancy would have been 96 points and excuse me, 96.2%. So we're seeing good activity there. We're actually seeing trade outs improve and the trailing 30 over what was the quarter one results were up closer to over 1% blended trade out there. So we see a very nice strength there, and we're looking forward to continued our continued success in the multifamily space.

Okay. You mentioned we work the page 19 of the supplemental with the one lease $1.35 million of ABR is the 1.35 of ABR the reduced rent level for the remainder of '24? Or is that what they were paying previously to coming to the agreement.

Yes, sir. The super spot on the one three four is the reduced rent level essentially through the end of 2024. You will see that number drop down to a 50 or so in 2025, which obviously will drop them out of the top 20. And that was my comment less than 0.5% of the ABR, if you will.

Okay, that's helpful. And then are you able to currently market the second floor that's going to vacate to get a jump on the basically have somebody signed ready to go in there once reconstruction is done or they or is it going to be a later this year events that you guys are the market that ?

We have a cooperative relationship with the tenant and so we are able to reasonably get and market the space. So yes, essentially, that space will come back to us Jan 1 and our hope is to, to your point, have had good activity between then and now.

Okay. And then you obviously have, you know, three big projects, all three are supposed to complete later this year. How are you guys thinking about new starts once those three projects complete? Is stuff teed up? Is the environment not such that you're likely to start anything in the back half of '24, early '25, how should we how are you guys thinking about development? How should we be thinking about development once these three are completed?

We're obviously. So our expectation would be the only thing that we will embark on the rest of 2024 is the redevelopment of Columbus Village with the old Bed Bath space. I look for some really nice announcements on that coming up of beyond that right now, we're not seeing anything that pencils to be worthy of worthy of any of our equity.

With where construction prices it are and interest rates the spread, we look to have a 150 to 200 basis point spread on launching a development that would make those things accretive to the company right now that spreads just not attainable.

I shouldn't say it's not attainable in any of the sectors that we would want to launch something at Believe it or not. There's a number of office build to suit opportunities out there, and we're just not right now in the appetite of launching any office space.

Okay. That's helpful. And then last one for me, Matt, on the mess that you expect to come out this year, is that Solar City Park two? Or is that one of the other ones. Just trying to figure out how we should be thinking about money to you and lost interest income going forward.

Rob, let me jump in on the actual identification of that property. We believe it's probably best for our partner to announce that for a number of reasons, competitive and so on and so forth. But I'll defer to Matt, on the second piece of the question.

Yes, good morning, Roque. But yes, your assumptions are correct that we will reduce the interest income. We expect the expectation of interest income when on that, that properties potentially exited from the programs as we've had in guidance, we will look to deploy some of that in a in another or a new real estate financing project later in the year. But I just would caution that not all of them. I will go straight back out at once and it's going to going to take a little bit of time for those to our schedules to go to go through. So we anticipate potentially a small portion of that going back out in the final quarter of the year.

Okay. That's helpful, guys. Thanks. I appreciate the time this morning.

Thanks a lot Rob.

Peter Abramowitz, Jefferies.

Yes, I yes. So thanks for the time. I noticed you added a chart in there with your multifamily trade out, and I think it's kind of negative mid-single digits this quarter and last quarter on new leases, could you just talk about kind of the trend there, what your expectations are for the rest of the year, whether you have sort of any visibility to an inflection and sort of what's embedded in the guide?

Sure. Thank you for being here this morning, Peter. Yes, the on the blended was 0.1 for the quarter positives, new leases to your point were about 4.5 negative while renewals were 5.2. The positive, what we're seeing since then and the kind of trailing 30 is about a 1% positive trade out blended that that negative on the new leases has shrunk to about 2.5% and then the renewals are up in the four% plus range.

So we're seeing improvement there. I think we should be thinking about a year of 95% occupancy, give or take and 1% to 2% trade outgrowth on kind of blended. So we're seeing strength improve there. A lot of this has to do it in the first quarter. Supply online. As most people know, there are some challenges, some headwinds, I would say in supply in the Charlotte market, some in the Richmond market, but we also are seeing kind of offsetting strength in the Virginia Beach and Baltimore markets.

So I would say, yes, you should probably see low single digits blended on a go forward basis and driven by stronger renewals and improving new lease numbers.

Got you. That's helpful. And then another question on multifamily. So you talked about a pretty strong cap rate on the disposition that you're expecting. I think you mentioned that the asset is in the Southeast where a lot of the supply issues are happening, and I think your occupancy is lower than the rest of your multifamily portfolio. I guess just trying to get some context around the cap rate there?

