Participants
Chelsea D. Forrest; Director of Corporate Communications, IR & Marketing; Armada Hoffler Properties, Inc.
Louis S. Haddad; Vice Chairman, President & CEO; Armada Hoffler Properties, Inc.
Matthew T. Barnes-Smith; CFO, Treasurer, Corporate Secretary & Principal Financial Officer and Principal Accounting Officer; Armada Hoffler Properties, Inc.
Shawn J. Tibbetts; COO; Armada Hoffler Properties, Inc.
David Bryan Rodgers; Senior Research Analyst; Robert W. Baird & Co. Incorporated, Research Division
Joichi Sakai; Equity Research Analyst; Singular Research, LLC
Peter Dylan Abramowitz; Equity Analyst; Jefferies LLC, Research Division
Robert Chapman Stevenson; MD, Head of Real Estate Research & Senior Research Analyst; Janney Montgomery Scott LLC, Research Division
Unidentified Analyst
Presentation
Operator
Good morning, girls and gents, and welcome to the Armada Hoffler Fourth Quarter 2022 Earnings Conference Call. (Operator Instructions) This name is being recorded as we speak, Tuesday, February 14, 2023.
Chelsea D. Forrest
Good morning, and thanks for becoming a member of Armada Hoffler’s Fourth Quarter and Full Year 2022 Earnings Conference Call and Webcast. On the decision this morning, along with myself, is Lou Haddad CEO; Matthew Barnes-Smith, CFO; and Shawn Tibbetts, COO.
Louis S. Haddad
Thanks, Chelsea. Good morning, everybody, and thanks for becoming a member of us as we speak. In addition to analysts and traders, there are a lot of of the Armada Hoffler household and three way partnership companions on the decision. On behalf of our Founder and Chairman, Dan Hoffler, the Board of Directors and government administration, we sincerely thanks for being part of our workforce.
Matthew T. Barnes-Smith
Good morning, and thanks, Lou. What a 12 months. I’m extraordinarily proud to be a part of the Armada Hoffler workforce that continues to outperform all expectations.
Shawn J. Tibbetts
Thank you, Matt. As Lou indicated, the corporate’s 2022 efficiency was the strongest throughout the board from a KPI standpoint in its 43-year historical past. That mentioned, we are actually targeted on 2023 targets and the groups at Armada Hoffler stays hyper-focused on execution and operational excellence to make sure that the constructive pattern continues, and that worth creation stays prime of thoughts. We imagine that best-in-class execution all through the portfolio, protected and dependable development providers mixed with seamless execution of high-quality improvement initiatives will proceed to create sustained shareholder worth for years to return.
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Question and Answer Session
Operator
(Operator Instructions) Your first query comes from Dave Rodgers of Baird.
David Bryan Rodgers
Yes. Congratulations on the debt score. I do know you have been engaged on that for some time. Maybe begin with Lou and Shawn with respect to the acquisition pipeline and the OP items you’d wish to use, a few ideas there or questions. First, are you able to give us a little bit bit extra element perhaps on what you are seeing? Is this extra distressed out of the non-public facet, extra conventional relationships that you just had, would that quantity that you just gave embody Interlock. And perhaps the third query on that might simply be, as you concentrate on type of deploying the fairness there, is there one other supply of capital, both assumed debt or another level that might type of fill within the clean for us?
Louis S. Haddad
So as I discussed beforehand within the name, we have recognized just a few alternatives that principally are from — come from long-term relationships — of us that personal properties that we would be very excited by buying, once more off-market and on the proper quantity with the chance to extend NOI.
Operator
My apologies, our final caller has been faraway from the queue. Your subsequent query will come from Peter Abramowitz of Jefferies.
Peter Dylan Abramowitz
Yes. I simply wished to ask, by way of the expansion trajectory for ’23, that is implied within the steerage. Could you give a little bit bit extra element on what’s type of assumed by way of same-store progress, I might think about, it is in all probability flat or unfavorable on workplace given the transfer out however constructive elsewhere. But simply any extra colour you could possibly give round that.
Louis S. Haddad
Yes. Peter, and I’m unsure the place you are selecting up the unfavorable, the place our projection is that Office will proceed to be constructive on a same-store foundation. I’m unsure there is a transfer out, however there’s already a transfer in past that in addition to important progress throughout the sector. So backside line is, all sectors are forecasted to be constructive in same-store progress. We suppose that, as Shawn talked about, multifamily goes to reasonable into the low-single digits, it is historic vary. Retail goes to proceed to outperform as effectively workplace. And then the most important a part of that NOI progress is a full 12 months of the two newly stabilized condo properties that we introduced on-line final 12 months. And lastly, the stabilization of Wills Wharf, which once more can have a full 12 months good time round.
Peter Dylan Abramowitz
Okay. Got it. And what is the timing of the leases that you’ve got in place to backfill the JHU transfer out?
