Business context and reporting period
Armada Hoffler Properties, Inc. (the registrant named in the filing) 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 three months ended March 31, 2015, compared with the same quarter of 2014. The financial statements received an independent accountant’s review, not an audit.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / prior period |
|---|---|---|
| Total revenue | $47.3 million | $34.4 million |
| Net income | $8.1 million | $2.5 million |
| Net income attributable to stockholders | $5.1 million | $1.5 million |
| Diluted net income per share and unit | $0.20 | $0.08 |
| Operating income | $5.3 million | $5.1 million |
| Net operating income (NOI) | $12.7 million | $11.1 million |
| FFO / normalized FFO | $6.8 million / $7.4 million | $6.5 million / $6.4 million |
| Cash from operating activities | $(0.4) million | $3.2 million |
Rental revenue was $18.2 million, up from $15.2 million. General contracting and real estate services revenue was $29.1 million, versus $19.2 million. Total expenses were $42.0 million, compared with $29.3 million; operating income was about 11.2% of revenue, versus 14.8% a year earlier. Construction segment operating margin declined to 3.2% from 6.5%.
Net income included a $6.2 million gain from the sale of the Sentara Williamsburg office property and a $0.2 million loss on extinguishment of debt. Interest expense was $3.0 million, compared with $2.6 million. The company declared dividends and distributions of $0.17 per common share and unit, versus $0.16.
At March 31, 2015, total assets were $604.0 million and total liabilities were $441.1 million. Indebtedness was $363.7 million, plus $17.3 million of debt secured by property held for sale. Cash and cash equivalents were $31.5 million; restricted cash was $4.0 million. The company reported $81.5 million available under its new credit facility. Stockholders’ deficit was $1.9 million, while total equity including noncontrolling interests was $162.9 million.
Material changes versus the prior comparable period
- Revenue increased $12.8 million, reflecting higher construction volume and growth in rental income. Construction volume rose more than 51%, primarily on the Exelon project, but construction NOI declined $0.3 million as margins tightened.
- NOI grew across office, retail, and multifamily segments; same-store NOI was $10.0 million versus $9.6 million. The company attributed same-store gains mainly to improved leasing.
- Net income rose substantially, largely because of the property-sale gain; FFO per diluted share fell to $0.17 from $0.20, while normalized FFO per share was $0.19 in both periods.
- Operating cash flow moved from $3.2 million provided to $0.4 million used, primarily due to higher cash use in the construction business. Investing cash use narrowed to $8.3 million from $25.9 million, including $15.2 million of net sale proceeds.
- The company refinanced into a $200 million senior unsecured facility: a $150 million revolver and $50 million term loan. At quarter-end, $60 million was drawn on the revolver and $50 million on the term loan; stated rates were 1.73% and 1.68%, respectively.
Outlook, commentary, risks, and unusual items
No specific earnings or FFO guidance was provided. Management expected to fund near-term needs with operating cash, available cash, construction loans, and credit-facility borrowings; longer-term needs may be funded through operations, debt, and equity issuance. The third-party construction backlog was $138.4 million at quarter-end, including $109.3 million for the Exelon project, which the company expected to substantially complete in 2016.
After quarter-end, the company completed acquisitions of Stone House Square and Perry Hall Marketplace on April 8 for total consideration of $35.4 million in cash and 415,500 common shares. It also expected the $35.6 million Whetstone Apartments sale to close in Q2 2015. A proposed $8.7 million Myrtle Beach retail acquisition was expected to close in Q2, subject to customary conditions.
Interest-rate exposure is material: 63% of debt was variable-rate at quarter-end. Management estimated that a 1 percentage-point rate increase, with variable debt unchanged, would reduce annual cash flow by approximately $2.4 million. A $50 million interest-rate swap was entered into for the term loan, effective March 1, 2016. The company said it was in compliance with debt covenants. Risks discussed include development execution and cost, tenant defaults or vacancies, financing and refinancing, interest-rate changes, construction margins, property markets, and maintaining REIT qualification. Performance/payment bonds totaled $199.4 million; outstanding standby letters of credit were $8.5 million. Management did not expect pending legal matters to have a material adverse effect.
Important facts for investors to verify
- Confirm the registrant identity: the request metadata names AH Realty Trust, Inc., but the supplied filing is for Armada Hoffler Properties, Inc.
- Assess how much of reported net-income growth came from the $6.2 million property-sale gain, and compare recurring measures such as FFO and normalized FFO.
- Track construction profitability, operating cash flow, and working-capital needs as construction activity and backlog change.
- Review debt maturities, variable-rate exposure, covenant headroom, and the company’s ability to fund development, acquisitions, and dividends.
- Confirm completion and final financing/accounting for the post-quarter acquisitions and the expected Whetstone sale; these transactions were not completed as of March 31.