Armada Hoffler Properties, Inc. (NYSE:AHH) Q2 2020 Results Earnings Conference Call August 4, 2020 8:30 AM ET

Company Participants

Michael O’Hara - CFO
Louis Haddad - CEO

Conference Call Participants

Dave Rogers - Baird
Rob Stevenson - Janney
Jamie Feldman - Bank of America Merrill Lynch
Bill Crow - Raymond James

Operator

Welcome to our Armada Hoffler's Second Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded today, Tuesday August 04, 2020.

I will now turn the conference over to Michael O'Hara, Chief Financial Officer at Armada Hoffler. Please go ahead.

Michael O’Hara

Good morning and thank you for joining Armada Hoffler's Second Quarter 2020 Earnings Conference Call and Webcast. On this call this morning, in addition to myself is, Lou Haddad, CEO. The press release announcing our second quarter earnings, along with our quarterly supplemental package were distributed this morning. A replay of this call will be available shortly after the conclusion of the call through September 04, 2020.

The numbers to access the replay are provided in the earnings press release. For those who listen to the rebroadcast of this presentation, we remind you that remarks made herein are as of today, August 04, 2020 and will not be updated subsequent to this earnings call. During this call, we will make forward-looking statements, including statements related to the future performance of our portfolio, our development pipeline, impacts of acquisition and dispositions, a mezzanine program, our construction business, liquidity position, our portfolio performance and financing activities as well as comments on our guidance and outlook.

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, particularly in the light of the adverse impacts of the COVID-19 pandemic on U.S. and global economies.

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 in our press release this morning and the risk factors disclosed in documents we have filed with or furnished to the SEC. We'll also discuss certain non-GAAP financial measures, including, but not limited to, FFO and normalized FFO.

Definitions of these non-GAAP measures as well as reconciliations to the most comparable GAAP measures are included in the quarterly supplemental package, which is available on our website, armadahoffler.com.

Now I'll turn the call over to Louis.

Louis Haddad

Thanks Mike. Good morning, everyone, and thank you for joining us today. As we all continue to fight the pandemic in our own ways, we express our gratitude to those who are battling for us on the front lines, and pray for all who have been affected by COVID-19.

We are grateful that the health and wellbeing of our employees and their families remain largely unaffected by the virus and that our company remains strong and optimistic about our future. Obviously, we must all remain diligent in our activities and stay prepared for potential setbacks.

You saw from our earnings release this morning, and the various press releases we’ve issued over the last few weeks. We've been extremely busy at the company over the last few months. Our activities have been consistent with the formula we've employed during the last four recessions that the company has endured; strengthen the balance sheet, work with your tenants, cut expenses, and most importantly, be ready to outperform your peers in the subsequent recovery.

After my remarks, Mike will relay to you how we both did our liquidity position to pre pandemic levels, maximize rent collections to nearly normalized levels and reduce expenses. Prior to that, and I will focus on the last and most important facet of our strategy, positioning the company for growth in the subsequent recovery.

Although the improvement in the economy has been uneven todate and most probably will still incur some setbacks, we believe that the most likely case to be a slow, bumpy climb back to normalcy over the next 18 to 24 months. We believe that with our multiple property types and operating divisions, we will thrive in such an environment, much as we have done in the past.

Today, we reported earnings of $0.29 of normalized FFO for the quarter. This result combined with $0.32 from the first quarter gives us the highest earnings during any six month period in our history. Although the second half will not be quite as strong, primarily due to over $100 million of asset sales, and to a lesser extent bad debt assumptions. We are confident in our guidance for the year in the range of $1.09 to $1 13 per share.

Although there remains a material amount of uncertainty surrounding the effects of the virus on the economy, as a company that has a hard won reputation for transparency, we think that it is important to offer guidance, based on the information we have available to us, and our best projection of our company performance for the remainder of the year.

Our guidance reflects the proactive measures we've taken to strengthen the balance sheet, as well as taking into account the various effects the pandemic may have on our company, tenants and clients.

As Mike walks you through the components of our guidance later in the call, please know that this level of performance is only made possible through the efforts of a seasoned, dedicated, and motivated group of professionals who have risen to the occasion under extremely adverse conditions to stabilize our operations. On behalf of our board of directors, our heartfelt thanks to our team for the passion, determination and excellence they continue to display.

While we are extremely proud of the accomplishments to date, we're most excited about the moves being made to position the company for a return to growth with the eventual upswing in the economy.

