Business context and reporting period
The supplied 10-Q is for Armada Hoffler Properties, Inc. (NYSE: AHH), not a registrant named AH Realty Trust, Inc. It covers the quarter and six months ended June 30, 2019; the interim financial statements are unaudited. Armada Hoffler is a REIT focused on office, retail, multifamily, development, and construction services, primarily in the Mid-Atlantic and Southeastern United States. At quarter-end it reported 54 operating properties and eight properties under development or not yet stabilized.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $57.8 million | $49.3 million | $105.8 million | $101.0 million |
| Operating income | $9.7 million | $7.9 million | $17.8 million | $15.6 million |
| Net income | $5.8 million | $5.9 million | $12.3 million | $12.9 million |
| Net income attributable to common stockholders | $4.4 million; $0.08/share | $4.3 million; $0.09/share | $9.3 million; $0.18/share | $9.4 million; $0.21/share |
| FFO per diluted share and unit | $0.27 | $0.24 | $0.51 | $0.50 |
| Normalized FFO per diluted share and unit | $0.30 | $0.24 | $0.57 | $0.49 |
Rental revenue rose 27% in Q2 to $36.4 million, while general contracting and real estate services revenue increased 4% to $21.4 million. Q2 net operating income (NOI), a supplemental non-GAAP measure, was $26.2 million versus $19.9 million. Q2 same-store NOI increased 3.4% in office, 3.8% in retail, and 20.9% in multifamily. Construction-services gross profit was $1.3 million, with a 6.2% operating margin, compared with $0.6 million and 2.7% a year earlier.
For the first six months, operating cash flow was $28.1 million, investing cash outflow was $246.6 million, and financing cash inflow was $220.4 million. Cash, cash equivalents, and restricted cash ended at $26.0 million. At June 30, total assets were $1.73 billion, indebtedness net was $949.3 million, and total equity was $606.4 million. Unrestricted cash was $23.1 million; the company reported $27.7 million available on its credit facility and $104.3 million available under construction loans. It reported covenant compliance and no loans maturing during the remainder of 2019.
Material changes versus prior comparable period
- Q2 total revenue increased $8.6 million, largely from acquisitions, new property operations, and higher occupancy; six-month revenue rose $4.8 million as construction-services revenue declined $5.2 million.
- Q2 common-stockholder earnings per share fell to $0.08 from $0.09 despite slightly higher attributable earnings, reflecting a larger weighted-average share count and preferred dividends. Six-month EPS declined to $0.18 from $0.21.
- Interest expense rose to $7.6 million for Q2 and $13.5 million for six months, mainly due to higher debt balances. Interest income increased to $5.6 million and $10.9 million, respectively, as mezzanine lending grew.
- Net real estate investments rose to $1.36 billion from $987.8 million at year-end 2018. Debt increased to $949.3 million from $694.2 million.
- The company acquired One City Center, a 79% controlling interest in 1405 Point, Red Mill Commons and Marketplace at Hilltop, and Thames Street Wharf, and sold Waynesboro Commons. These transactions materially expanded its portfolio.
Outlook, commentary, risks, and unusual items
- No formal earnings or operating guidance is provided in the supplied filing text. Management announced Southern Post, a planned 240,000-square-foot mixed-use development in Roswell, Georgia, with approximately $80 million of estimated development and construction costs and anticipated construction commencement in Q1 2020.
- The company issued $61.3 million of net proceeds before offering expenses from 6.75% Series A preferred stock and raised $37.8 million net through its common-stock ATM program in the first half. Preferred dividends are cumulative; the securities rank ahead of common stock but behind debt.
- Q2 included a $1.9 million loss from changes in fair value of interest-rate derivatives; first-half derivative fair-value losses were $3.4 million in earnings, in addition to cash-flow hedge losses recorded in other comprehensive loss. Management expects to reclassify approximately $1.1 million of net hedge losses into earnings over the next 12 months.
- Approximately 52.2% of principal debt was variable-rate at quarter-end. The filing estimates that, holding variable debt constant, a 100-basis-point LIBOR increase would reduce annual cash flow by $1.3 million after caps; a 100-basis-point decrease would increase annual cash flow by $3.6 million.
- Near-term debt maturities are significant: scheduled principal payments include $124.0 million in 2020, $251.7 million in 2021, and $319.0 million in 2022. The company also has $56.7 million of payment guarantees for third-party development loans and outstanding performance and payment bonds of $29.0 million.
- Risks include refinancing and interest-rate exposure, development cost or schedule overruns, tenant nonrenewal or default, mezzanine borrowers’ repayment capacity, and REIT qualification. Dick’s Sporting Goods will not renew its anchor lease after January 31, 2020; the company is evaluating replacement uses and tenants. The Red Mill acquisition also carries a tax-protection agreement of up to 10 years, subject to exceptions.
- Adoption of the new lease accounting standard added right-of-use assets and lease liabilities but did not affect results or cash flows. The company noted that the forthcoming expected-credit-loss standard may lead to earlier recognition of provisions on notes receivable.
- Management stated that existing legal proceedings are not expected to have a material adverse effect. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Confirm the issuer identity: this filing is Armada Hoffler Properties, Inc. (AHH), not AH Realty Trust, Inc.
- Assess whether acquisition-driven growth and higher same-store NOI can offset rising interest expense, property costs, and depreciation.
- Review debt maturities, refinancing capacity, covenant headroom, and exposure to variable LIBOR-based rates.
- Evaluate repayment and collateral risks for the $144.7 million notes-receivable portfolio and the $56.7 million of related payment guarantees.
- Monitor Dick’s lease expiration, development execution and funding, and the company’s ability to sustain common and preferred distributions.