Lou Haddad - CEO Mike O'Hara - CFO Eric Smith - Chief Investment Officer.

Rob Stevenson - Janney Montgomery Scott Dave Rodgers - Robert W. Baird.

Welcome to Armada Hoffler Properties Third Quarter 2015 Earnings Conference Call. [Operator Instructions]. I will now turn the call over to Mike O'Hara, Chief Financial Officer at Armada Hoffler. Please go ahead..

Good morning. And thank you for joining Armada Hoffler third quarter 2015 earnings conference call and webcast. On the call this morning in addition to myself are Lou Haddad, CEO and Eric Smith, our Chief Investment Officer who will be available for questions.

The press release announcing our third 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 December 3, 2015. 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, November 4, 2015 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, impact of acquisitions and dispositions, our construction business, our portfolio performance and financing activities, as well as comments on our 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 risk factors discussed in our press release this morning and in documents that we have filed with or furnished to the SEC.

We also will 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 www.armadahoffler.com.

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

Lou?.

Thank you, Mike. Good morning and thank you for joining us today. As you can see from this morning's press release that we've had another solid quarter that ended with an exciting new announcement about our pipeline.

Not only are we seeing continued quarter over quarter strength this year in our rep [ph] resulted metric but we also continue to backfill our pipeline with high quality institutional grade product located in some of the best locations in the mid-Atlantic.

With sustained profitability in our third party construction business stabilization recently delivered multifamily project and continued capital recycling where once again it would raise our guidance for the year.

Regarding this morning's announcement on Point Street Apartments in Baltimore I will spend a few minutes towards the end of my remarks to discuss some details of this new investment.

This opportunity once again highlights the benefits of being vertically integrated both service real estate company that's not only create value beyond the traditional buy and hold real estate investment strategy but allows for flexibility in structuring deals the best leverages the combined of various capability.

We believe that are unique business model continue to deliver a superior value to our shareholders. I will now cover a few highlights from last quarter as well as recent development and then turn the call over to Mike O'Hara to discuss the quarter details in detail.

We're pleased to report FFO per share of $0.25 and normalized FFO per share of $0.26 which is a reflection of the tremendous quarter we have.

In addition we have once again raised both the top and bottom ends of our guidance range resulting in 2015 full year normalized FFO of $0.91 and $0.93 per share better than expected third party construction profit and multifamily occupancy affected outlook for this quarter's guidance range to contribute to the upward revision.

At quarter end occupancy across the core portfolio was 95.6% which continues to be within our targeted range. As we discussed last quarter both Encore and Liberty Apartment paid 80% occupancy with continued upward momentum throughout the quarter and thus are both now stabilized and included in our multifamily occupancy figure.

We expect the multifamily occupancy metric in the near future to return to previous levels as lease up at these two properties is finalized in the coming quarter. In fact as of today, Liberty is nearly 100% occupied an Encore is approaching 90%.

As you might expect we’re pleased with the performance and stability of the multifamily sector of our business. Our success in leasing and a strength of our overall portfolio is evidenced by increase in quarterly GAAP and cash same store NOI which makes five consecutive quarter a significant same store NOI growth.

With regard to stabilized assets we continue to deliver on our promise to actively manage our portfolio while mitigating risks and proactively managing our balance sheet.

Building off the previously announced disposition of Whetstone Apartment and partly use those sale proceeds for purchase the [indiscernible] we utilized the remainder of the proceeds to close on the acquisition of Providence Plaza for $26.2 million during the third quarter.

To remind everyone Providence Plaza is a 97% occupied, 103,000 square foot mixed use complex located in the South Park submarket of Charlotte, North Carolina. This asset was constructed in 2008 and is comprised of 54,000 square feet of office space and 49,000 square feet of retail space across three building.

This acquisition allows us to diversify the Charlotte market and in particular the South Park submarket where average household income immediately surrounding this asset exceeds a $145,000 per year. This makes this asset as a fantastic addition to the Armada Hoffler portfolio.

Additionally this site includes an undeveloped parcel of land, it is owned for multifamily development. We've already begun our efforts to determine how the value of this additional land could be best modified for our shareholders and we'll keep you updated on [indiscernible].

The previously announced sale of the Ocean Greenbrier building located in Chesapeake, Virginia closed at the end of October and as expected the sale yielded a profit of approximately 20% on cost after only eight months holding period.

Our intention is to reinvest the proceeds for the sale to create additional value for our shareholders while continuing our focus on asset quality and regional diversification.

