Michael O'Hara - CFO Louis Haddad - CEO Eric Smith - CIO.

Dave Rodgers - Robert W. Baird John Guinee - Stifel Rob Stevenson - Janney Montgomery Scott Craig Kucera - Wunderlich Securities Laura Engel - Stonegate Capital Partners.

Welcome to Armada Hoffler's First Quarter 2017 Earnings Conference Call. At this time, all participants are in a listen-only mode. After management's prepared remarks, you will be invited to participate in a question-and-answer session. [Operator Instructions]. As a reminder, this conference call is being recorded today, Tuesday, May 2, 2017.

I would now like to turn the conference over to Michael O'Hara, Chief Financial Officer at Armada Hoffler. Please go ahead..

Good morning and thank you for joining Armada Hoffler's first quarter 2017 earnings conference call and webcast. On this call this morning, in addition to myself, are Louis Haddad, CEO; and Eric Smith, our Chief Investment Officer, who will be available for questions.

The press release announcing our first quarter earnings, along with our quarterly supplemental package were distributed this morning. A replay of this call will be available shortly after the conclusion of the call through June 2, 2017. 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 2, 2017, and will not be updated subsequent to this 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 we have filed with or furnished to the SEC.

We will also 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'm now turning the call over to our Chief Executive Officer, Louis Haddad.

Lou?.

Thanks Mike. Good morning everyone and thank you for joining us today. Today we reported first quarter 2017 results of $0.26 of normalized FFO per share which is in line with our expectations and our per share guidance for 2017 is unchanged.

As we said at the beginning of the year, we remain very focused on delivering the tremendous growth expected from our development pipeline, with delivery commencing a couple of quarters from now and meaningful earnings growth thereafter. We believe these top quality assets constitute significant value creation for our company.

To that end I have several exciting updates to share with you regarding our development projects. Let's begin with the latest additions to our pipeline and work through to those closest to completion. Last month, we announced $100 million development of two student housing projects on the historic Charleston Peninsula.

Brand assemblage and the lengthy entitlement process were performed by our local partner Spangle Development, and we expect to break ground this summer. Market research indicates there is currently a shortage of over 5,000 beds for this type of housing.

We will deliver over 600 new beds within one mile of the College of Charleston and in close proximity to five other schools in this sought-after district. With these two projects, we will be the largest developer and owner of off-campus student housing in Charleston and we look forward to becoming a major player in this high barrier to entry market.

Next is our new office building at Brooks Crossing which is essentially a 100,000 square foot build to suite for Huntington Ingalls, a Fortune 400 Company. The design for this 100% pre-leased building is well underway and we expect to break ground by the end of summer.

This state of the art facility will house nearly 600 employees when opened in the fourth quarter of 2018. This building should be a great catalyst for further development in this public/private partnership with the City of Newport News.

Our Harding Place project in Downtown Charlotte is well underway and we are very pleased with the occupancy and rent growth that the submarket continues to display. Construction of Phase VI of the Town Center Virginia Beach is now in the vertical stage and is tracking for delivery next summer.

The 10-pillar block will have a variety of entertainment options as well as exciting new retailers and loft style apartment homes. The Town Center Virginia Beach continues to be our flagship project and we are currently pursuing further expansion of this pre-eminent development.

The Point Street and Annapolis Junction multifamily project in Maryland are both on track to be delivered later this year. Given their prime locations and compelling market dynamics, we are excited about these projects and fully expect to exercise our cost purchase options.

Perhaps most significant is the leasing progress at One City Center in Downtown, Durham. Recently we entered into an LOI for a large block of the remaining office space. Assuming leased execution, this commitment along with the Duke University anchor lease will ensure that the building opens in summer of 2018 with office occupancy of at least 90%.

All told, the total cost of the projects in our current pipeline approaches $440 million. Given our history of delivering healthy wholesale to retail spreads of around 20%, we expect that these projects alone will add some $90 million to NAV a well over $1 per share on a fully diluted basis over the next few years.