Because it would seem that, you know, the pool of capital still pretty deep pricing still pretty attractive. Is it simply kind of buyers are just short of brushing off the supply and looking through that in the next year or two or just some context around how you can still get the strong pricing despite the supply challenges?

Peter, I'll let Shawn answer that specifically, but I want to make sure we reiterate what we said earlier, that occupancy is what looks like a dip in occupancy in those properties down there is solely due to the insurance claim. So we left those units in the denominator and perhaps maybe we shouldn't have, but we wanted to be as accurate as possible. We expect to lease right back up once they come back online. So there really wasn't a dip in occupancy. Go ahead Shawn.

Yes, I think what you're referring to Peter is on Page 17. The Southeast Sunbelt looks like it's our dip to 91.1 right in that range and again, there are 41 units not contributing to the occupancy there. So to Lou's point, we thought that given there's an insurance kind of effort moving forward, we thought we should keep in the denominator. We've got that either way but again, adjusted holistically, high-level macro, we're at 96.2% when adjusting for those 41 down units.

To your question about the strength of, I would say that the interest in our asset is due to the quality and due to location, as is typical with our properties. And this the strength of that particular asset has been great for us. But we believe, as Lou said earlier, that, and as I alluded to yielding or harvesting that capital at those types of cap rates is probably the most prudent move for us in terms of capital.

That's helpful. And then one more for me. I just want to go back to Lou's comment a minute ago about office build-to-suits, um, so it sounds like you're hesitant to kind of get started on those. Is that a more a factor of just not wanting to increase office exposure or is it more about the construction costs. And then once the tenants understand kind of the premium rent they have to pay, they're a little hesitant and the deals won't pencil?

It's really the latter, Peter. We would engage with a credit tenant that would honor the spread we need to make in order to launch today. That number is outside the realm of what people are willing to pay and I expect that will change at some point, I expect trophy office buildings to go back to normal normalized cap rates and in not-too-distant future or in the next year or two. So we'll be on the lookout.

But right now, they just they just don't pencil. And we don't want to we've seen some real estate companies play the game of looking at year four or five as far as stabilization and saying that they're making a spread that's just not a game blade for 40 years are not going to start now.

Got you. That's helpful. And I guess one more while I have you any particular markets where those requirements are kind of most active right now?

It's really in our in our ecosystem of mixed use. And so you can guess there's still a lot of activity in Baltimore. We've got a couple of tenants that would love to get into Harbor Point. We just don't have the room and here in Virginia Beach, where we're still trying to shoehorn in tenants in a 99% occupied building. But again, it just you just can't launch.

Got it. Well, that's all for me. Thanks.

Camille Bonnel , Bank of America.

Good morning. You had mentioned dispositions are your preferred route to raise capital today. So just wanted to expand on this a bit more how big you expect this program will be what kind of assets are you looking to sell? And if you started marketing assets, how is interest been?

As I mentioned, we will say we're looking at two at most three assets for disposition. And I can tell you the interest is strong. We're waiting. These are noncore assets that we're waiting on a few brokers' opinions of value before we decide where to pull the trigger, but we're getting unsolicited offers or offers in on just about everything we own in the southeast of a multifamily variety.

Again, as Shawn alluded to, quality is everything for us for an investor that's looking for multiyear hold. They're viewing the current environment as an opportunity to pick up quality real estate at a discount and operated for years to come so the growth markets are still we're still where that activity is going to happen and we'll we will be making some announcements in the not-too-distant future on where that stands.

But as you might expect at the kind of cap rates we're looking at is by far the most efficient way to raise capital. And as I said with as many as five properties coming online and maybe a subtraction to the Company will be substantially larger next year in any results.

Shifting to the balance sheet, how are conversations with your lenders going on around your extension? And are there any updates on how you plan to address any near-term maturities? Just trying to get a sense of how far you are looking across your debt expiration profile when you're doing your capital planning?

Yes. Good morning, Camille. So yes, a lot of a lot of interest from lenders initially when we've looked at a couple of the term loans we have and I mean we have capacity on them to syndicate and I would say that it still is still limited the lenders off slowly coming back to the market to have those conversations. And it's better than it was last year when I would say that there was probably very limited lending activity, but that is that has eased up here in the in the 1 of the year.

We have on a couple of small maturities this year that we're going to pay off that maturity and we had a construction loan that we were able to extend. We have two one-year extension options on a relatively good rate that we pulled the first one-year extension option on.