Keeping with the theme of portfolio management we discussed during our last earnings call the acquisition of [Technical Difficulty] which took place earlier during the third quarter of this year.

The 65,000 square foot retail asset adjacent to the Town Center of Virginia Beach is a 100% leased that was purchase with an assumption of debt and issuance of 1.275 million operating partnership unit. The five acre property in the fine target for redevelopment and ultimate integration into this dynamic Town Centre environment.

The strategy nature of this property fits fairly within our investment philosophy and is expected to create significant long term value for our shareholders.

Lastly, as evidenced by our previous sales of single tenant assets such as the Virginia natural gas building, [indiscernible] office building and most recently the Oceaneering facility, we’re constantly assessing each individual assets with regard to it's current and future value prospect.

As many of you know we have been evaluating the risk reward equation of our Richmond Tower office building.

While in the Class A institutional grade office building within Richmond Central business district with super location and visibility the NOI from this asset represents a meaningful percentage of the company's total NOI from stabilized real estate this size and the predominantly single tenant nature of the income stream has led us to the conclusion that our company is better served by the redeployment of the equity in the building into other opportunities.

Thus we have entered into a contract to sell this asset for $78 million which represents a 7.5% cap rate on a pro forma basis. Closing and subject to customary condition including the sellers [ph] benefactor completion of due diligence. As such we have not yet fully evaluated how best if deployed [Technical Difficulty].

However our premier primary focal point will continue to be quality real estate, credit quality tenants and radical diversification. We expect to reach a conclusion in the near future. Having talks on asset management I now turn to our third party construction business.

We are pleased with the progress of the $170 million Exelon [ph] Tower in Baltimore's Harbor Point. The project is well underway as proceeding as scheduled toward the summer of 2016 completion. Construction products continue to outpace expectations and should now top $6 million for the full year.

While these stellar 2015 results will be difficult to sustain at this level the outlook for this segment of our business over the next few years as promised and we expect that 2016 will again skew towards the higher end of our historic earning [ph].

During our last quarter I provided an update on our approach to maintaining a strong development pipeline. At that time can John Hopkins [indiscernible] for the remaining two undelivered projects in our pipeline. Both projects are on schedule for a mid-year 2016 delivery.

Notably leasing activity at the Harris Teeter anchorage Lightfoot Marketplace has been robust and hence we have decided to initiate Phase 2 of the development which will include an additional 22,000 square feet. Ultimately this best in market center will encompass over 130,000 square feet.

You'll also notice in our supplemental that we have added a Brooks Crossing project for the development pipeline. Those who of you who have followed us for a while will remember Brooks Crossing is a joint venture with the City of New Portland, Virginia [ph] to bring an urban mixed use low rise development to begin our study [ph].

While somewhat smaller than our typical engagement this project is a showcase for the broad array of abilities present in our company. With groundbreaking break last year, our construction company is under contract with the municipality to build our $15 in infrastructure and public facility.

We’re also under contract to develop a $7 million police leasing [ph] that will be sold to the city upon completion. And finally we will develop for our own account a 38,000 square foot mixed use project that will be anchored by a long term lease with a credit office tenant.

Only a company with our broad base capability to take full advantage of these diverse opportunities.

And now to our exciting news of this morning, as I mentioned on our last conference call we’re focusing our development efforts on a large class A assets with a high barrier to entrance with the Baltimore Metropolitan area as well as major markets within the Carolina being natural geographic points of expansion for our firm.

This morning's announcement of our investment and the $93 million Point Street Apartments project allows us to take another significant stuff towards the next wave of growth for our company.

Our 20 plus year present at the Baltimore Waterfront has been predominantly comprised of third party general contracting work valued in excess of $1 billion, most notably the four seasons hotel, the late [indiscernible] headquarters and the Waterfront Marriott.

These engagements allowed us to develop many longstanding relationships that are now manifesting themselves in investment opportunities beyond the realm of pure construction. These relationships when combined with a multi-faceted nature of our company across both product size and capability provides for some unique opportunity.

Point Street Apartments is an opportunity that arose from a multi-decade association with the principles of development group [ph]. To control with we and many others consider to be the premier development track in the city and one of the best sites in the Mid-Atlantic.

Similar to the Town Center of Virginia Beach, Hoverpoint is a mixed use multi-asset development situated between the trendy historic Fell's Point neighborhood and a dynamic Harbor East area offering spectacular unparalleled water view, Harbor Point is anchored by the 900,000 square foot mixed use Exelon Tower that is currently being developed by BE Development group and built by Armada Hoffler construction company.

