Business context and reporting period
Armada Hoffler Properties, Inc. (NYSE: AHH) filed this unaudited Form 10-Q for the quarter ended September 30, 2013. The company owns and develops office, retail and multifamily properties and operates a general contracting and real estate services business in the Mid-Atlantic. At quarter-end its portfolio included 7 office, 15 retail and 2 multifamily properties.
The company completed its IPO and formation transactions on May 13, 2013. Accordingly, third-quarter 2013 results are those of the company, while 2012 results are those of its predecessor; nine-month 2013 results combine predecessor and company results. Comparisons are therefore not fully like-for-like. The interim financial statements were reviewed, not audited, by Ernst & Young.
Financial performance and position
Amounts below are in millions of dollars unless otherwise stated.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total revenue | $36.8 | $26.9 | $105.7 | $81.0 |
| Operating income | $5.2 | $5.8 | $13.7 | $17.7 |
| Net income | $1.3 | $1.8 | $11.6 | $5.7 |
| Funds from operations (FFO) | $5.2 | $4.5 | $13.2 | $15.2 |
| Cash flow from operating activities | Not provided for quarter | Not provided for quarter | $18.2 | $8.5 |
- Q3 revenue increased 36.5%, led by general contracting and real estate services revenue of $21.9 million, up $8.3 million; rental revenue was $14.9 million, up $1.6 million. Operating income declined to $5.2 million, and net income attributable to stockholders was $0.745 million, or $0.04 per share.
- Q3 net income included a $1.1 million debt-extinguishment loss and $0.2 million of non-cash stock compensation. Q3 FFO was $5.2 million, or $0.16 per share; FFO is a non-GAAP measure and is not a measure of liquidity.
- Nine-month net income included a $9.5 million non-cash gain from remeasurement of prior interests in acquired properties, as well as $2.3 million of debt-extinguishment losses and $0.5 million of impairment charges. FFO excludes the acquisition gain; nine-month FFO was down from 2012.
- Q3 portfolio occupancy was 93.4% for office, 93.6% for retail and 92.7% for multifamily. Same-store office and multifamily NOI improved year over year, while retail same-store NOI declined $0.2 million in Q3 and $0.7 million for nine months, mainly due to lower occupancy at three properties.
- General contracting revenue growth reflected progress on major projects, but segment operating margin fell to 4.5% in Q3 from 6.8% in Q3 2012 and to 3.6% for nine months from 6.0%. Backlog was $59.5 million, versus $65.9 million a year earlier.
- At September 30, assets were $406.9 million, net real estate investments $339.0 million, and total equity $108.0 million, including $152.9 million of noncontrolling interests. Cash and cash equivalents were $9.8 million, with $3.0 million restricted cash.
- Debt was $247.4 million at quarter-end, down from $334.4 million at December 31, 2012. The company reported $45.0 million drawn and $55.0 million available on its $100 million revolver at quarter-end. After the quarter, capacity rose to $155 million; as of the filing date, $60 million was drawn and $95 million available.
- Nine-month investing cash outflow was $29.2 million, including $24.9 million for real estate development. Financing cash flow was $11.4 million, reflecting IPO proceeds and borrowings offset by debt repayments and distributions. Cash increased by $0.4 million over the period.
Material changes, outlook and risks
- The May 2013 IPO raised approximately $203.2 million in net proceeds after underwriting discounts. Proceeds and revolver borrowing supported repayment of approximately $150.0 million of debt and formation-transaction consideration. IPO proceeds had been fully used by September 30.
- Development pipeline estimates totaled $142 million, with $35.7 million incurred by quarter-end. Projects included 4525 Main Street office, Encore and Whetstone apartments, Sandbridge Commons retail, Brooks Crossing office and Greentree Shopping Center. Schedules and costs remain subject to change, approvals, financing and market conditions.
- Management expected to acquire Liberty Apartments for approximately $31.9 million, subject to conditions, and anticipated closing in Q1 2014. This was a forward-looking expectation, not a completed transaction.
- Subsequent to quarter-end, the company borrowed an additional $15 million on the revolver, obtained an $18.5 million Whetstone construction loan, repaid the approximately $10.8 million Bermuda Crossroads loan, and amended six loans to extend maturities to October 2018 and lower rates. Some amended loans became non-recourse.
- Approximately $50.3 million of debt was scheduled to mature in 2014 as of September 30. Management was pursuing refinancing of Smith’s Landing debt, which matured January 31, 2014, but gave no assurance it could refinance on favorable terms or at all. Subsequent amendments and repayments changed the debt profile.
- The company intended to qualify as a REIT for the tax year ending December 31, 2013. It cited risks including development delays or cost overruns, tenant defaults or vacancies, construction margin pressure, access to financing, interest-rate changes, debt service, economic and real estate conditions, and maintaining REIT status.
- At quarter-end, 72% of debt was fixed-rate and 28% variable-rate. Management estimated a 1 percentage-point increase in rates, with variable debt unchanged, would reduce annual cash flow by approximately $0.7 million. The company reported compliance with debt covenants and effective disclosure controls; no material risk-factor changes were reported. Management did not expect pending legal matters to materially affect the company.
Important facts for investors to verify
- How much of reported revenue and growth reflects acquired/consolidated properties and construction projects rather than comparable-property improvement; note the predecessor-versus-company reporting basis.
- Whether construction margins and backlog recover, and whether retail same-store occupancy and NOI stabilize.
- Progress, financing, costs, leasing and delivery schedules for development projects, and whether Liberty Apartments closes on the stated terms and timing.
- Refinancing and repayment of near-term maturities, subsequent debt amendments, revolver availability, covenant headroom and exposure to variable rates.
- The quality and repeatability of earnings, particularly the impact of the acquisition gain, debt-extinguishment losses and impairment charges; reconcile GAAP income with FFO and cash generation.
- REIT qualification and dividend sustainability. The filing reports $0.16 per share/unit declared for the period; confirm the applicable declaration, payment dates and cash requirements.