Business context and reporting period
Armada Hoffler Properties, Inc. (the registrant named in the filing) is a full-service real estate company focused on office, retail and multifamily properties, primarily in the Mid-Atlantic and Southeast, with a general contracting and real estate services business. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017. The interim financial statements received an independent accountant’s review, not an audit.
Financial and operating highlights
Amounts below are in millions of dollars unless otherwise noted.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $83.4 | $57.5 | $174.2 | $117.5 |
| Operating income | $8.3 | $6.7 | $16.7 | $12.7 |
| Net income | $4.9 | $3.1 | $13.7 | $29.7 |
| Net income attributable to stockholders | $3.5 | $2.0 | $9.4 | $19.4 |
| Stockholder earnings per share, basic and diluted | $0.08 | $0.06 | $0.24 | $0.62 |
| FFO per diluted share and unit | $0.24 | $0.24 | $0.50 | $0.42 |
| Normalized FFO per diluted share and unit | $0.25 | $0.26 | $0.51 | $0.51 |
- Q2 revenue growth reflected higher construction and services activity, acquisitions and new properties in service. General contracting and real estate services generated $56.7 million of Q2 revenue and $2.7 million gross profit; its reported operating margin was 4.7%, versus 3.5% a year earlier.
- Q2 property NOI was $18.0 million, compared with $16.9 million. Retail NOI rose to $11.6 million from $10.6 million and multifamily NOI to $3.5 million from $2.8 million; office NOI fell to $2.9 million from $3.5 million. Same-store property NOI declined to $14.4 million from $14.9 million.
- Cash from operations for the first six months was $19.9 million, versus $18.9 million. Investing used $37.1 million, compared with $149.4 million, largely because the prior-year period included a major retail portfolio acquisition. Financing provided $13.8 million, versus $123.4 million. Cash and cash equivalents ended at $18.6 million, down from $21.9 million at year-end 2016.
- At June 30, total assets were $1.014 billion and total liabilities $579.8 million. Net indebtedness was $465.3 million (gross principal repayments schedule totals $470.3 million). The company reported $117.9 million of available credit-facility borrowings and $3.1 million of restricted cash.
- Debt maturities included $40.2 million in 2017, $66.7 million in 2018, $40.8 million in 2019 and $129.5 million in 2020, before any extension options. Approximately 50.2% of debt carried fixed rates and 49.8% variable rates. The company said it was in compliance with debt covenants.
- Dividends and distributions declared were $0.19 per common share and unit for Q2, up from $0.18 a year earlier. The six-month declared amount was $0.38 versus $0.36.
Material changes versus prior comparable periods
- Six-month net income fell to $13.7 million from $29.7 million, primarily because the 2016 period included $26.7 million of gains on property sales, versus $3.4 million in 2017. Q2 net income increased year over year.
- Retail and multifamily rental revenue increased, respectively, 10.4% and 32.6% in Q2. Growth reflected acquisitions, completed developments and, for multifamily, Johns Hopkins Village entering service. Office rental revenue declined 10.2%, reflecting weaker occupancy and prior office dispositions.
- Construction and services revenue increased 70.7% in Q2 as new large projects began after Q1 2016. Third-party construction backlog was $116.7 million at quarter-end, down from $252.3 million a year earlier.
- Common shares outstanding increased to 44.9 million from 37.5 million at year-end 2016. A May public offering produced $85.3 million net proceeds; ATM sales produced $6.2 million net proceeds during the first half.
Outlook, risks and unusual items
- The filing provides no quantified full-year earnings or revenue guidance. Management described expected liquidity sources as operating cash flow, available cash, development/construction loans, credit-facility borrowings and equity or debt issuance.
- Management cautioned that development projects may miss anticipated schedules or costs. Point Street Apartments and Annapolis Junction were expected to open in Q4 and Q3 2017, respectively, but timing and cost were not assured. The company also reported investments in these projects as loans and had guaranteed up to $25 million of senior construction debt for each; funded balances were $21.5 million and $40.9 million, respectively. Both borrowers were current at quarter-end.
- The company funded $10.8 million of a mezzanine loan for a Whole Foods-anchored Decatur development, accruing interest at 15%. The filing identifies risks from project execution, occupancy and leasing, tenant defaults, interest rates, refinancing and covenant compliance, financing availability, and real estate market conditions.
- Contingent exposure included $43.0 million of performance, payment and other bonds and $4.1 million of standby letters of credit. Management said pending legal matters were not expected to have a material adverse effect, while acknowledging litigation uncertainty.
- After quarter-end, the company sold two Virginia office properties for $12.8 million net proceeds and a $4.2 million gain, repaid a related $4.9 million mortgage, and increased revolver borrowings by $30.0 million. It also acquired land and a retail outparcel after quarter-end.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. The filing said there were no material changes to the risk factors from the 2016 Form 10-K.
Important facts for investors to verify
- Confirm the exact registrant: the supplied filing is for Armada Hoffler Properties, Inc., although the request metadata names AH Realty Trust, Inc.
- Review the 2017–2020 debt maturities, variable-rate exposure, credit-facility availability and the effect of the post-quarter $30 million revolver draw.
- Track construction backlog conversion, project completion timing and costs, and exposure from construction guarantees, letters of credit and bonds.
- Assess whether rental growth and property NOI can offset weakness in office and same-store performance, and distinguish acquisition-driven growth from organic growth.
- Consider dilution from equity issuance and the sustainability of dividends relative to operating cash flow and debt requirements; FFO and normalized FFO are supplemental non-GAAP measures, not liquidity measures.