AH REALTY TRUST INC (AHRT) Earnings Call Transcript

Greetings, and welcome to Armada Hoffler's Harbor Point Update Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Monday, December 7, 2020. I would now like to turn the conference over to your host, Lou Haddad, Chief Executive Officer of Armada Hoffler. Please go ahead.

Good afternoon. This is Mike O’Hara. I'll start the call today. Good afternoon, and thank you for joining us for an update on our new joint venture to develop and build the new T. Rowe Price global headquarters building. On the call this afternoon, like i said, in addition to myself, is Lou, CEO. Please go to the Investor Relations section of our website, armadahoffler.com, for the Harbor Point Update presentation. During this call, we will make forward-looking statements. Listeners are cautioned that these statements are subject to certain risks and uncertainties, many of which are difficult to predict and generally beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations, and we advise listeners to review the forward-looking statement disclosure on our December 3 press release and the risk factors disclosed in documents we have filed with or furnished to the SEC. Our opening remarks will be short, and afterwards, we will be available for Q&A. Now I'll call -- turn the call over to Lou.

Thanks, Mike. Good afternoon, and thank you for joining us today. As you saw from last week's press release, we are embarking on a new joint venture with a long-established partner to bring a major new facility to our Harbor Point development on Baltimore's waterfront. We are hosting this brief call and offering the short presentation available on our website to give further details on this exciting project and answer any questions you may have. The importance of T. Rowe Price's commitment to Baltimore in general and our site, in particular, cannot be overstated. Not only does the new world headquarters building further validate Harbor Point as a top East Coast destination, but bringing some 1,700 employees to the site will further increase demand for our existing adjacent facilities and accelerate the opportunities for additional development. Once again, the advantages of a diversified, vertically integrated business model have proven to be key for maximizing the positive financial impact that the new project will have on our company both in the short and long term. First, as would be the case for any property owner, the presence of this iconic building abutting currently owned high-quality assets is a major value enhancement to our portfolio in and of itself. Secondly, and not nearly as commonplace, is our 25-year relationship with Beatty Development, a partnership which has produced some of Baltimore's most prestigious landmarks. This familiarity allows us to assume the high return yet limited risk of the equity in the joint venture. We expect our $30 million investment in this build-to-suit to yield double-digit profits. Additionally, we have the option to exit the venture after 4 years for full market value. While those 2 benefits will have long-lasting positive effects on the value of our company, the unique advantage of having a top-flight general contracting company allows us the ability to help maintain the project schedule and earn substantial income during the development process. We anticipate construction fees for the engagement to fall between $4 million and $5 million over a 2-year period. A second joint venture with Beatty will be developing a mixed-use facility, inclusive of an oversized parking garage on an adjoining parcel to accommodate existing parking commitments as well as a significant portion of the T. Rowe Price requirement. We are currently programming the site and will offer further details on this project along with our existing predevelopment pipeline on our next quarterly earnings call. Now I'll turn the call over to Mike for further details on this announcement.

Thanks, Lou. This project will be very beneficial for our 3 existing assets on Harbor Point and for our company as a whole. On Page 4 of the Harbor Point Update presentation, you'll see the proximity of the T. Rowe Price's new headquarters, number 4, to our 3 buildings, which are highlighted in green. This is our third joint venture with Beatty Development on Harbor Point and the first in which we are the minority partner. Beatty Development is the lead developer with our role of adding development expertise, being a cash equity source and a general contractor. With AHH being the minority partner, this is an unconsolidated joint venture, and therefore, will be an off-balance sheet project. As such, the only impacts on our balance sheet will be our cash equity requirements. No debt will be reflected on our balance sheet as the joint venture will be the borrower under the construction loan. Discussions with a lender are ongoing, and we do not expect financing to be an issue. Just to be clear on the structure, we have ownership in a joint venture. This is not a mezzanine loan. As a minority partner in a joint venture, we view this as a short-term investment with a 4-year exit strategy and not a long-term hold. Per our agreement, we have the right to sell the asset for our share of the JV for full market value. Once complete, we are expecting an annual double-digit return on our capital before an exit profit, which we expect to be substantial. As you can see on Page 6 of the presentation, we're also be forming a joint venture with Beatty Development to develop the mixed-use project, a large parking facility on an adjoining parcel. The JV will be structured in the same manner. There will be an unconsolidated joint venture with a 5-year exit strategy. As for our equity needs, Beatty Development owns the land for both projects. Therefore, there are no immediate material cash requirements. As with other development projects, the cash requirements will be spread out over the next 2 years. Given our current liquidity position, we are well positioned to take advantage of these opportunities. We are now available for questions.

[Operator Instructions] Our first question comes from the line of Rob Stevenson with Jann.

So Mike, just one clarification. So Beatty is a 60% partner on the mixed-use and the garage and you guys are 50-50 on the T. Rowe headquarters?

Yes, it's 50-50 on the T. Rowe and the 60-40 for the other. We are the 60% and he is the 40%.

Okay. You were the 60% on that one. Okay. And then, Lou, so it's a 15-year lease. What are you looking at in rents for T. Rowe? And what level of TIs are you guys expecting to give them on this? And how does that compare to the existing office buildings?

Rob, right now, we can't divulge the rent. It's really a question for T. Rowe. We've offered all the information we can at this time.

I guess another way to put it is, where are rents on the other office buildings these days on leases that are being signed?

So triple-net rents are in the high 20s and low 30s.

Okay. And are they just the one building or you guys have been working on backfilling some of the WeWork space? Are they taking any building in any space in any -- in the existing building or anything?

No. Their headquarters will be as a stand-alone on the adjacent -- on the parcel adjacent to the Wills Wharf building.

Okay. And can you remind us what the current occupancy or current lease rate is in that building or as of 9/30, whatever?

It's in the supplemental as of 9/30. It's in -- do you remember, Mike?

Yes. We've got about 100,000 square feet left to lease on the building and the rates are, like Lou was saying, in the high 20s, low 30s as the asking price, depending on TI, triple-net.

Okay. And is there -- I mean, when I look at the picture in 10 of the presentation, it looks like that the site for the T. Rowe building is being used as parking. I would expect that parking isn't really a problem right now with COVID. But as that starts to go back over the next couple of years, during the construction process, where are those people going to park? And are you having to pay or do anything to -- from parking for the other office buildings?

No. There's still room on the site to relocate the cars while we're building the oversized parking garage on the adjacent parcel to the T. Rowe building. That structure will go up first, and we'll break ground some time in 2021. Well, we're programming that site now, and we're coming up with details at our next earnings call.

And Robert...