Armada Hoffler: Strong Results Should Lead To Higher Price (NYSE:AHH)

The past 12 months have been a tough time that many tech investors likely want to forget, as many once high-flying names continue to trade weakly compared to their all-time highs. In fact, some investment banks such as Goldman Sachs (GS) forecast that stocks overall may have less pain but no gain in 2023.

That’s where the value of dividends come in, and this brings me to Armada Hoffler Properties (NYSE:AHH).

AHH’s stock price has budged up by less than 1% since my last bullish take on it in August of 2021, but has produced a 9.3% total return due in large part to dividends, far surpassing the -7% change of the S&P 500 (SPY) over the same timeframe.

In this article, I highlight what makes AHH a continued buy for potentially strong returns.

Why AHH?

Armada Hoffler Properties is a self-managed REIT with four decades of experience in developing, acquiring, and managing high-quality office, retail, and multi-family properties across the Mid-Atlantic and Southeastern regions of the U.S. In addition, AHH leverages its expertise to provide general construction and development services to 3rd party clients.

It appears that AHH’s multi-cylinder model of acquiring high quality assets in various categories is working well. This is reflected by its strong 2022 year-end occupancy of 97%, comprised of Office at 97% occupancy, Retail at 98%, and Multifamily at 96%.

Also encouraging, AHH is seeing respectable same store net operating income growth in all three property segments, ranging from 3% growth in Office to 6% growth in Retail. This was driven by healthy tenant demand, as reflected by 6% and 10% lease spreads on office and retail lease renewals, respectively.

This continues AHH’s track record of Portfolio NOI growth every year since 2020, and management has guided for continued growth this year, as shown below.

Looking ahead, Portfolio NOI growth is expected to be realized from organic growth in the same store portfolio, and lease up and stabilization of delivered development projects and anticipated acquisitions. Also encouraging, management expects to see another record year in construction as it works through $600 million in 3rd party contracts over the next 2 years.

Notably, Office properties represent 34% of AHH’s expected annual base rent for 2023. While questions surrounding return to office may give some investors pause, management highlighted the resiliency of its property base and strong tenant demand that belies what headlines are suggesting during the recent conference call:

We understand [NOI guidance] runs against the drumbeat of news in some real estate sectors, especially office, particularly if your focus is on gateway markets. On the contrary, we are seeing record demand and consequently have the ability to drive rental rates across our properties and submarkets. Given the economic history of resilience this portfolio has demonstrated, we see no reason for this to change. The biggest challenge we are facing in accommodating tenant demand and expansion in a portfolio add capacity.

In short, to group us together with the office REITs facing major structural issues is to ignore the strength, quality and performance of our office properties. And even more importantly, this inaccurate characterization would overlook the other 70% of our portfolio and fee income sources, all of which are operating at record levels of profitability.

Importantly, AHH’s forward outlook and development opportunities are supported by its strong balance sheet with a debt to adjusted EBITDA ratio of 5.3x. It also carries a low weighted average cost of debt of 3.6% and 100% of its debt is either fixed or hedged. Moreover, AHH has no debt maturities in 2023, thereby mitigating near-term interest rate risk and only has a small amount of debt maturing in 2024, which management expects to pay off at that time.

AHH’s quarterly dividend is also now just $0.02 shy of its pre-pandemic rate and is well-protected by a 61% payout ratio, based on 2023 Normalized FFO per share guidance of $1.25 at the midpoint.

Lastly, AHH appears to be good value at the current price of $13.47 with a forward P/FFO of 10.8 based on the aforementioned guidance, and sitting below its normal P/FFO of 13.0. This appears to be too cheap considering AHH’s strong operating fundamentals and even with a low conservative long-term FFO per share growth rate in the mid-single digit.

Analysts had a $13.60 price target on AHH at time of its earnings release, and I would expect for their price targets to be revised upward considering AHH’s strong results and the positive market reaction.

Investor Takeaway

Armada Hoffler Properties is well-positioned to deliver strong organic growth and benefits from a sturdy balance sheet, low cost of debt and pays an attractive dividend yield. Its stock also appears to be undervalued considering its strong earnings results, well-below average valuation, and the potential for higher price targets from analysts. As such, investors looking for meaningful income and growth kicker from construction ought to give AHH a hard look.