Long before the pandemic, we embarked on a long term disciplined rotation out of much of our older non-core retail centers into higher quality, multifamily and mixed use assets, both through development and acquisition. The seven asset sale completed in the second quarter was a major step in the continuation of this process.

As a part of this strategy, we intend to continue the disposition process with a few smaller retail assets. These dispositions are strong cash position, anticipated payoff of three mezzanine loans and measured use of the preferred stock ATM give us the capital to potentially restart the development process and pursue additional acquisitions later this year.

To that end, we are proceeding with the acquisition of the Edison Apartment complex in Richmond, Virginia, as previously disclosed in our original 2020 guidance. This 174 unit asset was developed by the company in partnership with an experienced Richmond based multifamily developer. As such, current ownership includes several members from our management team and board of directors. The building could not be acquired until this year due to the historic tax credit structure of the entity. The complex is within sight of the state capital and has achieved high occupancy and increasing rents for several years. We will be acquiring the asset at a 675 cap rate, which equates to a $25 million purchase price with $7.5 billion of equity paid in the form of OP units priced at $12 in keeping with our track record of selling units at a premium to the current stock price. We appreciate our 40% joint venture partners, vote of confidence in our company by taking units priced at a meaningful premium to the current market price of our common stock.

With our increased focus in the multifamily sector, we’ve created a new division internally to manage the operations, growth and opportunities we are seeing in this asset class. This group will focus on a rapidly expanding portfolio and targeted acquisitions, combined with a robust pipeline of high quality apartment developments taking shape. The new division is comprised of seasoned individuals with considerable multifamily experience, who have been selected from existing development, construction and asset management personnel to spearhead all aspects of this initiative.

With this increased focus on multifamily, we expect this piece of our business to expand at a faster rate than the office and retail segments, while we strive to grow the portfolio as a whole. To be clear, mixed use assets, CBD office, and high-quality grocery anchored retail will also continue to be significant drivers of growth and value for the company. The key to our 40-year track record of success has been the strength of our diversified platform, and the flexibility it affords us to adapt and capitalize on the ever changing landscape of commercial real estate.

Over the next few months, we expect to establish a timeline for the ramp up of the previously halted development pipeline, as well as new opportunities that have come our way. Our expectation is that we will be able to enhance the return on cost of new developments that break ground over the next several months, due to our construction divisions ability to procure lower subcontractor pricing than was previously estimated.

Meanwhile, we have delivered the last two projects from our previous pipeline. Summit Place, one of two student housing complexes in Charleston, South Carolina, is now open and stands at 98% preleased for the upcoming 12 months. This asset, along with Hoffler Place, which is fully leased, gives us two high quality assets on historic Charleston Peninsula. And combined with our asset at Johns Hopkins University, our student housing portfolio stands at over 95% preleased.

We've also delivered the Wills Wharf office building at Baltimore's Harbor Point. This trophy office building is nearly 50% leased, after the rework termination, and we are in negotiations with two high credit tenants that would fill the rest of the vacancy. Despite the slower pace of lease negotiations due to the pandemic, with the encouraging amount of activity in this sub market, we're hopeful of having new leases in place by year end.

Turning to the construction business, we continue to collect third party fees at a very brisk pace. As most of you know, this substantial income generator is uniquely ours across the unique REIT universe. You'll recall that we entered the year with one of our largest third party contract backlogs ever.

As you can see, we ended the quarter with nearly $200 million in remaining contract value, a total that will take us well into 2021. In addition to adhering to all local pandemic guidelines, we have initiated protocols for temperature testing, protective procedures and safety gear at all of our construction job sites. Our construction group has maintained this high rate of production and profitability, despite the difficult conditions. This performance is no different than what we have come to expect from these professionals, and we greatly appreciate their dedication to the company.

Assuming no change in government guidelines, we expect this division to earn around $7.5 million of gross profit, which is in line with our previously disclosed estimates. And as I said earlier, we look forward to using the unique advantage this division gives us by tightening budgets and schedules on our upcoming development projects.

The mezzanine lending program is also using very robust income. This aspect of our business made possible through long term relationships with seasoned developers and a steady influence that we enjoy through our construction division will contribute over $17 million of net income for 2020.