Point Street Apartment is expected to feature 289 units and 18,000 square feet of retail space. We have entered into an agreement with BE Development group to collaborate on the Point Street project.

The way we will participate demand some explanation but it once again highlights the benefits of our integrated business model while emphasizing our ability to provide a platform for our partners that isn't easily replicated by other firm. The structure consists of three separate agreements with BE Development.

We will provide mezzanine financing upto $23 million which when combined with proceeds from our construction loan and the developer's equity will complete BE Development's capital back.

We will have the option to purchase an 88% interest in the project after developer's cost upon completion of the construction and we will construct the building as a general contractor with a guarantee of maximum price construction contract.

By proceeding with the venture in this manner we do not stress our balance sheet during development and initial lease up, we do recognize third party construction fees and earn interest income on the mezzanine loan.

And finally the at cost option to buy the 88% interest preserves a traditional development spread which we create on our development project. And you might expect this structure and the services we are providing within it appeal to a number of other developers to control desirable sites and need make apartments.

This structure is particularly well suited for multifamily developers and we are currently betting a number of similar opportunities. Point Street Apartment, when combined with our mark-key projects at John Hopkins as well as the 185,000 square feet added to the company's portfolio from the two Maryland grocery anchored retail acquisition.

It will constitute a very meaningful presence for Armada Hoffler in Maryland further diversifying ourselves into the broad Mid-Atlantic market. We believe that Armada Hoffler is the only REIT that provides investors the opportunity to benefit from all three profit centers in real estate.

Number one the ownership of income property which is where most we spoke.

Secondly, a profitable development of world class properties at wholesale cost for either portfolio placement or for sale to recycle the capital at a gain and in-house construction which not only generates substantial profits for third party business but also control cost and schedule in our development project.

We believe this is the third factor is unique to Armada Hoffler across the entire REIT universe. We will continue to execute across these profit centers to maximize the investment returns to our shareholders and with that I will turn the call over to Mike and then we will take your questions.

Mike?.

Thanks, Lou and good morning. Today I want to cover the highlights of the quarter including thoughts on our balance sheet and our wrap up with our 2015 guidance. This morning we reported FFO of $0.25 per share and normalized FFO of $0.26 per share which was better than our expectations.

This was due to increased profits in third party construction, continued strong multifamily leasing and lower property expected.

Please page 7 for supplemental for the normalized FFO calculation which this quarter excludes debt extinguishment clauses, property acquisition cost, development and other pursuant cost and mark to market adjustment for interest rate derivatives. We had another strong quarter of same store NOI growth.

Same store NOI was positive 2.9% on a GAAP basis and positive 5.7% on a cash basis compared to third quarter of 2014. We had two development projects to our core operating portfolio, these properties are now stabilized and have been removed from the development pipeline. They are Encore apartment and Liberty apartment.

At the end of the quarter our core operating portfolio occupancy was 95.6%, office came in at 95.5%, retail at 96.2%, multifamily at 94.9%. Multifamily occupancy number declined this quarter due to the addition of Encore for the core operating portfolio.

On the construction we reported a segment gross profit for the third quarter of $2.1 million on revenue a $54 million. Construction Company had another excellent quarter some of reasons was better than expected.

As we announced earlier our construction company signed a $94 million contract to build two Virginia Beach Ocean front hotel as well as retail and a garage [ph]. The owner of this project since then decided to build the project at this stage and delay the construction of one of the hotel.

The contract was amended and reduced by $55 million to reflect this change. The first phase of the project is under construction completion is expected in the spring of 2017. At the end of the third quarter the company had a third party construction backlog of one $118 million which includes the reduced contract I just discussed.

Now turning to our balance sheet, in the third quarter we continue to take actions to enhance flexibility and strengthen our balance sheet. We continue to use the ATM program last quarter as expected to raise a $4.1 million of gross proceeds at an average price of $10.11 per share.

We expect the ATM program to continue to be used as long as multiple options are at disposable to raise capital to fund our development activity.

As you can see from our outstanding debt summary on page 11 of our supplemental, at quarter end we had total outstanding debt of $420 million including $106 million outstanding under the $150 million revolving credit facility. Our debt metric continue to be in line with our corporate goals.

As of September 30, our fixed rate debt including swap locks was 52% of our total debt including interest rate cap 77% or a debt of [indiscernible] per head. At the quarter end we purchase a $75 million LIBOR interest rate GAAP of 1.25% including this new GAAP 95% of our debt was fixed overhead.

