Executive Summary / Key Takeaways

• Strategic Transformation Underway: Armada Hoffler is executing a deliberate pivot from a reliance on fee-based construction and mezzanine income towards higher-quality, recurring property-level earnings, aiming to enhance portfolio quality and balance sheet resilience.
• Resilient Property Performance: Despite broader market headwinds, AHH's diversified portfolio of retail, office, and multifamily assets demonstrates strong occupancy (averaging 95% overall) and positive re-leasing spreads, particularly in its amenity-rich mixed-use environments.
• Balance Sheet Fortification: The company is actively strengthening its financial foundation through strategic debt management, including a recent $115 million private debt placement, hedging against interest rate volatility, and a reaffirmed BBB credit rating with a stable outlook.
• 2025 as a Trough Year: Management projects 2025 to be an earnings trough, with normalized FFO guidance of $1.00 to $1.10 per diluted share, driven by a planned reduction in construction activity and the lease-up of new developments, but anticipates growth in 2026 and beyond.
• Disciplined Capital Allocation: AHH is focused on value creation through strategic redevelopments, selective dispositions of stabilized assets for capital recycling, and the potential integration of high-quality multifamily assets from its real estate financing platform.

A Strategic Evolution Towards Quality

Armada Hoffler Properties, Inc. (AHH) stands as a vertically integrated, self-managed REIT with a four-decade legacy in developing, building, acquiring, and managing high-quality retail, office, and multifamily properties across the Mid-Atlantic and Southeastern United States. The company's unique vertical integration, encompassing development, construction, and property management, serves as a foundational strength. This integrated model allows for superior project management, enhanced cost control, and potentially faster project execution compared to rivals. It also fosters stronger customer loyalty and generates recurring revenue from third-party services, contributing to operational efficiencies and improved margins.

AHH's strategic journey has been marked by a deliberate evolution, particularly evident in its recent actions. The company is undergoing a significant rebalancing, shifting its focus from more volatile fee income derived from general contracting and mezzanine financing towards a higher proportion of stable, recurring property-level earnings. This strategic pivot is rooted in a core commitment to "quality," aiming to build a more efficient, balanced, and resilient enterprise. Management believes this emphasis on property-level income will ultimately garner higher valuation multiples from the equity market.

In the competitive landscape, AHH operates against a diverse set of REITs. Against national retail giants like Simon Property Group (SPG), AHH's regional concentration and hands-on, vertically integrated approach allow for greater localized adaptability and tailored development strategies. While SPG benefits from immense scale, AHH's model can deliver efficiency and cost control in its specific markets. In the multifamily sector, AHH's diversified portfolio contrasts with specialized players like Equity Residential (EQR). AHH's integrated development and management capabilities provide a unique value proposition, potentially offering greater efficiency in execution. For office properties, AHH's assets, predominantly located in amenity-rich mixed-use environments, command a premium. This differentiates it from traditional office REITs like Boston Properties (BXP), which focus on larger urban centers. AHH's office properties, for instance, command approximately a 15% premium over competing central business districts in its regions, with significantly lower vacancy rates.

Broad industry trends underscore AHH's strategic positioning. The limited new big box retail development nationally creates demand for infill retail space, which AHH is adept at capturing through redevelopments. Furthermore, the trend of Fortune 100 companies returning to in-office work (54% fully in-office, up from 5% two years ago) and the decline of hybrid models (to 41%) drives demand for the engaging, high-amenity office environments AHH provides. In multifamily, signs of supply absorption in key Sunbelt markets like Atlanta and Charlotte suggest improving rent growth prospects.

Operational Excellence and Portfolio Resilience

AHH's operational performance in the second quarter of 2025 reflects the resilience of its diversified portfolio. Overall portfolio occupancy remained healthy, averaging at least 95% for the fourth consecutive quarter. This consistent performance is a testament to the company's focus on high-quality assets and proactive management.

