Julie Loftus Trudell - VP, IR Louis S. Haddad - President and CEO Michael P. O’Hara - CFO.

David Rodgers - Robert W. Baird John Guinee - Stifel Nicolaus RJ Milligan - Raymond James.

Welcome to Armada Hoffler's Third Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, you'll be invited to participate in a question-and-answer session. (Operator Instructions) As a reminder, this conference call is being recorded today, Friday, October 31, 2014.

I'll now turn the conference call over to Julie Trudell, Vice President of Investor Relations at Armada Hoffler. Please go ahead..

Good morning and thank you for joining Armada Hoffler’s third quarter 2014 earnings conference call and webcast. With me this morning are Lou Haddad, CEO; and Mike O'Hara, CFO; and Eric Smith, our Vice President of Operations, 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 November 28, 2014. The numbers to access the replay are provided in the earnings press release.

For those who listen to the rebroadcast after this presentation, we remind you that the remarks made herein are as of today, October 31, 2014, 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, impacts of acquisitions, 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 advice 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, 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 Web-site at www.armadahoffler.com.

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

Lou?.

Thanks, Julie. Good morning and thank you for joining our call today. This morning we reported another solid quarter with both FFO and core FFO per share coming in better than expectations, driven primarily by stronger than expected leasing.

In addition to our leasing efforts, we delivered the remaining three development projects slated for this year, closed on the Dimmock Square acquisition, and are in the process of selling two assets. We raised our 2014 outlook and are enthusiastic about a strong finish to this year as well as in our ability to execute in the coming year.

The team has a lot to be proud of as all three of our divisions continue to perform admirably. Before I turn the call over to Mike O’Hara to discuss the quarter in more detail, let me make a few observations on our performance. With regard to our stable portfolio, occupancy is over 95% as of the end of the third quarter.

We've leased an additional 26,000 square feet that once delivered in the fourth quarter will continue the positive trend in occupancy. In Town Center, we have signed several additional leases and are delighted that the retail space is essentially 100% occupied.

A number of new tenants opened recently at Town Center, including Anthropologie, lululemon and Free People. These retailers are creating additional excitement as well as meaningful long-term value for our shareholders. This is evidenced by a quarter-over-quarter increase in same-store NOI on both the GAAP and cash basis.

This quarter marked an inflection point in the execution of our development pipeline as we delivered Greentree Shopping Center and Encore Apartments, both in Virginia, and the Whetstone Apartments in North Carolina. We turned over approximately 83,000 square feet of office space to Clark Nexsen, the anchor tenant in a new 4525 Main Street tower.

Office occupancy at 4525 Main Street is over 50%. Let me remind you that this building is positioned as the most expensive address in the region. It's completely state-of-the-art, it's the best address in this market. It is designed to give us a couple of years worth of absorption.

For the last several years with essentially no office space to lease here at Town Center, we've had to turn prospects away. We now have the capacity to absorb tenant demand over the next few years. We delivered the initial units at both Encore Apartments and Whetstone Apartments in September of 2014.

Encore is currently about 30% leased, which is several months ahead of expectations. At Whetstone, in Durham, North Carolina, we have approximately 20 units already leased at this early stage in the process as the leasing team has only been on site since late September.

Finally, as of today, we delivered the remaining space at Greentree Shopping Center in Chesapeake, Virginia. We are pleased that several of these deliveries were earlier than expected. Controlling costs and positively impacting timelines are the benefit of having our own captive general contractor.

As for the return on cost metrics for our development projects, we have maintained our corporate targets. Because of this discipline, our spreads have continued to widen as we are maintaining our return on cost targets in our pipeline regardless of the continued progressiveness in cap rates.

Lastly, the Johns Hopkins project continues to move forward with the signed ground lease and the schematic design phase well under way.

With the delivery of our development pipeline in full swing and the fluid nature of the stabilization process, we have maintained it to the development pipeline page in our supplemental package in an effort to make it easier to track our development projects through various stages of delivery and stabilization.

As you'll see, we have categorized our development pipeline into three sections; not delivered, delivered not stabilized, and redevelopment.

