Business context and reporting period
The supplied filing is Armada Hoffler Properties, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2016; this differs from the request metadata naming AH Realty Trust, Inc. Armada Hoffler is a REIT focused on office, retail, and multifamily properties, with a general contracting and real estate services business, primarily in the Mid-Atlantic.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $63.9 | $75.1 | $181.4 | $189.4 |
| Operating income | $6.9 | $8.0 | $19.6 | $19.9 |
| Net income | $7.9 | $4.3 | $37.6 | $22.7 |
| Net income attributable to stockholders | $5.2 | $2.7 | $24.6 | $14.3 |
| Diluted earnings per share | $0.15 | $0.10 | $0.77 | $0.56 |
| FFO per diluted share | $0.25 | $0.25 | $0.68 | $0.65 |
| Normalized FFO per diluted share | $0.26 | $0.26 | $0.76 | $0.69 |
- Q3 total revenue fell 15%, chiefly because general contracting and real estate services revenue declined 28% to $38.6 million amid lower timing and volume of work. Rental revenue rose 19% to $25.3 million.
- Property segment NOI increased to $17.1 million from $14.4 million in Q3. Retail NOI rose to $10.7 million, while office NOI declined to $3.2 million, mainly reflecting office property sales. Multifamily NOI increased to $3.1 million. Same-store NOI was $10.0 million versus $9.9 million.
- Construction/services gross profit declined to $1.3 million from $2.1 million in Q3; operating margin was 3.3% versus 3.9%. Third-party construction backlog was $246.4 million at quarter-end, compared with $118.2 million a year earlier.
- Reported earnings included real estate disposition gains of $3.8 million in Q3 and $30.4 million for the first nine months. Nine-month gains included the Richmond Tower sale. Interest expense increased 17% in Q3 and 20% year to date, primarily due to increased borrowings.
- Nine-month operating cash flow was $38.8 million, versus $17.6 million. Investing cash outflow was $187.7 million, reflecting acquisitions, development spending, and notes receivable; financing cash inflow was $145.8 million. Cash and cash equivalents ended the period at $23.9 million.
- At September 30, indebtedness, net, was $514.0 million (carrying debt before unamortized adjustments: $519.2 million), up from $377.6 million at year-end 2015. Approximately 46.6% of debt was fixed-rate and 53.4% variable-rate. Management estimated a 1 percentage-point rate increase would reduce annual cash flow by approximately $2.8 million, assuming variable debt did not increase.
- Available liquidity included $23.9 million unrestricted cash, $3.5 million restricted cash, $48.0 million of available credit-facility borrowings, and $23.9 million remaining under the new ATM program. The company reported compliance with debt covenants. Principal maturities include $44.5 million in 2017, $61.5 million in 2018, $114.8 million in 2019, and $104.5 million in 2020.
- Quarterly dividends/distributions declared were $0.18 per share and unit, versus $0.17 a year earlier. The filing reports 34.3 million common shares outstanding at September 30; 36.4 million were outstanding on November 1.
Material changes, outlook, and risks
- The company acquired an 11-property retail portfolio for $170.5 million, Southgate Square for approximately $39.5 million, and Southshore Shops for approximately $9.3 million during the period. It also sold several properties, including Richmond Tower, Willowbrook Commons, Kroger Junction, and Oyster Point. After quarter-end, it acquired a stabilized retail asset for $26.2 million in common stock.
- Retail growth reflected acquisitions, new development, and improved same-store occupancy; multifamily growth reflected stabilization of properties. Office revenue and NOI were lower following office building dispositions. Management gave no consolidated earnings or FFO guidance in the supplied filing.
- Management cited development timing and cost, tenant vacancies or defaults, construction execution, access to financing, debt refinancing and covenant compliance, interest-rate changes, real estate market conditions, and REIT qualification as risks. Annapolis Junction is scheduled to open in 2018, but management cautioned that timing and cost are not assured.
- The company disclosed that hedge-accounting errors led to 2015 net income being overstated by $0.6 million for the quarter and $1.0 million for the nine-month period; management deemed the errors immaterial. In 2016 it recognized amounts previously recorded in other comprehensive income and recognized subsequent derivative fair-value changes in earnings.
- Contingent items include $184.0 million of performance, payment, and other construction bonds, $2.0 million of outstanding letters of credit, and guarantees related to development financing. Management did not expect pending legal proceedings to materially affect financial position or results.
Important facts for investors to verify
- Confirm the registrant identity: the filing is for Armada Hoffler Properties, Inc., not AH Realty Trust, Inc.
- Assess how much reported earnings growth depends on property-sale gains, and compare GAAP earnings with FFO and normalized FFO.
- Review debt maturities, variable-rate exposure, available credit, and compliance with financial covenants as financing needs evolve.
- Monitor whether construction backlog converts to revenue and profit, and whether development projects meet expected timing and budgets.
- Consider the disclosed derivative-accounting error, its immateriality assessment, and the resulting recognition of derivative changes in earnings.
The interim financial statements were reviewed, not audited, by Ernst & Young LLP.