The Retail Real Estate segment, despite a 5.0% year-over-year decrease in NOI to $18.313 million for the three months ended June 30, 2025 (primarily due to dispositions), showed underlying strength. Occupancy stood at 94.2%, with renewal spreads of 10.8% on a GAAP basis. AHH has successfully backfilled former big box vacancies from tenants like Party City (PRTY), Conn's (CONN), Joann's (JOAN), and Bed Bath & Beyond (BBBYQ) with stronger, higher-credit retailers. For example, at Columbus Village, Trader Joe's and Golf Galaxy are set to anchor the former Bed Bath & Beyond space, projected to increase rents by nearly 60%. Similarly, a reconfiguration at Southgate is expected to drive almost a 40% rent increase. These achievements highlight AHH's ability to capitalize on a supply-constrained retail market.

The Office Real Estate segment continues to be a standout performer. NOI increased by 4.5% year-over-year to $15.445 million for the three months ended June 30, 2025. Occupancy remained high at 96.3%, with impressive re-leasing spreads of 11.7% on a GAAP basis. Critically, less than 4% of AHH's office space expires in 2026, providing strong earnings visibility. The company's strategy of owning office assets within amenity-rich, mixed-use environments, such as Harbor Point in Baltimore, continues to attract and retain tenants. The opening of T. Rowe Price's (TROW) global headquarters at Harbor Point has already boosted retail sales in the area by over 20%, demonstrating the synergistic benefits of AHH's placemaking strategy.

The Multifamily Real Estate segment delivered a 6.0% year-over-year increase in NOI to $8.724 million for the three months ended June 30, 2025. Occupancy experienced a modest dip to 94% in Q2 2025, attributed to seasonal turnover and supply/demand pressures near universities. However, renewal leases grew by 4.8%, and new leases by 2.8%, with blended spreads improving to 4.3% in July. Chandler Residences at Southern Post successfully transitioned to the stabilized portfolio, and Allied, the newest multifamily building in Harbor Point, is leasing ahead of schedule at 68% leased as of July 20, 2025. AHH is also evaluating bringing two high-quality multifamily assets, The Allure (93% leased) and Gainesville II (97% leased), from its real estate financing platform onto the balance sheet.

The General Contracting and Real Estate Services segment saw a significant decrease in gross profit, down 68.1% year-over-year to $1.384 million for the three months ended June 30, 2025. This reduction is primarily due to the substantial completion of previously executed projects and a corresponding decrease in backlog. This aligns with AHH's strategic shift away from reliance on fee income. Similarly, Real Estate Financing gross profit decreased by 20.6% year-over-year to $1.746 million, mainly due to decreased interest rates on certain loans, partially offset by higher principal balances on others.

Fortifying the Balance Sheet for Future Growth

Armada Hoffler is actively strengthening its balance sheet, a critical component of its quality-first strategy. As of June 30, 2025, unsecured debt constituted 54.5% of total borrowings, an increase from 53.9% a year prior, reflecting a deliberate shift towards greater financial flexibility. The company maintains robust liquidity, with $52.1 million in unrestricted cash and $114.5 million available under its revolving credit facility, totaling $172.2 million as of early August 2025.

A significant milestone was achieved in July 2025 with the successful closing of AHH's inaugural $115 million private debt placement. These senior unsecured notes, issued in three tranches with a blended interest rate of 5.86% and a weighted average maturity of 5.3 years, provide long-term, fixed-rate capital. Proceeds were strategically used to repay the Southern Post construction loan and a portion of the revolving credit facility, enhancing balance sheet flexibility and reducing interest rate risk. This transaction, coupled with a $150 million notional interest rate swap at a 2.5% fixed rate completed in Q1 2025, underscores AHH's commitment to mitigating interest rate volatility. The company anticipates recognizing approximately $2.0 million in net hedging gains as reductions to interest expense over the next 12 months.

The company's disciplined approach to capital management is further evidenced by Morningstar DBRS reaffirming its BBB credit rating with a stable outlook in January 2025, citing an improved leverage profile and diversified portfolio. While net debt to total adjusted EBITDA stood at 7.7x as of June 30, 2025, management expects this metric to improve to the 7.4x-7.5x range by year-end 2025 as new assets stabilize and contribute EBITDA. The company also proactively extended the maturity of its TD term loan facility by one year to May 2026.

In March 2025, AHH reset its quarterly common dividend to $0.14 per share. This strategic decision ensures the dividend is fully supported by operating property cash flow, reinforcing the company's commitment to sustainable payouts and long-term balance sheet strength. The AFFO payout ratio stands at 77.8%, or 97.2% after adjusting for non-cash interest income, demonstrating strong coverage.