Remember this does not include many other exciting development opportunities that we continue to explore in virtually all of our existing markets as well as new areas within the region. However, I believe it is important to note that we continue to be very selective and decline the vast majority of opportunities presented to us.

The standards we use to evaluate whether to deploy our precious capital on a new project remain and will continue to be exceedingly strict. All of these decisions are considered in light of our position as far and away the largest equity holder in the company.

In addition to this robust development activity, we are very pleased with the performance of our existing portfolio.

Although there will be very little impact on the current year, the new 40,000 square foot tenant at 4525 Main, combined with the existing Town Center tenants who relocated, upgraded, and expanded into this building, will bring occupancy to over 93%. We have achieved our goal of holding rents at this the Premier address in the region.

Nearly as significant these relocations created vacancy and lower price point space elsewhere in Town Center that appeals to a wider variety of perspective tenants. To this end, four new tenants are poised to sign leases that start to backfill second generation space.

We are well on our way to bringing office occupancy at Town Center back to its historic level in the mid-to-high 90. On a separate note, we feel confident that once the necessary disruption caused by the construction of Phase VI is mitigated, the multifamily component will retain to its normal mid-90s occupancy level.

The rest of the portfolio continues to perform well; in particular, our retail assets continue to increase in both occupancy as well as same-store sales. As most of you know our concentration for this sector is in high volume well-located grocery anchored shopping centers.

We have always avoided malls and department stores and limited our exposure to big box retailers. This strategy has served us well for nearly four decades in our target markets in the Mid-Atlantic and Southeast we feel that the high quality food anchored model will continue to be strong for the foreseeable future.

In this regard, we are actively pursuing the expansion of this line of business. Recently, we entered into an agreement with S.J. Collins, a seasoned developer of high quality grocery anchored retail centers to deliver a whole food center in Decatur Georgia.

We are hopeful that this relationship will lead to more opportunities with both this developer and exclusive retailer.

Lastly, our construction company continues to exceed even our lofty expectations both from a cost control and schedule basis on our own projects as well as producing profits at the high-end of our historical range in the third-party business.

Many of the complex projects we take on and financial structures we employ are made possible by this unique expertise, we enjoy relative to our peers.

In closing, our business model has served us well for nearly four decades with a growing stable of trusted and light minded development partners; we have been able to increase our development run rate without compromising our core underwriting criteria.

Premier locations, credit quality anchor tenants, accretive returns, and healthy wholesale to retail spread. The sheer volume of opportunities allows us to select only the most attractive project to diligence and then only a fraction of those are pursued in earnest.

With this combination of opportunities and execution along with the performance of our properties should be easier to see why we're so optimistic about the continued growth of our company. At this time, I will ask Mike to walk through the details and key assumptions underlying our first quarter results and 2017 guidance..

total NOI in the $73.7 million to $74.2 million range, third-party construction gross profit in the $5.6 million to $6.3 million range, general administrative expenses in the $10.6 million to $11 million range, interest income from our mezzanine financing program in the $6.7 million to $6.9 million.

This was an increase from last quarter, and as Lou mentioned, we entered into an agreement with a Whole Foods developer. The initial step for this developer is funding equity on this project under our mezzanine loan program. At the end of the quarter, the average balance of these mezzanine loans are $61 million.

Interest expense in the $18.5 million range and 57 million weighted average shares outstanding. Now turning 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. [Operator Instructions]. Our first question comes from Dave Rodgers with Robert W. Baird. Please proceed with your question..

Hey, Lou. I just wanted to talk about 4525, I know that came together may be a little bit more quickly than you would have hoped to.

Who has really anticipated as you had looked for some vacancy, how much -- how many of the wholes you will have to kind of backfill you said there is four new tenants does that kind of fill the substantial vacancy left behind and just any more details on the lease of 4525 because I don't think it shows up in the supplement yet? Thanks..

Sure. First, on the large lease that we talked about last quarter the 40,000 square foot lease which I believe it's a 12-year lease that's there it's a software company that's really excited about that's growing by leases down here in area.

