Lou Haddad - President, Chief Executive Officer and Director Mike O'Hara - Chief Financial Officer Eric Smith - Chief Investment Officer.

John Guinee - Stifel Dave Rodgers - Robert W. Baird Craig Kucera - Wunderlich.

Greetings and welcome to Armada Hoffler's Second Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, you will be invited to participate in a question-and-answer session. [Operator Instructions].

As a reminder, this conference call is being recorded today, Tuesday, August 4, 2015. I will now turn the conference call over to Michael O’Hara. Thank you sir, you may begin..

Good morning and thank you for joining Armada Hoffler's second quarter 2015 earnings conference call and webcast. Those of you familiar with our company will notice that Julie Trudell, Vice President of Investor Relations is not with us this morning.

Julie recently accepted a position as a Senior Vice President of Investor Relations in the healthcare space which she has previously worked for many years before working at Armada Hoffler. We wish her well in her new role. I will serve as the contact for any investor/analyst inquiries for the time being.

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 second 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 September 4, 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, August 4, 2015 and will not be updated subsequent to this initial earnings call.

During this call, we will make forward-looking statements including statements relating 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 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 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?.

Thanks, Mike. Good morning and thank you for joining us. As you can see from this morning's press release, we have had another tremendous quarter. Activity across the broad spectrum of our business model continues to accelerate.

Increased third-party construction profits, robust multifamily leasing, stabilization of nearly 300,000 square feet of development projects and accretive capital recycling through requisitions and dispositions has once again enabled us to raise our earnings guidance for the year.

Two years ago at our IPO we told investors that the benefits of being diversified and integrated would ultimately be self evident in our results. We are glad to continue delivering on that promise. I'll now cover a few highlights from last quarter and some of the recent developments in our business.

Mike O'Hara will then discuss the quarterly results in detail. We are pleased to report another solid quarter with FFO per share of $0.22 and normalized FFO per share of $0.24, which was higher than anticipated as we did not expect to reach this run rate until the third quarter of this year.

We have raised both the bottom and top end of our guidance range. We now expect 2015 full year normalized FFO of $0.88 to $0.91 per share. Positive changes in our outlook for third-party construction process, G&A, multifamily leasing and interest expense contribute to our guidance revision which Mike will address in more detail.

At quarter end occupancy across the core portfolio was 95.3%, which continues to be within our targeted range. Notably excluded from this occupancy figure are both Encore and Liberty apartments which are both still in lease-up. As of our call today occupancy for both of these assets is in excess of 80%, which is slightly ahead of our expectations.

We had forecasted a temporary drop in occupancy at the Cosmopolitan due to the initial lease-up of the adjacent Encore property. However, the Cosmo has maintained occupancy in the high 90s throughout the process thereby providing even further evidence of the tremendous market strength of Town Center.

When you also consider the perennially full Smith's Landing property and the handsome profit on sales from the Whetstone project in Durham, you can understand how extremely pleased we are with the performance of the multifamily sector of our business.

Our success in leasing and the strength of our overall portfolio is evidenced by an increase in quarterly GAAP and cash same-store NOI, 3.2% and 5.4%, respectively compared to the second quarter of 2014. You will note that this makes four consecutive quarters of significant same-store sales growth.

Staying on the theme of our portfolio assets, we continue to actively manage our portfolio in the context of asset quality, risk management, geographic diversification and the management of our balance sheet.

As we previously announced we completed the sale of Whetstone apartments in Durham, North Carolina during the second quarter for approximately $35.6 million, representing an implied cap rate of 5.7% on a pro forma rents and a profit well in excess of 20%.

This 204 unit apartment community was delivered in late 2014 and sold at a very attractive spread despite being in the early stages of lease-up.

We utilized a portion of these sale proceeds after quarter end to purchase Socastee Commons, 57,000 square foot grocery store anchored retail center located in Myrtle Beach, South Carolina and in a 1031 tax differed transaction.

We purchased this asset for $8.7 million including the assumption of $5 million of debt for an implied cap rate on current NOI of 7.25%. This center is 100% leased as of today.

In addition to providing a positive yield spread on the proceeds from the Whetstone sale, this purchase represents our first portfolio asset in South Carolina as a publicly traded company. Much like Virginia Beach, Myrtle Beach is a vibrant mid-Atlantic destination which we believe provides a great climate for retail sales growth.

We have previously owned assets in this robust market and we expect to see additional opportunities for development, construction and acquisitions in the near future. There is a small amount of developable land associated with this center and we are exploring how best to monetize this and further enhance the impact from this acquisition.

