Business context and reporting period
The filing is Armada Hoffler Properties, Inc. (NYSE: AHH), not a filing under the name AH Realty Trust. It covers the unaudited quarter and nine months ended September 30, 2020. The company is a REIT focused on office, retail and multifamily real estate, with general contracting and real estate services. Its portfolio included 52 operating properties and four properties under development or not yet stabilized.
Financial and operating results
Amounts below are in millions, except per-share data. Comparisons are with the corresponding 2019 period.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $98.3 | $69.9 | $285.1 | $175.6 |
| Net income | $10.8 | $12.1 | $32.3 | $24.4 |
| Net income attributable to common stockholders | $6.4 | $7.1 | $20.4 | $16.4 |
| Basic and diluted EPS | $0.11 | $0.13 | $0.36 | $0.31 |
| Net operating income (NOI) | $26.8 | $29.4 | $86.5 | $77.5 |
| Operating cash flow | — | — | $67.8 | $45.5 |
- Q3 revenue rose about 41%, largely because general contracting and real estate services revenue more than doubled to $58.6 million. Rental revenue fell 6% to $39.6 million.
- Q3 NOI declined about 9%. Segment NOI was $7.0 million for office, $11.2 million for retail and $6.4 million for multifamily. Retail NOI fell 27%; office NOI rose 10% and multifamily NOI rose 1%.
- Construction segment gross profit was $2.1 million in Q3, a 3.6% margin, versus $1.2 million and 4.3% a year earlier.
- Management reported Q3 FFO of $19.2 million, or $0.24 per diluted share and unit, versus $21.7 million, or $0.29. Normalized FFO was $19.0 million, or $0.24, versus $22.5 million, or $0.30. These are non-GAAP measures.
- For the nine months, investing cash flow was a use of $3.9 million and financing cash flow was a use of $28.2 million; cash, cash equivalents and restricted cash ended at $79.2 million. Unrestricted cash was $73.6 million.
- Net indebtedness was $886.5 million, versus $950.5 million at December 31, 2019. Principal debt was $885.4 million: $680.4 million secured and $205.0 million unsecured. The revolving credit facility had no balance; reported available borrowing capacity was $125.0 million, with another $52.8 million available under construction loans.
Material changes versus the prior comparable period
- Nine-month revenue increased 62%, supported by higher construction activity and rental revenue growth in office and multifamily. Nine-month NOI increased about 12%, although Q3 NOI declined.
- Retail was the principal operating pressure: Q3 retail rental revenue fell 25%, reflecting the sale of seven retail properties, tenant disruption and Regal Cinemas lease terminations. Same-store retail NOI declined 16%.
- The company sold seven retail properties for $90.0 million in May and a Walgreens outparcel in September. It acquired Nexton Square in September and expanded development activity, including a new Gainesville multifamily project.
- The company issued $86.1 million net proceeds from a public offering of 6.75% Series A preferred stock in August, using proceeds partly to repay revolving borrowings. Preferred stock dividends increased to $2.2 million in Q3 from $1.2 million.
- Common dividends were suspended for Q2 as a liquidity measure, then reinstated at $0.11 per share and unit for Q3. Preferred dividends continued.
Outlook, commentary and risks
- No quantified earnings or FFO guidance is provided. Management said the duration and effects of COVID-19 remained uncertain, particularly for retail tenants, and could affect rent collections, occupancy, development and financing.
- As of October 27, the company reported collecting 96% of Q3 portfolio rent: 100% office, 93% retail and 98% multifamily. October collections were also 96% overall. Occupancy at September 30 was 95.4%.
- Management deferred the Chronicle Mill, Southern Post and Ten Tryon developments, slowed redevelopment and suspended non-essential capital spending. It said it believed available cash, credit capacity and capital-market access would cover operations and debt service for the next 12 months, but noted this depended on conditions and access to financing.
- Management reported $163.0 million of loans scheduled to mature in 2021 and said refinancing was in process. The debt schedule lists $173.6 million of 2021 principal payments; management anticipated up to $24.0 million of aggregate curtailments when refinancing Hoffler Place and Summit Place.
- Two mezzanine loans, Delray Plaza and The Residences at Annapolis Junction, were placed on nonaccrual effective April 1. Their combined amortized cost basis was $57.1 million, and $4.2 million of interest income was not recognized during the nine months. The allowance for credit losses was $3.1 million; adoption of the expected-credit-loss standard reduced retained earnings by $3.0 million.
- Other notable items include a $1.1 million Q3 rental-revenue write-off for Regal Cinemas and $0.4 million of additional Q3 bad-debt charges, primarily related to retail delinquencies. The company also disclosed $47.8 million of guarantees on portions of third-party senior loans. It reported compliance with debt covenants after obtaining certain waivers; no material adverse effect from pending legal proceedings was expected by management.
- Subsequent events included the acquisition of Edison Apartments and a 79% interest in the Residences at Annapolis Junction, as well as modifications to the Delray Plaza and Interlock Commercial loans.
Important facts for investors to verify
- Whether reported rent collections translate into sustained cash receipts, especially for retail, and how Regal vacancies and other announced lease terminations affect occupancy and rental income.
- Progress, terms and required equity curtailments for the 2021 debt refinancings, and continued compliance with debt covenants and waiver conditions.
- Recoverability of the mezzanine loan balances, collateral values and expected collections after the nonaccruals, loan amendments and Annapolis Junction acquisition.
- Whether construction backlog converts to revenue and profit at expected margins, given the $122.7 million backlog, project timing and contract cancellation risk.
- Future common-dividend levels and the company’s dependence on capital markets, including additional preferred or common equity issuance.