AH Realty Trust, Inc. quarterly report, Q1 FY2013

Business context and reporting period

The filing is Armada Hoffler Properties, Inc.’s Form 10-Q for the quarter ended March 31, 2013. The filing text identifies the registrant as Armada Hoffler Properties, Inc., not AH Realty Trust, Inc. The reported historical operating results are those of the predecessor entities: the company itself had no operations before the May 13, 2013 IPO and formation transactions. Thus, the quarter’s results do not reflect the post-IPO company or its acquired portfolio on a consolidated basis.

The predecessor operated office, retail and multifamily properties, as well as general contracting and real estate services, primarily in the Mid-Atlantic. Its March 31 portfolio included seven office properties, 14 controlled retail properties and one multifamily property; two additional properties were accounted for as equity-method investments.

Financial performance and position

Historical amounts below are in millions, except percentages. Predecessor results are for the three months ended March 31.

• Total expenses increased 16.0% to $25.78 million, faster than revenue. Operating margin was approximately 17.8%, versus 20.7% in Q1 2012; net margin was approximately 6.2%, versus 6.7%.
• Segment net operating income (NOI) was $9.46 million, down from $9.99 million. Office NOI was $4.54 million (approximately flat); retail NOI was $3.33 million, down 6.9%; multifamily NOI was $1.09 million, down 10.9%; and contracting/services NOI was $0.50 million, down 23.3%.
• At March 31, predecessor assets were $333.3 million, including net real estate investments of $262.7 million and cash of $4.1 million. Liabilities were $376.1 million, including $333.0 million of secured debt and a $0.6 million participating note; reported equity was negative $42.7 million.
• Predecessor cash declined $5.3 million during Q1. Investing used $3.2 million and financing used $6.4 million; cash paid for interest was $3.75 million.
• Post-IPO pro forma information shows total debt of approximately $244.9 million, including $219.9 million of property-secured debt and $25.0 million drawn on the new revolver. The filing says about $91.9 million, or 41.6% of the pro forma property-secured debt, was variable-rate debt.

Material changes, outlook and risks

• Revenue growth came primarily from higher construction volume. Contracting/services expenses grew faster than that revenue, reducing segment NOI and margin. Rental revenue was nearly unchanged; retail same-store rental revenue fell 4.7%, partly reflecting a shift to cash-basis recognition for certain tenants where collection was not reasonably assured.
• Office occupancy was 93.9% at March 31, down from 94.1% at year-end 2012; retail occupancy was 94.2%, up from 93.9%. Multifamily occupancy was 87.7%, versus 89.2% a year earlier.
• The May IPO priced 16.525 million shares at $11.50; the full over-allotment added 2.479 million shares. The filing reports approximately $199.2 million of net proceeds in its pro forma discussion. Proceeds and revolver borrowings funded debt repayment, formation consideration and related uses. The revolver has $100 million of capacity, an accordion feature up to $250 million subject to conditions, and a May 2016 maturity with an optional one-year extension. The filing also reports a $15 million repayment on the revolver in June.
• Management cited a development pipeline estimated at $143.4 million, with six projects and planned completion dates from 2014 to 2015. Construction timing, costs and ownership estimates may change and projects depend on approvals, financing and market conditions. Management expected to pursue development, acquisitions and growth, but the filing provides no formal earnings or dividend guidance.
• Near-term financing items included a Main Street Land loan due July 3, 2013, which management expected to repay with planned construction financing, and a Smith’s Landing loan due January 2014 that management said was being refinanced. Management reported compliance with debt covenants.
• Management estimated incremental annual public-company costs of $1 million to $2 million, excluding stock compensation, and anticipated $0.7 million of noncash stock compensation. Pro forma Q1 results included $2.72 million of net income and $0.08 per share, but were illustrative, not forecasts; pro forma FFO was $6.50 million, or $0.20 per share.
• Key risks include development execution and cost overruns, tenant defaults or lease non-renewals, construction profitability, refinancing and interest-rate exposure, access to financing, related-party conflicts, and maintaining REIT qualification. Management estimated a 1 percentage-point rate increase would reduce annual cash flow by about $1.25 million, assuming no change in variable-rate debt.
• Management said ordinary-course legal matters were not expected to have a material adverse effect. Interim financial statements were reviewed, not audited. The company intended to qualify as a REIT for the 2013 tax year.

Important facts for investors to verify

• Confirm the registrant and ticker: the filing names Armada Hoffler Properties, Inc. and identifies NYSE ticker AHH.
• Reconcile the IPO net-proceeds figures across the filing, which presents approximately $199.2 million in the pro forma discussion and approximately $195.8 million in another use-of-proceeds discussion.
• Assess post-formation debt, variable-rate exposure, covenant headroom, and the 2013–2016 maturity schedule, including refinancing of near-term loans.
• Track occupancy, tenant collections and bad-debt trends, especially the retail and multifamily NOI declines.
• Verify development budgets, financing, approvals, leasing and delivery progress, including the Apprentice School Apartments acquisition conditions.
• Evaluate the effect of public-company expenses, stock compensation, related-party arrangements and REIT compliance on future distributable cash.