For those projects that are not yet delivered, not much has changed in the reporting, although we think it's important to mention that it is not unusual for projects to change in scope and timing particularly in their early stages. An example of such a change is Brooks Crossing.

You'll notice that we have removed the data we have previously disclosed on this project. As a reminder, Brooks Crossing is a multi-building, multi-phase partnership with the city of Newport News. The first phase was originally a development pipeline project that would have been placed into service in our stable portfolio of assets.

However, the city of Newport News has decided that they prefer to own this building, a police precinct and 911 call center, turning this into a development project with a sale upon completion. We hope the buildings in future phases will become part of our stable portfolio.

However, flexibility in public-private partnerships is key to repeat business and is a big reason why we have been engaged by municipalities over 20 times. Next on our pipeline page are those development projects that are delivered but not yet stabilized.

This concept is straightforward, so we believe it is important to differentiate these projects as they create near-term noise around our stable ongoing FFO. For the same reason these assets are not yet in our occupancy and same-store NOI calculations.

This noise is more pronounced currently since we have three multifamily properties in lease-up, which typically take longer to reach stabilization than office and the retail assets.

It is the same reason why we have been reporting core FFO, which excludes the effects from these non-stabilized developments, as we believe that this has been a more meaningful statistic in analyzing the performance of our business. We will move these assets off of this schedule once they reach 80% occupancy.

These first two categories of development projects shows not delivered and those delivered but not yet stabilized, demonstrate the volume of throughput we expect from our development business, approximately $150 million to $175 million of development projects every 18 to 24 months.

We continue to execute at our targeted pace and expect current development activities, so listed on this page and those in predevelopment, to result in approximately $25 million of incremental annualized NOI by 2017. The third category is redevelopment projects.

Listed here is the renovation and expansion of the space adjacent to Dick's Sporting Goods here in Town Center for the national accounting center of USI Insurance. We expect USI will occupy the resultant 20,000 square feet on this redeveloped space in the fourth quarter. One last thing to note on the supplemental package.

We have added a summary page of our acquisitions and dispositions. To date we have executed on two acquisitions. As we have stated, we are committed to strategic acquisitions as a way to complement growth from our development pipeline.

During the quarter, we completed the purchase of Dimmock Square, a 100% occupied 106,000 square foot retail power center located in Colonial Heights, Virginia. The acquisition was accretive this past quarter's FFO per share and is expected to be accretive to annual FFO per share. Earlier in the year, we closed on Liberty Apartments.

Currently we have nearly 70% of the Apartments' units leased with about half of the retail space either leased, under letter of intent or in negotiation. Also listed here are two pending dispositions. As we have stated, we are continuing our long-standing strategy of selling non-core and single-tenant assets from time to time.

We are on track to wrap up the previously disclosed sale of the Virginia Natural Gas office building in the coming quarter. As you'll recall, we intend to sell this building for approximately $8.9 million, which represents an implied cap rate of approximately 6.25%.

During the quarter, we entered into a preliminary agreement to sell the Sentara Williamsburg office building for approximately $15.4 million, representing an implied cap rate of approximately 6.3%. So as you can see we have already executed on our 2014 objectives and the year is not yet over.

To reiterate, our long-term strategy remains as it has for the last three decades and is simple, continue to grow NOI through organic growth in our stable portfolio, through our development pipeline projects, through our third-party construction gross profits, and through strategic acquisitions.

When combined with measured decisions about our corporate metrics and balance sheet, we are focused on ensuring that our future NOI growth will translate into increased FFO and free cash flow on a per-share basis.

With that, I turn the call over to Mike O’Hara to walk you through some of the key financial and portfolio metrics for the third quarter, and then we will take questions.

Mike?.

Thank you, Lou. Good morning. Today I want to cover the highlights of the quarter including a discussion on our recent equity raise, our balance sheet and I'll wrap up on our 2014 outlook. This was a good quarter for us in all aspects. We reported better than expected earnings, strong leasing activity and reported positive same-store NOI results.

