AH Realty Trust, Inc. quarterly report, Q2 FY2016

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Business context and reporting period

Armada Hoffler Properties, Inc. (the registrant named in the filing; not “AH Realty Trust, Inc.” in the request metadata) is a Mid-Atlantic real estate company operating office, retail, multifamily, and general contracting and real estate services businesses. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2016. The interim financial statements received an independent accountant’s review, not an audit.

Financial and operating results

  • Second quarter: Total revenue was $57.5 million, down 14.2% from $67.0 million. Rental revenue increased 21.8% to $24.3 million, while contracting and real estate services revenue declined to $33.2 million from $47.1 million.
  • Earnings: Operating income was $6.7 million versus $6.6 million; net income was $3.1 million versus $10.3 million. Net income attributable to stockholders was $2.0 million, or $0.06 per diluted share, compared with $6.5 million, or $0.25 per share. The comparison reflects, among other items, a much smaller real estate disposition gain in Q2 2016 ($0.01 million) than Q2 2015 ($7.2 million), higher depreciation and interest expense, and derivative fair-value losses.
  • Six months: Revenue was $117.5 million, up 2.9%; net income was $29.7 million versus $18.4 million. The 2016 result included $26.7 million in disposition gains, principally from Richmond Tower. Net income attributable to stockholders was $19.4 million, or $0.62 per diluted share, versus $11.6 million, or $0.46.
  • REIT operating measures: Q2 FFO was $11.7 million ($0.24 per diluted share) and normalized FFO was $12.5 million ($0.26), up from $8.8 million ($0.22) and $9.7 million ($0.24), respectively. Six-month FFO was $20.2 million ($0.42 per share) and normalized FFO was $24.1 million ($0.51). These are non-GAAP measures and are not measures of liquidity.
  • Property operations: Q2 property segment NOI increased to $16.8 million from $13.3 million. Retail NOI rose to $10.6 million, largely due to acquisitions; multifamily NOI rose to $2.8 million. Office NOI fell to $3.5 million, principally due to office-property sales. Same-store NOI was $9.2 million versus $9.1 million. Contracting segment gross profit was $1.2 million versus $1.8 million, with operating margin of 3.5% versus 3.8%; management attributed changes to contract timing and project closeouts. Third-party construction backlog was $252.3 million at quarter-end.
  • Cash flow and liquidity: Six-month operating cash flow was $18.9 million, investing cash outflow $149.4 million, and financing cash inflow $123.4 million. Cash declined $7.0 million to $20.0 million; restricted cash was $3.2 million. The filing reported $41.0 million available on the credit facility and $56.4 million available for future ATM issuance.
  • Debt and capital: Balance-sheet indebtedness, net, was $501.9 million, plus $6.4 million of debt associated with properties held for sale. The debt schedule reported $512.7 million total indebtedness. Debt rose from $377.6 million at December 31, 2015, driven by acquisitions and development financing. Of scheduled maturities, $30.9 million was due in 2016 and $105.2 million in 2017. The $250 million unsecured credit facility had $41 million available; revolver and term-loan effective rates were 2.21% and 2.16%. The company reported covenant compliance. Common shares outstanding increased to 32.8 million from 30.1 million at year-end.
  • Margins and distributions: Q2 contracting operating margin was 3.5%. Dividends and distributions declared were $0.18 per share and unit, compared with $0.17 in the prior-year periods.

Material changes versus prior comparable periods

  • Retail growth from the January acquisition of an eleven-property portfolio and the Southgate Square acquisition substantially lifted rental revenue and NOI; acquisitions and development contributed $4.9 million of Q2 retail NOI.
  • Office revenue and NOI declined following prior-period and 2016 sales of office assets, including Richmond Tower; lower occupancy at One Columbus also affected same-store office performance.
  • Multifamily results benefited from stabilization of Encore and Liberty Apartments and improved leasing at The Cosmopolitan. Same-store retail and multifamily NOI showed only modest growth.
  • Contracting revenue was lower in Q2, which management attributed to the timing and volume of construction work; six-month contracting gross profit increased modestly.
  • Depreciation and amortization and interest expense increased, reflecting acquisitions and higher borrowings. Six-month results also benefited from higher disposition gains, while derivative fair-value losses were greater.

Outlook, risks, contingencies and unusual items

  • The filing gives no formal earnings or FFO guidance. Management expects short-term funding from operations, cash, construction loans, credit-facility availability, and equity issuance; longer-term needs may be met through operating cash flow and debt or equity financing.
  • Development timing and cost are uncertain. Annapolis Junction was expected to open in 2018, but management cautioned that the schedule and cost are not assured. The company had a $23.7 million balance on its Annapolis Junction note at quarter-end, accruing interest at 10% under the described loan terms, and agreed to guarantee up to $25 million of senior construction debt in connection with purchase options. It also guaranteed 37% of City Center’s construction loan; that loan had not been drawn at June 30.
  • Interest-rate exposure is material: 58% of debt was variable-rate. Management estimated that a 1 percentage-point rate increase, assuming no change in variable debt, would reduce annual cash flow by approximately $3.0 million. Interest-rate caps and swaps are used to manage exposure.
  • The company disclosed a hedge-accounting error involving two swaps: management said prior-period errors were immaterial, but reported that 2015 net income was overstated by $0.5 million for the quarter and $0.3 million for the six-month period. A $1.0 million accumulated hedge-related adjustment was recognized in 2016 earnings.
  • Construction performance and payment bonds totaled $184.1 million; standby letters of credit totaled $2.0 million. Management did not expect current legal proceedings to have a material adverse effect. The filing listed customary real estate, tenant, development, financing, interest-rate, and REIT-qualification risks, with no material change to previously reported risk factors.

Most important facts for investors to verify

  • Reconcile Q2’s lower GAAP net income with FFO and normalized FFO, including disposition gains, depreciation, derivative marks, and the disclosed hedge-accounting correction.
  • Review debt maturities, refinancing plans, covenant headroom, variable-rate exposure, and the effect of further acquisitions or development borrowing on liquidity.
  • Assess acquisition-driven retail growth against same-store performance, office occupancy and asset-sale effects, and the sustainability of contracting margins and backlog conversion.
  • Monitor funding, guarantees, development costs, and completion schedules for Annapolis Junction, City Center, and other construction projects.
  • Confirm ATM issuance, dilution, and dividend coverage: the filing reported $56.4 million of remaining New ATM capacity at June 30 and a $0.18 quarterly dividend.