With regarding to the backfill, Dave, the best way to look at this unfortunately we are kind of trapped by what's in the portfolio and what's in development but not stabilized yet and all that kind of things. The best way to look at it is Town Center has about 800,000 square feet of office space. Right now there's about 80,000 square feet of vacancy.

So our historical norm has been in the mid-90 so we've got about 40,000 some thousand square feet to lease, couple of those new, the new four tenants are about 20,000 square feet. I think two of them are already in the number that the occupancy number that I quoted two of them are not.

We have about 35,000, 40,000 square feet of space to lease to get to that 95% mark..

In addition to the four leases you just talked about?.

Correct..

Got it, okay..

It's spread across five buildings..

Got it, okay. And then I guess with regard to -- you had talked about Charleston previously and now looking at the Decatur project are you comfortable continuing to expand the footprint of the development business and the ownership operation after that.

I know you're continuing to look at new market in addition to where you have just added here in the near -- in the recent past..

Thanks for that question Dave; I will make sure that those on the phones know our history. We are experienced over the last four decades in 13 states up and down the East Coast. The markets that we're talking about now be it a Charleston or Georgia or Central Florida those are all markets that we're familiar with and have done business in before.

So it's really not new for us, especially with the kind of luck of is well when we became public that we were very much Virginia centric. So these are not really an expansion of our footprint from our historical norm..

Great.

And then may be last question for me, Mike you talked about dispositions and the guidance, I might have missed the number you said the third quarter disposition, I missed the number if you said it, if you didn't may be give us a little context around the types of assets that you expect to continue to sell and as the development pipeline continues to grow could we see that disposition number growth throughout the year?.

Hey, good morning, Dave. This is another small sale like the Valva we're taking a look at the single tenant one-off type buildings non-essential to our business, so this sale is the Courthouse 7-Eleven, it's not a big asset but it's going to be proceeds in the $2.4 million.

The other things we're looking at the other single tenant office buildings that we have discussed in the past..

Okay.

But the only thing in the guidance is the first quarter sale of Valva and then this small disposition of the third quarter?.

Correct..

Thank you. Our next question comes from John Guinee with Stifel. Please proceed with your question..

Great, thank you. Okay. Couple of questions though, one on retail and the other on your mezz business, you mentioned Lou that you got $400 million in the pipeline on page 16 of which you have the benefit of exercising purchase options at cost. That and there is lot of values creation, that's the good news.

The bad news is it takes a lot of equity to do it, can you do this all with ATM equity issuance or how do you plan to fund $400 million of purchase option?.

Yes. Couple of answers there and then I will let turn it over to Mike for a little bit more specifics. First, on as we said before we're not certain that we won't monetize a couple of the assets as well as dispositions from the stable portfolio. Secondly, the ATM is operating very well, we continue to use that.

Thirdly, aside from the two large mezzanine projects that will be purchased, the rest of the projects are being funded on balance sheet and so we're keeping within our norms regarding that.

Mike do you want to add anything to that?.

Yes, couple of things on the balance sheet, John. So at quarter end year, our debt metrics are at the low-end of our corporate goals, right, our core debt-to-EBITDA six times and our overall debt-to-EBITDA at 6.5 times.

And where we sit today is if you take a look at the development projects we have delivered, the mezzanine loans and the City Center joint venture we have funded 90% of all that equity there including the Decatur mezz loan. So from that standpoint, we have funded all that.

So what we're looking at now are the projects that are coming out of the ground right now. We have got two that are just coming out of ground and have the other three in pre-development. So those are not going to start hitting the balance sheet till late this year.

As we discussed we have got until as late as 2019 to exercise our options on the other property. So from that standpoint, John we feel pretty good about it..

Got it. Okay. Then the second thing is you basically have done a great job of 1031 exchanging out of single tenant office buildings into Food Drug anchored retail centers up and down the Mid-Atlantic.

Can you talk about your ability to keep these retail centers full and potentially what's happening with rental rates right now in your world of retail?.

Sure. John we've had really good same-store sales growth in our retail portfolio. As I've mentioned several times before see obviously grocery anchorage shopping centers that have very high sales volume and when you have high sales volume you can keep your small stock full and expand. We don't see any interruption in that across the portfolio.