So it's nothing for us really, really too much concern until we get into the end of 2026. But yes, we're in constant contact with all of our lending partners to make sure that the debt side of the capital is available as and when we may need.

Okay. When do you think about those 2026 maturities is the idea to in no way or is there opportunity to address those maturities today? I think you've seen in our mix strategies across the region in terms of how far they're looking out.

So we are always monitoring on those maturities, as you know, as we transition into this unsecured balance sheet and there are very, very limited prepayment penalties on those loans. So at the right rates, of course, we would go ahead and refinance or extend those terms out as and when we as and when we could, we would love at some point as we have said, to utilize our investment grade credit rating on.

The rates and the spreads on the treasury is still a little bit rich for proper pace right now. But yes, we will continue to monitor up and at the appropriate time we will take the appropriate action.

Finally, the new leasing activity with retailers have been slowing over the past few quarters, we've been hearing that retailers, though are moving forward with their store opening plans. So just wondering to get more insight on what tenants are saying to you and are they prioritizing certain markets ?

They certainly are price wars prioritizing certain markets and again, back to the growth markets, we really haven't seen any kind of a slowdown in expectations or remember, our portfolio is 95% leased. So there just isn't that much room to do a whole lot of the vacancies that John mentioned.

We already have prospects for all of them, actually multiple prospects. So we are not seeing that. But again, that's we think that's markets specific. I'm not sure what's happening in the rest of the country, but we're seeing robust sales really across the board with people that report sales.

Shawn, do you want to add to that.

Yes, I would just add to that, that generally speaking, those decisions are driven by rooftops in the kind of immediate vicinity as well as foot traffic and I'm tying that back to well-located properties, right? So where our ecosystems are driving traffic people want to be located and statistically, that's where business is done. So I think to Lou's point, we're seeing good activity.

And yes, to your point, Camille, we are seeing people actually signing up, which is a good thing, a little bit different than it was, say four years ago. And so we feel good about that and looking forward to continued success in that space.

Thanks for taking my questions.

Thank you.

Bill Crow, Raymond James. Please go ahead.

Good morning, Lou I was looking back through some old notes and I made it back to 2018, and I'm sure I could come back on the but further. But during the last six years, we've been talking about uncomfortable levels of balance sheet leverage. And during those six years, you have chances to issue equity at or certainly near $20 a share to sell assets hit the pause button on new investments, mez commitments, et cetera.

So why are we still talking about the balance sheet? And I get the dilution to sustain, but I also see a stock price of sub $11. It certainly reflects leverage levels that are higher than that, then it should be. So how do we do we ever get it back down? Or is it just difficult to say, known and good project?

So I appreciate the question, Bill, and also I want to clear up something that might have been a misunderstanding. A change in fair value of derivatives is excluded from our core results on this year. And this quarter it was positive. Last quarter, it was negative, which is exactly why we exclude it. So I want to make sure nobody picks up the fact that we made some money or made some money on paper regarding a derivative.

Bill, as far as your other question, I think we're always going to be on the higher side of leverage a company our size that has the kind of development activity that we have is always going to be on the higher side simply because the most efficient way to do development is with as much debt as possible. And then ultimately, when those projects stabilize and bring them online and you deliver.

And so I think the short term debt is a reality of the way the way we sit in the marketplace. We have delivered with $18 stock and $15 stock. We have sold assets at 4.15 cap rates, and we're going to continue to operate that strategy ultimately of with match plan of ultimately going into the preferred bond market. And that leverage will come down to where we would like to see it in that 5.5 times range. But again, that will simply be on our core portfolio because development is always going to be full leverage.

Appreciate that. When do you think we can get to 5.5 times is that. So two years three, I mean, just give us a target to kind of think about.

I think you're a couple of years out. And again, I mean, we need the macro economy too, to participate in that you'd like to see some normalization of interest rates and spreads come in a little bit. But we're used to the position as I said in the US.

At the outset, we're comfortable at these levels. As you probably recall, Bill, we've never gone below 93% occupancy in the Great Recession in 2008, our portfolio went all the way down to 92%. That's an all-time low. And so we don't really have a lot of speculative income to concern to be concerned about where the leverage sit. That said, obviously, the market we'd like to see it lower. We'd like to see it lower. We're just not going to do it at any cost.

Okay. Thank you.

Thank you. And there are no further questions at this time. I would like to turn it back to Lou Haddad for closing remarks.

Thanks very much for your time and attention this morning. It's been a great quarter and we look forward to another great quarter of assets in just another couple of months. Take care and have a great day.

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.