We have also entered into a definitive agreement to acquire Providence Plaza, a 97% occupied 103,000 square-foot mixed-use complex located in the South Park submarket of Charlotte, North Carolina for $26.2 million.

This property is to be purchased with the remainder of the proceeds from the Whetstone disposition 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 buildings.

The buildings include a four story 70,000 square foot office with ground-floor retail and two separate retail buildings along with a two floor parking garage of 256 spaces.

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

In addition to the stabilized NOI of approximately $1.9 million and a going-in cap rate of 7.25%, despite also included an undeveloped tract of land of approximately 1 acre that is known for multifamily development, we have already begun our efforts to determine how the value of this additional land could be best monetized for our shareholders and we will keep you updated on our progress.

Recycling the capital from the Whetstone asset into Socastee Commons and Providence Plaza, inclusive of the wholesale to retail value spread created by our development process, achieves a number of goals simultaneously.

We maintain institutional grade asset quality of our portfolio while providing FFO and NAV per share accretion and improving our geographic diversification through our expansion into North and South Carolina. In addition we have the opportunity to leverage our development expertise through the additional opportunities at and around both properties.

Keeping with the theme of recycling capital, we have engaged a brokerage firm and are actively soliciting offers for the sale of the Oceaneering building located in Chesapeake, Virginia.

Given the level of bio-competitiveness for credit quality single tenant assets with long-term leases combined with our belief in the inherent risk of holding such assets while lease term burns off we believe it is in the best interest of our shareholders to sell the Oceaneering building into the current environment and redeploy the equity generated by our development engine to create additional shareholder value.

As of Whetstone our expectation is a profit margin of 15% to 20% which will also be excluded from FFO.

Rounding out our acquisition activity we announced after quarter end the acquisition of Columbus Village, a 65,000 square foot retail property located adjacent to the Town Center of Virginia Beach and anchored by Barnes & Noble along with ULTA Beauty, Five Below, f.y.e., and LensCrafters.

The center is currently 100% leased with strong upward pressure on renewal rates. Even more importantly this 5-acre parcel is a prime target for redevelopment. To this end we have already begun discussions with the City of Virginia Beach on how best to integrate this asset into a public-private partnership.

While Hampton Roads is not the focus of our acquisition platform clearly the strategic nature of this property fixed squarely into our investment philosophy and should create significant long-term value for our shareholders.

Mike is going to provide additional details on the transaction in his remarks, but I would like to point out that Columbus Village is another example of a property owner letting our business model underwriting the value of our properties and ultimately taking a significant equity position in our company, in this case in excess of 1.2 million operating partnership units, valued at $11 each in exchange for all of their equity in this asset.

Shifting gears from the portfolio to the third party construction business, we are very pleased with the outlook for this segment of the business over the next few years.

In addition to the development projects that are underway, the $170 million Exelon engagement continues to process as scheduled and is tracking towards completion in the second quarter of 2016.

Our recent announcement that Armada Hoffler Construction Company was contracted to build two new hotels at the Oceanfront in Virginia Beach, Virginia, is just the latest evidence of the lucrative nature of our third-party construction business, which just as it has many times in the years past produces profits at the higher end of our historical range as the economy continues to improve and as opportunities to build projects for both long-term and new clients expands.

In concluding my remarks today, I will now update you on the activities of our development company.

As you may recall we delivered four development pipeline projects during the first quarter of 2015, which included more than 200,000 square feet of fully leased office space, consisting of two build-to-suit office buildings for the Commonwealth of Virginia which are a 100% leased for 15 years and the Oceaneering building which I discussed earlier.

We also delivered Sandbridge Commons, a new 70,000 square foot shopping center in Virginia Beach anchored by a Harris Teeter grocery store. With leasing nearly complete we are about to launch another phase of small shops at the center. This leaves Johns Hopkins Village and Lightfoot Marketplace, as the remaining undelivered projects in our pipeline.

These two represent over $90 million of investment and both are proceeding on budget and on schedule. We have a number of exciting opportunities that will more than fill our pipeline proceeding to develop through the predevelopment stage. We are confident that these will be ready to be launched later this year.

While it would be premature to announce these projects by name, I can't reiterate the attributes that we are targeting in new product for our portfolio.

