‘Betting on ourselves’
Armada Hoffler’s IPO put national spotlight on Hampton Roads and company’s CEO.
- August 28, 2013
At 55, Lou Haddad exudes a sense of contentment about life. “To this day, I can’t wait to get to work in the morning, and I can’t wait to get home at night. I’ve been blessed beyond any reasonable expectation.”
Fitting words for a man who started in the construction industry as a ditch digger. Today, Haddad heads one of Virginia’s largest commercial real estate and construction companies.
As president and CEO at Armada Hoffler Properties Inc., Haddad steered the Virginia Beach firm through a new chapter this spring: an initial public offering that sold nearly 19 million shares of stock, at $11.50 a share. The company raised $218.5 million with actual proceeds, after underwriting and other costs, $199.2 million, according to public filings.
AHH debuted on the New York Stock Exchange on May 8 — 34 years after founder Daniel A. Hoffler began the company with a small office in Chesapeake. In mid-August, the company had a market cap of $198 million, and its stock was selling at $10.24 a share. It reported pro forma funds from operations of $6.5 million, or 20 cents a share, for the second quarter.
Haddad joined AHH in 1985 as a construction superintendent. Hoffler handpicked Haddad to lead the company in 1999, after he had risen through the ranks on the construction side. In a recent memoir penned by Hoffler with a co-writer, he describes Haddad as “the pile driver behind our aggressive construction schedules … This imposing man is a gentle giant with a warm demeanor but a laser-like business focus.”
That focus was on display in June when Haddad moved quickly to close Guadalajara, a restaurant and bar located in Town Center of Virginia Beach, Armada’s flagship project. The closure came a week after a shooting near the restaurant that left one person dead and five others injured. In 2010, there was a shooting near Guadalajara during a birthday party for NFL football player Michael Vick.
As the landlord, Haddad said AHH felt it was in the best interest of the center for the restaurant to close, and the owner agreed. “It’s just not worth the risk,” Haddad says.
A stickler for meeting construction schedules, Haddad gained a new appreciation for deadlines during the eight-month journey from private to public company. 2013 has been a big year for real estate investment trust (REIT) IPOs, and this chapter in Armada’s history would prove to be both challenging and expensive. “We spent nearly $9 million to go public,” says Haddad, “with the biggest portion of that going toward accounting and legal fees.”
Since REITs typically buy real estate rather than build it, Armada had to explain the company’s model of developing, building, owning and managing real estate to investors. Plus, it has a diverse mix of properties whereas many REITs deal in only one sector.
With Hampton Roads a blip on the radar of institutional investors, the package wasn’t an easy sell. “We found that people knew very little about the strength and population size and demographics of this market,” says Haddad.
In the end, after meetings and road shows with 60 institutional investors, many of them purchased stock.
Deborah Stearns, a longtime real estate executive in Hampton Roads and currently a senior vice president for Jones Lang LaSalle, says the IPO enhanced regional identity. “The institutional investors who heard Armada Hoffler’s story … that’s huge,” she says, “because we often feel that the story of Hampton Roads is not broadly known.”
She describes Haddad as a leader with a “quiet, effective demeanor … He’s very competent and smart.”
He’s also quick to puncture assumptions. Ask about his rise from manual laborer to CEO, and he interjects, “It’s not quite as romantic as that.” The reason he applied for a job as a manual laborer with Harkins Builders in Maryland all those years ago is because it was the only job opening at the company. His real goal was to get into Harkins’ management-training program. “I said, ‘Well, I’d like to come on board and do whatever you have to do until there is an opening’ ... It took a year before that opening came up.”
As for the flashy, stereotypical developer out speculating on land, Haddad says that has never been Armada Hoffler. “People have a concept of the developer with the gold chains, and he’s out there speculating on this, that and the other. We don’t speculate on land, and we don’t speculate on buildings.” AHH’s mantra: bring on a major tenant and do a build-to-suit.
At 6 feet, 4 inches, Haddad is no slouch in a public setting. Still, the IPO moved Haddad front and center as the face of Armada Hoffler. In the past, the more flamboyant Hoffler — known for entertaining the rich and famous at his 142-acre farm on the Eastern Shore and his big-game safaris — has been the commanding public figure.
Hoffler, the company’s executive chairman; A. Russell Kirk, vice chairman; Haddad; and other related partners own 40.5 percent of the company’s shares. Hoffler remains the largest shareholder with an ownership stake of about 17 percent.
Haddad says Hoffler’s longtime management team is convinced the IPO was the way to go. It provided a cash infusion for growth and incentives for the next generation of leaders. “Basically, we’ve left all of our equity in, not because we’re great guys, but because we’re betting on ourselves for the future,” says Haddad.
There are differences, though, in heading a public vs. a private company. Before, if something didn’t go well with a project, “It was just me and Dan sitting around saying, ‘We screwed up.’ Now we say, ‘Does that have to be reported?’ We’re much more aware of our responsibilities. There is more pressure,” Haddad says.
