Business context and reporting period
Armada Hoffler Properties, Inc. (NYSE: AHH), a REIT focused on office, retail and multifamily properties and general contracting, reported unaudited results for the quarter and six months ended June 30, 2021. The filing identifies the registrant as Armada Hoffler Properties, Inc.; this differs from the company name in the request metadata. Its portfolio included 56 operating properties and three properties under development or not yet stabilized.
Financial results and key metrics
Unless otherwise stated, amounts are in millions of dollars.
- Second-quarter revenue: $65.8, down from $97.3 a year earlier. Rental revenue rose to $47.4 from $39.9, while general contracting and real estate services revenue fell to $18.4 from $57.4.
- Second-quarter earnings: GAAP net income was $8.5 versus $12.3. Net income attributable to common stockholders was $4.1, or $0.07 per share, versus $8.1, or $0.14. Including OP unitholders, attributable income was $5.6, or $0.07 per diluted share and unit, versus $11.2, or $0.14.
- REIT operating measures: Second-quarter FFO was $22.9, or $0.28 per diluted share and unit, versus $22.0, or $0.28. Normalized FFO was $23.3, or $0.29, versus $22.6, or $0.29.
- Six-month results: Total revenue was $147.1 versus $186.9; GAAP net income was $14.5 versus $21.4; and net income attributable to common stockholders was $6.5, or $0.11 per share, versus $14.1, or $0.25. FFO was $43.6, or $0.54 per diluted share and unit, versus $44.3, or $0.57; Normalized FFO was $43.9, or $0.54, versus $47.3, or $0.61.
- Segment NOI: Second-quarter total NOI was $30.9 versus $29.4. Office NOI increased to $7.4 from $7.0; retail NOI declined to $14.0 from $14.2; multifamily NOI increased to $9.2 from $6.1. Contracting and real estate services gross profit dropped to $0.3 from $2.1, with operating margin of 1.5% versus 3.6%.
- Cash flow: First-half operating cash flow was $40.6 versus $49.8. Investing activities used $31.6, compared with $17.7 provided in the prior-year period; financing activities used $6.2 versus $35.9. Cash, cash equivalents and restricted cash totaled $53.2 at June 30, including $43.5 unrestricted cash.
- Debt and liquidity: Indebtedness, net, was $964.4 at June 30, versus $963.8 at year-end. The company reported $100.5 of available revolving-credit borrowings and $81.8 available under construction loans; no revolving-facility balance was outstanding at quarter-end. It reported compliance with credit-facility covenants and no loans scheduled to mature during the remainder of 2021. The filing lists $289.9 of principal payments due in 2025, before any applicable extensions.
- Occupancy and dividend: Stabilized portfolio occupancy was 94.1% (office 96.5%, retail 94.7%, multifamily 92.2%). The company declared a second-quarter common dividend of $0.16 per share, reporting a 45.5% cumulative increase year-to-date.
Material changes versus the prior comparable period
- Rental revenue growth reflected multifamily acquisitions, higher occupancy and rents, and the ramp-up of Wills Wharf. Multifamily NOI rose sharply, while retail NOI weakened, including from Regal Cinemas lease restructuring, tenant closures and lease terminations.
- Contracting revenue and gross profit declined substantially because fewer significant third-party projects began in late 2020 and the first half of 2021. Backlog at June 30 was $70.2, down from $193.7 a year earlier.
- Lower total revenue and common-stockholder earnings also reflect the much lower construction-services volume and higher depreciation, interest expense and preferred dividends. Second-quarter Normalized FFO included $0.03 per diluted share and unit from the early repayment of the Solis Apartments at Interlock mezzanine loan.
- First-half investing cash flow shifted from a source to a use, principally due to lower property disposition proceeds, higher acquisitions and investment contributions. Common-stock issuance generated $23.1 net proceeds in the first half.
Outlook, management commentary, risks and unusual items
- The filing provides no formal earnings or FFO guidance. Management said COVID-19 effects remain uncertain and cannot be fully estimated, with retail tenants particularly exposed to closures, rent relief requests and weaker collections; renewed restrictions remain possible.
- COVID-related rent deferral agreements totaled $5.6 from April 2020 through June 2021. By quarter-end, $2.3 had been collected, $0.3 written off, and $1.7 granted as abatements; $1.2 remained outstanding, of which the company expected to collect $0.8 in the second half of 2021 and $0.4 in 2022. These figures exclude Regal Cinemas write-offs.
- A $3.0 impairment was recorded for Socastee Commons after the anchor tenant lease expired and management concluded near-term reletting at sufficient rates was not probable. A sale agreement for $3.8 was signed in July, with completion expected by year-end.
- At quarter-end, the company had $112.4 net notes receivable, including $106 million in mezzanine loans; all outstanding loans were rated Pass and none were on nonaccrual. It had a $34.3 payment guarantee related to Interlock Commercial and recorded a $1.9 liability for it. A $15.0 standby letter of credit supported the Harbor Point Parcel 3 investment, and a separate $9.5 letter of credit secured performance on a related-party construction project.
- Management expects to contribute up to $30.0 to the Harbor Point Parcel 3 joint venture; combined equity needs for planned Parcel 3 and Parcel 4 projects were estimated at $60.0. Wills Wharf was substantially complete and approximately 60% leased; Chronicle Mill was expected to begin deliveries in the third quarter of 2022.
- Other notable items include the February acquisition of Delray Beach Plaza for $27.6 and the July acquisition of Overlook Village for $28.4, funded in part by a $25.0 July revolver borrowing. Management cited refinancing, interest-rate, tenant credit, development and construction execution risks. It also disclosed the transition from LIBOR to SOFR and anticipated reclassifying approximately $4.2 of hedge losses into earnings over the next 12 months.
- Management reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of June 30.
Important facts for investors to verify
- Reconcile the sharp decline in contracting backlog and the timing and expected profitability of new third-party projects.
- Track retail tenant health, Regal Cinemas lease economics, Socastee Commons sale completion and any further impairment or rent relief.
- Assess the repayment, collateral and senior-loan exposure of mezzanine investments and guarantees, including Interlock Commercial.
- Review debt maturities, refinancing and covenant headroom, post-quarter borrowing, and the effects of the LIBOR transition and interest-rate hedges.
- Evaluate whether portfolio occupancy and multifamily improvement support the higher dividend, while distinguishing GAAP earnings, FFO and Normalized FFO; the latter are non-GAAP measures and do not represent cash available for dividends or debt service.