In keeping with the optionality that this structure provides us, we expect three of these loans will be retired over the next several months; one, through a pre-negotiated discount purchase price for the Nexton Square, Lifestyle Center in the Charleston area. One is on the market, the Delray Whole Foods Center, and lastly, Annapolis Junction, where we hope to negotiate a purchase.

We believe that our ability to create a favorable tax and earn out structure for our partner will prove to be more advantageous to him than taking the property out to market. With these three payoffs, and only the interlock loans active in 2021, we expect this aspect of our business to diminish over the next few years. This is in keeping with our previously stated goal of using more of our capital and human resources on our own projects to more quickly grow net asset value.

Six months ago, we were on the cusp of achieving one of our long term goals. Financial metrics consistent with supporting a share price in excess of $20. And we were well on our way to a $2 billion market cap. Even with those lofty achievements, we recognize then that to sustain and ultimately eclipse that level of performance, we would need to incrementally refine our business model over the subsequent several quarters.

The adjustments entailed decreasing the percentage of traditional retail in our portfolio, while enhancing our commitment to the multifamily and mixed use sectors. Also underway is the plan reduction of the mezzanine loan components of our income, coupled with the overall reduction in leverage. Although we could have not foreseen the subsequent disruption caused by the pandemic, and we certainly don't want to downplay its horrific human costs, it has enabled us to accelerate these initiatives in a meaningful way.

As the company's largest equity holder, management believes the current share price does not come close to representing the value of our diversified, high quality portfolio in our construction and development businesses. Over the next few quarters, we believe that investors will recognize the demonstrable strength of our diversified model and the quality of our portfolio. We expect investors will reward the company in much the same way as they have in previous years.

As most of you know, through 2019, we more than tripled the returns of the rate index over the preceding five years. Before I turn it over to Mike, I'd like to thank our board for the swift action in reinstituting our dividends. We believe that it was very prudent to suspend the dividend in early April, with so many unknowns surrounding our industry.

Although we are far from sounding the all clear, we believe that our strong results and even stronger prospects for growth over the next couple of years merit a reinitiation of the payments with an eye towards a measured ramping of the dividend level. Mike?

Michael O’Hara

Thanks Lou. Good morning. These are certainly unprecedented times and hope you and your families are healthy. Three months ago on our last earnings call; we discussed how we are reacting to the uncertainty of the pandemics impact on the health and economy of the country. With its uncertainty, we took steps to prepare the company for the worst.

Fortunately, this time, it looks like the country is on the road to recovery, albeit bumpy, we look forward to repositioning the company and taking advantage of the opportunities we are seeing.

The second quarter reported FFO of $0.28 and normalized FFO of $0.29 per share. The effects of the pandemic on the quarter included deferred rent $5.4 million, and bad debt write-offs of $1.2 million. We are projecting another $1.5 million of bad debt towards the end of the year from a combination of rent abatements and bankruptcies. We believe this is a conservative estimate given the current economic environment. The portfolio has performed well in the second quarter under the circumstances with rent collections of 87% portfolio wide and we expect 96% for the month of July.

We have agreements granting rent deferrals with 90% of the tenants that have requested them, with deferred rent being paid over the next three months to multiple years depending on the structure. These run the full range from simple letter agreements to lease amendments, renewals and lease extensions. Please see the new pages we added to the supplemental package with detailed information on rent collections and deferrals starting on page 27.

Our core operating portfolio occupancy for the second quarter was strong at 94% with offset 97%, retail at 95% and multifamily 88%. Multifamily occupancy was down compared to last quarter due to the seasonality of the two student housing projects. Without the effect of the student housing properties, occupancy was 94% for multifamily, which is higher than the last quarter.

The pandemic certainly had a huge impact on our same-store NOI in the second quarter. GAAP was negative 6.7%, and cash flow was negative 28.8% with retail negative 44.9% on a cash basis. The cash NOI numbers excluded $4.3 million of deferred rent. Without the effect of the deferred rent, same-store NOI was negative 3.8% and retail was negative 6.7%.

Releasing spreads were strong for the quarter with both office and retail positive on a GAAP and cash basis. Office was positive at 8.6% on GAAP and 4.7% on cash basis. Retail was positive 7.7% on GAAP and 5.5% on a cash basis.

For further details on the second quarter, please see our supplemental package that was published this morning. We continue to take action to strengthen the balance sheet for the recession and future growth. With our common stock trading at current levels, we’re utilizing other sources of capital, including asset sales and issuing preferred stock under our ATM program.

