AH Realty Trust, Inc. (Armada Hoffler Properties, Inc.; NYSE: AHH) — Form 10-Q Summary
Reporting period: Quarter ended June 30, 2023. The filing identifies the registrant as Armada Hoffler Properties, Inc. Financial statements are unaudited and prepared under U.S. GAAP. Dollar amounts below are in millions unless stated otherwise.
Business context
The company is a self-managed REIT focused on office, retail and multifamily properties, primarily in the Mid-Atlantic and Southeastern United States. It also provides third-party construction services and invests in development projects through mezzanine loans and preferred equity. At quarter-end, its portfolio included 60 stabilized operating properties and one property under development.
Financial results and key metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $165.9 | $103.8 | $310.1 | $186.7 |
| Operating income | $23.8 | $38.4 | $44.1 | $55.8 |
| Net income | $14.9 | $30.8 | $20.3 | $43.0 |
| Net income attributable to common stockholders | $9.0; $0.13 per share | $21.3; $0.31 per share | $10.8; $0.16 per share | $28.4; $0.42 per share |
| Operating cash flow | Not separately presented | Not separately presented | $40.5 | $50.4 |
| FFO per diluted share and unit | $0.35 | $0.31 | $0.59 | $0.62 |
| Normalized FFO per diluted share and unit | $0.32 | $0.30 | $0.62 | $0.58 |
- Q2 revenue growth was driven largely by construction services revenue, up to $102.6 from $45.3; corresponding expenses were $99.1 and $43.4. Construction segment gross profit was $3.5, a 3.4% operating margin.
- Rental revenue rose 8.6% in Q2 to $60.0. Same-store NOI increased 4.8% overall, with office up 1.3%, retail up 7.5% and multifamily up 4.3%.
- Weighted average portfolio occupancy was 97%: office 96%, multifamily 96% and retail 98%. Commercial lease renewals in Q2 increased 8.9% on a GAAP basis.
- Q2 segment NOI was $46.6 versus $41.0 a year earlier. Reported net income was lower despite revenue and NOI growth, in part because Q2 2022 included a $19.5 gain on real estate dispositions; interest expense also increased.
- Six-month net cash used in investing was $103.2; net cash provided by financing was $47.0. Cash, cash equivalents and restricted cash declined by $15.8 to $36.1.
Balance sheet, debt and liquidity
- At June 30, 2023, total assets were $2.471 billion and total liabilities were $1.589 billion. Indebtedness, net, was $1.265 billion, compared with $1.068 billion at December 31, 2022.
- Unrestricted cash was $34.1, with $2.0 of restricted cash. The company reported $96.0 of available revolving-credit borrowings and $67.3 of available construction-loan borrowings.
- Principal balances totaled $1.270 billion: $620.6 secured and $649.0 unsecured. Unsecured debt represented 51.1% of total borrowings, versus 24.6% a year earlier. Variable-rate debt is primarily SOFR-based; interest-rate caps and swaps reduced reported effective rates on several facilities.
- Scheduled principal payments include $69.9 in 2024, $150.5 in 2025, $324.8 in 2026 and $315.6 in 2027. The company reported no loans maturing in the remainder of 2023 and stated it was in compliance with debt covenants.
Material changes, outlook and risks
- The May acquisition of The Interlock, a 311,000-square-foot Atlanta mixed-use property, had total consideration of $214.1 plus acquisition costs. Funding included cash, redemption of the company’s $90.2 mezzanine loan, $12.2 of OP units and assumed debt refinanced with new term-loan and revolving-credit borrowings.
- Interest expense increased 45.4% in Q2 and 40.9% for the six-month period, primarily from higher average debt, rising rates and financing costs; management said hedging derivatives partly offset the increase.
- Third-party construction backlog was $592.8 at quarter-end, compared with $541.2 a year earlier. Management expects to complete most existing contracts over the next 12 to 24 months. Construction working-capital timing contributed to lower six-month operating cash flow.
- Management provided no quantified company-wide earnings or FFO guidance in this filing. It described a target of approximately $80 million of outstanding real estate financing investments; this segment is intended in part to support a development pipeline.
- Key risks include interest rates and refinancing, tenant defaults or vacancies, construction execution and costs, development and acquisition outcomes, real estate financing borrower repayment, and REIT qualification. The company had $35.0 of unfunded loan commitments, a $0.2 guarantee liability related to Harbor Point Parcel 4, and a completion guarantee for Harbor Point Parcel 3. Management said pending legal matters were not expected to have a material adverse effect.
- After quarter-end, the company reported $37.0 of net revolving-credit borrowings in July and entered into two additional preferred-equity investments totaling up to $37.6. It also authorized a $50.0 share-repurchase program, with no repurchases made during the first half of 2023.
Important facts for investors to verify
- Whether the acquisition-driven growth in rental revenue and NOI is sustained, and how The Interlock performs after integration.
- Construction backlog conversion, gross margins and working-capital requirements, particularly given the segment’s 3.4% Q2 margin.
- Debt maturities and refinancing capacity, interest-rate exposure after hedges expire, and continued covenant compliance.
- Credit quality and repayment prospects for development loans, including the $35.0 of unfunded commitments and the concentration of financing in projects under development or lease-up.
- Cash available after dividends, development commitments and debt service; FFO and Normalized FFO are non-GAAP measures and are not substitutes for operating cash flow or liquidity.