AH Realty Trust, Inc. quarterly report, Q1 FY2020

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Business context and reporting period

Filing identity: The submitted 10-Q is for Armada Hoffler Properties, Inc. (NYSE: AHH), not a registrant named AH Realty Trust, Inc. It covers the three months ended March 31, 2020; financial statements are unaudited. The company is a REIT owning, developing and managing office, retail and multifamily properties, with a general contracting and real estate services business. It reported 58 operating properties and three properties under development or not yet stabilized.

Financial performance and position

  • Revenue: $89.6 million, up from $47.9 million in Q1 2019. Rental revenue was $42.3 million versus $30.9 million; contracting and real estate services revenue was $47.3 million versus $17.0 million.
  • Profit: Operating income was $11.9 million versus $8.1 million; net income was $9.1 million versus $6.5 million. Net income attributable to common stockholders was $5.9 million, or $0.11 per diluted share, versus $4.9 million, or $0.10. Management reported combined common-stockholder and OP-unit-holder net income of $8.2 million versus $6.5 million.
  • NOI and margins: Segment net operating income (a non-GAAP measure) was $30.3 million versus $21.8 million. Contracting/services gross profit was $1.7 million; operating margin was 3.6%, down from 4.4%.
  • REIT performance measures: FFO was $22.3 million ($0.29 per diluted share and unit), versus $16.6 million ($0.25). Normalized FFO was $24.7 million ($0.32), versus $18.5 million ($0.27).
  • Cash flow: Operating cash flow was $20.3 million versus $16.1 million. Investing used $49.2 million versus $79.8 million; financing provided $38.1 million versus $58.6 million. Cash, cash equivalents and restricted cash ended at $52.8 million.
  • Liquidity and debt: Cash and cash equivalents were $48.1 million, with $4.7 million restricted. Net indebtedness was $1.007 billion ($1.016 billion principal). The $355 million credit facility was fully drawn, with no remaining facility availability. Management reported $40.4 million available under construction loans at quarter-end; $4.9 million was borrowed in April. The company said it was in compliance with credit-facility covenants at March 31.
  • Portfolio: Core operating-property occupancy was 95.6%, down from 96.5% at December 31, 2019. Third-party construction backlog was $235.6 million, versus $160.9 million a year earlier.

Material changes versus Q1 2019

  • Revenue and segment NOI increased, largely reflecting acquisitions and properties entering service during 2019, including One City Center, Thames Street Wharf, 1405 Point and Hoffler Place, as well as the timing of new construction projects. Same-store NOI rose 2.2% in retail and 4.9% in multifamily, but fell 3.5% in office.
  • Interest expense on indebtedness rose to $8.0 million from $5.9 million, mainly due to increased borrowings. Depreciation and amortization increased to $14.3 million from $9.9 million.
  • Cash used for investing fell year over year, reflecting lower development and acquisition spending, partly offset by increased mezzanine-loan funding.
  • Adoption of the expected-credit-loss standard reduced retained earnings by $3.0 million at January 1, 2020. The company recorded a $3.2 million allowance on notes receivable at March 31, including a $0.4 million quarterly provision.

Outlook, risks and unusual items

  • COVID-19: Management said the pandemic’s effects were uncertain and could materially affect operations, cash flows and financial condition, particularly through retail closures, delayed or missed rent, rent relief requests, tenant failures, development disruption and tighter capital markets. As of April 24, the company had collected approximately 78% of expected April rents; it reported collecting 57% of retail rent and deferring 43%.
  • Actions and outlook: The company deferred Chronicle Mill, Southern Post and Ten Tryon, slowed redevelopment at The Cosmopolitan, postponed acquisitions and suspended nonessential capital spending. Summit Place and Wills Wharf remained scheduled for 2020 delivery, subject to potential disruption. The filing provides no quantified full-year earnings or revenue guidance.
  • Dividends: On April 30, the board suspended common-stock dividends and Class A unit distributions, with no timetable for resumption. The Series A preferred dividend was not suspended. The CEO and directors also elected 25% compensation reductions effective May 1.
  • Credit and liquidity: The company drew the remaining $15 million on its revolver in March. It obtained post-quarter debt-service-coverage waivers for certain property loans and was discussing potential future covenant options with lenders. No loans were scheduled to mature during the remainder of 2020; $145.0 million of principal was scheduled for 2021.
  • Mezzanine loans: Effective April 1, Delray Plaza and The Residences at Annapolis Junction were placed on non-accrual status for accounting purposes. The company reported $56.7 million of guarantees on certain borrowers’ senior loans; the Interlock Commercial guarantee was increased to $34.3 million in May.
  • Other unusual items: A planned $106.5 million sale of seven retail properties was terminated April 8. Derivative fair-value changes reduced first-quarter earnings by $1.7 million, while $7.5 million of unrealized cash-flow-hedge losses reduced comprehensive income. The company expects about $3.7 million of net hedge losses to be reclassified into earnings over the next 12 months.
  • Management said ordinary-course legal proceedings were not expected to have a material adverse effect. The filing identifies COVID-19, tenant credit and collections, mezzanine-loan recoveries, refinancing, interest rates and covenant compliance among key risks.

Important facts for investors to verify

  1. Confirm the issuer identity: this filing is for Armada Hoffler Properties, Inc. (AHH).
  2. Track subsequent rent collections, concessions and delinquencies by property segment; the April collection figures are dated April 24, 2020.
  3. Assess the credit quality, collateral values and recovery prospects of the five mezzanine loans, particularly the two placed on non-accrual, and monitor related guarantees.
  4. Review available liquidity after the revolver draw, construction-loan funding, deferred projects and common-dividend suspension, as well as upcoming 2021 maturities and covenant waivers.
  5. Distinguish GAAP earnings and operating cash flow from FFO, Normalized FFO and NOI, which are supplemental non-GAAP measures.