AH Realty Trust, Inc. quarterly report, Q3 FY2014

Business context and reporting period

This is Armada Hoffler Properties, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2014; the supplied company label, AH Realty Trust, does not match the registrant named in the filing. Armada Hoffler is a Mid-Atlantic real estate owner, developer and manager, with office, retail and multifamily properties and a general contracting and real estate services business. It reported 25 stabilized properties, four unstabilized properties and six properties under development. The interim statements received an independent accountant’s review, not an audit.

Financial performance and position

• Q3 rental revenue rose 12% year over year; general contracting and real estate services revenue increased to $31.5m from $21.9m. Higher construction volume drove much of the revenue growth.
• For the nine months, net income fell despite higher revenue and operating income, principally because 2013 included a $9.5m acquisition gain. The nine-month 2013 comparison also combines predecessor and company results, whereas 2014 reflects the company.
• Segment NOI for Q3 was $4.9m office, $4.3m retail, $1.6m multifamily and $1.1m contracting/services. Stabilized portfolio occupancy was 95.1%; office 94.8%, retail 94.7% and multifamily 96.6%.
• At September 30, total assets were $567.3m, carrying-value indebtedness $335.8m, and cash and cash equivalents $17.1m, plus $4.4m restricted cash. Stockholders’ equity was a $2.3m deficit; total equity, including noncontrolling interests, was $162.8m.
• Nine-month operating cash flow was $21.3m, investing cash outflow $87.5m and financing cash inflow $64.4m; cash declined $1.8m to $17.1m. Development investment was $77.1m. Management separately reported $12.3m of Q3 operating cash flow in its highlights.
• Debt carrying value increased from $277.7m at year-end 2013. About 57% of debt was variable-rate; management estimated a 1 percentage-point rate increase would reduce annual cash flow by about $1.9m, assuming variable debt did not increase.

Material changes versus comparable periods

• Q3 net income and FFO improved year over year; all four segments reported higher NOI. Same-store NOI increased in office and retail, while multifamily same-store NOI was up in Q3 but down slightly over nine months.
• Growth reflected the opening and leasing of 4525 Main Street, acquisitions of Liberty Apartments and Dimmock Square, stronger occupancy, and higher construction activity. Dimmock Square was acquired for $19.7m; Liberty Apartments’ consideration was $26.7m.
• Development in progress rose to $93.9m from $56.7m at December 31, 2013. The company issued 5.75m shares in September at $9.05 per share, generating $49.3m net proceeds, used to repay part of its credit-facility balance.
• Construction backlog was $153.5m, versus $59.5m a year earlier, including $143.8m remaining on the Harbor Point project.

Outlook, risks and unusual items

• No formal earnings or FFO guidance is provided in the supplied filing text. Management expected several development projects to deliver in 2015–2016 and anticipated completing proposed sales of Virginia Natural Gas (about $8.9m) and Sentara Williamsburg (about $15.4m) in 2014; both were non-binding letters of intent, not completed sales.
• The $155m credit facility had $54m drawn and $11m of letters of credit outstanding at quarter-end; reported availability was $90m. It matures May 2016, with an optional one-year extension subject to conditions. The filing states the company was in compliance with debt covenants. An additional $10m was borrowed in October, after quarter-end.
• Debt maturities were concentrated in 2016 and 2017: $95.9m and $105.9m, respectively, in the maturity schedule. The filing also reports $193.4m of construction-related bonds and $11.0m of standby letters of credit, contingent on performance obligations.
• Key risks include development delays or cost overruns, tenant defaults or vacancies, construction-contract profitability, refinancing and interest-rate exposure, access to financing, economic and real estate market conditions, and maintaining REIT qualification. Management said ordinary-course legal proceedings were not expected to have a material adverse effect. No material risk-factor changes were reported.
• Unusual comparisons include the prior-year acquisition gain and debt-extinguishment losses, as well as differences in the predecessor/company reporting basis. Q3 contracting operating margin declined to 3.4% from 4.5%, despite higher volume.

Important facts for investors to verify

• Confirm the registrant identity: this filing is for Armada Hoffler Properties, Inc., not AH Realty Trust.
• Check leasing, stabilization and actual delivery progress for development projects, and compare costs and timing with management’s estimates.
• Verify completion and proceeds from the proposed property sales; the cited letters of intent were non-binding.
• Assess refinancing needs around 2016–2017, covenant headroom, variable-rate exposure and the effect of post-quarter borrowings.
• Review construction backlog conversion, project margins and contingent bonding and letter-of-credit obligations.
• Interpret nine-month year-over-year results in light of the predecessor/company reporting differences and the 2013 acquisition gain; FFO is non-GAAP and is not a measure of liquidity.