We believe that using interest rate GAAP limits our exposure to rising rate while giving us flexibility at a reasonable cost. As Lou discussed earlier on the call, the Point Street Apartment not consolidated and near quarter does not stress our balance sheet during construction lease up.

Project of this size and the duration requires debt and equity for over two years with no return on that capital. With this project we have paid a return on our equity on a construction period during the development at an option to purchase a controlling interest in that property on complete.

Our investment is the form of $23 million as an even loan which bears interest at 8%. As with any development project, it will take time for the project to ramp but we’re not expecting quite an impact during the fourth quarter. From a timing standpoint $23 million to be fully funded until sometime in the first quarter of 2016.

The construction contract will be approximately $57 million with a fee of 3%. The other new development project that we discussed is Brooks Crossing, we expect to fund this project with a credit facility due to it's modest size. I want to spend a couple of minutes reiterating the details of the Columbus Village acquisition.

This acquisition was funded by the assumption of $8.8 million of debt and a aim of issuance of 1.275 million operating partnership, 1 million of these units do not earn or recruit dividend until July 2017 and 275,000 units will not be issued until January 2017 we do not earn or recruit dividend until January 2018.

The interim dividend that would have been paid at the current dividend rate weigh to $1.8 million. We view this as a reduction in purchase prices. It can also be viewed as a higher valuation of the OP [ph] 24 to 30 month period closing dividend will not be paid off the [indiscernible] potential NOI growth.

Even if those dividends are not being paid on these units total 1.275 million units are included in our diluted share account for FFO per share calculation. To close on the Providence Plaza acquisition on September 1, of $26.2 million representing a going in cap rate of 7.25%.

This was acquired by using $14 million of 10/31 proceeds [Technical Difficulty] and the remainder was funded through the credit facility. This property is unencumbered and will be added to the borrowing base of the credit facility with two other properties to increase the capacity by 25 million.

These changes to the borrowing base are expected to close during the fourth quarter. On the asset sales front we closed on a sale of the Oceaneering building last week, the building sold for $30 million which represents a 6.6% cap rate. This is our fourth disposition in the past 12 months and asset cap range between 5.75% and 6.6%.

The sales is another example of the value in cap rates for our property. The 20% profit on this sale similar to the profit from the west [ph] sale is another example to the equity delivered from our development process. We can use the proceeds from the sale of the 10/31. Now let me walk you through our full year 2015 guidance.

This morning we raised 2015 full year normalized FFO guidance now $0.91 to $0.93 per share from our previous guidance of the $0.88 to $0.91 per share. The increase in guidance due to the performance of third party construction business in multifamily, a 2015 estimate predicate on the following assumption.

GAAP NOI in $53.7 million to $53.9 million range. Third party construction company gross profit in the 5.8 million to 6.1 million range, general administrative expenses is 8.3 million to 8.5 million range, interest expense and the 13.3 million to 13.5 million.

The 41.1 million weighted average shares of units outstanding which includes the unit associated with the acquisition of Columbus Village. This guidance excludes any impact from future acquisition, asset sales of Oceaneering or other capital market activity with the exception of continuing the ATM program.

Before we turn to Q&A o would like to make a comment about 2016. As Lou discussed to sign an agreement to sell the Richmond Tower subject to the usual due diligence in closing requirement.

Due to this uncertainty the size of the sale and we’re still formulating our plan on how to best to reinvest the proceeds, it's too early to give any insight into 2016. We will give an update once we close on the transaction and have finalized our reinvestment plan. I will now turn the call back to Lou..

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

[Operator Instructions]. Your first question today is coming from Rob Stevenson from Janney Montgomery Scott. Please proceed with your question..

Can you talk a little bit about the Richmond office market and where sort of other competing assets have traded recently and then also with respect to that market I mean you know you assess that on the office side with the sale of Bridgeman [ph] Tower, is this the market that you want to be back in longer term or should we read into it that Richmond is part of this transaction, that Richmond office is not in long term cards for the company?.

I think it's the latter. We're obviously very happy with the assets, it served us well, it's a marquee asset in that city. There is a competing product going up across the street from the project that’s going to be similar in size and so is ours.

That will represent the only two new office towers in the Richmond market, actually when we built towers as we were the first one in over 20 years to go into the downtown market. So we're looking at it as more and more of an outlier with not a lot of upward pressure and as the I said earlier in reviewing it.