In May, we sold seven unencumbered retail centers for $90 million. Use of the proceeds included paying down the credit facility by $62 million and the remainder in cash. We continue to review our portfolio to identify disposition candidates for additional capital. We currently have two additional dispositions of unencumbered assets under on LOI, that would raise approximately $13 million in cash.

In addition to asset sales, we have been active with the preferred stock portion of ATM program that we put in place last quarter. Last month, we raised $16.3 million at an average price of $22.88 for a yield of 7.4%, and we plan on continuing to be active, assuming favorable market conditions.

Given a temporarily depressed level of our common stock, we believe preferred stock and asset sale are our lowest cost of capital at this time. With these steps, we have enhanced our liquidity position. At quarter end, we had $75 million in cash and $20 million available under our credit facility.

In addition, we raised $16.2 million of cash to the preferred ATM after quarter end. As discussed last quarter, we took steps to position the company immediately after the pandemic became apparent in March. These steps included deferring development projects, non-essential CapEx and acquisitions as well as reducing expenses, including pay cuts for the board and CEO and lastly, suspending the common dividend.

At this time, we have not started any of the suspended development projects, but hope to do so over the next several months, if the economy continues to stabilize. Currently two projects are in the final stages development, Wills Wharf and Summit Place.

The remaining costs to complete these projects will be funded by the construction loans and therefore no immediate cash requirements. As for redevelopment, accounts and redevelopment projects are well underway. Columbus village is now 91% leased and close to completion. The renovation of The Cosmopolitan Apartments continue but now at a slower pace to conserve cash. The expected cash requirement for these projects is $7 million for the remainder of 2020.

We have three development projects that were suspended in the second quarter. The total cost the date of these projects is $23 million, including $14 million for the cost of the land. Other than minimal carry costs, there are no future cash requirements until construction is commenced.

In summary, the remaining 2020 cash requirements for the development and redevelopment project are $7 million. As for our mezzanine loan program, two projects that are currently under construction, Interlock and the Solis at Interlock, both of which are located in Atlanta, and are scheduled to be completed in the second quarter of next year with the loans expected to be outstanding, at least till 2021 to allow stabilization.

We believe both these projects to trophy assets will sell for low cap rates resulting in significant profits for our partners. As with our development projects, we have no remaining 2020 cash requirements with the project construction loans funding all remaining costs to complete.

With the sale and loan payoffs of the Delray, Whole Foods Center and Annapolis Junction being delayed due to the pandemic, we decided to stop recognizing GAAP interest income on these loans effective April 1. We believe this is prudent to allow for an extended hold period due to the pandemic.

As discussed in the past, all mezzanine projects were underwritten for the same standard as our own development projects, and we are happy to assume ownership. We believe all these as top quality assets with a long term value, and we plan on exercising our discounted purchase option on Nexton Square as Lou said, we are negotiating to acquire Annapolis junction.

As we’ve discussed in the past, the mezzanine program will become the smaller portion of our business, with the expected payoff of three loans this year, only the two interlock loans will be outstanding in 2021, that's resulting in substantially smaller mezz program going forward.

As for future mezz activity, we’ll be focused on projects that are smaller, have shorter schedules from inception to pay-off. As to debt maturities, we have no maturities for the remainder of 2020 and four loans mature in 2021. We have begun discussions with the lenders on all four loans and do not anticipate any issues getting these refinanced.

As discussed in the past, our debt strategy has been a targeted mix of 50% fixed, and 50% of variable rate debt along with an interest rate hedging strategy. This quarter, we continue to be active with our hedging strategy. We bought $100 million of LIBOR caps at 50 basis points for three years.

At June 30, 61% of our debt was fixed and 100% was either fixed or hedged. The weighted average interest rate as of June 30 was 3%, with these moves and the current LIBOR for yield curve, interest expense is expected to be low for the next couple of years which lowers our fixed charge thereby -- therefore increasing coverage.

As Lou discussed, we issued -- updated 2020 guidance of $1.09 to $1 13 or normalized FFO per share. This guidance includes an additional $1.5 million of projected bad debt, citing the two properties for $13 million acquiring Nexton square, the Edison Apartments and raising additional capital to the preferred ATM. The details of our guidance are on page six of the supplemental package. In these uncertain times, we will continue to be transparent and keep you informed as it affects our company.

Now I’ll turn the call back to Lou.

