AHH - Armada Hoffler: Stable As A Rock

2023-05-18 00:13:13 ET

Summary

• Armada Hoffler’s guidance range is $1.23 to $1.27 per diluted share of normalized FFO for the year.
• AHH’s quarterly growth rate has stabilized in the mid-single digits, and the other income stream, construction is also stabilizing.
• The management emphasized several times that they intend to keep the current dividend policy in the future.

Armada Hoffler Properties, Inc. ( AHH ) effectively uses superior quality and synergy of its property portfolio to achieve growth where its peers have experienced shrinking. In the first quarter, they achieved significant growth in same-store sales and maintained an occupancy rate of approximately 97%. Despite the loss of Bed Bath & Beyond Inc. ( OTCPK:BBBYQ ), the company signed several other deals and the construction side of AHH’s business is stable.

Business Model

Armada Hoffler is a real estate investment trust that manages itself and has been an industry leader for 40+ years. It specializes in constructing, acquiring, and managing commercial, retail, and residential properties across the Mid-Atlantic and Southeastern United States. Aside from constructing properties for its account, the company also offers development and general contracting services to its external customers. They integrated the retail, residential, and office spaces to maximize the return on each property. Sometimes they even convert retail spaces into residential properties to capitalize on the demand. Both the current and the projected portfolio are well diversified with fortyish percent retail share, 35% office share, and twentyish percent multifamily share.

Q1 Earnings

The first quarter's earnings were $0.30 per share, which was in line with the predictions and reaffirms the management’s guidance for the whole year. AHH also sticks to its guidance range of $1.23 to $1.27 per diluted share of normalized FFO for the year. The portfolio has been able to achieve significant growth in same-store sales, along with healthy releasing spreads, and maintained an occupancy rate of approximately 97% across the portfolio. In terms of leases the Bed Bath & Beyond Inc. bankruptcy has affected AHH. They had a lease with the company and after the bankruptcy, the management is thinking of two options. One option is that Bed Bath & Beyond stores will reopen, which unfortunately means that the two locations will be generating less rental revenue. The other option is that the Bed Bath & Beyond space at Town Center will be converted into ground-floor retail and apartments above it because there is significant demand for multifamily apartments at this location. Other significant news was that AHH was able to agree with KPMG, securing a long-term lease in the complex located in Town Center, Virginia Beach.

AHH’s quarterly growth rate has stabilized in the mid-single digits, and I anticipate that this trend will continue in the upcoming months. This is because its assets are situated in areas that offer walkability and a mix of uses. During economic unrest and elevated stress levels, complimentary property types have performed especially well as we have seen in the last year. The other income stream of AHH is also stabilizing. Construction prices have plateaued and aren't seeing the double-digit increases that were previously seen. AHH’s construction company is doing almost exclusively third-party client constructions and is remaining very active, partially because wood prices have come down substantially over the last six months. The only construction it is doing for AHH is the T. Rowe Price building.

At the beginning of May, the management announced its planned purchase and recapitalization of the Interlock mixed-use asset located in West Midtown, Atlanta. They are expecting to fund the acquisition with an amount of $100 million through unsecured fixed-rate financing. This transaction will allow the company to achieve several objectives at once, such as reinforcing its diversified portfolio with another trophy-quality mixed-use asset in the region plus other assets around it. It will also help the company establish a strong presence and make big investments in the top growth markets of Atlanta. The company will further reinforce its existing dominant market position in Baltimore's Harbor Point and Virginia Beach's Town Center.

I think the biggest risk for AHH is its heavy reliance upon floating rate debt in this rising rate environment. Although the Fed has signaled that the May interest rate increase could have been the last. Roughly 40% of AHH’s debt is a variable rate and the weighted average maturity is at approximately 5 years. The management has been transitioning the balance sheet towards long-term fixed-rate unsecured debt and also heavily using hedges. However, many of these hedges expire in 2023 and 2024, and within the still high-interest environment, the company could face higher interest rate expenses until the base rate starts to normalize.

Valuation

AHH appears to be trading at attractive levels with a forward P/FFO of 11.51 based on the management’s guidance. This has increased in the last months from approximately 10.7-10.8. AHH's fundamentals are in great shape, and when assuming a conservative long-term FFO per share growth rate in the mid-single digits the company appears to be undervalued. Its price-to-book value is sitting on tempting levels for investors at 1.67x despite it trading well above its book value. The company also has a strong balance sheet with a debt-to-adjusted EBITDA ratio of 5.4x.

Dividend

AHH has been a stable dividend-payer REIT since its 2013 IPO . The management has been increasing the dividend until the pandemic, then it was cut but with the recent increase, the dividend is almost back at the pre-pandemic $0.22 per share level. Armada Hoffler is yielding 6.85% on its common shares and the dividend is well covered by FFO and AFFO. Armada Hoffler's Board of Directors has declared a cash dividend of $0.195 per common share, representing an increase of 3% from the prior quarter. The management is clear about its dividend policy, both the intention to maintain and raise it.

“This modest dividend increase of just under 3% maintains our AFFO coverage ratio in the 80% range and cannot only be attributed to our portfolio's performance but also our strong balance sheet.” Matthew Barnes-Smith - CFO

The management also emphasized that they intend to keep the current dividend policy in the future.

“We have every reason to believe that… the dividend rate will continue the trend” Lou Haddad – CEO

Final thoughts

AHH is a rock-solid REIT company that uses the synergies in its property portfolio to achieve above the average earnings and FFO. Its valuation is attractive, its dividend is stable, and the fundamentals are solid. I believe that the company could be an ideal choice for long-term income-seeking investors.

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