Armada Hoffler: The 7.4% Yielding Preferred Shares Still Offer An Excellent Risk/Reward Ratio

1 year ago

beritaja.com

Cityscape and high-rise buildings successful metropolis metropolis halfway . Downtown business territory successful panoramic position .

Introduction

Back successful December, I turned bullish connected Armada Hoffler Properties (NYSE:AHH) preferred shares, which are trading pinch (NYSE:AHH.PA) arsenic ticker symbol. I thought nan caller correction of nan preferred share value created an opportunity arsenic I liked nan risk/reward ratio offered by nan preferred shares which evidently rank elder to nan communal units.

2022 was a bully year

As a reminder, Armada Hoffler focuses connected three circumstantial plus types: retail, agency and multifamily properties. I’m lukewarm connected agency assets truthful it’s important to support an oculus connected really this conception successful Armada’s portfolio is doing arsenic nan comparative publication of nan agency portfolio will proceed to summation complete nan adjacent fewer years. Offices contributed conscionable 26% of nan NOI successful FY 2021 but this will summation to 34% this year. The unit assets stay the astir important contributor to nan NOI.

During nan last 4th of nan year, Armada Hoffler reported a full FFO attributable to nan communal stockholders and Operating Partner portion holders of $29.4M. After making immoderate adjustments, nan normalized FFO was $30.6M. Considering location are 88.3 cardinal unit-equivalent outstanding, nan normalized FFO per stock came successful astatine conscionable nether $0.35 (this was rounded to $0.35 successful nan results).

Keep successful mind this includes nan effect of nan operating business units, which accounts for astir 23% of nan 88.3M units outstanding.

From nan position of a preferred shareholder, I americium very happy pinch nan sum level of nan preferred dividends. Keep successful mind nan commencement of nan FFO calculation was nan reported nett income, and this already includes nan preferred dividend payments. As you tin spot below, nan full magnitude of preferred dividends was $2.9M which intends nan full FFO excluding nan preferred dividends was astir $33.5M, indicating nan REIT needed little than 10% of nan Q4 FFO to screen nan preferred dividends. A very patient sum ratio, indeed.

Even if you would look astatine nan AFFO consequence ($0.28 per stock successful Q4 and $0.99 for nan full twelvemonth 2022) nan preferred dividends are very good covered arsenic they correspond conscionable $0.033 per communal unit.

The outlook for 2023 is beautiful decent arsenic well

Armada Hoffler has besides released an first guidance for adjacent year. The REIT expects to make a NOI of astir $158M while it should besides make astir $12M successful nan building segment.

The FFO guidance calls for a normalized FFO of $1.23-1.27 per diluted share, truthful nan midpoint would beryllium $1.25 per share. This really makes nan communal units beautiful charismatic arsenic well, arsenic they are trading astatine conscionable astir 11 times nan normalized FFO for 2023. Assuming nan stock count doesn’t change, nan $1.25 normalized FFO guidance implies a full FFO of $110M. This includes nan $12.5M successful preferred dividends which again intends nan full sum ratio of nan preferred dividends will transcend 1,000% and that’s evidently wholly good pinch me.

Keep successful mind 2023 is conscionable a stepping chromatic towards further increases successful nan NOI arsenic Armada Hoffler continues to create its pipeline. As you tin spot below, Armada is guiding for different double digit percent summation of nan NOI successful 2024 followed by a mid-single digit summation erstwhile nan portfolios are afloat stabilized.

This intends we should expect further improvements successful 2024 and beyond and while a higher liking disbursal (the costs of indebtedness is afloat hedged for 2023, truthful I’m not expecting a awesome near-term impact) will for judge measurement connected nan conversion from NOI to FFO, Armada Hoffler really is successful a beautiful bully style and particularly from nan position of a preferred shareholder, I americium emotion very comfortable pinch my agelong position.

Investment thesis

These preferred shares person a fixed preferred dividend of 6.75% based connected nan $25 main worth of nan preferred information and this useful retired to $1.6875 paid per stock successful 4 quarterly installments of $0.421875. These securities tin beryllium called by Armada from June 2024 on. The preferred shares are presently trading astatine $22.80 for a existent output of 7.4%. The output to telephone is successful excess of 11% but astatine this constituent I’m not betting connected Armada calling nan preferred shares arsenic 6.75% is simply a beautiful adjacent costs of equity.

I initiated a agelong position successful nan preferred shares soon aft nan publication of nan December article. Given nan beardown capacity successful 2022 and nan very encouraging outlook for 2023, I would for illustration to adhd to my preferred stock position connected weakness.

Consider joining European Small-Cap Ideas to summation exclusive entree to actionable investigation connected appealing Europe-focused finance opportunities, and to nan real-time chat usability to talk ideas pinch similar-minded investors!