Business Description
Armada Hoffler Properties (AHH) is a vertically integrated, self-managed diversified REIT that focuses on mixed-use communities (office+retail+apartments), and grocery-anchored shopping centers in mid-Atlantic and Southeast markets in the United States.
It has four decades of experience developing, building, acquiring, and managing high-quality, multifamily, office, retail and mixed-use properties. In addition to developing and building properties for its own account, the company also provides development and general contracting construction services to third-party clients (about single digit percentage of its gross profit). It was founded in 1979 by Daniel A. Hoffler.
It is worth noting that Armada Hoffler essentially builds luxury master planned communities consisting of trophy class-A properties instead of other standalone offices, shopping centers or multifamily apartments.
By 2023 Q1, the expectation is that the pipeline will have NOI stabilized by 2025, and the breakdown will be:
Retail: 42%
Multifamily: 23%
Office: 35%
Multifamily strategy:
Wholesale to retail spread through development
Retail strategy
Acquisition of reliable grocery anchored centers
Development of mixed-use, walkable lifestyle centers
Office strategy
Class-A trophy properties in high demand locations
Long-term leased properties with low turnover
SWOT analysis
Strengths
Vertically integrated, four decades of experience developing, building, acquiring, and managing high-quality, multifamily, office, and retail properties
Founder-led company
Office and retail properties are part of a community development with multifamily properties, which give some certainty in the attractiveness of the properties for people who like walkable lifestyles.
Weaknesses
Small scale
No obvious economic moats except for local knowledge of the regions
Not geographically diversified.
Opportunities
Its real estate development capabilities ensure its growth is not a problem.
Threats
Subject to macro economics in mid-Atlantic and Southeast in the United States
Existential crisis of office properties
References
Updates
2024/09/27 Comment on the 9 million shares equity issuance
On Sept 26th, AHH filed the prospectus with the detailed pricing of the equity issuance. It's 9 million shares, and about $10 each share after underwriter discount. It is a 13-15% dilution in share counts:
before: 69,346,160 shares
after: 78,346,160 shares (79,696,160 shares if the underwriters exercise their option to purchase additional shares in full)
I conservatively estimated the fair value of each share is over $13, so I was disappointed that the offering was priced this low, not to mention the NAV per share can be as high as $18 per share by some measurement, and the market price was a bit over $12 before the offering news.
There are quite a few ways to think about it.
A simple way is, if we assume the offering issued shares at a 50% discount to its true value, the fair value per share after this offering is decreased by about 7% (a hair less than 50% of 13-15% dilution).
A more common way is to based on whether it is FFO accretive or dilutive. AHH's development can earn about a 8% cap rate. After financing, the cash-on-cash return is about 10%. Before the offering, FFO per share is expected to be about $1.25 in 2024. Assuming the new cash can earn 10% FFO yield, FFO per share after the offering is about: ($1.25 + 0.15 * $10 * 10%) / (1 + 0.15) ~ $1.21. That is a negative impact of about 3%.
Then there is another way, which assumes I can commit the cash to participate in the offering (i.e. buy the shares at $10 per share) to buy enough to keep my ownership percentage of the company. In that case, it actually does not matter how low the issuance price is if I am happy with the 10% cash-on-cash return of the new cash. This is very counterintuitive. A way to think about this is that the company as a whole is going to earn a bit more money by using the new cash, so by keeping my ownership percentage the same, my claim of the earnings increases after the offering. The increase is proportionate to how much I contribute in the offering. That proportion is exactly the cash-on-cash return that we assume of AHH, which is 10%. It's much easier to understand if we assume we own 100% of the company from the beginning, and we can see we are the only participants in the transaction (both the buyer and the seller), so the share price does not really matter. However, in practice, we cannot participate in the offering, and there is some leakage in the transaction, we can only earn about 90% of the cash-on-cash return of the new cash, which gets to about 9%. With the issuance size of about 15% of the company, the negative impact is about 1.5%.
From all the thinking above, the negative impact of the valuation goes from 1.5% to 7%. If the cash-on-cash return with the new cash is higher than expected, e.g. it saves the company from going broke, it can potentially be a positive impact. At the end of the day, it's about how much we trust the management on using the new cash. Hopefully we can find out more in the next earnings call.
For my buy below price calculation, I would lower it by 7%. I would also lower AFFO estimation by 7%.
For extra information, High Yield Landlord's take was:
"AHH plans to use this equity to deleverage the balance sheet and fund its development pipeline, which has historically yielded very high returns on its invested capital"
"AHH has a great track record so I trust their judgement"
2024/02/23 Update with 2023 Q4 earnings
Normalized FFO was $1.24 per share for the whole 2023 year, compared to $1.22 last year, only 1% increase. The NOI growth was good due to the new acquisition of Sherlock to the portfolio, same-store NOI was bad due to the Wework vacancy of the office space. However, the NOI growth ($1.8 per share vs $1.66 per share last year) was mostly offsetted by the jump in interest expenses ($0.65 per share vs $0.45 per share).
The guidance of normalized FFO $1.24 per share in 2024, which is flat compared with 2023. NOI per share goes from $1.8 per share to about $1.88 per share, while G&A, interest income, interest expenses and construction segment profit are mostly the same, so I suspect that the management is lowballing the guidance.
The company is doing fine with over 5% annual growth in NOI in 2023, very likely to have something similar for 2024. That explains why the management was comfortable with the 5% dividend hike. My valuation is similar to the one last time, but the annual is changed to $0.82. The buy below price is then: $0.82/(0.11-0.05) = $13.66.
2023/10/27 Valuation
Using numbers from 2023 Q2 Supplemental Financial Package, the 2023 AFFO will be about $0.96. With the stock price of $10.2, that is P/AFFO = 10.62x. Annual dividend is $0.78, which gives a dividend yield of 7.6%, and a payout ratio of 81%.
Historically, the company can grow normalized FFO at 5+%. When we compare 2022 and 2023, excluding the increase in interest expense due to increase in interest rate, the growth would be about 5.7%.
AHH belongs to a category of companies with average return on equity at about 10-12% with stable cash flow, so I would use a 11% discount rate. The fair value is thus: dividend / (11% - growth rate) = $0.78/(0.11-0.05) = $13
Another way to look at AHH is that it has a portfolio NOI of $161.5 million annually. With 89,598 thousands diluted shares at a price of $10.2 each, preferred equity of $171.1 million, and a total debt of $1270 million, the implied cap rate of the company is: 161.5 / (89.6*10.2 + 171.1 + 1270) = 6.8%. Its profit from General Contracting and Real Estate Services, which does not make use of the balance sheet, almost covers its G&A, so the cap rate is pretty clean. A 6.8% cap rate for mostly class A properties that have NOI growth of 5+% annual growth (2023 growth rate will be about 6.7%) is pretty attractive even for the current high interest rate environment.
The stock also had insider purchases in April, July and October this year at a price range of $10-$12.
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