AH Realty Trust, Inc. quarterly report, Q1 FY2017

Armada Hoffler Properties, Inc. — Form 10-Q for Q1 2017

Identity note: The supplied filing is for Armada Hoffler Properties, Inc., not AH Realty Trust, Inc. Verify the issuer before relying on this summary. The quarter ended March 31, 2017; interim statements are unaudited and were reviewed, not audited.

Business context and results

The company develops, builds, owns and manages office, retail and multifamily properties, primarily in the Mid-Atlantic, and operates a general contracting and real estate services business.

MetricQ1 2017Q1 2016
Total revenue$90.8 million$60.1 million
Operating income$8.5 million$6.0 million
Net income$8.8 million$26.5 million
Net income attributable to stockholders$5.9 million; $0.16 per diluted share$17.4 million; $0.57 per diluted share
FFO$14.8 million; $0.27 per diluted share and unit$8.4 million; $0.18 per diluted share and unit
Normalized FFO$14.6 million; $0.26 per diluted share and unit$11.6 million; $0.25 per diluted share and unit
Cash from operating activities$7.9 million$11.3 million

Revenue grew about 51%, with rental revenue up $3.9 million and contracting/services revenue up $26.7 million. Property-segment NOI was $18.7 million versus $15.6 million; total segment NOI, including contracting and services, was $21.0 million versus $17.4 million. Contracting gross profit rose to $2.3 million from $1.8 million, while its operating margin declined to 3.7% from 4.8%. Same-store property NOI was approximately $12.0 million versus $11.9 million.

Financial position, liquidity and capital

  • At March 31, total assets were $992.9 million, net real estate investments $779.8 million, and indebtedness (net of GAAP adjustments) $522.4 million.
  • Cash and cash equivalents were $10.0 million; restricted cash was $3.6 million. Operating cash flow was lower year over year, mainly reflecting lower net collections on construction contracts and timing of working capital.
  • The credit facility had $275 million of capacity, $207 million outstanding and $64 million of available borrowings. The company also reported $10.6 million available under its $75 million ATM equity program.
  • Debt included $320.5 million secured and $207.0 million unsecured before unamortized GAAP adjustments. Approximately 54.5% was variable-rate debt. Management reported compliance with debt covenants.
  • Declared dividends and distributions were $0.19 per share and unit. The company issued 248,559 shares through its ATM program in the quarter for $3.4 million net proceeds.

Material changes and unusual items

  • GAAP net income fell substantially from Q1 2016, when property-sale gains were $26.7 million, compared with $3.4 million in Q1 2017. The prior-year gain included sales of Richmond Tower and the Newport News Economic Authority building; Q1 2017 included the Greentree Wawa outparcel sale.
  • FFO and Normalized FFO increased year over year, reflecting stronger operating results and the smaller disposition gain in the current period. These are non-GAAP measures and are not substitutes for cash flow or liquidity.
  • Retail and multifamily NOI benefited from acquisitions, completed developments and higher occupancy; office NOI declined, partly due to prior property sales and lower occupancy at Armada Hoffler Tower.
  • Third-party construction backlog was $157.7 million at quarter-end, down from $217.7 million at the start of the quarter. New contracts and change orders were $3.4 million, compared with $129.5 million in Q1 2016.
  • The company acquired undeveloped Charleston land for a contract price of $7.1 million plus capitalized costs. After quarter-end, it agreed to sell Courthouse 7-Eleven for $2.4 million, with closing expected in Q3 2017.

Outlook, risks and contingencies

No quantified earnings or FFO guidance is provided. Management expected to fund near-term needs through operating cash flow, cash reserves, construction loans, credit-facility borrowings and equity issuance; longer-term needs may require operating cash, debt and equity financing. Management cautioned that development schedules and costs, including Point Street Apartments and Annapolis Junction, are not assured.

  • Debt maturities are concentrated over 2017–2020; the filing’s scheduled principal table lists 12% due in 2017, 18% in 2018, 25% in 2019 and 21% in 2020, before maturity extensions.
  • A 1 percentage-point interest-rate increase was estimated to reduce annual cash flow by approximately $1.0 million, assuming no change in variable-rate debt.
  • The company had agreed to guarantee up to $25 million of senior construction loans for each of Point Street Apartments and Annapolis Junction, and guaranteed 37% of City Center’s construction loan. It also reported $4.1 million of standby letters of credit and $40.1 million of bonding obligations.
  • Notes receivable totaled $61.0 million, largely tied to Point Street Apartments and Annapolis Junction development loans. Project delivery, cost, repayment and the related purchase options are relevant risks.
  • Management said existing legal proceedings were not expected to have a material adverse effect. The filing reported no material change to the risk factors in the 2016 Form 10-K.

Important facts for investors to verify

  • Confirm the filing entity: this 10-Q identifies Armada Hoffler Properties, Inc., not AH Realty Trust, Inc.
  • Review debt maturity, refinancing and variable-rate exposure, including the effect of any interest-rate changes and available facility capacity.
  • Assess the funding, completion timing, cost and guarantees associated with development projects and construction-loan receivables.
  • Track whether contracting backlog is replenished and whether contracting margins recover from the 3.7% reported for the quarter.
  • Reconcile GAAP earnings with FFO and Normalized FFO, and evaluate cash generation against dividends, development spending and debt service.