AH Realty Trust, Inc. quarterly report, Q2 FY2013

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Armada Hoffler Properties, Inc. — Q2 2013 Form 10-Q

Issuer identification: The supplied filing is for Armada Hoffler Properties, Inc., not AH Realty Trust, Inc. It covers the quarter and six months ended June 30, 2013. The company completed its IPO and formation transactions on May 13, 2013, so 2013 results combine predecessor operations with the company’s post-IPO operations; comparisons with 2012 are not fully like-for-like. Financial statements are unaudited and were reviewed, not audited.

Business context and reporting period

Armada Hoffler owns and develops office, retail and multifamily properties in the Mid-Atlantic and operates a general contracting and real estate services business. At June 30, its portfolio included seven office, 15 retail and two multifamily properties. The company intended to elect REIT status beginning with tax year 2013.

Key financial metrics

  • Revenue: Q2 revenue was $37.5 million, up 44.4% year over year; six-month revenue was $68.9 million, up 27.5%. Q2 rental revenue rose 4.6% to $14.2 million, while general contracting and services revenue rose 88.1% to $23.3 million.
  • Earnings: Q2 net income was $8.4 million versus $2.1 million; six-month net income was $10.3 million versus $4.0 million. Q2 operating income declined 51.9% to $3.0 million; six-month operating income declined 28.6% to $8.5 million. Net income included a one-time $9.5 million acquisition-related gain. Q2 basic and diluted EPS was $0.26. Dividends declared were $0.08 per share and unit.
  • Segment performance: Q2 net operating income (NOI) was $10.4 million versus $10.3 million; first-half NOI was $19.8 million versus $20.3 million. Office NOI declined 5.9% in Q2 and retail same-store NOI declined 4.7%; multifamily NOI increased 32.7%, partly reflecting the Smith’s Landing acquisition. Construction/services segment profit was $0.8 million on $23.3 million revenue.
  • Cash flow: First-half operating cash flow was $6.9 million, versus $6.6 million. Investing cash outflow was $14.3 million, mainly reflecting real estate development; financing cash inflow was $12.8 million, reflecting IPO proceeds and borrowing offset by debt repayment. Cash at June 30 was $14.7 million, with restricted cash of $3.1 million.
  • Assets, debt and liquidity: Total assets were $399.3 million and total equity $111.6 million. Secured debt was reported at $244.3 million on the balance sheet; MD&A lists $219.2 million of property secured debt plus $25.0 million drawn on the credit facility at June 30. The $100 million revolver had $25 million drawn at quarter-end, with capacity subject to an accordion feature up to $250 million. Approximately 37.1% of debt was variable-rate; management estimated a 1 percentage-point rate increase would reduce annual cash flow by about $0.9 million. The filing reports $63.8 million of scheduled debt maturities in 2014 and $65.6 million in 2016.

Material changes versus the prior comparable period

  • Revenue growth was driven mainly by increased construction activity; construction/services expenses also rose sharply, and that segment’s profit declined to $0.8 million for Q2 from $0.9 million.
  • Rental revenue increased modestly overall, but office revenue softened and same-store retail revenue and profit fell. Management cited tenant departures, collection uncertainty and expense increases. Office occupancy was 93.4%, retail 94.6%, and multifamily 91.2% at June 30.
  • Operating income fell despite higher revenue, reflecting higher operating costs, depreciation, public-company costs and a $0.5 million impairment charge. Interest expense declined as debt was repaid.
  • FFO, a non-GAAP measure, fell to $2.9 million in Q2 from $5.4 million and to $8.0 million for six months from $10.7 million. The Q2 result excludes the acquisition gain under the company’s FFO reconciliation.
  • The IPO generated approximately $203.2 million of proceeds after underwriting discount in the financial statement notes. The later proceeds discussion reports approximately $192.2 million net after underwriting discounts and other offering expenses. The company used proceeds and revolver borrowings to repay about $150 million of debt and make formation-transaction payments.

Outlook, management commentary, risks and unusual items

  • Management described portfolio results as solid and said it intended to pursue disciplined development and acquisitions. No numeric earnings, revenue or FFO guidance was provided.
  • The six-project development pipeline was estimated at $143.4 million total cost, with $15.0 million incurred by June 30; targeted completions generally ran from 2014 to 2015. Main Street Office Tower and Apartments were expected to enter service in July 2014. Management said projects remained on schedule, subject to permits, financing and market conditions.
  • At June 30, the construction business had 17 contracts with estimated total value of $117.3 million, $59.1 million of work in place and $58.2 million remaining. Additional contracts under negotiation were estimated at about $200 million, but execution was not assured.
  • After quarter-end, the company drew another $15 million on the revolver and defeased the One Columbus loan; it also closed a $63 million construction loan for the Main Street projects. The filing said a Smith’s Landing refinancing was expected in Q3 2013, ahead of its January 2014 maturity. These subsequent events affect liquidity and debt comparisons.
  • Principal risks cited include development execution, leasing and tenant credit, debt service and refinancing, interest-rate changes, financing availability, real estate market conditions, conflicts of interest, and maintaining REIT qualification. Management said ordinary-course legal proceedings were not expected to have a material adverse effect and that the company was in compliance with debt covenants. Disclosure controls were assessed as effective.

Most important facts for investors to verify

  1. Confirm the issuer: this filing identifies Armada Hoffler Properties, Inc.; it does not identify AH Realty Trust, Inc.
  2. Reconcile the IPO net-proceeds figures ($203.2 million after underwriting discount versus $192.2 million after all offering costs) and the debt totals reported in the balance sheet and MD&A.
  3. Assess underlying earnings excluding the $9.5 million acquisition gain, alongside the decline in FFO and operating income.
  4. Track 2014 and 2016 maturities, the Smith’s Landing refinancing, revolver availability and the post-quarter Main Street construction borrowing.
  5. Monitor construction-contract margins and completion risk, development funding and leasing/occupancy trends, especially in office and retail properties.