Louis Haddad

Thanks Mike. Before we start the question and answer period, I’ll mention that although it might have gotten lost in the midst of the pandemic, the decision to opt out of MUTA, as well as the adoption of several other best practices serve to enhance what we believe was an already stellar ESG stance.

I hope you can find time to take a look at our 2019 sustainability report and related enhancements on our website. The current state of affairs only emphasizes the need for good corporate citizenship.

Operator, we would now like to begin the question-and-answer session.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from line of Dave Rogers of Baird. Please proceed with your question.

Dave Rogers

Hey good morning, guys. And thanks for all the details this morning on the quarter and the outlook. I wanted to maybe start Lou on the acquisition side. You kind of made two comments. One is more multifamily in the future, and then potentially more acquisitions as the year moves on and as you move into 2021. So maybe tell us what you're seeing out there and how you think that maybe some of the multifamily acquisitions from a yield perspective will fit in with the portfolio and kind of get you to the goals that you're looking for.

Louis Haddad

Sure. Thanks, Dave. The -- well first up is the one we just announced this morning, which is a great project for us. It's been a great project for a number of years. This is our first opportunity to bring it into the REIT. And we're happy to take stock or OP units, in exchange for that equity; it can be a great addition to the portfolio.

Secondly, as we also mentioned we’re hopeful of getting control of Annapolis junction, which is a great asset, right outside of Fort Meade, and our expectation is that we'll be able to consummate a deal here in the not too distant future. Beyond that, what's really taking shape is a lot of exciting opportunities in our development pipeline. As we had pre-announced, as we announced that pipeline, pre pandemic, you'll recall that the majority of what was in those projects was multifamily.

With one pair multifamily at Chronicle Mill, outside of Charlotte, as well as Roswell, Georgia, where it has a substantial portion of multifamily. The opportunities that we're seeing coming on our way are largely those in the multifamily sector, in really strong markets in the southeast. And at this point in time, we're basically just cherry picking, deciding which ones that we want to execute on.

So we, this is all in keeping with the same rotation that we talked about a year ago, when we did our first portfolio review or extensive portfolio review and came up with the, the assets that we wanted to sell, which we've subsequently executed on. And you'll see that rotation continue. I believe that where we end up is somewhere around a third, a third, a third, as far as office retail and multifamily, at least in the foreseeable future, and we're very comfortable with that kind of a mix.

Dave Rogers

Great, thanks for that Lou. Maybe second on Charleston, obviously great success on the lease up of the student housing assets there. Maybe any additional detail as you said at the beginning of the call, I may have missed it. But were these just kind of one-off student leases? Was there master lease from the university? Any clauses about COVID that we should just be aware of, and I get how these end up shaping up relative to pro forma, they leased up pretty quickly this year?

Louis Haddad

Yes, obviously, we're very pleased with the lease-up on the student housing section. No, there aren't any master leases of any note in any of the three properties. Those were all one-off and with the -- in the case of Charleston, they are simply 12 month leases, with no contingencies whatsoever. At Johns Hopkins, students do have the ability for a significant penalty to get out of their lease, at least the preponderance of those leases contain that clause. They contained that clause from the beginning; we don't anticipate a whole lot there.

With regard to pro forma, I'll tell you, to be frank, that second student housing project in Charleston is not where we wanted it to be pro forma wise. We wanted to make sure it was both. We'll worry about rent escalations later. But the initial lease up contains some incentives, and therefore isn't where we want it to be, from a return on cost standpoint. But our expectation is that will stabilize over the next few years and be a great asset for us.

Dave Rogers

Great, maybe last question for Lou, you and Mike. Just with regard to capital and liquidity. Mike, you ran through the liquidity which appreciate, but maybe go back to the dividend and reinstating the common dividend, I think after the first quarter call, you had said that you guys were pretty comfortable putting the dividend back in place at a lower rate, which I understand on the flip side, you had also indicated that leverage was a little higher coming into this than you wanted.

So I guess maybe I'll just bridge the gap of reinstituting the common dividends that you didn't need for tactical reasons for the rest of the year and then also issuing on the preferred ATM which you know will serve to increase leverage again. So I just tying those comments that would be helpful.