So we believe that model is going to continue to be very strong in our markets and as I mentioned we’re going to look to continue to expand that. I think you still might see some 1031 activity with a couple of projects that Mike mentioned. But that's going to continue to be a focus for us.

Mike?.

Yes, so John the other thing is re-leasing spreads this last quarter are really strong, so on retail re-leasing spreads were positive 7% on GAAP and 6% on a cash basis and included in there we're seeing some of our tenants pick up the option like this past quarter we had Food Lion, Regal, P.F. Chang's pick up their options this past quarter..

Thank you. Our next question comes from Rob Stevenson with Janney Montgomery Scott. Please proceed with your question..

Thank you.

Lou you had a couple of questions here on retail and just one more here, I mean as you think about the sort of future funding requirements, how are you thinking about the retail portfolio strategically today as potentially a source of capital especially where -- where do you think that those assets monetized and how does that compare to the cost of capital that you're rising on your ATM these days.

If you wanted to sell grocery anchored strips that are made what does that look like for you in terms of market pricing and liquidity levels there to be able to do something like that versus the stock price falls and the pricing your ATM goes off?.

It's a great question Rob. This is something that we spend an awful lot of time on and we continually evaluate.

Right now as you know our cost of capital in our world is high and so therefore we always want to evaluate whether or not, it makes sense to raise equity to continue to expand the portfolio versus read some of the low cap rates projects that we have in the portfolio.

We're going to continue to do that and I would see there is so many dynamic factors of what's going on. I would tell you that there is two lenses that we look at, that we have looked at for a very long time as you guys know it's my 33rd year here.

The first lens is the right real estate, we’re getting what I will do is we are getting what the market is expecting and the like.

The right real estate decisions is always do upgrade your portfolio and so anytime that we're looking at bringing something in be it a development project or a mezzanine project or an acquisition rather than just saying let's add to the mix.

We want to look at and see if there are candidates who get rid of at that same point of time through a 1031 or adding into the balance sheet in order to further upgrade the portfolio from an NAV basis. And secondly and perhaps even more clear we are as I mentioned barring away the largest shareholder and so we’re always looking at solution as well.

There is no benefit to us expanding the company for the sake of expanding the company. The benefit is all in getting accretive share price, continuing the rate of dividend in a responsible basis so that we can always hire happy so many..

Well I guess said another way, is a well leased food anchored or Food Lion anchored grocery center ever worked more than right after Food Lion extends its lease?.

That’s a very good question, again the goal of beyond those numbers into what those sales are doing, the Food Lion centers that we have that we continue to operate as we mentioned Food Lion has picked up their options, pick up those options because there is high sale for Food Lion. When there is high sale then we get good growth in our small shops.

And as Mike mentioned the re-lease in spreads are pretty favorable. That said we're continually looking to upgrade the portfolio and as much as Food Lion has been good to us, that is not a name that we want to have large concentration in. So you may well see us repost that..

Okay. Anything that should meaningfully positively or negatively impact same-store NOI growth over the remainder of 2017.

In other words should the full year 2017 NOI growth be roughly in line with the 1% GAAP, 2% cash that you guys reported in the first quarter here or is there something that we should be mindful of that impacts over the final three quarters is going to move that around up or down meaningfully?.

Thanks again for another great question. So there is two -- there are two anomalies that Mike and I believe are going to affect same-store sales later on in 2017. One is in multi-family, as we mentioned we've got a pretty significant amount of disruption right in front of the cosmopolitan apartments here at Town Center.

Occupancy fell this past quarter and is now in the mid-80, we expect that to continue to be a drag until we at least can close in the construction of the new phase which won't be until fall, if not later. So I think we're going to see some if not negative some drag on same-store sales in the multi-family sector due to that one building.

In the office space, there is another, another in that we took 30,000 feet of tenants out of the same-store sales part if you will and turned them into 40,000 square feet of tenant in building that is not in same-store sales.