FFO for the third quarter was $0.21 per share and core FFO was $0.22 per share. Our adjustments from FFO to core FFO are illustrated on Page 11 of the supplemental package. This quarter unstabilized development projects had positive FFO of $178,000, which was excluded from third quarter FFO.

During the third quarter we executed approximately 72,000 square feet of new and renewal office and retail leases. Office re-leasing spreads for the quarter were lower by $1.13 per square foot on a GAAP basis and lower by $1.36 per square foot on a cash basis. This was primarily driven by low TI costs associated with these leases.

The retail re-leasing spreads were higher by $1.45 per square foot on a GAAP basis and higher by $0.78 per square foot on a cash basis. Same-store NOI was positive for each segment during the quarter. In total, same-store NOI for the quarter was positive $361,000 or 3.7% on a GAAP basis and positive $216,000 or 2.2% on a cash basis.

During the third quarter, our portfolio occupancy increased from 94.6% at June 30 to 95.1%. We expect this trend to continue in the fourth quarter with the signed but not yet occupied leases. On the construction front, we reported a segment gross profit in the third quarter of $1.1 million on revenue of $32 million.

At the end of the third quarter, Company had total construction backlog of $154 million. Now turning to our balance sheet, in early September we issued 5.8 million shares of common stock which net of issuance cost raised $49 million. The proceeds were used to repay a portion of the credit facility which has been used to fund our development pipeline.

Between this capital raise and other balance sheet activity we've discussed including planned dispositions, we have accomplished four things. First, we ensure the majority of our value creation from the current pipeline will be enjoyed by our long-term shareholders. Second, we have reduced debt borrowing to fund our development pipeline activities.

Third, this delevering has brought our debt metrics and leverage ratios into ranges in which we are comfortable operating. And fourth, we are well-positioned over the coming year to take advantage of the new investment opportunities when they present themselves.

Prior to the equity raise, our debt metrics were getting elevated in order to fund our robust development pipeline. As we've discussed on many prior calls, we incur a substantial debt to fund development projects with a lag until the project delivers and the NOI materializes.

Multifamily projects, of which we have three in lease-up, as part of this pipeline, magnified this issue as the ramp-up period to stabilization is typically longer than office and retail assets.

As we manage the time gap, our goal is to maintain core debt to core EBITDA in the 6x range, where it now resides and total debt to EBITDA in the 8x range as we borrow to fund development projects. At the end of the third quarter, we had total outstanding debt of $336 million putting $54 million outstanding on our credit facility.

The weighted average interest rate is 3.5% and the average loan term to maturity is nine years. Approximately 44% of our debt was fixed at September 30, and then taking into account interest rate caps approximately 78% of our debt was fixed on hedged. Please see Page 14 of the supplemental package for the detailed interest rate caps.

We believe that using interest rate caps limits our exposure to rising rates while giving us flexibility at a reasonable cost. As our development projects ramp-up and start to come online, we are evaluating our ratio of fixed rate debt to overall debt. We are evaluating a couple of fixed-rate loans at this time.

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.

We have little exposure through 2015 with only one loan maturing in 2014 for the balance of $1 million, and two loans maturing in 2015 with combined balances of less than $9 million. Now let me walk you through our updated full year 2014 outlook.

We raised our full year 2014 total core FFO outlook to approximately $29 million from the previous expectations of approximately $27.5 million. The increase was driven by better-than-expected leasing activity across the portfolio, most notably at the Cosmopolitan, better than expected construction activity and lower interest expense.

Full year Construction Company annual segment gross profit is now expected to be approximately $4.6 million, from the previous expectation of $4.3 million. The increase reflects the impact of $178 million of new contracts signed in 2014 which are expected to begin earning later this year.

We set out to deliver five development projects in 2014, all of which have been delivered as of today and the leasing activity for these projects has been strong.

Based on this leasing activity, we now expect the negative impact on 2014 FFO from these five non-stabilized projects to be approximately $400,000, which is better than the previous expectation of approximately $1 million. Before I move on to some thoughts in 2015, let me update you on our share count.