Michael O’Hara

Hi, good morning Dave. So, yes, certainly the -- we've been focused on liquidity right now, more so than leverage with the bad debt, and obviously affecting EBITDA, which is increase our debt-to-EBITDA, but that will come back over time, as we focus on liquidity. So certainly the enhanced liquidity position, certainly makes us more comfortable putting the dividend back out at $0.11 a share, as well as our rent collections continue to go up, and looking at 96% for April, we now have month of July, we now have more than enough cash flow, in order to cover all our requirements that I went through, as well as paying the dividend.

Dave Rogers

Great, thank you.

Operator

Thank you. Our next question comes from line of Rob Stevenson with Janney. Please proceed with your question.

Rob Stevenson

Good morning, guys. Mike, have you had to go to a cash accounting on any of your tenants at this point that's fallen below the sort of 75% collectability threshold?

Michael O’Hara

There was -- there's been a change in GAAP recently, Rob, where the new lease standards that came out last year. It’s like now either at games, it's collectible or not. There's no kind of midway anymore. We certainly spent a lot of time going through all our attendance and going through where we thought everybody was going to fall. So certainly on the $1.3 million that we wrote-off, we deemed as uncollectible. And then all the associated GAAP that goes with that and you know, straight line rent and etcetera.

And we continue that going through and say, okay, where are the tenants we have here? Who do we think might come into trouble, based on what the economy looks like over the next six months? And based on that where we came up with the projection, or we're going to say out there, it's another $1.5 million we're expecting this year now. We don't have a crystal ball. That's what we think it's going to be. Hopefully it's more on the conservative side.

Rob Stevenson

Okay. And then how many tenants do you have that haven't paid and where you haven't come to some sort of agreement at this point?

Michael O’Hara

Right now, we have -- we got a deck on page 28. We've got 16 tenants right now that we expect to collect it. We're in some sort of negotiations but not completely done at this point in time. As of today, that number is down to 14. We've gotten a couple more tenants. Not at this point in time, we haven't reserved for those bad debt because we expect to get something done.

Rob Stevenson

Okay. And then how are you guys thinking about, restarting development and then possibly having to stop it again, if there's another significant outbreak. I mean, are you guys planning to try to get to a threshold that makes sense where you could just, stop the site? Is that a situation where you're thinking, probably wait to early 2021 until some of this is better known to restart this, how is that sort of coming into play, because it's typically depending on the project where you are on a project to be difficult to stop construction again.

Louis Haddad

Yes, Rob, We suspended -- development projects that we suspended had not broken ground yet. So had they broken ground, we would not have stopped. We've never stopped a construction project, and as you've seen, all construction sites essentially worked right through the pandemic. If we decide to start these, you're looking at 18 to 22 months schedules in terms of delivering. So we don't expect, once we start to have to stop and when we deliver nearly two years later, our expectation is that the current circumstances will be well over.

Rob Stevenson

Okay. And then Lou, how are you characterizing the WeWork negotiations on their other locations with you and your partners? Are they still, is it still in negotiation to try to get back some space and reduce the lease? Are they happy, and you're happy with them and your other locations? How -- how's that these days?

Louis Haddad

Well, again, there's -- I will make sure we're clear. We have one WeWork location and that is in Durham, North Carolina. They are open, operating and paying rent. They along with a couple hundred of our other tenants had requested some sort of deferral for a couple of months during the year and that was all worked out.

Obviously in Baltimore, we negotiated an exit and our partners, the last location which tangentially we have, through our mezzanine loan with our partners. Our partners are in negotiations with WeWork to right size that lease. So, all the negotiations have been very professional. The guys seem to really believe wholeheartedly in their -- in their business model, and we're certainly pulling for them and look forward to them to continue paying the rent in Durham.

Rob Stevenson

Okay, and then last one from me. Mike, what's the sort of max amount of preferred that you'd really want to have as a percentage of your capital stack going forward? I mean, how much road do you have to keep issuing preferred before you sort of max where you want it? Where you, you think it should be as part of the cap stack?

Michael O’Hara

Yes, so in the past we said we want that to be in the 10% to 15% range, and that's still where we're thinking. Now the only issue now is our market cap is half of what it used to be a while ago. But so, if we do more preferred now, it would be the anticipation of the equity market cap overall increasing so we stay in that 10% to 15% range.

Rob Stevenson

Okay, guys. Thanks.

Louis Haddad

We'd like to think that we're not going to continue trading it nine times earnings. So we'll see.

Operator

Thank you. Our next question comes from line of Jamie Feldman with Bank of America Merrill Lynch. Please proceed with your question.

