Business context and reporting period
The supplied filing is Armada Hoffler Properties, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2018; it is not filed under the name AH Realty Trust, Inc. The company owns, develops, builds and manages office, retail and multifamily properties, primarily in the Mid-Atlantic and Southeastern United States. At quarter-end it reported 50 operating properties and 10 development properties.
Financial performance and position
| Metric | Q3 2018 / Sep. 30, 2018 | Comparable period / prior year-end |
|---|---|---|
| Total revenue | $48.9 million | $68.3 million in Q3 2017 |
| Net income | $5.7 million; $4.2 million attributable to stockholders, or $0.09 per share | $10.5 million; $7.5 million attributable to stockholders, or $0.17 per share, in Q3 2017 |
| FFO / normalized FFO | $15.9 million / $15.7 million; $0.24 per diluted share and unit for each | $15.5 million / $15.5 million; $0.25 per diluted share and unit for each, in Q3 2017 |
| Nine-month net income / FFO / normalized FFO | $18.6 million / $47.3 million / $46.3 million | $24.2 million / $44.6 million / $44.8 million in 2017 |
| Cash flows, nine months | Operating $27.2 million; investing $(183.6) million; financing $154.1 million | Operating $31.7 million; investing $(64.3) million; financing $30.4 million in 2017 |
| Cash and liquidity | Cash and equivalents $17.7 million; restricted cash $2.9 million; reported available credit-facility borrowings $45.9 million and construction-loan availability $108.0 million | Cash and equivalents $20.0 million at Dec. 31, 2017 |
| Debt and equity | Indebtedness, net $653.8 million; total principal balances $660.6 million. Stockholders’ equity $274.9 million | Indebtedness, net $517.3 million; stockholders’ equity $226.7 million at Dec. 31, 2017 |
Quarterly rental revenue rose 6.8% to $28.9 million. Segment NOI was $20.0 million, compared with $19.4 million in Q3 2017. General contracting and real estate services gross profit was $1.0 million, with a 4.9% margin; nine-month gross profit was $2.2 million with a 3.4% margin. Dividends and distributions declared were $0.20 per common share and unit for the quarter.
Material changes versus prior periods
- Total revenue fell 28.4% in Q3 and 38.2% for the first nine months, largely as general contracting and real estate services revenue declined 51.6% and 60.6%, respectively, amid a lack of significant new third-party contracts.
- Rental revenue increased, supported by acquisitions and development activity in retail, improved occupancy at Johns Hopkins Village, higher Smith’s Landing rents, and a new tenant at 4525 Main Street. Retail and office same-store NOI improved, while retail same-store NOI was broadly flat over nine months.
- Net income decreased year over year, in part because 2017 included real estate disposition gains ($4.7 million in Q3 and $8.1 million in the first nine months); there were no disposition gains in the 2018 periods. Higher interest income partly offset increased interest expense.
- Investing outflows increased with development spending and three operating-property acquisitions. The company issued 4.23 million shares under its ATM program for $59.7 million net proceeds over nine months; outstanding shares increased to 49.6 million from 44.9 million at year-end 2017.
- Debt increased, including expanded credit-facility commitments and development borrowing. The company stated it was in compliance with debt covenants.
Outlook, commentary, risks and unusual items
- The filing provides no numerical earnings or FFO guidance. Management expected to fund liquidity needs from operations, cash, credit facilities and construction loans, and equity and debt issuance. It expected most construction contracts outstanding at quarter-end to be completed in the next 12–18 months.
- In October, the company expected a transaction involving the Residences at Annapolis Junction option sale to yield $5.0 million plus approximately $12.0 million of mezzanine-loan repayment; completion was anticipated in Q4 2018. This was an expectation, not a completed quarter-end transaction.
- Principal risks identified include development delays or cost overruns, tenant defaults or vacancies, repayment risk on mezzanine loans, refinancing and covenant risk, rising interest rates and operating costs, and REIT qualification and regulatory risks. About 48.7% of debt was variable-rate at September 30; management estimated a 100-basis-point LIBOR increase would reduce annual cash flow by $0.3 million, assuming no increase in variable-rate debt.
- Notes receivable were $100.5 million, primarily mezzanine loans. The company also disclosed loan guarantees, a $2.1 million standby letter of credit and $33.4 million of construction-related bonds. Management did not believe pending legal matters would materially affect financial position or results.
- The filing describes immaterial cash-flow classification corrections and adoption of revenue-recognition guidance, with no material cumulative effect. Management was evaluating the lease-accounting standard effective in 2019. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Confirm the intended issuer: the provided 10-Q is for Armada Hoffler Properties, Inc., not AH Realty Trust, Inc.
- Track third-party construction awards, backlog (down to $25.2 million from $76.7 million a year earlier) and contracting margins.
- Assess debt maturities, variable-rate exposure, available borrowing capacity and compliance with covenants; October borrowing and refinancing activity occurred after quarter-end.
- Monitor development execution, leasing and stabilization, and repayment or refinancing of mezzanine loans and related guarantees.
- Reconcile FFO and normalized FFO to GAAP net income and cash flow; these non-GAAP measures are not measures of liquidity or cash available for dividends.