We had the rule of 30 year history don't like to hold a single tenant asset with this predominantly is for the long haul and so that's what was behind the decision to divest. I will I mean that's not a hard contract at this point, but hopefully it will go along to closing. But I don't see us in the downtown market in any meaningful way in the future..

Okay.

And best guess at this point is that like the second quarter if everything goes well sale?.

No it will be before the end of the year..

And then I maybe I don't know what I you know I missed it or whatever but did you guys -- have you guy decided on a plan yet for Columbus Village?.

We’re evaluating several right now as you know we're in partnership with the City and both of us are interested in expanding Town Centre. We're not certain just how vertical it's going to go or whether we are retenanted and expanded horizontally. So as we're going to bide our time there and let a few more cards be played..

Okay.

And what are the leases sort of run on that, what's the earliest that you could do anything on that site?.

We just extended the Barnes and Noble lease for a period of two years and so that's about when although we have the ability to relocate them as a part of the extension. So I can see, I don't see much happening in 2016 but possibly towards the end having a plan finalized..

Our next question today is coming from Dave Rodgers from Robert W. Baird. Please proceed with your question..

Couple of maybe yield or numbers questions just to start off on the Richmond Tower you said I think it's 7.5% cap rate, I'm assuming based on the length of the lease there that’s the gap number.

Can you tell me if it's gap or cash and what the cash number would be on that?.

That is based on a pro forma cash number..

That’s the cash, what would be the GAAP be on that?.

It's between 7.5 and 8 cap rate range on a GAAP basis, Dave..

The investment in Baltimore, I think you went through a good amount of detail in terms of the mezzanine loan and financing and did not hear if you quoted a yield on what you expect kind of your stabilized investment to be if you bought the majority share in the asset at this point do you’ve a view on what that would be?.

As we represented this is going to hit our traditional spread, we roughly 125 to 200 basis points spread. Obviously if you move down the cap rate curve that gets a little narrower, but we’re looking at a 100 basis points plus you know actually, I'm being conservative with that statement.

A nearby apartment property just sold for what would end up being a 4.5 cap we're not using that as a comp but I can tell you this is a better product than that but I think it's very reasonable that that waterfront real estate where rents are rapidly approaching $4 will trade in the 5.5 cap range and of course our spreads going to maintain close to seven.

.

Last on the numbers, the Liberty and Encore is stabilized in the quarter, how did those come in relative to pro forma and can you give us type sense of yield there as well on a stabilized basis now?.

Yes I think, while Encore is still stabilizing, just hitting 90% or so now it's a little bit above pro-forma for the better than what we thought. And we'll see how that goes once if it's all the way home. On Liberty to be honest with you, we’re not satisfied with the yields there below pro-forma.

I mean it's great that it, I mean things like 99% occupied but we’re not happy with the expenses the way they're coming in that we're going to have a hard look at that can and see if we can use that a bit. But to be honest with you right now we’re not pleased with the occupancy but not pleased with the deal..

With regard to your comment I think you said there's more projects in the works maybe similar to the Baltimore projects you just talked about today, the Harbor Point, would those also be in Baltimore? Are you kind of looking more broadly? Should we be thinking maybe down the coast toward Charlotte Raleigh or these were you talking specifically in the Baltimore region?.

Both Dave, the Baltimore metropolitan area is a focus for us we're looking at other opportunities there. And as you know we are looking at opportunities throughout the Carolina.

So we're excited about that program, having a well-healed 30 some-year old construction company gives us the ability to control costs through a different mechanism that isn't available to others and makes this very comfortable and makes the kind of investment and as we said keeps it off of our balance sheet, we see an income coming and maintains our spread.

So I think as I alluded to as you can imagine, there's a lot of developers out there that need strong partner. So we're providing a number of opportunities at this point..

Last one for me, Mike with the sale of the Richmond office tower kind of played did come in by year end, what would you look at your total availability or total capacity kind of going into next year? A - Mike O'Hara Capacity-wise, we look good I think as I mentioned on the call, we’re going to increase the capacity on our credit facility by $25 million, the way we're doing Harbor Point, it's not going to stretch the balance sheet and actually you know we're going to create EBITDA through the mezzanine interest as well as the construction fee so that ones taken care from that standpoint.

So from that standpoint balance sheet all looks good, we will then end up with a lot of cash between the sales of Oceaneering and sale of [indiscernible] and now we’re in the great position of looking how we want to reinvest that money..

We have reached the end of our question and answer session. I would like to turn the floor back over to management for any further or closing comments..

So thank you for your time this morning and thanks very interesting in our company. And we look forward to updating you again soon..

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today..