During the past three decades, Armada has built office, retail and multi-family projects in the mid-Atlantic, including the Williams Mullen office tower in Richmond and the 17-block Town Center at the beach. The IPO included a portfolio of 24 properties encompassing 2.8 million square feet, mostly in Virginia.
Haddad works in the Armada Hoffler office tower at town center, 21 stories up with a commanding view of the area off Independence Boulevard that has become Virginia Beach’s downtown.
By most measures, the nearly one million-square-foot center has been a success with occupancy rates at 94 percent. Work has begun on Phase Five, a 15-story tower that will include nine floors of office, 284 apartments, 30,000 square feet of retail and a 950-car parking garage.
The anchor tenant for the office space is an architecture firm, Clark Nexsen, which will lease three and a half floors for a new headquarters location.
Town Center has been done in partnership with the city of Virginia Beach. The city has assessed a special tax to pay for some of the infrastructure, including $57.5 million in public dollars for three parking garages. In this current phase, AHH expects to invest $83.2 million, and the city is investing $18 million in a fourth parking garage.
At the end of his workday, Haddad commutes nearly an hour to his version of paradise: a pastoral, 25-acre peninsula in Suffolk surrounded by Lake Prince where he likes to spend time with his wife and four adopted children, ages 16 to 25. “Our dream was to have a big house in the country and to fill it up with children.”
Haddad dropped out of college after his sophomore year but has encouraged his children to get an advanced education. “It turned out well for me, but I wouldn’t want to make that bet for everyone.”
In fact, Haddad and his wife, Mary, created a foundation in 1999 that seeks to empower children through education. “You can’t go through the adoption process without being attuned to the plight of at-risk children,” he says.
Virginia Business interviewed Haddad at his office in July. The following is an edited transcript:
Virginia Business: Did you ever dream when you came to Armada Hoffler at age 26 that you would one day be its CEO?
Haddad: Certainly my career has surpassed my expectations. I came here with a thought that this was a great place to build a dream on. When I met Dan and a couple of the other executives prior to coming on board, I was impressed with their demeanor and their vision of what they thought the company could be. That’s what convinced me to come.
VB: Where did you come from?
Haddad: I came from the Harkins Group in Silver Spring, Md. That’s where I got my start. I was with them for five or six years. I basically started from the ground up there, and that company sent me here to build a building once I had become a superintendent.
VB: Is it true that when you began at Harkins you literally were digging ditches?
VB: What did you learn as a manual laborer?
Haddad: I learned an awful lot. It helps me in a lot of ways to this day. Number one, by understanding what the people who build the buildings actually go through. It’s not just lines on paper with architectural plans. It’s real sweat and effort and problem solving on a daily basis. I was always enamored with big superstructures. That’s why I wanted to get into the business. So learning it from the ground up … gives you a much better appreciation for everything it takes to actually complete a structure like that.
Ultimately, when I got out of the construction side, I learned that there was an enormous amount of work beyond the physical construction in design, financing, entitlements and all the like. So the business was even more complex than I thought.
VB: I’d like to move to the IPO. What were the biggest challenges in taking Armada Hoffler public?
Haddad: It’s what I call the three M’s: our model, our mix and our market. Our business model is that we create the real estate and then put it in service as opposed to most REITs, which purchase completed real estate.
VB: Isn’t it a little unusual for an REIT to have such a major portion of its portfolio under contracting, and how did that fly with some of your potential investors?
Haddad: I want to make sure you understand, because there’s a misconception and then there’s a reality. The misconception is on the revenue side. Let me explain it to you this way. A typical REIT has 100 percent of its revenue come from rental incomes on properties and so if a REIT our size … I’ll just use some ballpark numbers. So if we have $50 million worth of revenue, and then you take out $10 million worth of expenses, then there’s $40 million worth of funds from operations, if you will. So because of our structure, construction revenue has to be added to that revenue.
We tried to convince the SEC [Securities Exchange Commission] that that is going to create confusion because on the construction side, as a general contractor, the revenue for a building all comes through your books. Let’s say that Armada Hoffler Construction Co. goes out and does a $50 million contract … The difference is Armada Hoffler Construction might make $1 million on that. So the construction piece isn’t critical to our revenue or our profit, but because of the way they make you report it, it looks like it’s half of your business. So that’s the misconception that will dog us for eternity.
VB: Was that a hard sell to some of your potential investors?
Haddad: They understood that, as an ancillary business, it’s construction, and construction has been profitable for us for the last 30 years. We can count on it to make a couple hundred million dollars. Not really material in what it adds to the bottom line, but very material in terms of our business model and that is creating the real estate and controlling the costs and then adding it to our portfolio …
The misnomer, if you will, was the development business and not really the construction business. So as a developer, that makes us a nonstandard model and that was a hurdle.
