AH Realty Trust, Inc. Q1 FY2024 earnings call

• Capital Allocation: Management, as largest equity holder with 12% stake, averse to dilution, will recycle assets at profits to raise capital when stock is undervalued.
• Portfolio Performance: Portfolio has 95% occupancy, strong commercial re-tenanting, multifamily occupancy over 95%, office at 94% due to mixed use locations. Signed 24 commercial leases, 2 office renewals, 19 retail renewals/new leases.
• Construction Business: Record results with $343 million backlog, Q1 profit consistent with guidance.
• Development Projects: Three projects expected to deliver by end 2024; Southern Post in Roswell progressing well; T. Rowe Price and Allied Department projects near completion.
• WeWork: Atlanta location income removed from 2024 guidance; Durham location renegotiated terms, WeWork to vacate one floor in 2025.

For the first quarter of 2024, property NOI was approximately $580,000 better than expected, with strong commercial re-tenanting and multifamily expense savings adding an additional $1 million of NOI above the midpoint. The Construction segment profit was $4.1 million in Q1, in line with guidance, with the midpoint of the year's Construction segment profit range remaining at $13.75 million, expecting Q2 profit to be consistent with Q1 and lower in Q3 and Q4. G&A expense was $5.7 million in Q1, marginally above guidance due to timing variances but expected to reach the midpoint of the range. Interest income was roughly $300,000 more than expected in Q1 but the full-year range was reduced by $1.5 million due to a partner exiting a real estate financing project. Interest expense was in line with guidance but the midpoint of the range was increased by $2 million due to higher interest rates. Property NOI contributed significantly to overall performance, with construction segment profit and G&A/interest components also playing key roles.

• NFFO guidance per diluted share remains $1.21 to $1.27.
• Removed material equity capital markets activity for rest of 2024.
• Construction profit midpoint $13.75 million, Q2 profit consistent with Q1, lower in Q3/Q4.
• Interest income reduced due to partner exiting a real estate financing project, interest expense range midpoint increased due to higher rates.
• Southern Post carry costs not a 2024 earnings benefit, but 2025 to benefit.
• Potential sale of real estate financing asset, expected interest income reduction in H2 2024, return capital to be redeployed into another preferred equity investment.

• Forward-looking statements subject to risks/uncertainties beyond control.
• Leverage remains elevated until new properties stabilize.
• Interest rate changes could affect interest expense.
• Partner actions regarding real estate financing projects could impact income.
• Office build-to-suit deals may not pencil due to construction costs and rent premiums.

Q: On leasing side, how to think about office and retail occupancy?

A: Shawn Tibbetts said retail is tit-for-tat, office occupancy affected by WeWork loss in Atlanta, multifamily adjusted occupancy 96.2% when adjusting for down units.

Q: Thoughts on office build-to-suit?

A: Lou Haddad said hesitant due to construction costs and rent spreads not penciling.

Q: Balance sheet leverage?

A: Lou Haddad explained leverage is due to development activity, expects to delever as projects stabilize, target 5.5x leverage in core portfolio eventually.