Jamie Feldman

Thank you, and good morning. I guess just sticking with the capital stack, how should we think about where you'd be willing to take leverage as you ramp up these development projects?

Michael O’Hara

Good morning, Jamie. Our target range has not has not changed on that. That is core debt to core EBITDA in the six times sudden range, and maxing out in high seven’s times that's not going to change. We'll continue to manage to that. We will not start the development projects unless we've got the capital to get those underway.

Louis Haddad

Jamie, one thing to keep in mind on our development projects. As I said before, these are 18 to 22 month schedules. The land purchases have already been made. And so you're looking at a very slow ramp up on any kind of equity need.

Jamie Feldman

Okay. And then as you look at the preferred more, which I think you said something, it's sevens yield, how do you just think about your cost of capital versus the returns on these investments?

Michael O’Hara

So obviously, it'd be a mix of debt and equity. So obviously the equity portion has got more expensive. It was an average of 7.4%. But since then actually the preferred now is trading above par. So that's certainly going to be helpful on the costs on the preferred side. And on the other side of the equation, the debt side has dropped substantially. So now you're looking at 3% debt. So a mix of the two, obviously, you'd have more debt than equity, you know works out to the cost of capital, works for the development projects will work in that, and have it be accretive.

Louis Haddad

…And more important graphs -- perhaps as importantly, obviously, there is no dilution and compilation effect on the preferred.

Jamie Feldman

Okay, so you say your IRRs are not that different than pre-pandemic based on all the moves in capital costs or you've actually you've seen some bleed, or projected bleed?

Louis Haddad

Jamie, like I said earlier in my remarks, we believe it's going to be better. This is, as you guys know, and you probably heard me say too many times, this is our fifth recession. For the first four, we believe the fifth one is going to be no different. So we're going to get a nice discount on construction pricing coming out of it. And that should serve to enhance returns. Not by a lot, but by enough to be measurable.

Jamie Feldman

Okay. And then, heading into this you had a good amount of retail and experiential retail in the portfolio. How do you think about, I guess first, the continued potential pain for those tenants and if you need to flush any of those out of the portfolio? And then second, just thinking about your business longer term, what the right type of retailers or right type of mix would be?

Louis Haddad

Sure. Like I said that the percentage of traditional retail is going to continue to fall, even though on an absolute basis, it may grow because all of our grocery partners are anxious to expand, as opposed to contract. But for us, remember, a large part of what we do is mixed use and a large part of mixed use is having that experiential retail on these ground floors, that's how you enhance your returns on both the office and the multifamily. So that's going to continue to be a part of our portfolio.

We've seen that movie before, so to speak. We're going to have to continue working with our tenants over the next several months. We don't believe that on the other side of this thing, that people are going to lose their appetite for going to hair salons and spas and exercise places in restaurants and the like. We think if anything, that's going to accelerate.

And like you guys have heard me say before, you don't build real estate for what's going to happen over the next six months, you build it for the long term. And so we believe mixed use and walkability and less use of commuters is going to be -- continue being a trend, and a part of that trend is having options for people to take advantage of -- their place of work and where they live.

Jamie Feldman

Okay, thank you. And then just finally, I think you had mentioned more bad debt to come in the back half of the year and lease termination fees. Can you talk specifically about what you expect? And then, just as why would you have taken it already if you see it coming?

Michael O’Hara

First off, because they're not -- they're not bad. This point in time we expect to collect. But what we're saying is, chances are the probability is we're not going to collect 100% of the tenants, or the rent that's due and some other tenants may go into bankruptcy during this pandemic.

Louis Haddad

We thought Jamie, it was important for us to re-establish guidance. We've come to be known for our transparency. We have a lot of information available. We get as much of it out there as possible. And in order to put that guidance out and not having to revise it, we worked really hard on where the low end of the range could be.

And in a worst reasonable case scenario, and that's where you see what Mike talked about, potentially within our guidance, we are taking a conservative view of what may happen. And we're hopeful that none of it happens. But we thought it would be prudent for -- mainly for our analysts, to make sure that you knew that we were taking all that into account.

Jamie Feldman

So would you say that bad debt is tied to specific tenants or it's more of just a bucket?

Michael O’Hara

We, we went through, like I was saying, we went through every tenant and put and we, you know, we went through and say, Okay, what is the likelihood of these tenants and just went down through the whole the, whole list. And what we came up with is we came up with who we think are the most likely candidates to go bad here between now and the end of the year and went to analysis and went through a probability and from there just kind of did a matrix and came up with a number.