Class A assets with a high barrier to entry, diversification primarily targeting the Raleigh Durham, Charlotte and Baltimore markets, strategic expansion at Town Center, maintenance of our traditional 150 to 200 basis point development spread through public-private partnerships, cost control through our operating companies and premier site selection and joint venture opportunities utilizing our unique ability to co-develop and construct.

We look forward to culminating negotiations on several lease opportunities over the next two quarters and updating you accordingly. With that, I 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 I’ll wrap up with our 2015 guidance. This morning we reported FFO of $0.22 per share and normalized FFO of $0.24 per share, which was better than our expectations.

This was due to increased profit from third-party construction business and robust multifamily leasings. Please see page 10 of the supplemental for the normalized FFO calculation which excludes debt extinguishment losses, property acquisition costs, and pyramid charges and mark-to-market adjustments for interest rate derivatives.

Our current quarter FFO also excludes a gain from the Whetstone sale. This is the third quarter in a row in which we have a gain on the sale. As we have discussed in the past, asset sales will continue to be an element of future shareholder value creation. We had another strong quarter of same-store NOI growth.

Same store NOI was positive 3.2% on a GAAP basis and positive 5.4% on a cash basis compared to the second quarter of 2014. We added five development projects to our core operating portfolio. These properties are now stabilized, have been removed from the development pipeline.

They are Greentree Shopping Center, Oceaneering, two Commonwealth of Virginia buildings, and Sandbridge Commons shopping center. At the end of the quarter our core operating portfolio occupancy was 95.3%. Office came in at 94.6%, retail at 95.6% and multifamily at 96.5%.

These occupancy numbers include the five development properties just added to our core operating portfolio. In our portfolio summary on page 14 of the supplemental, you will see that we have summarized all properties, our core operating portfolio as well as those from the development pipeline that are delivered but not yet stabilized in one place.

We added a new column this quarter noting which properties are incumbent. On the construction front we reported a second gross profit in the second quarter of $1.8 million on revenue of $47 million. The construction company had an excellent quarter and is one of the reasons the quarter was better-than-expected.

As we announced earlier, our construction company will serve as the general contractor to Oceanfront Hotels that include over 300 rooms, a parking garage and a retail space. We expect to start construction late-summer.

While the first phase of any construction project always carries the most variability from a timing standpoint, we expect construction efforts to be in full swing in the back part of 2015 and construction completion expected in the spring of 2017. This assumption is included in our construction company gross profit guidance.

At the end of the second quarter, the company had a third-party construction backlog of $195.5 million. Now turning to our balance sheet. In the second quarter we continued to take actions to enhance flexibility and strengthen our balance sheet. We refinanced Smith’s Landing with a new $21.6 million 4.05% fixed rated loan that matures in 2035.

In addition after quarter end we closed on a $50 million construction loan to fund the John Hopkins Village project. Since the inception of the ATM continuous equity program last quarter we raised $3.8 million of gross proceeds at an average price of $10.50 per share.

The ATM program will be one of multiple options at our disposal to raise capital to fund our development activities. We expect to continue utilizing this program to raise equity at a similar place assuming favorable market conditions.

As of June 30, our fixed rate debt including swap locks was 55% of our total debt including interest rate caps, 83% of our debt was fixed or hedged.

As you can see from our outstanding debt summary on page 11 of our supplemental we had total outstanding debt of $387 million including $83 million outstanding under the $115 million revolving credit facility. Our debt metrics continue to be in line with our corporate goals.

I want to spend a couple of minutes discussing the details of the Columbus Village acquisition. The acquisition was funded by the assumption of $8.8 million of debt and the issuance of 1.275 million operating partition units.

1 million of these units will not earn or accrue dividends for 24 months, 275,000 units will not earn or accrue dividends for 30 months. The interim dividends that we have then paid at the current dividend rate equates to $1.8 million. We view this $1.8 million as reduction in the purchase price of this center.

It could also be viewed as higher valuation of the OP units. The 24 to 30 month period that dividends will not be paid also coincides with potential NOI growth at the center. Even though dividends are not being paid on these units, the total 1.275 million units will be included in our diluted share count.

Now let me walk you through our full 2015 guidance. This morning we raised 2015 full year normalized FFO guidance now $0.88 to $0.91 per share from our previous guidance of $0.86 to $0.90 per share.

We are increasing the guidance due to the performance of third-party construction business, multifamily releasing, G&A expenses, interest savings due to changes in the LIBOR forward yield curve.

