Business context and reporting period
Armada Hoffler Properties, Inc. (NYSE: AHH), a REIT developing, owning and managing office, retail and multifamily properties primarily in the Mid-Atlantic and Southeast, filed this unaudited Form 10-Q for the quarter ended September 30, 2019. Its portfolio included 56 operating properties and five properties under development or not yet stabilized. The filing identifies Armada Hoffler, not AH Realty Trust, as the registrant.
Financial performance and position
Amounts are in millions except per-share data. Comparative periods are the three or nine months ended September 30.
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenue | $69.9 | $48.9 | $175.6 | $149.9 |
| Net income | $12.1 | $5.7 | $24.4 | $18.6 |
| Net income attributable to common stockholders | $7.1 | $4.2 | $16.4 | $13.6 |
| Common-stockholder diluted EPS | $0.13 | $0.09 | $0.31 | $0.29 |
| Operating cash flow | Not separately reported quarterly | $45.5 | $27.2 | |
| FFO per diluted share and unit | $0.29 | $0.24 | $0.81 | $0.74 |
| Normalized FFO per diluted share and unit | $0.30 | $0.24 | $0.87 | $0.72 |
At September 30, cash and cash equivalents were $44.2 million, restricted cash $3.4 million, and net real estate investments $1.36 billion. Indebtedness, net, was $943.4 million ($951.9 million principal); total liabilities were $1.12 billion and total equity $636.6 million. Management reported $39.7 million available under the credit facility and $76.8 million available under construction loans. Core operating-property occupancy was 96.4%, versus 95.6% at June 30, 2019.
For the first nine months, investing cash outflow was $255.9 million, mainly for development, acquisitions and notes receivable; financing cash inflow was $233.9 million. Cash, cash equivalents and restricted cash increased $23.6 million to $47.6 million. Segment NOI was $29.3 million for Q3 and $77.4 million for nine months, compared with $20.0 million and $60.0 million, respectively, in 2018.
Material changes versus prior periods
- Q3 revenue rose 42.9%; nine-month revenue rose 17.2%. Growth was led by acquired or newly operating properties, including One City Center, Thames Street Wharf, 1405 Point, Red Mill Commons and Marketplace at Hilltop, and by increased multifamily operations.
- Same-store NOI growth was more modest: office +4.4% and retail +4.3% in Q3; multifamily +16.3%. Management attributed gains mainly to occupancy, rental rates and tenant recoveries.
- Q3 common-stockholder net income increased, but included a $4.7 million real-estate disposition gain. Interest expense on debt rose to $8.8 million from $4.7 million in Q3, reflecting higher borrowings; derivative fair-value changes were a $0.5 million loss versus a $0.3 million gain.
- Nine-month operating cash flow improved by $18.3 million year over year. Capital deployment increased, while common and preferred equity issuance and borrowings supported financing needs.
Outlook, risks and unusual items
- No formal earnings or operating guidance is provided. Management expects to fund near-term needs from operating cash flow, cash reserves, construction loans, credit availability and ATM equity proceeds. A majority of construction contracts outstanding at quarter-end were expected to finish within 12–18 months.
- Management announced the Southern Post mixed-use project in Roswell, Georgia, with estimated development and construction costs of approximately $95 million and anticipated construction commencement in Q1 2020. A $5.0 million land purchase followed on October 25.
- After quarter-end, the credit facility was amended to extend the revolver maturity to January 2024 and term-loan maturity to January 2025, reduce applicable interest-rate spreads, and increase the accordion capacity to $700 million. The company also extended the Premier loan to October 2024.
- Key risks include development execution and cost overruns, tenant nonrenewal or default, mezzanine borrower repayment, refinancing and covenant compliance, interest-rate exposure, and real-estate market conditions. The company disclosed $56.7 million of payment guarantees on third-party senior loans and $29.2 million of construction-related bonds. It reported covenant compliance and no material legal proceedings expected to adversely affect its financial position, results or liquidity.
- Interest-rate exposure is material: 52.1% of debt principal was variable-rate at quarter-end. Management estimated that a 100-basis-point LIBOR increase would reduce annual cash flow by $2.7 million, assuming no change in variable-rate debt.
- Dick’s Sporting Goods planned to leave its 84,000-square-foot space after January 2020; a 15-year Apex Entertainment lease was signed after quarter-end, subject to redevelopment and buildout expected to finish by year-end 2020. Adoption of the new lease standard added right-of-use assets and lease liabilities but did not affect reported operations or cash flows.
Important facts for investors to verify
- Confirm acquisition-driven revenue and NOI growth against same-store results and property occupancy, and assess the timing and costs of properties still in development or stabilization.
- Review debt maturities, availability under credit and construction facilities, covenant headroom, and the effects of the post-quarter credit-facility amendment; $125.3 million of principal was scheduled for 2020 before extensions or refinancing.
- Evaluate the collectability and concentration of the $148.7 million notes-receivable portfolio and the $56.7 million of related payment guarantees; no loan-loss allowance was recorded at quarter-end.
- Distinguish GAAP earnings from FFO and normalized FFO, and assess the impact of the Lightfoot Marketplace gain, derivative valuation changes and preferred dividends.
- Check the funding, schedule and leasing assumptions for Southern Post, Wills Wharf and other development projects, and monitor the replacement tenancy and redevelopment costs at the former Dick’s space.