Description
Description
We believe that Armada Hoffler Properties, Inc (AHH) is an attractive investment opportunity. AHH is a diversified REIT based in the Mid-Atlantic region. At current prices, AHH has a dividend yield of 6.75% and an implied capitalization rate of 8.8%. Using conservative assumptions, we believe AHH is trading at over a 20% discount to its fair value.
After 35 years in the real estate business, AHH came public in May of 2013 at $11.50 per share. AHH has three operating segments: 1. A diversified real estate portfolio consisting of office, retail, and multifamily properties in the Mid-Atlantic region; 2. A construction firm that develops real estate properties for third parties; 3. A development arm that builds properties for its own real estate portfolio. AHH is relatively unique among REITs, in that, it has its own construction business that it uses to build and develop real estate for its own portfolio. As a result, it is able to capture the spread between the cost of developing real estate and the market value of real estate.
Valuation
Stabilized Real Estate Portfolio
AHH’s stabilized portfolio consists of 25 properties in the Mid-Atlantic region. AHH’s real estate portfolio is approximately 40% office properties, 40% retail properties, and 20% multifamily properties. Out of its 25 properties, AHH has built and developed 23 of the properties. Occupancy is currently 95.1%. AHH’s portfolio has been relatively stable over time. At its low point during the Great Recession, occupancy was still 92%. In the quarter ending September 30, 2014, AHH’s stabilized real estate portfolio generated cash NOI of $10.4 million. If we assume a 6.0% cap rate for multi-family and an 8.0% cap rate for retail and office, AHH’s weighted average cap rate is approximately 7.60%. At this cap rate, AHH’s real estate portfolio has a value of $547.6 million. Given that AHH has agreements in place to sell its Sentara Williamsburg office building at a cap rate of 6.3% and to sell its Virginia Natural Gas office building at a cap rate of 6.25%, we believe this cap rate is conservative.
Development Pipeline
AHH has an identified development pipeline of nine properties. At cost, this pipeline has a value of $137 million. Management expects to generate $150-$175 million in development assets every 18-24 months. AHH develops these projects at spreads of 100-200 basis points. That is, the yield on cost is approximately 100-200 basis points higher than the market cap rates. The properties in AHH’s development pipeline have a yield on cost of 8.20% and have estimated market cap rates of 6.95%. Using these estimates, AHH’s development pipeline has a market value of $161.6 million.
3rd Party Construction Services
AHH provides general contracting services to third parties. In the past four years, operating income has been around $3 to $5 million. Given the cyclical nature of this business, we think a 6x multiple is appropriate. At 6x LTM operating income, this operating segment has a value of $29.33 million.
Total
Summing up the three operating segments, as well as the other assets and liabilities on the balance sheet, we get a valuation of $11.41 per share.
In addition to the sum of the parts valuation, we also calculated AHH’s implied capitalization rate.
I hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
· Increased NOI as a result of completion and stabilization of their development pipeline.
· AHH continues to sell properties at cap rates significantly lower than the company’s implied cap rate.