The mix was a hurdle because we are across multidisciplines. We do office and retail. We do hotels. We do multifamily. We have to do that because we’re in the public/private business … So that was nonstandard as well.
What was kind of neat about that whole process was we could overcome model and mix because we have a 30-year track record of profitability. We could overcome it through the fact that the exact same management team for nearly 30 years — Dan and myself and some others — is still in place.
The last piece, though, was our market. That was a major hurdle.
VB: Why was that?
Haddad: Hampton Roads is just not seen as an institutional-grade market … We were told by our investment bankers before we went out on the road that it was going to be a tough sell. They thought that we would end up with more retail investors than institutional investors, and we were okay with that.
VB: Did you end up with more retail than institutional?
Haddad: No, and that was the beauty of it … At the end of the day we were overwhelmed by the positive response of institutions. We had over 60 requests for meetings from institutions. We went and presented to those folks, and some 38 bought into the IPO. What’s really neat for our region is that all of those people now have a stake in Hampton Roads. So, hopefully that will help us get more and more exposure on a national basis.
VB: Why did Armada Hoffler decide
to go public?
Haddad: Why did we do it? We really had three goals … One was that Dan and I are very much interested in the legacy of the company and the company continuing. To that end, we’ve taken the last decade or so and built the next generation of management very carefully. As a private real estate company it’s very difficult to transfer wealth. So this was a model we could use to incentivize those folks to be here for 30 years.
Secondly was access to the public capital markets. As our projects grew bigger and more complex, the demand for additional capital increased beyond what Dan and I were comfortable funding.
The third thing was … we felt it was the best way to build additional personal wealth through stock growth of the company.
VB: In exchange for giving up some of the control, you also gave up some of the risk. You and Hoffler and another senior officer were the legal guarantors for the company’s debt, and now you’re legally off the hook, right?
Haddad: Correct … It constricts your growth. At some point you can only sign for so many dollars, before you can’t sign for it anymore.
VB: What about public/private partnerships. Doesn’t that represent a good chunk of Armada Hoffler’s business?
Haddad: That’s been a niche for the company since 1987 when we did the first one in downtown Hampton.
VB: What project was that?
Haddad: That was the Harbour Center project. It was the centerpiece of their downtown renaissance. We’ve done over 20 of them since. There’s not a lot of development companies doing them. The great part about public/private partnerships is you have the opportunity to do something that’s more than just bricks and sticks and dollars. You have the opportunity to really change a city’s fortunes by providing something that otherwise would not be created …That’s the good news. The bad news is they take a tremendous amount of patience, a tremendous amount of equity, and you have to deal with the public process.
VB: So how are things going as a public REIT for Armada Hoffler?
Haddad: It’s early. I don’t want to speak too soon. Preliminarily it appears that all we had hoped to achieve, we’ve achieved … We feel confident that if we continue doing what we’ve done over the last 30 years that we and our investors are going to be well rewarded. We intend to pay a 5.5 percent dividend … We’re on track for that with the goal being to over time responsibly raise that dividend to reward our long-term investors.
VB: What about the recent closure of Guadalajara here at Town Center of Virginia Beach following a fatal shooting? Did Armada Hoffler have to buy the restaurant out of its lease to force it to close?
Haddad: No. The owner of Guadalajara is a very responsible young man who is a good restaurant operator. We had a discussion, and we mutually decided that the best way to move forward was to close the restaurant.
VB: It’s been reported that 40 people will lose their jobs. Will some people think the closure was heavy handed since the shooting wasn’t directly linked to the restaurant?
Haddad: I can’t really comment on that … He said he felt comfortable he could get his people jobs. He owns other facilities as well in that marketplace … That’s really not on my radar screen. What we needed to do was the best thing for the project. The concern was that the Town Center could evolve into something less than what we in the city envisioned it to be.
VB: So what will happen to that space?
Haddad: We have many restaurant concepts that would like to come to Town Center, and we’re reviewing those for proper fits with what’s already here. We’ve also been approached by a couple of retailers. … I’m hoping that the proprietor [of Guadalajara] is going to come back with a concept that he’d like to do, either in that space or somewhere else in the Town Center.
VB: That’s seems like a pretty tough decision to me — to see a young man build up his business, this unfortunate event happens, and you say, ‘You’ve got to get out of here.’” What is it like being the CEO — the day-to-day responsibilities?
Haddad: In the same six-month period 29 years ago, I got married and I came to work at Armada Hoffler. It sounds hokey, but it’s like I was a double Powerball winner. To this day, I can’t wait to get to work in the morning, and I can’t wait to get home at night. I’ve been blessed beyond any reasonable expectation. I’ve never had a bad day on the job, but there are difficulties that come with it. You do have to make some tough decisions, but for the most part, we’ve got such great people and we’ve had extraordinary partnerships with various cities and other private individuals. It’s overwhelmingly positive, what I get to deal with every day.