Business context and reporting period
Armada Hoffler Properties, Inc. (NYSE: AHH), a REIT focused on office, retail, multifamily, development, construction and real estate services, reported unaudited results for the quarter ended March 31, 2019. The filing describes 48 operating properties and 11 properties under development or not yet stabilized. The request metadata names AH Realty Trust, but the filing registrant is Armada Hoffler Properties, Inc.
Financial and operating performance
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Total revenue | $47.9 million | $51.7 million |
| Operating income | $8.1 million | $7.8 million |
| Net income | $6.5 million | $7.0 million |
| Net income attributable to stockholders; diluted EPS | $4.9 million; $0.10 | $5.0 million; $0.11 |
| FFO; Normalized FFO per diluted share and unit | $16.6 million; $0.27 | $16.3 million; $0.25 |
| Net cash from operating activities | $16.1 million | $4.1 million |
| Cash, cash equivalents and restricted cash | $19.0 million | $19.3 million at March 31, 2018 |
| Indebtedness, net | $737.6 million | $694.2 million at December 31, 2018 |
- Rental revenue rose 7.7% to $30.9 million; general contracting and real estate services revenue fell 26.1% to $17.0 million. Total revenue declined 7.3%.
- Segment NOI increased to $21.8 million from $20.1 million. Office NOI rose 12.4%, retail 3.8%, and multifamily 18.5%. Contracting and real estate services gross profit increased to $0.75 million from $0.64 million, with margin of 4.4% versus 2.8%.
- Interest expense increased 34.6% to $5.9 million. A $1.5 million unfavorable change in derivative fair value was recorded in earnings; cash-flow hedge losses of $1.0 million were recorded in other comprehensive loss.
- Investing cash outflow was $79.8 million, principally reflecting $41.3 million of development spending and $25.8 million for acquisitions. Financing cash inflow was $58.6 million, including $30.6 million of net proceeds from common-stock sales and net debt borrowing.
- At March 31, unrestricted cash was $15.6 million; the company reported $56.6 million available under its credit facility and $40.2 million available under construction loans. It reported compliance with debt covenants and no loans scheduled to mature during the rest of 2019.
Material changes, outlook and risks
- Revenue and GAAP net income decreased year over year, while rental revenue, segment NOI and Normalized FFO per diluted share/unit increased. Management attributed the revenue decline mainly to construction projects being in early stages; the comparison period included higher construction activity.
- Same-store NOI increased 7.0% in office and 9.0% in multifamily; retail same-store NOI was generally flat. The company cited higher office occupancy and multifamily rental rates.
- The company acquired the office and retail portions of One City Center in March, exchanging its 37% joint-venture interest and paying $22.9 million cash; it also acquired a Wendover Village outparcel. After quarter-end, it acquired a 79% interest in 1405 Point and agreed to acquire two retail properties for estimated consideration of $105.0 million, including units, assumed debt and cash.
- Management provided no specific earnings or operating guidance in the supplied filing text. It cited development execution, tenant defaults or vacancies, mezzanine borrower repayment, interest rates, refinancing and access to financing among material risks. Construction backlog was $160.9 million, but management cautioned that key projects were at early stages and would generally generate less near-term revenue.
- Guarantees of third-party senior loans totaled $51.1 million at March 31, including a $30.7 million guarantee that became effective after quarter-end; the company also disclosed completion guarantees and construction-related bonds and letters of credit. Management did not expect pending legal matters to have a material adverse effect.
- The company adopted the new lease accounting standard in January 2019, recognizing $32.2 million of right-of-use assets and $41.7 million of lease liabilities at March 31; management said adoption did not affect earnings or cash flows. A new expected-credit-loss standard was still under evaluation and could accelerate loss recognition on notes receivable.
- The board declared a quarterly dividend of $0.21 per share and unit, a 5% increase from the prior quarter. The filing reported approximately 43.2% of debt at variable rates; management estimated a 100-basis-point LIBOR increase would reduce annual cash flow by $0.7 million, assuming no increase in variable-rate debt.
Key facts for investors to verify
- Confirm the registrant identity: this filing is for Armada Hoffler Properties, Inc., not AH Realty Trust.
- Review debt maturity concentrations, variable-rate exposure, credit-facility availability and covenant headroom, especially with debt increasing during the quarter.
- Assess whether construction backlog converts to revenue and cash on schedule, and whether project costs, occupancy and leasing support development returns.
- Evaluate collectability and credit exposure in the $152.2 million notes-receivable portfolio, borrower guarantees, and the impact of the new expected-credit-loss accounting standard.
- Consider dilution from ATM equity issuance and proposed acquisition units, the sustainability of the $0.21 dividend, and the distinction between FFO/Normalized FFO and GAAP earnings and operating cash flow.