Outlook: Beyond the Trough

Armada Hoffler has reaffirmed its full-year normalized FFO guidance of $1.00 to $1.10 per diluted share for 2025. Management explicitly characterizes 2025 as an "earnings trough," with expectations for increased growth in 2026 and beyond. This outlook is supported by stable operating performance from the existing portfolio, which continues to outperform initial 2025 guidance.

The anticipated trough in 2025 is primarily influenced by a planned reduction in the construction segment's gross profit, projected to be between $6.8 million and $8.6 million for the year. This reflects the strategic shift away from fee-based income. Additionally, increased interest expense from recently completed development pipelines will burden earnings until these assets are fully leased and stabilized. The stabilization of Chandler Residences, now expected in Q2 2025, and the ongoing lease-up of Allied at Harbor Point, will be critical drivers. Management is carefully managing Allied's lease-up velocity to maintain market rates and avoid cannibalization of other Harbor Point multifamily assets.

Looking ahead, AHH anticipates several catalysts for growth in 2026 and beyond. The full stabilization of newly delivered assets, continued organic growth within the existing portfolio, and the realization of higher rents from redeveloped retail spaces are expected to provide significant lift. Furthermore, management's rigorous expense management, including a projected 13% year-over-year reduction in general and administrative expenses for 2025, will contribute to margin expansion. The company also expects a more stabilized interest rate environment in late 2025 and 2026, which would further support its balance sheet strategy and reduce financing costs.

Investment Considerations and Risks

While Armada Hoffler's strategic rebalancing presents a compelling long-term investment thesis, several factors warrant investor consideration. The reduction in the construction backlog and the strategic de-emphasis of fee income will continue to impact near-term earnings, making the transition period crucial. The lease-up of new multifamily developments, particularly Allied and the ongoing improvements at Greenside in Charlotte (which will keep some units offline for 10-12 months), introduces execution risk. However, the strong leasing momentum at Allied (68% leased ahead of schedule) and the strategic location of Greenside mitigate some of this concern.

Macroeconomic uncertainty and potential tariffs remain external headwinds, though AHH is focused on controllable factors like cost management and operational efficiencies. The retail portfolio faces ongoing challenges from tenant bankruptcies (e.g., JOANN, Party City, Conn's), which collectively represent over 115,000 square feet of space. However, AHH's proactive leasing efforts have resulted in 85% of this space being under lease or LOI to higher-credit tenants at 20-25% higher rents, demonstrating effective risk mitigation. The office market, while strong for AHH's mixed-use assets, remains soft for dispositions, meaning trophy assets like the T. Rowe Price global headquarters will not be sold at a discount.

AHH's competitive positioning, while strong in its niche, faces challenges from larger, more specialized REITs. While AHH's vertical integration and regional expertise provide a competitive edge in project execution and local market adaptation, it may lag in overall scale-driven financial metrics like profitability and growth rates compared to national players. The company's commitment to maintaining approximately $80 million in its mezzanine program, without actively seeking new deals, reflects a disciplined approach to capital allocation but limits a historical source of higher-yield income.

Conclusion

Armada Hoffler is undergoing a profound and intentional transformation, shifting its business model to prioritize the quality and predictability of its income stream and balance sheet. This strategic rebalancing, spearheaded by new leadership, is designed to create a stronger, simpler, and more resilient company. While 2025 is projected as a trough year for earnings due to a planned reduction in construction activity and the lease-up of new developments, the underlying operational performance of its diversified property portfolio remains robust, characterized by high occupancy and positive re-leasing spreads across retail, office, and multifamily segments.

The company's disciplined capital allocation, marked by strategic dispositions, redevelopments, and a fortified balance sheet through fixed-rate debt and hedging, positions AHH for sustainable growth. Its competitive advantage lies in its vertically integrated model and expertise in creating high-amenity mixed-use environments that consistently outperform broader market trends. As AHH moves beyond its anticipated trough in 2025, the stabilization of key developments and continued organic growth are expected to drive increased shareholder value, making it a compelling consideration for investors seeking a quality-focused REIT poised for long-term appreciation.