Outstanding share count has changed with the equity raise and the Dimmock Square acquisition, which as we mentioned earlier in the call, we acquired with a combination of cash and OP Units. The weighted average shares outstanding for the third quarter was 34.6 million, and is currently 39.8 million for the fourth quarter.

While we are not ready to provide our 2015 outlook today, I want to reiterate what we said in our last earnings call regarding our NOI expectations from the development pipeline, we expect at least $8 million of NOI from the development pipeline projects in 2015. I'll now turn the call back to Lou..

Thank you, Mike. As I hopefully communicated on this call, we are doing what we said we were going to do and are ahead of schedule and feel great about where we are going. 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) The first question this morning is coming from the line of Dave Rodgers with Robert W. Baird. Please proceed with your question..

Lou, wanted to start with the broader development pipeline, obviously good quarter and finally things in maturation in the developments, but as you look forward, and I don't know if you provided in your comments, what are you seeing in that kind of equity owned or AHH invested development pipeline and the opportunities beyond what's listed in the supplement?.

Dave, we've got several projects now in predevelopment that are in various stages of negotiation. I'll tell you the activity we're seeing is just probably more robust since, most robust since the 2006 range. I think it's a combination of the markets that we are in and our ability to execute our long-term basis with repeat clients..

And then I guess on the flipside of that, dispositions starting to ramp up a little bit more, it's good to see that, it looks you've got about $24 million in the queue for the fourth quarter, Brooks Crossing on top of that.

As you think about what's in the portfolio and what seems like it will be accelerating spending in the next couple of years, over the next 12 or 15 months getting to the end of '15, what's in the bucket of potential sales that you think that you can kind of move forward and monetize assets with both in the development pipeline and kind of within the existing portfolio, what's that number range look like?.

Dave, recall in our last conference call we said that we had identified six such assets, both in existing portfolio and the development pipeline. I mean taken as a whole, that's probably in the $100 million range, but I don't want to give you an impression that we're executing on all six of those.

But as everybody on the phone knows where cap rates have gone, we want to take advantage of that obviously. And so, on a measured basis we're going to be looking at it very carefully..

Great.

And next question is, with regard to what's still in the leased but not yet occupied pipeline, can you sum that up for us both in office and retail, and I don't know if apartments is really as relevant I guess in that metric, but what do you still see either has yet to move-in in the fourth quarter or in the first quarter in aggregate between those two buckets?.

Dave, what we said, we just said on the call was about 26,000 square feet that's going to get delivered in this fourth quarter. That's not in any of our numbers yet. We also have letters of intent for another probably that much again that would be delivered somewhere around the first quarter, but there's not a whole lot there.

As you know from the six projects or so, listed in development, three of them are build-to-suits which are obviously 100% occupied, that comes online first quarter. The three that aren't, being the office building that we just spoke about as well as the two retail centers, were really down to small shops.

And so, it's not a huge number, and as we alluded to, at 4525 Main we anticipate that being a couple of years. The shopping centers obviously will be a little bit quicker..

Okay. Last question for Mike. I think you capitalized about $700,000 of interest in the third quarter. I assume that you stopped capitalizing Whetstone, Encore, Main Street in third quarter.

So what does the capped interest number look like in the fourth quarter, Mike?.

So on the capitalization for Whetstone, Encore, the multifamily, we will continue to capitalize interest on the portion of the building that is not completed at this point in time.

So I think on both those buildings at this point in time we are probably completed somewhere around 30% to 40% of the units, and as those units get completed, turned over and accepted by property management, that's the time we'll stop capitalizing those..

Just to make it clear for everybody, on our midway apartment projects, those are delivered on a phased basis, and we try and deliver a chunk of 20% or so every couple of months, and that's the way the construction is designed to perform..

Alright, thanks for the color..

Our next question is from the line of Robert Strigo with RAS Investments [ph]. Please go ahead with your questions..

Congratulations on an excellent quarter.

As far as the viewpoint of investing in your REIT and you haven't increased your dividend and it wouldn't be very difficult to increase your dividend, at least a few pennies, I would say at least a penny or two a quarter, so that will certainly invigorate the investment; you did an offering at [9.05] (ph) which was not at great price considering the dividend at that price, it was almost 8%, a little less than that.

