Armada Hoffler Properties, Inc. — FY2015 Form 10-K
Entity note: The request identifies AH Realty Trust, Inc., but the supplied filing is for Armada Hoffler Properties, Inc. (NYSE: AHH). It covers the fiscal year ended December 31, 2015; quarterly figures below are for Q4 2015.
Business context and reporting period
Armada Hoffler is a REIT focused on owning, developing, building and managing office, retail and multifamily properties, primarily in the Mid-Atlantic and Southeast. It also provides third-party general contracting and real estate services. As of year-end, its stabilized core portfolio occupancy was 95.8% for office, 95.5% for retail and 94.2% for multifamily. The portfolio was geographically concentrated: Virginia represented about 87% of annualized base rent.
Financial and operating performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Total revenue | $252.4 million | $168.1 million |
| Rental revenue | $81.2 million | $64.7 million |
| Net income | $31.2 million | $12.8 million |
| Net income attributable to stockholders | $19.6 million; $0.75 per share | $7.7 million; $0.36 per share |
| FFO | $35.9 million; $0.87 per diluted share | $28.1 million; $0.80 per diluted share |
| Normalized FFO | $38.7 million; $0.93 per diluted share | $28.6 million; $0.82 per diluted share |
| Property segment NOI | $54.2 million | $42.3 million |
| Cash from operating activities | $33.1 million | $31.4 million |
| Cash used for investing activities | $56.4 million | $105.3 million |
| Cash from financing activities | $24.4 million | $80.9 million |
FY2015 construction and real estate services revenue was $171.3 million, with $5.9 million gross profit and a 3.5% operating margin, versus $103.3 million revenue, $4.6 million gross profit and a 4.4% margin in 2014. Q4 2015 net income was $8.4 million, or $0.19 per share, compared with $5.2 million, or $0.13 per share, in Q4 2014.
At December 31, 2015, cash and cash equivalents were $27.0 million, plus $2.8 million restricted cash. Debt principal was $382.0 million ($377.6 million net of unamortized adjustments and costs); 58.2% was variable-rate and 41.8% fixed-rate. The company reported $68.0 million of availability under its credit facility and $38.6 million of remaining ATM equity capacity. It was in compliance with debt covenants.
Declared dividends totaled $0.68 per share in 2015, up from $0.64 in 2014. The 2015 dividend was classified for tax purposes as 64.21% ordinary income and 35.79% return of capital.
Material changes versus the prior year
- Total revenue rose 50%, while rental revenue rose 25%. Net income more than doubled, substantially reflecting $18.4 million of gains on real estate dispositions and acquisitions, compared with $2.2 million in 2014.
- Property NOI increased $11.9 million. Retail and multifamily growth mainly reflected acquisitions and newly stabilized properties; office growth included a full year of 4525 Main Street and new build-to-suit deliveries. Same-store NOI rose to $40.2 million from $39.0 million.
- Construction revenue increased with higher project volume, principally the Exelon headquarters project, but construction margin declined to 3.5%. Backlog fell to $83.4 million from $159.1 million; new contract work was $95.4 million and work performed was $171.1 million.
- Operating cash flow increased modestly, while investing outflow narrowed as development spending declined to $52.7 million from $98.5 million. Debt rose to $382.0 million of principal from $360.7 million.
- The company refinanced its prior secured credit facility with a $200 million unsecured facility, comprising a $150 million revolver and $50 million term loan. It raised $35.1 million net in a public stock offering and $10.9 million net through its ATM program.
Outlook, commentary, risks and unusual items
The filing provides no formal earnings or FFO guidance. Management’s stated strategy is to develop and selectively acquire office, retail and multifamily properties, grow third-party construction work, and recycle capital through selective dispositions. The development pipeline included three projects with estimated total costs of $102 million and $47 million incurred at year-end; timing and cost remain subject to approvals, financing and market conditions.
- After year-end, the company sold Richmond Tower for $78 million on January 8, 2016; estimated gain was approximately $26 million. It also completed a $170.5 million acquisition of an 11-property retail portfolio on January 14, 2016. In January, credit-facility capacity increased to $225 million and the term loan balance to $75 million.
- Net income was materially supported by asset-sale gains: $6.2 million on Sentara Williamsburg, $7.2 million on Whetstone Apartments and $5.0 million on the Oceaneering building. These gains are not equivalent to recurring property operations.
- Debt maturities are concentrated in the near and medium term, including approximately $29.3 million in 2016, $100.2 million in 2017 and $83.3 million in 2019. The company warns of refinancing, interest-rate, covenant and liquidity risks; a 1 percentage-point rate increase was estimated to reduce annual cash flow by about $1.7 million, assuming no change in variable-rate debt.
- Key business risks include geographic concentration in Virginia, tenant defaults or lease expirations, retail anchor and co-tenancy exposure, development cost and schedule overruns, construction margin and backlog volatility, and hurricane, environmental and insurance risks. The company also notes REIT qualification and distribution requirements.
- Management reported effective disclosure controls and internal control over financial reporting as of year-end. The independent auditor issued an unqualified opinion on the financial statements; it did not audit internal control effectiveness.
Important facts for investors to verify
- Reconcile reported net income growth with the $18.4 million of property disposition and acquisition gains; assess recurring earnings alongside GAAP net income and FFO.
- Review debt maturities, variable-rate exposure, covenant headroom and the financing impact of the January 2016 retail portfolio acquisition.
- Assess whether construction backlog and margins can recover after the year-end backlog decline and the lower 2015 operating margin.
- Monitor lease-up and occupancy at 4525 Main Street and development projects, as well as tenant concentration and lease expirations.
- Confirm the economics and funding of the Point Street loan and guarantees, and the status, cost and timing of other development commitments.
- Evaluate Virginia and Hampton Roads concentration, insurance adequacy for hurricanes, and the tax treatment and sustainability of distributions.