AH Realty Trust, Inc. quarterly report, Q1 FY2018

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Business context and reporting period

Armada Hoffler Properties, Inc. (the registrant named in the filing) filed this unaudited Form 10-Q for the quarter ended March 31, 2018. The company is a full-service real estate owner, developer and contractor focused primarily on office, retail and multifamily properties in the Mid-Atlantic and Southeastern United States. The filing does not identify AH Realty Trust, Inc. as the registrant; verify that this is the intended filing.

Key financial metrics

  • Revenue: $51.7 million, down 43.0% from $90.8 million. Rental revenue rose 5.4% to $28.7 million, while general contracting and real estate services revenue fell to $23.1 million from $63.5 million.
  • Profit: Operating income was $7.8 million versus $8.5 million; net income was $7.0 million versus $8.8 million. Net income attributable to stockholders was $5.0 million, or $0.11 per diluted share, compared with $5.9 million, or $0.16.
  • REIT measures: FFO was $16.3 million ($0.26 per diluted share and unit) versus $14.8 million ($0.27); Normalized FFO was $15.4 million ($0.25) versus $14.6 million ($0.26). These are non-GAAP measures, not substitutes for cash flow or net income.
  • Property operations: Total segment NOI was $20.1 million versus $21.0 million. Office, retail and multifamily NOI were $3.2 million, $12.4 million and $3.9 million, respectively. Core operating portfolio occupancy was 95.6% at quarter-end, up from 94.2% at December 31, 2017.
  • Cash flow: Operating cash flow was $5.9 million versus $8.3 million. Investing used $69.7 million, mainly for development and acquisitions; financing provided $60.2 million. Cash, cash equivalents and restricted cash ended at $19.3 million.
  • Debt and liquidity: Net indebtedness was $589.6 million at March 31, compared with $517.3 million at year-end; principal debt was $595.6 million. Unrestricted cash was $15.8 million, with $39.9 million available under the credit facility and $112.6 million available under construction loans. The company reported compliance with debt covenants.
  • Interest-rate exposure: 62.7% of principal debt was variable-rate and 37.3% fixed-rate. Management estimated that, absent changes in variable debt, a 100-basis-point LIBOR increase would reduce annual cash flow by less than $0.1 million after interest-rate caps.

Material changes versus the prior comparable period

  • The large revenue decline primarily reflects substantially lower third-party construction activity: construction segment gross profit dropped to $0.6 million from $2.3 million, and operating margin fell to 2.8% from 3.7%. Management cited a lack of significant new third-party contracts in late 2017 and Q1 2018. Third-party backlog was $30.7 million, down from $157.7 million a year earlier.
  • Rental revenue increased across the reported property segments. Retail NOI growth reflected acquisitions and prior development completions; same-store retail NOI was nearly flat. Same-store office NOI declined 7.6%, while same-store multifamily NOI increased 0.7%.
  • Net income also reflects the absence of the prior-year $3.4 million gain on a property disposition. Interest income increased to $2.2 million, principally from higher notes-receivable balances; interest expense declined modestly.
  • Investing outflows increased substantially with development spending and two shopping-center acquisitions. Debt borrowings supported investment activity. The company acquired Indian Lakes Crossing and Parkway Centre, adding approximately 132,000 square feet of retail space.

Outlook, risks and unusual items

  • The filing provides no specific earnings or FFO guidance. Management expects to meet liquidity needs through operating cash flow, cash reserves, credit-facility and construction-loan borrowings, and potential equity and debt issuances. Most uncompleted construction contracts were expected to finish within 12–18 months.
  • The board declared a quarterly dividend of $0.20 per common share, a 5.3% increase from the prior quarter. The company launched a $125 million at-the-market equity program; it reported no Q1 sales under the program and $0.4 million of net proceeds from April sales.
  • Near-term debt maturities include $60.2 million in 2018, including the Johns Hopkins Village and Lightfoot Marketplace loans. The company said it had paid off two Columbus Village loans and extended the Sandbridge Commons loan to 2023. A further $218.5 million of principal was scheduled for 2021 and $200.1 million for 2022, before any extensions or refinancing.
  • Development, construction estimates and contract profitability involve execution and cost risks. Management cautioned that remaining portions of Point Street Apartments might not open on the anticipated schedule or within anticipated costs. The company also has loan guarantees and purchase options tied to development projects, including a guarantee of up to $25 million on each of the Point Street and Annapolis Junction senior construction loans.
  • Other disclosed risks include variable-rate debt and LIBOR changes, tenant defaults or vacancies, refinancing and covenant compliance, real estate market conditions, and REIT qualification. The company reported no material legal proceedings and no material changes to previously disclosed risk factors.
  • The company adopted ASC 606 for customer-contract revenue on January 1, 2018; adoption did not produce a material cumulative adjustment. A $0.3 million LIBOR cap was entered into during the quarter. In April, the company increased revolver borrowings by $19 million and entered into a $50 million interest-rate swap.

Important facts for investors to verify

  1. Confirm the issuer: the supplied filing is for Armada Hoffler Properties, Inc., not AH Realty Trust, Inc.
  2. Assess construction backlog, new third-party awards and segment margins, given the sharp year-over-year decline in construction revenue and backlog.
  3. Review debt maturities, available borrowing capacity, refinancing plans and sensitivity to LIBOR; confirm the effect of post-quarter borrowing and the April swap.
  4. Evaluate development completion, leasing and cost risks, including projects supporting notes receivable or guarantees, and the company’s purchase-option decisions.
  5. Reconcile net income, FFO and dividends with operating cash generation, capital spending and the planned use of the ATM program.