Jamie Feldman

Okay, and then what about the termination fee? Are those set, you're going to get them, or is that also speculative?

Michael O’Hara

We are in negotiations with a couple of tenants who want to give back some space, part of that is termination fees. Now they're not done at this point in time, but expect that we expected to happen.

Jamie Feldman

Okay. What's the size?

Michael O’Hara

The termination fees, net of expenses we're thinking could be upwards of $1 million.

Jamie Feldman

The $1 million total of earnings impact?

Louis Haddad

Correct, yes.

Jamie Feldman

Okay. All right. Thank you.

Operator

Thank you. Our next question comes from the line of Bill Crow with Raymond James. Please proceed with your question.

Bill Crow

Good morning, guys. Lou, I have heard your discussion about a $20 share valuation and I certainly appreciate your comments about how today's value doesn't come anywhere close to reflecting what you all have built and are building. And so that leads to the question of why issue any equity at $12 a share, OP units at $12 a share, when you wouldn't have done that four or five months ago and you may not do that six months from now, and you said it was kind of the first opportunity to acquire this particular asset? Just talk about how the valuation dynamics would have changed, if you had waited six months or a year?

Louis Haddad

I think a lot of things could have changed Bill. What we were looking at was the ability to get, I mean I don't think anybody on the phone has heard of a fully leased multifamily project and a capital city that trades at a 6.75% cap. So when you take the 6.75% on top of charging a 20% premium for the stock price, I think, as a CEO of the REIT we've made a very good deal. Add to that, that is immediately accretive, and we didn't see any reason to wait.

Bill Crow

How many more? I assume there is no pressure from the partners to have or modify it right now, right?

Louis Haddad

No, sir. It was initiated by the REIT.

Bill Crow

Yes, okay. And how many more properties are there that the Board or management team owns interest in, that might be a good fit for Armada and kind of build in that pipeline?

Louis Haddad

I believe that's the last one, Mike?

Michael O’Hara

Yes, we've got we have partial minority ownership in a couple of hotels and that's the last thing we're going to put the REIT obviously. You know you are a hotel guy Bill, but how do we want to do...

Bill Crow

Please don't…

Michael O’Hara

And I think that's, that's it. Certainly, there's been you know, we've talked about the construction company, building the two buildings at the oceanfront that Lou and I are involved in the Hyatt house at the ocean front and in the multifamily properties going up next to it, but neither one of those we have we have any interest in acquiring.

Bill Crow

Got you. And then just bigger picture, when you're thinking about shifting, increasing your multifamily exposure? You're right, 6.75% cap rate is pretty attractive, it really is attractive. But you think you can make the shift kind of a neutral basis, selling retail and redeploying in the multifamily? Is that possible at this point?

Louis Haddad

It takes time Bill. So like I said in my opening comments, we knew even when the stock was trading at 19 something, we knew long term that we wanted to make this move. We thought it would take a few years, because we weren't interested in destroying earnings in the process. This obviously the pandemic gives us the opportunity to accelerate it a bit, but at the same time we're not looking to retrace our earnings footsteps beyond this year.

So we'll be measured with it. We have no desire to fire sale anything. More likely, we're going to grow our way out of it. We have a significant spread in the multifamily projects that we're developing. And so our hope is that we can approach yields there that will offset the yields that we lose on the retail side. So we've got to be patient in order to reserve the ability to increase dividends and increase earnings.

Bill Crow

All right, one last one for me. Appreciate the time. In your student housing properties, did you approach the schools themselves to see if you could do large leases with them?

Louis Haddad

No. I mean, Hopkins, for years has had a lease of around 40 or so units that they didn't do this year. And actually in Charleston, the College of Charleston put out an RFP to try and get bids. But by time they got around to it, we had already filled up. So we didn't really need to do anything on the master lease side.

Bill Crow

Got you. Thanks, appreciate it.

Operator

Thank you. Ladies and gentlemen, that concludes our question and answer session. I'll turn the floor back to Mr. Haddad for any final comments.

Louis Haddad

Thanks very much for your interest in the company. We appreciate everybody's time this morning. And we are available to take additional questions, if there are any further otherwise; I look forward to speaking with you next quarter and stay tuned for more press releases. Thank you.

Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.