09/27/2022 | by Clay Risher

With a focus squarely on the Southeast United States, Armada Hoffler Properties, Inc. (NYSE: AHH) sees a clear flight to quality and safety amid the current uncertainty and market volatility. The REIT believes its long-term investment strategy of building on the strength of its class-A portfolio of mixed-use properties positions it well to deal with those trends.

Armada Hoffler Chief Operating Officer Shawn Tibbetts spoke with REIT.com about how the company has positioned itself to outperform, the challenges evident today, and how the adaptive reuse of a former textile mill is a case study for the sustainable practices the REIT aims to implement going forward.

How is Armada Hoffler navigating the current climate of high inflation and rising interest rates?

Armada Hoffler has long held a robust hedging strategy, as we prefer to be at 100% fixed/hedge with our debt. We have also restructured our credit facility and are strengthening the infrastructure of our balance sheet to get through potentially turbulent times in the broader economy.

Our investment focus is on mixed-use assets in our core submarkets and long-term growth in additional low-risk submarkets. That strategy helps insulate us from a possible recession.

What sectors are hot right now and why?

As our CEO, Lou Haddad, has continually stated, we are seeing a clear flight to quality and safety amid the uncertainty and market volatility. Multifamily continues to lead the way when it comes to investor demand. We do not see that changing in the near future.

Grocery-anchored retail remains a popular asset class among REITs, as grocery anchors often result in a strong in-line tenant mix throughout the center. Additionally, and contrary to widespread belief, we continue to see a demand for class-A office space in mixed-use environments.

As a small-cap REIT, how has Armada Hoffler responded to the continued rigor and focus on ESG initiatives?

The core components of ESG have been a fixture of Armada Hoffler throughout our over four decades of operation, but we have been able to take our ESG program to new heights over the past few years and overcame the gap in resources and personnel in comparison to larger REITs.

Armada Hoffler’s overall goal remains to create value for our shareholders. Three years ago, we started documenting our ESG activities and milestones in an annual sustainability report. The objective is to formally document our progress in a transparent fashion and demonstrate leadership in sustainability among fellow small-cap REITs. We strive to remain in the top third of our proxy peer group and have been successful in doing so.

How have we accomplished this? By making those operational adjustments that drive environmentally conscious results, having close oversight from our board, using a software program to track emissions, and continuing to evolve and adapt. We are proud to have many LEED properties in our portfolio, high engagement among our tenants and employees, and sound governance. These efforts result in a benefit to Armada Hoffler’s performance, in addition to being sustainably conscious.

How much have climate concerns changed Armada Hoffler’s investment thesis?

Armada Hoffler has always been mindful of the need to play our part in protecting the planet. The more recent step to formally document our efforts through our ESG program enables us to annually measure our impact and keeps us accountable.

In 2021, Armada Hoffler partnered with ESG software company Measurabl to gather, analyze, and track our consumption and emissions across our portfolio. By 2030, we expect to have greatly reduced our overall energy consumption and greenhouse gas emissions.

All of our newly developed properties have EV charging stations installed–that represents 55% of our current multifamily portfolio. By the end of 2023, 100% of our multifamily communal areas and exteriors will have 100% LED lighting. By 2025, that will include 100% of interior unit lighting.

We are upgrading our oldest HVAC systems and plumbing fixtures, focusing on our largest communities to maximize conservation efforts. Moving to electronic document signing resulted in the following 2021 environmental impact: 17,000 pounds of wood saved, 52,000 gallons of water saved, 40,000 pounds of carbon dioxide avoided, and 2,800 pounds of waste prevented.

From an investment standpoint, our Chronicle Mill mixed-use adaptive reuse project in Belmont, North Carolina is a case study for the sustainable practices we aim to implement going forward. The 240-apartment project is a repurposing of Belmont’s first-ever textile mill, which revolutionized the town into a center of innovation by introducing electricity to increase production.

Armada Hoffler has taken the existing structure of the mill–preserving the historical and architectural integrity of the building–and converted it into an apartment building with 9,000 square feet of commercial space. This allows for the continued use of a viable community asset, rather than it remaining vacant or being demolished. Armada Hoffler also used broken and unusable bricks from the original structure to form a retaining wall around the property. The refreshed property includes modern energy saving touches such as LED lighting, EV charging spaces, water-leak sensors, and low-flow fixtures.

Armada Hoffler is hopeful that projects like Chronicle Mill serve as a case study for how to create much-needed housing in growing markets through creative and environmentally friendly adaptive re-use.

What lessons were learned from the pandemic and what are some byproducts of how Armada Hoffler goes about investing post-pandemic?

The pandemic reinforced the importance of tenant relations and employee engagement. Armada Hoffler has historically taken a hands-on approach with management and tenant relations, but that went to another level throughout the pandemic. Constant communication and flexibility were paramount in those uncertain initial months to ensure tenants and team members had the resources and support they needed to navigate the unparalleled challenges.

Armada Hoffler’s long-term investment strategy is to build on the strength of our class-A portfolio of mixed-use properties like Town Center of Virginia Beach and Harbor Point in Baltimore. We continue to target such properties with the live/work/play components that include multifamily assets, grocery anchored shopping centers in our core submarkets, and focusing on long-term growth in low-risk submarkets.

What trends are you seeing in your development and construction projects post-COVID?

Everything costs more, from construction costs to individual rents. That is the most impactful post-COVID trend and inflation is being felt across the board. We are seeing a larger demand for outdoor dining space for restaurants, with the ability to close in those areas.

Apartment floor plan preferences have not necessarily changed much, except for tenants preferring to have a space allocated for a desk inside their unit or a coworking space in amenity areas. We will continue to take a conservative approach to developing and constructing assets based on the current market conditions, pricing, and demand.

How have the past couple of years impacted the asset management division?

The past few years gave the division an important opportunity to reconnect with all of our tenants and reinforced a sense of true partnership. The asset management team had regular one-on-one phone calls with all tenants to discuss current challenges and create a path forward to overcome them.

Armada Hoffler has expanded on this by implementing annual meetings with our office tenants and facilitating tenant interviews and surveys with our retail tenants, so we always have a direct pulse on their performance.

From a portfolio perspective, the importance of having popular, high-credit tenants that can withstand economic downturns or recessions was emphasized. This period also reiterated how critical it is for tenants and customers to feel safe in our buildings. Retail tenants must have an omni-channel platform, while multifamily tenants must have the ability to work comfortably from home and enjoy themselves when not working.

What geographies look good and why?

When monitoring migration and population growth trends, all roads lead to the Sun Belt. The Sun Belt was the clear winner from the pandemic, which exacerbated a shift that was already underway. Growth in these markets creates a need for more basic necessities, such as housing and food in the form of multifamily communities and grocery-anchored retail. For Armada Hoffler, the focus is on the Southeast U.S., specifically the Carolinas, Georgia, and Florida.