Business context and reporting period
The filing is Armada Hoffler Properties, Inc.’s Form 10-K for the fiscal year ended December 31, 2013; the filing does not identify the registrant as AH Realty Trust, Inc. Armada Hoffler is a Mid-Atlantic real estate company with office, retail, multifamily, development and third-party construction businesses. At year-end, it owned 24 operating properties in Virginia and North Carolina: seven office, 15 retail and two multifamily properties, with approximately 2.05 million rentable square feet and 626 apartments.
Comparisons require caution: Armada Hoffler completed its IPO and formation transactions on May 13, 2013. The 2013 results combine the company and its predecessor, while 2012 and 2011 results are predecessor figures; the periods are not fully comparable.
Financial results and key metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Total revenue | $140.0 million | $108.5 million |
| Rental revenue | $57.5 million | $54.4 million |
| General contracting and real estate services revenue | $82.5 million | $54.0 million |
| Net income | $14.5 million | $8.9 million |
| Net income attributable to stockholders; diluted EPS | $7.3 million; $0.39 | Not presented comparably |
| Funds from operations (FFO, non-GAAP) | $19.8 million | $21.9 million |
| Net operating income (NOI) | $42.1 million | $40.8 million |
| Cash from operating activities | $22.2 million | $22.3 million |
| Cash used for investing activities | $47.9 million | $4.7 million |
| Cash from (used for) financing activities | $35.3 million | ($21.7 million) |
Fourth-quarter 2013 results were rental revenue of $15.0 million, construction and services revenue of $19.4 million, NOI of $11.5 million and net income of $2.9 million.
Occupancy at year-end was 95.2% for office, 93.4% for retail and 94.2% for multifamily. Annualized base rent for office and retail properties totaled $44.9 million. Reported consolidated indebtedness was $277.7 million, down from $335.1 million at year-end 2012; the weighted average interest rate was 3.6%, versus 4.3%. Unrestricted cash was $18.9 million, with $2.2 million of restricted cash. The $155 million revolving credit facility had $70 million drawn and $82 million of capacity available at year-end.
Approximately 54% of debt was variable-rate. Management estimated that a 1 percentage-point increase in interest rates, assuming no change in variable-rate debt, would reduce annual cash flow by about $1.5 million. Total assets were $435.3 million and total equity was $105.5 million.
Material changes versus the prior comparable period
- Total revenue rose $31.6 million, principally from higher construction volume and the addition of Bermuda Crossroads and Smith’s Landing to consolidated results after the IPO. The reported comparison is affected by the predecessor-to-public-company transition.
- Net income increased by $5.6 million, including a $9.5 million noncash gain from remeasuring the company’s prior interests in Bermuda Crossroads and Smith’s Landing. The year also included $2.4 million of debt-extinguishment losses and $0.6 million of impairment charges.
- FFO declined $2.1 million to $19.8 million. The filing cites debt-extinguishment losses and $1.2 million of noncash stock compensation among 2013 items. FFO is a supplemental non-GAAP measure, not a liquidity measure or substitute for operating cash flow.
- Interest expense fell $4.3 million, reflecting lower debt after IPO-funded repayments and refinancing. The company repaid approximately $150 million of debt using IPO proceeds and credit-facility borrowings; the IPO generated $192 million of net proceeds.
- Same-store NOI weakened in office by $0.2 million and retail by $0.7 million; multifamily same-store NOI declined $0.2 million. Retail decreases were associated with lower occupancy at South Retail and Dick’s at Town Center; office and multifamily declines reflected higher property costs.
- Third-party construction revenue increased, but segment NOI fell to $3.7 million from $3.9 million and the operating margin narrowed to 4.5% from 7.3%. Year-end construction backlog was $46.4 million.
Outlook, risks, contingencies and unusual items
The company gave no specific consolidated earnings or FFO guidance. Management’s stated priorities were to increase occupancy and FFO, complete development projects, pursue selective acquisitions, manage leverage and maintain construction margins. The identified development pipeline included office and retail projects and 686 apartment units, with estimated project costs totaling $195.7 million including Liberty Apartments; estimates and schedules were subject to change, approvals, financing and market conditions. Liberty Apartments was acquired in January 2014 for $30.7 million of consideration, including assumed debt of $20.9 million. A $19.5 million construction loan for the Oceaneering facility closed in February 2014.
Debt concentration is significant: $99.6 million, or 45% of scheduled principal and term-loan maturities in the filing’s maturity schedule, falls in 2016, including the $70 million credit facility maturing May 2016 (with a conditional one-year extension). Another $70.9 million is scheduled for 2017. The company reported compliance with its debt covenants at year-end. Its contractual-obligations table reported $426.4 million in total payments, including principal, estimated interest, leases and other commitments.
Key risks include geographic concentration (approximately 94% of portfolio annualized base rent came from Virginia), hurricane exposure, refinancing and floating-rate risk, development cost and lease-up uncertainty, and dependence on major tenants. Williams Mullen represented about 14% of total portfolio annualized base rent and 31.7% of office portfolio rent. Retail anchor concentration, lease expirations and negative cash-based renewal spreads also merit attention. Long-term ground and other operating lease payments totaled $69.4 million, mostly due after five years.
Other notable disclosures: the company intends to qualify as a REIT beginning with 2013, subject to ongoing requirements; it reported no material litigation expected to adversely affect its financial position, results or liquidity. The auditor issued an unqualified opinion on the financial statements. Management said disclosure controls were effective; a management assessment and auditor attestation on internal control over financial reporting were omitted under the newly public company transition provisions.
Investor verification priorities
- Confirm the issuer identity and compare 2013 performance carefully with predecessor-only periods, particularly for revenue, earnings and FFO.
- Assess whether cash generation and available credit can support the development pipeline, dividends and the 2016–2017 debt maturities; verify subsequent refinancing and borrowing availability.
- Track project budgets, leasing, delivery dates and stabilization, including the still-unsigned principal tenant lease for Brooks Crossing noted in the filing.
- Monitor tenant concentration, occupancy, renewal rents and leasing costs, especially Williams Mullen and retail anchors.
- Reconcile reported net income with recurring operating performance, including the acquisition gain, debt-extinguishment losses, impairment and stock compensation; review FFO limitations.
- Verify continued REIT qualification, distribution capacity and compliance with credit-facility covenants, and consider the effects of redeemable OP Units and related dilution.