So the question is, can you – and you talked about everything but the dividend, what is the outlook for that dividend?.

Great question, Robert. As you probably know, the management owns approximately a third of the entire Company. So you bring up a subject that's very near and dear to our hearts as well. We're obviously very pleased with the performance of the Company.

We've got a tremendous amount of NOI and therefore free cash flow coming online over the next several quarters. Mind you we've only been public for five quarters, and so we're still getting to where we understand the entire scope of metrics that we need to look at before we take on such an increase.

However, we are constantly evaluating the best way to deliver value to our existing shareholders, and the topic you bring up I can tell you the hot topic around the office here, we're looking forward to completing the year and as we offer our guidance for 2015 I think you'll see some exciting developments with regards to our ability to deliver value to the shareholders..

Our next question comes from the line of John Guinee of Stifel. Please go ahead with your question..

Thank you very much on continued explanations of a lot of moving pieces.

Is it possible, and maybe we'll have to do this offline, to reconcile between essentially Page 18, your development pipeline, and then your balance sheet in terms of construction in process, construction receivable, construction payables, or are there just too many moving pieces because part of the balance sheet includes third-party development and part of the balance sheet includes AHH development?.

That's a great question, John, I appreciate it. And the answer is, yes, that's a pretty complex explanation. We'll be happy to take you through it but I think it's best done off-line..

Okay.

And then just out of curiosity, has the building, the gas building, $6 million or $7 million, I can't remember $10 million, why is that taking so long to close, the sale?.

John, I don't think – I mean it's all relative, right, I mean we signed up for the highest offer, it had with it a 45 day due diligence and a 30 day close. So we're tracking exactly that..

Okay, perfect. Talk you..

Thanks, John, appreciate it, and Julie will set something up and we'll continue discussion offline..

The next question today comes from the line of RJ Milligan with Raymond James. Please go ahead with your question..

I just want to follow up on Dave's question about, Lou, your comments on development demand and that it was pretty robust today and I was just curious in which segments, is it more retail, is it more office, is it both, where are you seeing the demand coming from?.

Remember that – and I'll say it's both but I need to qualify that, and not to pat ourselves on the back but we've got a quarter of a century of doing public-private partnerships with municipalities and states and the institutions and the like.

As the economy continues to just bump along, as we've all been experiencing, the pressure on these institutions and municipalities to disproportionately affect our tax base or student base or employee base increases exponentially.

And fortunately through what we built, Dan Hoffler started 30 some years ago and we continued to build on, we sit pretty much in the catbird seat when such an institution and our footprint has such projects to do. So when I say our pipeline is robust, it's fairly verified here that we're operating it.

And so, long answer to a short question but it ultimately manifests itself as office retail or multifamily projects..

Got you.

So in other ways, Armada Hoffler's demand is through the roof but it's still not a lot of demand out there in the general market?.

That's correct, and I don't want to give anybody a misimpression, the bread-and-butter growth out there that you typically would see in higher end tenants and the kind of tenants that we all want to see in our portfolio, that growth is not there. People are maintaining and we're still reabsorbing space from the big crash.

So I think it's going to be a while before you can see a situation where the [indiscernible]..

Got you. And I saw in your guidance you guys increased the construction company gross profit projections about 300,000.

I was just curious what was driving that?.

As we talked before, the construction business is a little bit harder to project, particularly you have – and I think we alluded to this in our last conference call – we have a particularly large project, the Exelon project, at Baltimore's Inner Harbor that's coming out of the ground.

It's $170 million project with tremendous amount of the low grade work. And so it was very difficult to forecast how fast that work would go with as you would imagine unforeseen obstructions and the like. But it's going a bit faster than our conservative projection would have told us..

Thank you. I'll now turn the floor back to Mr. Lou Haddad for any closing comments..

Thanks very much. We appreciate your interest in our Company and we look forward to updating you on our activities and results in the coming quarters. Take care and have a great day. Thank you..

This concludes today's teleconference. You may disconnect your lines at this time..