Louis S. Haddad
Yes. That’s being backfilled by Morgan Stanley. And I feel it does not come on-line till the primary of the 12 months. We can get that reply for you. Do you’ve got that, Shawn?
Shawn J. Tibbetts
Yes, lease graduation as the start of ’25, so January ’25. And we’ll get you a little bit extra element on that. But sure, the lease graduation date is 1/1/25, that coincides effectively with the JHU expiration.
Louis S. Haddad
Yes, I feel the best way you are headed, Pete, there is a hole there, nevertheless it’s completely washed over by the rise in NOI from the opposite tenants transferring in in addition to the remainder of the workplace portfolio.
Peter Dylan Abramowitz
Okay. Makes sense. And then simply basically, are you able to speak about non-public actual property markets any indicators of issues type of thawing on the market and convergence and extra exercise between purchaser and vendor expectations in addition to the financing facet?
Louis S. Haddad
Yes. I feel by way of acquisitions, inclinations and the like, I feel persons are nonetheless looking for what true cap charges are. We do not suppose that is actually going to settle out till later within the 12 months, hopefully. So worth discovery is a matter. That’s why, frankly we’re not excited by taking a look at something that is out in the marketplace, however are hoping to transact privately with some shut relationships that we have already got.
Operator
Your subsequent query comes from Rob Stevenson of Janney.
Robert Chapman Stevenson
Lou, I feel in your feedback, you indicated that you just count on to exit the T.Rowe Price JV upon completion. Is {that a} 2025 transaction for you guys?
Louis S. Haddad
Well, the property — they’re going to be occupying within the third quarter of 2024. So we’ve got to take a look at market situations, whether or not that is going to be a day one disposition or maintain till early ’25. And after all, you have acquired a major advertising effort as effectively. And Rob, we simply wish to be certain it is clear. That’s our present considering. And we love the enterprise. We love the constructing. Obviously, we will personal every thing round it. We’re just a bit involved about focus in addition to we might like to get that capital again and redeploy it. Again, assuming that cap charges settle out the place trophy constructing can transact at an affordable degree.
Robert Chapman Stevenson
Okay. And then I feel you and Shawn each talked a little bit bit about redevelopment. Can you speak about what the kind of near-term redevelopment plans are, particularly within the portfolio, particularly if you aren’t getting the Bed Bath or the Regal stuff again within the close to time period? Where else is there alternatives for you guys? And when are these kind of — when is the timeframe for begin and/or completion of the alternatives that you’ve got within the portfolio as we speak?
Louis S. Haddad
I’ll let Shawn reply it extra particularly. But so far as redevelopment, these are the one properties that we’ve got that we would be trying to take down and alter makes use of. And we’re, frankly, anxious to type of sitting in a catbird seat. We’re deciding on a ton of lease proper now. But on the identical time, long run, we might like to see multifamily in each of these places. With regard to ground-up improvement. Shawn, do you wish to — you are taking a look at an terrible lot of stuff.
Shawn J. Tibbetts
Sure. Yes, I feel there isn’t any scarcity of alternatives on the market, as you’d think about. And so we’re seeing numerous deal stream. To Lou’s level again on the redevelopment, we’re joyful to gather lease and watch development costs type of stabilize or come down. That helps, clearly, the yield and helps our enterprise case. In phrases of ground-up improvement, right here in Town Center, we’ve got, as you already know, Rob, a chance for a web site right here ought to the chance come up to develop a mixed-use constructing. We’ve been calling that Parcel or Block II and in Baltimore as effectively we’ve got the chance to — if we wish to elect to construct extra multifamily items subsequent to the Allied items which are there as we speak or being constructed as we speak.
Robert Chapman Stevenson
Okay. And then, Matt, something of notice to the cadence of ’23 earnings. I feel the steerage averages out to a little bit over $0.31 1 / 4. Are there something that is going to disrupt that, neither push the quarterly development up or down meaningfully in particular quarters at this level?
Matthew T. Barnes-Smith
Today — Rob, as we speak in our steerage the place the typical items unfold are roughly even, there’s a potential alternative for one in all our most well-liked fairness offers like Solis Nexton got here early in 2022, probably Solis City Park may very well be bought and are available early in 2023, however we’ve got not put that within the base case of steerage, that might be probably upside. But sure, we really feel that, sure, it is going to be pretty evenly unfold all through the quarters, and we are going to see type of as Lou and Shawn talked about, the potential acquisitions that we have positioned in steerage. We’ll see what they type of materialize and the timing on that as we work by means of the 12 months.
Robert Chapman Stevenson
Okay. And the $30 million of mezz most well-liked within the steerage, is that simply the three current investments? Or does that ponder a further funding or 2 all year long?
Louis S. Haddad
That’s simply the three which are energetic proper now.
Robert Chapman Stevenson
Okay. So something along with that, on a internet foundation, would push steerage up at that time?