Our 2015 expenses are predicated on the following; GAAP NOI at $53.3 million to $53.8 million range, including approximately $8 million from the development pipeline projects; third-party construction company gross profit in the range of $5.4 million to $5.9 million; general administrative expenses in the $8.1 million to $8.4 million range; interest expense in the $13.3 million to $13.8 million range.

This point of range reflects the assumption factors in the LIBOR forward yield curve which anticipates increase in LIBOR during the year. At 41.1 million weighted average shares and OP units outstanding which includes the units issued for the acquisition of Columbus Village.

This guidance excludes any impact from future acquisitions with the exception of the second Whetstone replacement property, this positions our other capital market activity with the exception of continuing the ATM program consistent with the second quarter assuming favorable market conditions.

Before turn to the Q&A I would like to make a few comments about the third quarter. After quarter end we closed on the Myrtle Beach shopping center which was purchased using other proceeds from the Whetstone sale. We expect to close on Providence Plaza the second swap property towards the end of this quarter which is later than we expected.

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..

Thank you ladies and gentlemen. [Operator Instructions]. Our first question comes from the line of John Guinee with Stifel. Please go ahead with your question..

John Guinee here, thank you. A couple of questions. First, obviously, you are hitting on all 8 cylinders now. Congratulations. If I look at the acquisition list, I think Providence Plaza was a 1031 exchange; Myrtle Beach 1031 exchange; Columbus Village OP unit deal; Dimmock Square in Colonial Heights OP unit deal.

The two assets in Maryland, were those OP units, 1031s or neither?.

A combination of the two John. Thanks for the question. One of the assets involved OP units, the other was acquired debt free.

Eric, is there anything to add to that?.

No. One of them was them was use of [Sentara] proceeds Center 1 proceeds so in line and consistent with the other examples that you are familiar with John..

Just a fine clarification, on one of those centers they -- the seller actually didn’t change their mind at the last minute, actually took back stock instead of OP units because they wanted to trigger their cash..

Okay.

And then the second, what have you done since the IPO on your dividend and what's your dividend thoughts right now?.

John we went from at the IPO we started with $0.16 per quarter dividend. We raised this past year to $0.17 per quarter. Now as I think you can tell our payout ratio is dropping nicely.

We are going to try and keep that in a range and as it dropped I think you would expect that one of the ways that we are going to return value to the shareholders is to evaluate raising the dividend again..

Great, okay. Hey, thank you very much..

Thank you..

Thank you. Our next question comes from the line of Dave Rodgers with Baird. Please go ahead with your question..

Maybe a multipart question. I think year to date you've spent about $40 million on acquisitions and on dispositions; and following on John's question, obviously realize there are some 1031s in there. But you have $75 million left to spend this year and you're talking about a building pipeline.

Can you kind of talk about various funding sources; how much do you plan to sell in the second half; how much can you tap on the ATM and kind of what your thoughts are to continue to help support the growth of the business?.

Sure. Thanks Dave, I will try and take that one at a time. As Mike and I have mentioned a couple of quarters ago, we have a long history of selling these single user assets from time to time and we had a half-dozen or so of those in the portfolio.

So with the announcement this morning that what we are doing with Oceaneering I think you can expect that to be one of the vehicles that we will use for funding going forward. With regard to the ATM, basically with we expect as Mike said to stay in that range that we are in -- we have been in for a quarter or so. We want to be very cautious with it.

It's a $50 million program. We would like to think that the remaining $46 million is going to be a lot closer to our NAV, but we are going to be averaging in on a cautious basis as market conditions allow. With the new projects that are lining up, we have got some really exciting stuff, we can't wait to talk about it.

There are opportunities through joint ventures to help us with funding there. Mike and I are very confident where the balance sheet sits today. There is a tremendous amount of NOI yet to come on line that are going to keep our metrics in line. So we feel pretty comfortable with where we sit..

And maybe a follow-up to that for Mike with regard to kind of current capital.

I guess assuming no dispositions or no ATM issuance, how comfortable are you on the capital front in terms of what your runway is for spend here in the second half and early 2016?.

Dave we are comfortable with it. You can see what kind of NOI and EBITDA growth we get in here and so that's obviously going to support more debt. Moreover as we have said we like to be core debt to core EBITDA to be in the 6x something range and total debt to EBITDA in the 8x something range.

That's where we currently sit and the way we look at things with the growth and EBITDA and the development spending, at what we have released so far is not that big for the rest of the year. So we are comfortable with where we sit today..

Okay. I think in your prepared comments, you said something about a G&A benefit to earnings.

Is that just better cost controls or is that more capitalized overhead, or did I not hear that right?.

