Business context and reporting period
Armada Hoffler Properties, Inc. (the registrant named in the filing) is a full-service real estate company focused on developing, building, owning and managing office, retail and multifamily properties, primarily in the Mid-Atlantic and Southeast. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017. The interim financial statements were reviewed, not audited.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $68.3 million | $63.9 million | $242.5 million | $181.4 million |
| Operating income | $8.0 million | $6.9 million | $24.7 million | $19.6 million |
| Net income | $10.5 million | $7.9 million | $24.2 million | $37.6 million |
| Net income attributable to stockholders | $7.5 million | $5.2 million | $16.9 million | $24.6 million |
| Diluted EPS attributable to stockholders | $0.17 | $0.15 | $0.41 | $0.77 |
| FFO per diluted share and unit | $0.25 | $0.25 | $0.75 | $0.68 |
| Normalized FFO per diluted share and unit | $0.25 | $0.26 | $0.75 | $0.76 |
Quarterly property NOI was $17.6 million, compared with $17.1 million; the broader segment NOI measure including construction services was $19.4 million, versus $18.4 million. Core portfolio occupancy was 94.7% at quarter-end, compared with 94.2% at June 30, 2017; management noted occupancy would be 94.3% excluding ground leases under its prior calculation method. Construction-services gross profit was $1.8 million for the quarter, with a 4.4% operating margin, and third-party construction backlog was $76.7 million.
For the nine months, net cash from operations was $36.6 million, investing cash outflow was $69.5 million, and financing cash inflow was $30.7 million. Cash and cash equivalents ended at $19.7 million, down from $21.9 million at year-end 2016; restricted cash was $3.2 million. At September 30, total assets were $1.031 billion, net real estate investments $811.9 million, and net indebtedness $488.6 million. Principal debt was $493.5 million, of which 52.4% was variable-rate. Total liabilities were $597.6 million. The declared quarterly dividend/distribution was $0.19 per share and unit.
Material changes versus comparable periods
- Q3 revenue rose 7.0%; nine-month revenue rose 33.7%, driven mainly by higher construction-services activity and retail and multifamily properties added through acquisitions and development.
- Nine-month net income declined despite higher operating income, mainly because gains on real estate dispositions were $8.1 million in 2017 versus $30.4 million in 2016. Q3 net income increased year over year.
- Retail NOI increased to $11.6 million in Q3 from $10.7 million; multifamily NOI was broadly flat at $3.1 million. Office NOI declined to $2.8 million from $3.2 million, reflecting lower occupancy and property sales. Same-store NOI weakened in office and multifamily; retail same-store NOI decreased 1.9% for the quarter.
- Nine-month operating cash flow decreased 5.6% from 2016, which management attributed primarily to timing differences in operating assets and liabilities. Investing outflows were substantially lower than in 2016, when the company acquired an 11-property retail portfolio.
- Common shares outstanding increased to 44.9 million from 37.5 million at year-end 2016. The company received $85.3 million net from a May public offering and $6.2 million net under its at-the-market program during the first nine months.
Outlook, risks and unusual items
- The filing provides no specific earnings or FFO guidance. Management expects short-term liquidity needs to be met through operating cash flow, existing cash, construction financing, credit-facility availability and equity proceeds; longer-term needs may be funded with operating cash flow, debt and securities issuance.
- After quarter-end, the company amended and restated its credit facility, increasing total capacity to $300 million and extending revolving-facility maturity to October 2021, with extension options, and term-loan maturity to October 2022. The company reported $92.0 million of available borrowing capacity at September 30 under the prior facility and said it was in compliance with debt covenants.
- Debt maturities are concentrated in 2018–2021: scheduled principal due was $67.3 million in 2018, $71.4 million in 2019, $130.1 million in 2020 and $110.5 million in 2021, before extension options. Near-term refinancing and liquidity remain relevant considerations.
- Interest-rate exposure is material: variable-rate debt was 52.4% of total principal. The company uses interest-rate caps and swaps; management estimated that, with variable debt unchanged, a 100-basis-point LIBOR increase would increase annual cash flow by about $0.5 million because of caps, while a 100-basis-point decrease would increase it by about $2.4 million.
- Development, construction and loan exposures include projects with uncertain completion timing and costs. Portions of Annapolis Junction opened in Q3, with remaining portions expected in Q4; Point Street Apartments was scheduled to open in Q1 2018. The company cautioned that these schedules and costs are not assured. It also has loan guarantees and investment options tied to certain projects.
- Other risks identified include tenant defaults or nonrenewals, vacancies and rents, construction execution and margins, financing access and covenant compliance, interest rates, real-estate market conditions, weather and environmental matters, and continued REIT qualification. Management said there were no material changes to the risk factors in its 2016 Form 10-K and no legal proceedings expected to have a material adverse effect. Bonding obligations totaled $44.9 million; standby letters of credit totaled $4.1 million.
- Reported results include disposition gains: $8.1 million for the first nine months of 2017 versus $30.4 million in the prior-year period. Q3 gains were $4.7 million. FFO and Normalized FFO are non-GAAP measures and should not be treated as cash available for dividends or debt service.
Important facts for investors to verify
- Reconcile reported earnings growth with the large year-over-year reduction in disposition gains, and assess recurring operating performance using both GAAP results and clearly defined non-GAAP measures.
- Review debt maturities, the October 2017 credit-facility amendment, covenant headroom and the company’s ability to refinance upcoming obligations.
- Track occupancy and same-store NOI trends, particularly office and multifamily weakness, and whether retail acquisition-driven growth translates into durable operating performance.
- Monitor construction backlog conversion, project completion dates and costs, and the performance and repayment prospects of notes and mezzanine loans, including associated guarantees and purchase options.
- Assess the impact of the share issuance and larger share count on per-share results, and whether operating cash flow supports dividends, development spending and debt service.