Business context and reporting period
This is Armada Hoffler Properties, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2020 (NYSE: AHH). The filing identifies the registrant as Armada Hoffler Properties, Inc., not AH Realty Trust, Inc. The company is a REIT focused on office, retail and multifamily properties, with a general contracting and real estate services business. It reported 51 operating properties and three properties under development or not yet stabilized.
Key financial metrics
Unless otherwise noted, figures are in millions of dollars. Quarterly comparisons are with Q2 2019; six-month comparisons are with the first half of 2019.
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Total revenue | $97.3 | $57.8 | $186.9 | $105.8 |
| Rental revenue | $39.9 | $36.4 | $82.2 | $67.3 |
| Contracting and real estate services revenue | $57.4 | $21.4 | $104.7 | $38.5 |
| Net income | $12.3 | $5.8 | $21.4 | $12.3 |
| Net income attributable to common stockholders | $8.1 | $4.4 | $14.1 | $9.3 |
| Net income attributable to common stockholders and OP unit holders, per diluted share/unit | $0.14 | $0.08 | $0.25 | $0.18 |
| Net operating income (NOI) | $29.4 | $26.3 | $59.7 | $48.1 |
| FFO per diluted share/unit | $0.28 | $0.27 | $0.57 | $0.51 |
| Normalized FFO per diluted share/unit | $0.29 | $0.30 | $0.61 | $0.57 |
Contracting gross profit was $2.1 million in Q2 on $57.4 million of revenue, a 3.6% operating margin, down from 6.2% in Q2 2019. The filing does not provide a consolidated operating margin measure.
- Cash flow: First-half operating cash flow was $49.8 million, versus $28.1 million. Investing activities provided $17.7 million, compared with $246.6 million used in the prior-year period, mainly reflecting the 2020 property sale and lower development activity versus substantial 2019 acquisitions. Financing activities used $35.9 million, compared with $220.4 million provided in 2019. Cash, cash equivalents and restricted cash ended at $75.1 million.
- Balance sheet and liquidity: June 30 cash and cash equivalents were $71.0 million; restricted cash was $4.1 million. Indebtedness, net, was $953.8 million ($956.7 million principal balances). Total assets were $1.799 billion and total equity $646.9 million. Management reported $20.0 million of available credit-facility borrowings and $27.8 million available under construction loans. No loans were scheduled to mature during the remainder of 2020.
- Debt: The revolving facility balance was $80.0 million and term-loan balance $205.0 million at June 30. Following the seven-property sale, revolving-facility borrowing capacity fell from $150 million to $100 million. The company said it was in compliance with debt covenants, including after obtaining certain property-loan waivers.
- Portfolio: Core portfolio occupancy was 93.6% at June 30, versus 95.6% at March 31. Office occupancy was 97.0%, retail 95.1% and multifamily 87.9%; multifamily occupancy excluding seasonal student housing was 93.9%.
Material changes versus prior comparable periods
- Revenue and earnings increased substantially, led by a large increase in contracting activity from a high year-end backlog and by property additions and lease-ups. First-half construction revenue rose to $104.7 million from $38.5 million.
- Q2 retail NOI declined 1.6% year over year; same-store retail NOI fell 5.4%, primarily due to COVID-related bad-debt charges. Multifamily same-store NOI declined 9.8% in Q2, primarily from lower occupancy at Encore and Johns Hopkins Village. Office same-store NOI declined 7.2%, while total office NOI rose with new and acquired properties.
- The company sold seven retail properties on May 29 for $90.0 million, recognized a $2.8 million gain and repaid $61.9 million on its revolver, leaving $25.9 million net proceeds. It also acquired land for two planned mixed-use developments for a combined $8.6 million.
- First-half cash flow and investing patterns differed sharply from 2019, when acquisitions drove substantial investing outflows. First-half 2020 development investment was $39.9 million, versus $75.7 million a year earlier.
- Adoption of the expected-credit-loss (CECL) standard reduced retained earnings by $3.0 million at adoption. At June 30, the company had a $3.1 million notes-receivable allowance, and two mezzanine loans with $57.3 million total amortized cost were on nonaccrual.
Outlook, management commentary, risks and unusual items
- Management described COVID-19’s duration and financial effects as unknown and unquantifiable, with particular concern about retail tenant operations, collections, rent relief requests and potential business closures. As of July 31, collections were 87% of Q2 portfolio rent due: 100% office, 72% retail and 99% multifamily. July collections were 93% overall: 100% office, 86% retail and 97% multifamily. These are collection updates, not a forecast.
- The board suspended common dividends and OP-unit distributions for Q2 to preserve liquidity, while maintaining preferred dividends. In July it reinstated a common dividend of $0.11 per share/unit for Q3, below the pre-suspension quarterly rate; management said it could not assure a return to the earlier level. The Q3 preferred dividend was declared at $0.421875 per share.
- Management deferred Chronicle Mill, Southern Post and Ten Tryon development starts, slowed redevelopment at The Cosmopolitan, and suspended non-essential capital expenditures. Third-party construction sites remained open; backlog was $193.7 million, with most contracts expected to be completed within 12 to 18 months.
- The company terminated WeWork’s 69,000-square-foot lease for the top two floors of Wills Wharf. This adds leasing exposure as the office project is being completed.
- Delray Plaza and Residences at Annapolis Junction loans were placed on nonaccrual effective April 1; $2.6 million of Q2 interest income was not recognized. Both are secured by development projects whose sale or stabilization has taken longer than expected. Interlock Commercial received an additional potential $8.0 million funding commitment, and the company increased its payment guaranty on the project’s senior loan to $34.3 million.
- Guarantees of portions of third-party senior loans totaled $62.7 million. A $9.5 million letter of credit supports performance obligations on a related-party construction project. Management did not expect pending legal proceedings to have a material adverse effect.
- Other notable items include a $158,000 first-half impairment, $17.8 million in derivative liabilities at June 30, and an expected $4.3 million of net hedge losses to be reclassified to earnings over the next 12 months. Following the period, the company reduced its revolver balance by $32.0 million in July to $48.0 million and raised $16.0 million net from July preferred-share sales.
- The filing provides no quantified full-year earnings or FFO guidance. Management cautioned that operating results may remain affected by the pandemic and related restrictions.
Important facts for investors to verify
- Confirm the filing entity: this 10-Q is for Armada Hoffler Properties, Inc. (AHH), despite the request metadata naming AH Realty Trust, Inc.
- Track retail collections, tenant delinquencies, concessions and bad-debt charges, and confirm whether collection rates reported after quarter-end translate into recognized revenue and cash receipts.
- Review the performance, collateral values, nonaccrual status and repayment prospects of the mezzanine loans, especially Delray Plaza and Residences at Annapolis Junction, as well as the additional Interlock commitment and guarantee exposure.
- Monitor occupancy and leasing at Wills Wharf after the WeWork termination, and the effects of deferred development and redevelopment plans on backlog, costs and future NOI.
- Reassess liquidity, revolver availability, debt covenants, 2021–2024 maturities and the company’s ability to sustain the reinstated common dividend; also verify the completion and tax treatment of the planned Nexton Square acquisition.