Business context and reporting period
Armada Hoffler Properties, Inc. (NYSE: AHH), a REIT, filed this Form 10-K for the fiscal year ended December 31, 2017. The filing describes a diversified real estate and construction company focused primarily on the Mid-Atlantic and Southeast, with office, retail, multifamily, and general contracting and real estate services segments. The request metadata names “AH Realty Trust, Inc.”; the registrant in the filing is Armada Hoffler Properties, Inc.
At year-end, the operating portfolio included 38 retail properties, four office properties, and five multifamily properties. The company owned 72.0% of its Operating Partnership. Figures below are for the full fiscal year unless noted; fourth-quarter results are identified separately.
Financial and operating performance
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $302.8 million | $258.4 million |
| Rental revenue | $108.7 million | $99.4 million |
| General contracting and real estate services revenue | $194.0 million | $159.0 million |
| Net income | $29.9 million | $42.8 million |
| Net income attributable to stockholders; diluted EPS | $21.0 million; $0.50 | $28.1 million; $0.85 |
| FFO; normalized FFO | $59.7 million; $59.3 million | $48.0 million; $50.9 million |
| Cash provided by operating activities | $58.0 million | $60.0 million |
| Cash and cash equivalents at year-end | $20.0 million | $21.9 million |
Property-segment NOI was $72.8 million, versus $67.9 million. By segment, 2017 NOI was $11.9 million office, $46.7 million retail, and $14.2 million multifamily. General contracting gross profit was $7.4 million on $194.0 million of revenue, a 3.8% operating margin. Same-store NOI was $45.2 million, compared with $46.8 million.
Year-end stabilized occupancy was 89.9% in office, 96.5% in retail, and 92.9% in multifamily. The company declared dividends of $0.76 per share for 2017, up from $0.72 in 2016.
Debt, liquidity, and capital
Year-end indebtedness was $523.4 million principal ($517.3 million net of unamortized adjustments and issuance costs), compared with $527.1 million principal at year-end 2016. The company reported $20.0 million of unrestricted cash and $81.9 million available under its credit facility. Total assets were $1.04 billion and total equity was $420.3 million.
In October 2017, the company replaced its prior facilities with a $300 million unsecured credit facility: a $150 million revolving facility maturing in 2021, with two six-month extension options, and a $150 million term loan maturing in 2022. The revolver carried a 3.11% rate and term loans rates of 3.06%–3.50% at year-end. The company said it was in compliance with its debt covenants.
Debt principal maturities included $77.7 million in 2018, $176.3 million in 2021, and $169.8 million in 2022. After year-end, the Sandbridge Commons mortgage was extended to 2023; the company also drew an additional $58.0 million on its revolver in January 2018. Although 56.2% of year-end principal debt was variable-rate, management stated that swaps and caps economically hedged all debt.
Material changes versus 2016
- Total revenue increased $44.4 million, with rental revenue growth from retail acquisitions and developments, and higher construction activity.
- Net income declined $12.8 million, principally reflecting the much smaller disposition gain: $8.1 million in 2017 versus $30.5 million in 2016. Diluted EPS fell to $0.50 from $0.85.
- FFO rose to $59.7 million from $48.0 million, while normalized FFO increased to $59.3 million from $50.9 million. Normalized FFO per diluted share was $0.99 versus $1.01, reflecting share issuance and other factors.
- Property NOI increased, led by retail and multifamily; office NOI declined to $11.9 million from $13.4 million, partly due to office property dispositions. Same-store NOI decreased, especially in office and multifamily.
- Construction backlog fell to $49.2 million from $217.7 million as the company performed $193.8 million of work and added $25.2 million of contracts and change orders.
- Operating cash flow declined $2.0 million, which management attributed primarily to significant construction accounts-payable payments, partly offset by increased property NOI.
Outlook, commentary, and risks
Management reported progress on projects expected to deliver mainly in 2018–2019, including Town Center Phase VI, Harding Place, 595 King Street, 530 Meeting Street, and the Brooks Crossing office tower. The stated estimated cost of the development pipeline was $241 million, with $104 million incurred at year-end; estimates and schedules are subject to change, approvals, financing, and market conditions. One City Center was approximately 90% pre-leased, including a 62,000-square-foot WeWork lease, and was scheduled for completion in mid-2018. The filing does not provide formal earnings or FFO guidance.
Subsequent to year-end, the company announced a $0.20 first-quarter 2018 dividend per share, a 5.3% increase from the prior quarter, and a planned $23 million Lowes Foods-anchored center in Mount Pleasant, South Carolina. It also acquired two retail centers after year-end.
- Concentration: Approximately 68% of portfolio annualized base rent was in Virginia and 17% in North Carolina; Hampton Roads properties generated 53% of rental revenue, and Town Center properties 38%.
- Tenant and leasing exposure: Kroger/Harris Teeter represented 11.0% of retail ABR; Clark Nexsen represented 12.7% of office ABR. Retail lease expirations were concentrated in 2019–2020, when 32.6% of retail ABR was scheduled to expire.
- Financing and rates: Significant debt maturities in 2021–2022, variable-rate exposure, refinancing needs, and credit-facility covenants could constrain liquidity and distributions.
- Development, lending, and guarantees: Construction costs, delivery and lease-up risks, mezzanine loan subordination, joint-venture exposure, and guarantees—including a $25 million guarantee tied to Point Street—could affect returns or require funding.
- Other risks: The portfolio is exposed to hurricanes and potentially insufficient insurance, environmental and regulatory liabilities, retail-sector changes, and the company’s ability to maintain REIT qualification. The 2017 tax law changes had an uncertain longer-term effect; the company recorded a provisional $0.2 million tax expense for deferred-tax remeasurement.
The company reported no material litigation expected to adversely affect its financial position, results, or liquidity. Management concluded disclosure controls and internal control over financial reporting were effective at year-end; an auditor attestation on internal controls was not required while the company remained an emerging growth company.
Most important facts for investors to verify
- Confirm the registrant identity and compare the decline in GAAP net income and EPS with the increase in FFO and normalized FFO, including the effect of 2016 disposition gains and 2017 share issuance.
- Review the debt maturity schedule, post-year-end revolver draw, covenant headroom, and refinancing plans for 2021–2022.
- Assess whether development projects meet cost, delivery, pre-leasing, and stabilization expectations, and whether loan and guarantee exposures are adequately protected.
- Track same-store NOI and occupancy trends, especially office and multifamily performance, retail tenant concentration, and near-term lease expirations.
- Evaluate dividend coverage and cash available for distribution against operating cash flow, debt service, development spending, and REIT distribution requirements.