AH Realty Trust, Inc. quarterly report, Q1 FY2022

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AH Realty Trust, Inc. — Filing Summary

Filing and entity: The supplied filing is Armada Hoffler Properties, Inc.’s Form 10-Q (NYSE: AHH), for the quarter ended March 31, 2022. This differs from the company name in the request metadata. Figures below are unaudited.

Business context and reporting period

Armada Hoffler is a vertically integrated REIT focused on office, retail and multifamily properties, primarily in the Mid-Atlantic and Southeastern United States, with a general contracting and real estate services business. At quarter-end, it reported 57 stabilized operating properties and four properties under development or not yet stabilized.

Financial and operating performance

  • Revenue: $79.3 million, down 2.5% from $81.3 million in Q1 2021. Rental revenue rose 19.4% to $54.6 million; contracting and services revenue fell 30.7% to $24.7 million, mainly due to project timing.
  • Profit: Operating income was $13.8 million versus $9.2 million; net income was $12.3 million versus $6.0 million. Net income attributable to common stockholders was $7.1 million, or $0.11 per diluted share, versus $2.3 million, or $0.04. Net income attributable to common stockholders and OP unitholders was $9.3 million, or $0.11 per diluted share, versus $3.1 million, or $0.04.
  • Funds from operations: FFO was $27.6 million ($0.31 per diluted share and unit), versus $20.8 million ($0.26). Normalized FFO was $24.5 million ($0.28), versus $20.6 million ($0.26). These are non-GAAP measures.
  • Property operations: Same-store NOI increased 7.3%; multifamily rose 15.3%, retail 7.5% and office was materially flat. Stabilized portfolio occupancy was 97.1% (office 97.3%, retail 96.7%, multifamily 97.3%). Retail and office leasing spreads were 11.8% and 11.3%, respectively.
  • Contracting: Segment gross profit decreased to $0.8 million from $1.3 million; operating margin was 3.4% versus 3.6%. Construction backlog increased to $419.4 million from $38.8 million a year earlier, primarily reflecting the Harbor Point Parcel 3 project.
  • Cash flow: Operating cash flow was $30.6 million versus $8.1 million. Investing cash outflow was $137.6 million, mainly reflecting acquisitions, development and lending; financing cash inflow was $106.1 million, including equity proceeds and net borrowing. Cash, cash equivalents and restricted cash ended at $39.5 million.
  • Debt and liquidity: Net indebtedness was $1.137 billion; total principal balances were $1.179 billion. Unrestricted cash was $32.9 million, with $85.0 million available on the revolver and $47.0 million available on construction loans. The company reported compliance with credit-facility covenants at quarter-end.
  • Equity and distributions: A January common-stock offering generated $58.0 million net proceeds; ATM sales generated a further $7.1 million. Common and OP-unit distributions declared were $0.17 per share/unit for the quarter; preferred dividends were $2.9 million.

Material changes versus Q1 2021

  • Rental growth reflected acquisitions, including Constellation Office and retail properties, as well as improved occupancy and rental rates in parts of the portfolio. The Exelon Building acquisition closed in January 2022.
  • Total revenue declined despite stronger rental revenue because contracting revenue fell with project start timing.
  • Net income improved, with lower impairment charges than in 2021 and a $4.2 million gain from changes in fair value of derivatives and other items. Q1 2021 included a $3.7 million real estate disposition gain.
  • Interest expense increased 13.2% to $9.0 million, primarily due to loans obtained or assumed in acquisitions. Shares issued in the public offering and ATM program increased the common share base.

Outlook, risks and unusual items

  • The filing provides no specific earnings or FFO guidance. Management expects to meet liquidity needs using operating cash flow, cash reserves, construction financing, revolver capacity, equity issuance and property dispositions.
  • Wills Wharf covenant: Subsequent to quarter-end, the company disclosed it was below a loan lease-up requirement: 70% leased versus a 75% minimum. It agreed to restrict $4.3 million of cash as additional collateral; two prospective leases could address the shortfall if executed.
  • Debt maturities: The Marketplace at Hilltop loan, with $9.6 million outstanding, was scheduled to mature in October 2022. The company reported no other maturities for the rest of 2022.
  • Credit and guarantees: Notes receivable totaled $133.6 million, including development-related mezzanine and preferred-equity exposures. All outstanding loans were rated “Pass,” but the Exelon seller note was on non-accrual. The company had a $37.5 million payment guarantee related to Interlock Commercial and $15.7 million in unfunded loan commitments.
  • Development commitments: The company disclosed completion-guarantee exposure of approximately $56.5 million for Harbor Point Parcel 3 and partial payment/completion guarantees of approximately $38.4 million for Harbor Point Parcel 4. It also had a projected $74.0 million equity commitment to Parcel 4.
  • Subsequent events included sales of Hoffler Place for $43.1 million and Summit Place for $37.8 million, and new construction loans for Harbor Point Parcel 3 and Parcel 4. A new interest-rate cap corridor was entered into in April to limit exposure to rising rates.
  • Management cited risks including interest-rate increases, refinancing and covenant compliance, tenant defaults or vacancies, development execution, construction timing and costs, and repayment of mezzanine loans. Management said pending legal proceedings were not expected to have a material adverse effect.

Key facts for investors to verify

  • Whether Wills Wharf achieves the required 75% lease-up and whether the $4.3 million cash restriction remains in place.
  • Debt maturities, refinancing plans and exposure to variable rates, including the transition from LIBOR to alternative reference rates.
  • Collection and collateral performance of mezzanine loans, especially Interlock Commercial, and the status of the Exelon seller note on non-accrual.
  • Funding requirements and potential obligations under Harbor Point project commitments, guarantees and construction contracts.
  • Whether occupancy, same-store NOI and construction backlog convert into sustained cash generation, given the quarter’s acquisition-related and derivative fair-value effects on reported results.
  • Reported financial statements show net income attributable to common stockholders of $7.1 million, while the company’s combined common-stockholder and OP-unitholder measure is $9.3 million; investors should distinguish these measures when comparing per-share results.