No we have lowered the range. We have put out the G&A budget beginning the year obviously. We had to make some assumptions what we were going to do with legal, accounting and personnel and you know it’s not -- we are coming in lower than the higher that we would have expected.

You know obviously the big piece is for us and what's been driving the higher G&A over the past year is mainly accounting and as we start to Sarb-Ox compliance ramp up. So that's the biggest piece we had to get our hands around and keep control..

Last question for me. And Lou, I ask every quarter, but I will ask again. In terms of Main Street office, the traffic you are seeing there, I know this is a project you are hoping to have a couple years worth of inventory out of, but I'm sure the rest of us would like to see it leased up.

So what's the update on that?.

Yes, Dave, as we have talked many times before that building is positioned as the premier building in the 1.8 million person MSA and as such it is going to take rent payers at the up of mid-high of the market. We have targeted three or four firms that have rollovers in 2016 that we feel really comfortable. We will ultimately locate in [4525].

We have had a tremendous amount of tours go through but as I have said before, this is a building that's 80% or so of the market cannot consider. That it takes those firms that need the presence and see the value in being in that address in town. So we feel pretty good about where it's at.

We also just this past couple of weeks ago, the last of the ground floor tenants opened Tupelo Honey Cafe. So the retail now of all 30,000 feet is off and running and doing great sales..

All right, great. Thanks for the update..

Thank you. Our next question comes from the line of Craig Kucera with Wunderlich. Please go ahead with your question..

Thanks. I know you mentioned you were brokering Oceaneering for sale, and right now it seems that you are getting some of the more attractive interest and bids coming on your multifamily. You had an unsolicited bid for Whetstone.

Does it make sense to sell out of multifamily given the current environment, reinvest into retail or mixed use, or do you want to maintain your multifamily exposure?.

That's a great question, Craig. I am glad that you brought that up. We talked a lot at our IPO as well as on our subsequent road trips about our need to stay diversified. When you do the niche that we are in the public-private partnerships and when you approach cities about remaking the skylines a big part of that is multifamily.

Heads and beds are required in order to attract retail and office and basically a general sense of place. So in the case of the two assets Town Center for instance, those are integral to the success of the overall 1 million square feet that we have for lease here. So it's unlikely that our core multifamily work that we would get rid of that.

I suspect they would command quite a number but the short-term gain would be offset by what we view as long-term value disruption. So I don't see that happening. However as you can see by our short history we are not afraid to redeploy capital in non-core assets.

So to the extent that those are multifamily projects which is quite possible then I think you will see further dispositions in the future if we take advantage of that market that you mentioned..

Got it. And then also I wanted to get a little bit more detail on the structure of the Columbus Village acquisition where you had a buyer not taking dividends for a number of months.

Are you finding that structure common where the seller is willing to avoid income for a while, or do you think this is probably more likely a one-timer?.

It's -- really I can answer your question in a number of different ways. I don't think it's difficult for people to take millions and millions of dollars in stock or OP units as you look across the broad universe of REITs.

I think that if I may be so bold we have a tremendous reputation in this region that's been built over 35 years from the inception from Dan Hoffler and there is a lot of people that want to be a part of that story and feel very comfortable about managing their wealth.

You have seen that manifest itself a few times and now you are seeing it in a big way at Columbus Village. This is someone that did a tremendous amount of research on our company, actually some of it surreptitiously, sending some money managers in to interview us.

So I don't think it's typical, but I think you'll see it continue with us in this region. It's a great tax planning tool, but tax planning only works if you feel comfortable with the investment that you are making. You have to make the money before you got to worry about paying the tax, right. So I see that continuing for us.

I think it's a great venue for us and actually we have got several things in predevelopment that may involve additional taking of stock. The way this was structured, just so everybody knows, as you might expect we have created quite a market around Town Center for the adjacent real estate.

And so you're talking about cap rates that are in the low 6s and in some cases high 5s. We bought this center with an eye towards redevelopment. We feel very comfortable that we will ultimately be able to get this well into the 7s once we do redevelopment and in fact we were paying the owner to not take advantage of the immediately available upside.

All of the tenants that are in there are looking to re-up for a long-term basis at a significant bump. We are effectively paying -- pay the owner to not do that and part of the rationale of the delayed dividend was to give us the time to evaluate whether or not we could do something even better.

And if not, we will just take advantage of what was being offered..

Okay, great. Thanks, appreciate the color..

Okay. Thank you all for listening to the call. 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..