Filing summary
Issuer and period: The supplied filing is Armada Hoffler Properties, Inc.’s Form 10-K for the fiscal year ended December 31, 2014, filed March 16, 2015. It is not identified in the filing as an AH Realty Trust filing. The year-over-year comparison requires caution: 2013 includes both the company and its predecessor for part of the year, while 2014 reflects the company after its 2013 IPO and formation transactions.
Business context and reporting period
Armada Hoffler is a Mid-Atlantic real estate company that owns, develops and manages office, retail and multifamily properties, and operates a general contracting and real estate services business. Its property portfolio is concentrated in Virginia and North Carolina. The company elected REIT tax treatment beginning in 2013; construction and development services are conducted through taxable REIT subsidiaries.
Financial and operating results
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Total revenue | $168.1 million | $140.0 million |
| Rental revenue | $64.7 million | $57.5 million |
| General contracting and real estate services revenue | $103.3 million | $82.5 million |
| Net income | $12.8 million | $14.5 million |
| Net income attributable to stockholders | $7.7 million | $7.3 million |
| Diluted EPS | $0.37 | $0.39 |
| FFO | $28.1 million | $19.8 million |
| Core FFO | $29.4 million | $24.0 million |
| Cash from operating activities | $31.4 million | $22.2 million |
| Cash used for investing activities | $105.3 million | $47.9 million |
NOI, a non-GAAP segment measure, was $46.9 million, up from $42.1 million. Office NOI was $19.1 million, retail $16.8 million, multifamily $6.4 million and contracting/services $4.6 million. Same-store NOI was $36.0 million versus $35.3 million. Contracting/services operating margin was 4.4%, compared with 4.5%; management attributed revenue and NOI growth to higher construction volume, particularly the Exelon project.
At year-end, stabilized occupancy was 95.2% for office, 96.4% for retail and 95.7% for multifamily. The company reported $25.9 million of cash and cash equivalents and $4.2 million of restricted cash. Total assets were $590.9 million; total liabilities were $429.0 million and total equity $161.9 million.
Material changes versus the prior comparable period
- Total revenue grew 20.0%, driven by higher construction activity and additional or newly occupied properties. Rental revenue rose 12.6%; contracting/services revenue rose 25.2%.
- Net income fell 11.7%, while FFO increased 42.0%. Lower interest expense and higher NOI supported results, but 2013 included a $9.5 million acquisition-related gain from remeasuring prior equity interests; 2014 included a $2.2 million gain on the Virginia Natural Gas property sale.
- Operating cash flow increased $9.2 million. Investing outflow grew as development spending rose to $98.5 million from $41.3 million.
- Debt increased to $359.2 million carrying value from $277.7 million. The company raised $49.3 million net in a September 2014 common-stock offering and declared $0.64 per share in 2014 dividends, versus $0.40 in 2013.
- Acquisitions included Liberty Apartments and Dimmock Square. Development deliveries included 4525 Main Street and initial units at Encore and Whetstone Apartments; the company also sold Virginia Natural Gas.
Debt, liquidity, outlook and risks
At December 31, 2014, debt principal was $360.7 million, of which approximately 60% was variable-rate. The former $155 million secured credit facility had $59.0 million drawn and $87.5 million of capacity available at year-end; the company reported compliance with its covenants. Debt maturities were concentrated in 2016 and 2017, representing approximately 37% and 41% of scheduled principal, respectively. Management estimated that a 1 percentage-point increase in interest rates, with variable debt unchanged, would reduce annual cash flow by about $2.2 million.
After year-end, on February 20, 2015, the company replaced the former facility with a $200 million unsecured facility: a $150 million revolver and $50 million term loan, with an accordion feature up to $350 million subject to conditions. It borrowed $104 million to repay the prior facility and approximately $39 million of other secured debt. The new facility has maturities in 2019 and 2020 and includes leverage, coverage, asset and dividend restrictions. In January 2015, the board declared a quarterly dividend of $0.17 per share; future dividends remain discretionary and subject to cash availability and debt terms.
Management’s stated strategy is to develop and own office, retail and multifamily properties, pursue selective acquisitions and grow third-party construction work. The filing gives no formal earnings or FFO guidance. Development schedules and estimates are subject to financing, regulatory approvals, market conditions, costs and leasing. The pipeline included projects with estimated costs of $138 million pending delivery and $119 million delivered but not stabilized; estimates may change. A $159.1 million construction backlog at year-end included $126.0 million remaining on the Exelon project.
Notable risks include geographic and tenant concentration: Virginia represented about 94% of stabilized annualized base rent, and Williams Mullen represented 33% of stabilized office rent and about 14% of total stabilized portfolio rent. The company also cited refinancing and interest-rate exposure, development execution, construction cost and schedule risks, retail tenant defaults and lease expirations, hurricane and insurance exposure, environmental and regulatory liabilities, REIT qualification requirements, related-party conflicts and potential dilution from redeemable OP Units. Management reported effective disclosure controls and internal control over financial reporting at year-end; the independent auditor issued an unqualified opinion on the financial statements.
Subsequent transactions disclosed include the January 2015 sale of Sentara Williamsburg for $15.4 million and a planned use of proceeds, together with equity issuance, toward two Maryland retail acquisitions; a contracted $8.7 million Myrtle Beach retail acquisition; and an agreement to sell Whetstone Apartments for $35.6 million, expected to close in the second quarter of 2015. These transactions were subject to customary conditions as described in the filing.
Key facts for investors to verify
- Confirm the intended issuer: the provided filing is for Armada Hoffler Properties, Inc. (NYSE: AHH), not AH Realty Trust.
- Review the complete audited statements and reconciliation of GAAP net income to FFO and Core FFO; these supplemental measures are not substitutes for cash flow or a measure of dividend capacity.
- Check current debt balances, covenants, borrowing availability and the execution and ongoing terms of the February 2015 refinancing; year-end debt maturity figures predate that refinancing.
- Assess the effect of Williams Mullen’s rent concentration and the company’s substantial Virginia and Hampton Roads exposure.
- Verify actual completion, cost, occupancy and returns for development projects and the status and economics of the announced sales and acquisitions.
- Evaluate dividend sustainability against operating cash flow, development and capital needs, debt restrictions, and the tax character of distributions; 42.4% of 2014 dividends was reported as return of capital.