When the whole office portfolio is only 900,000 square feet and you're going to have a meaningful drop we think in same-store sales if not in office in subsequent quarters. So obviously there are not things that -- these are things that are positive for us long-term.

So we're not too concerned about them but it’s going to look a little weird in numbers for the next couple of quarters.

Mike just got through saying that we had our 11th consecutive quarter of same-store sales increase; we have got a bad year as to whether the next quarter or the following quarter that trend start to reverse because of what I just said..

Okay.

And then one quick one for Mike, are you waiting until 2018 to adopt the new acquisition cost looks like you still had a moderate amount of acquisition cost that were expensed in the first quarter here?.

No, we adopted that in the fourth quarter. We just this past quarter where I think was like $40,000 of miscellaneous things that came through that we just ran through there without capitalizing that cost..

Thank you. Our next question comes from Craig Kucera with Wunderlich Securities. Please proceed with your question..

Yes, good morning guys.

I don't know past you were, you were discussing how the cost of swapping from your debt had moved around quite a bit and become a lot more expensive but can you give us an update on how things are looking today and as you look towards the fourth quarter when you've got another maturity how you're thinking about managing that -- managing your variable rate that going forward..

Hey, good morning Craig, yes this, we've seen a cap pricing kind of go up and down depending on what's the latest -- latest news summary we'll continue to monitor that by the caps when we see the right time and the cap we just bought last you know this past quarter and we thought we got a good pricing on, on that one as well.

The other thing were going to evaluate is we've kept the LIBOR caps at 150 is whether or not depending on pricing as LIBOR goes up, we move those caps up to 175 or so. We have one cap that we got another year plus on that caps LIBOR it's a 1% that looks like will be in the money on that one.

I had been joking around like right we said about $20 million worth of that one is that we bought that 1% cap, take cost 140 grant for that one..

I think you, I think Craig add another -- add a note there as long as the long end of the curve stays flat like it’s been, I think you will see us quote a couple of projects away on permanent debt as well as Mike has said in the past, we look at the debt holistically and no matter how well hedged or capped we are we want to keep a nice mix of long-term debt as well..

Thank you. Our next question comes from Laura Engel with Stonegate Capital Partners. Please proceed with your question..

Good morning and thanks for taking my questions. I guess first is a follow-up I didn't hear did you comment on the timing of those new I think you said four potential leases for Town Center as far as we’re well into this next quarter can give us a little bit of an idea on that as well as how long that will take wrap those up..

Sure, two of them actually have been signed, the other two we expect to be signed during the month of May but and the doubt is that while that those numbers obviously go into our quarter occupancy numbers, we don't expect really any impact in 2017 speak off due to the refit of this space.

So is this all kind of geared towards really hit the ground running in 2018 with a significant amount tenant being kicking in towards the end of the year..

Okay. And then you gave some detail discussing the construction company business and the increased guidance. The cost savings that you mentioned this quarter is that something you expect to see going forward as far as margins on that business..

That one is a bit of an out wire because of the size of it. As Mike said it was $180 million contract and we get some fairly outside savings that believe our share was in the high six figure.

Typically they're not that large but and we really don't are -- we aren't forecasting another large contract or any kind of meaningful savings for the rest of the year.

So a bit of an outlier as obviously taking our earnings to new heights in the construction company as companies continued to see hit on all cylinders and seems like every time we increase expectations those guys increased them again for us..

Right and I agree. Okay. And then lastly I was just going to comment Decatur Georgia [indiscernible] for that exciting news and I'm sure you'll all do better. Thanks for taking my questions and I'll get back in the queue..

Thanks very much. We're very excited about Decatur and as I mentioned the relationship with that developer is I think extremely confident developer that we've known of for several years that I've known for several years as well as a great name in the space that we want to be in and so we're hoping to have further announcements in that regard..

Thank you. There are no further questions at this time. I would like to turn the call back over to Lou Haddad for closing remarks..

Thank you everybody for your interest in the company and your time that you spent with us this morning. We look forward to updating you on more exciting activities or results over the course of the year. Take care..

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day..