Matthew T. Barnes-Smith
Yes. Rob, there’s one extra mezzanine most well-liked fairness take care of our most well-liked companions, [TP, Solis Kennesaw] that’s within the mannequin. Hopefully, that may shut within the first quarter of this 12 months to switch the Solis Nexton transacted early.
Operator
Your subsequent query comes from Dave Rodgers at Baird.
David Bryan Rodgers
Sorry about earlier, however thanks for the reply to that first query. Follow-up for me, Lou, on the development facet of the enterprise, added fairly a little bit of the backlog within the fourth quarter. Curious about simply what you are seeing type of in development total, together with perhaps some price will increase that you just’re nonetheless seeing. But I suppose with regard to the backlog, are you simply seeing an acceleration of improvement with this simply distinctive to Armada Hoffler, actually making an attempt to get a way for the aggressive panorama perhaps that you just’re going through as effectively?
Louis S. Haddad
Dave, I feel to reply your final query first, I feel it is pretty distinctive to us. We’ve acquired these long-term relationships. They’re very energetic proper now, and we are the beneficiary of that and can proceed to be so for the subsequent couple of years. In phrases of pricing, issues have moderated. We’re nonetheless placing escalations in contracts, however not almost to the extent that we had been right now final 12 months and thru the spring. We’re not likely seeing and I do not suppose anyone is anticipating that there is going to be any important lower. The commodity costs have come down considerably, however that is been offset largely by labor prices in addition to a scarcity of high-quality subcontractors.
Operator
Your subsequent query comes from [Kimeo Bono] of Bank of America.
Unidentified Analyst
A pleasant job on the investment-grade credit standing. It appears like from this name, you’ve got quite a few potential funding alternatives this 12 months. Can you simply elaborate a bit extra in regards to the plan versus and makes use of of capital and simply within the context of your medium-term leverage targets?
Louis S. Haddad
Sure. Kimeo, proper now, we have quite a few sources of fairness, and we’re gazing numerous alternatives to select up some actually good properties on an off-market foundation. And like I discussed earlier than, utilizing the corporate’s inventory at a premium worth. So we’re excited to get that finished. Matt’s acquired numerous arrows within the quiver.
Unidentified Analyst
Appreciate the colour there. And a lot of my questions have been answered already. So only one follow-up as I wished to verify I caught your earlier feedback on the same-store outlook as you are anticipating NOI to extend subsequent 12 months. So are you saying your expectations for occupancy will stay constructive or enhance in 2023 even factoring for any have recognized move-outs in your workplace and retail portfolio.
Louis S. Haddad
Sure. Well, I perceive enchancment is relative. We’re ranging from a base of 98% occupied. So there’s not numerous further area to lease. As Shawn talked about, we’re basically making an attempt to shoehorn yet another tenant into the Town Center right here in our workplace area, a world group as effectively. Our expectation is that we will keep at or close to or barely above that 98% degree in Office and Retail. We are projecting that multifamily will reasonable once more again to historic norms of being within the mid-90s with single-digit will increase versus what we have all seen within the final couple of years.
Operator
Your subsequent query comes from Chris Sakai of Singular Research.
Joichi Sakai
Can you speak about your — the principle drivers for the normalized funds from operations progress and steerage?
Louis S. Haddad
Yes. I feel should you take a look at the steerage package deal, the principle drivers are actually twofold. On Page 3 of the steerage, the steerage deck. Portfolio NOI is the most important improve and that once more is principally 2 elements: one being same-store gross sales being up throughout the board in every of our sectors in addition to a full 12 months of stabilized — newly stabilized properties which clearly on a year-over-year foundation offers a fairly important enhance. We’re additionally forecasting a fairly substantial improve in development revenue based mostly on that $600 million backlog that we talked about. Our guys — I’ll take a second to say our guys are doing an outstanding job. You can think about, we principally doubled our historic backlog, there are numerous giant advanced initiatives, and so they’re working full out and doing an awesome job for us.
Joichi Sakai
Okay. All proper. I suppose this query is for Matt. For 2023, how ought to we be taking a look at rental bills? Should it’s roughly the identical or growing from present ranges?
Matthew T. Barnes-Smith
Yes, Chris. We imagine that our margins on the NOI will probably be pretty according to what we have seen in 2022. So we are going to see a uptick in rental bills. But as NOI is rising, that will probably be type of countered by the rise in rental income. Yes. Chris, it is so value noting that within the business facet of the enterprise, a portion of these bills are additionally reimbursable or pass-through paid for by our tenants.
Operator
Ladies and gents, right now, there aren’t any additional questions. So I’ll flip the convention again to Lou Haddad for any closing remarks.
Louis S. Haddad
Thanks for all of your time and a spotlight this morning, and we’re pleased with our outcomes, and I respect your curiosity within the firm and stay up for additional bulletins coming quickly. Thank you.
Operator
Ladies and gents, this does conclude your convention name for this morning. We wish to thanks all for taking part and ask you to please disconnect your strains.
