AHH - Armada Hoffler's 6.5% Yield Is A Gift For Dividend Investors

2023-08-04 08:10:00 ET

Summary

• Armada Hoffler Properties is a self-managed REIT that offers a 6.5% yield and is undervalued.
• AHH has a strong occupancy ratio of 97% across its portfolio, with healthy lease renewal spreads and a growing asset base.
• The company is trading at an attractive valuation, with a forward P/FFO of 9.6, and management has launched a $50 million buyback authorization, indicating confidence in the stock.

Real estate remains a top way for everyday retail investors to accumulate sustainable wealth and income. For those who don’t have millions laying around to do individual deals, REITs are the next best alternative considering that they have a professional management team in place to generate positive returns for you.

While many investors are focused on more popular names such as Realty Income ( O ), there’s also value to be had in lesser-followed names that sport higher yields. This brings me to Armada Hoffler Properties ( AHH ), which currently throws off a 6.5% yield.

I last covered AHH here back in February, noting its high occupancy and strong operating fundamentals. In this article, I provide an update and discuss why the stock looks attractive at current levels, so let’s get dive in.

Why AHH?

Armada Hoffler is a self-managed REIT that was founded in 1979 and is diversified across high quality multifamily, office, and retail properties in the Mid-Atlantic and Southeastern parts of the U.S. What separates AHH apart from other REITs is that it also provides general construction and property development services to third party clients.

While there is complexity risk when it comes to a diversified portfolio, successful companies can work that to its advantage, by having the optionality to invest in higher growth areas without being constrained by a ‘pure-play’ mandate to own a single property type.

AHH’s success is reflected by its strong occupancy ratio of 97% across its portfolio during the second quarter, with multifamily being at 96%, office at 96%, and retail occupancy at a strong 98%. AHH is also seeing strong lease renewal spreads, signaling healthy demand. This is reflected by GAAP and cash renewal spreads of 8.9% and 7.3%, respectively, during the second quarter. This contributed to same-store NOI growing by 4.8% YoY on a GAAP basis and 2.9% on a cash basis.

Also encouraging, AHH’s 3 ^rd party construction backlog is at a healthy $593 million, and AHH just topped out T. Rowe Price’s ( TROW ) new global headquarters building in Harbor Point, with completion expected by the third quarter of 2024. AHH also committed an aggregate $75 million of new investments across the growing multifamily segment in the Atlanta and Coastal Virginia markets. This marks continued expansion for AHH, as its grown its asset base by over 5x since IPO in 2013.

Management seeks to fund this growth in part by trimming some of its office portfolio, which management noted as being trophy assets with many Fortune 500 tenants and luxury apartments. This would enable it to expand into higher growth Southeast markets, as mentioned earlier, and deleverage the balance sheet.

Risks to AHH include execution risk as it relates to its developments, in which cost overruns can hamper returns. Also while its debt service and fixed charge coverage ratios are reasonable at 2.7x and 2.3x at present, there is certainly room for improvement to get to a safer level of over 3.0x. This could be achieved with a stabilization of developments, and management expects to achieve a net debt to EBITDA ratio of 5.5x when its development pipeline starts to produce cash flow.

Meanwhile, AHH maintains plenty of liquidity with $130 million on hand to cover its remaining cash requirements for developments in 2023. It also has no debt maturities this year, and just a small amount of debt maturing in the 2024 - 2025 timeframe, at which time management expects to pay off.

Importantly, AHH currently pays an appealing 6.5% yield that’s well-covered by a 63% payout ratio. Notably, 34% of AHH’s dividends from 2022 was classified as return of capital for tax purposes, due to depreciation considerations on its property developments. Also interesting, it would take the S&P 500 ( SPY ) 23 years to reach the same yield as AHH today, based on its 1.45% yield and 6.9% 10-year dividend CAGR.

Lastly, I see value in AHH at the current price of $12.05 with a forward P/FFO of 9.6. This is considering the healthy lease spread and strong occupancy in Q2, with the expectation of at least low single digit annual FFO/share growth going forward. At this low of a valuation, AHH doesn’t have to generate high returns on its property portfolio in order to produce meaningful growth for shareholders. Management apparently also thinks that the shares are cheap, as it recently launched a $50 million buyback authorization on its common and preferred shares.

Investor Takeaway

Armada Hoffler is a self-managed REIT that’s trading at an attractive valuation considering its high portfolio occupancy and strong lease renewal spreads. Its diversified asset base positions it well to capitalize on higher growth markets in the Southeast, and management also sees value in its own stock with a $50 million buyback authorization. At the current low valuation, AHH doesn't have to outperform in order to deliver meaningful returns for shareholders. As such, AHH is currently a decent value opportunity with an appealing 6.5% yield.

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