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AHH > SEC Filings for AHH > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for ARMADA HOFFLER PROPERTIES, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for ARMADA HOFFLER PROPERTIES, INC.


12-Nov-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

References to "we," "our," "us," and "our company" refer to Armada Hoffler Properties, Inc., a Maryland corporation, together with our consolidated subsidiaries, including Armada Hoffler, L.P., a Virginia limited partnership, of which we are the sole general partner and which we refer to in this Quarterly Report on Form 10-Q as our Operating Partnership.

Forward-Looking Statements

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this report. We make statements in this report that are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (set forth in
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act")). In particular, statements pertaining to our capital resources, portfolio performance and results of operations contain forward-looking statements. Likewise, all of our statements regarding anticipated growth in our funds from operations and estimated general contracting and real estate services are forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "approximately," "intends," "plans," "estimates" or "anticipates" or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.

Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

adverse economic or real estate developments, either nationally or in the markets in which our properties are located;

our failure to develop the properties in our identified development pipeline successfully, on the anticipated timeline or at the anticipated costs;

our failure to generate sufficient cash flows to service our outstanding indebtedness;

defaults on, early terminations of or non-renewal of leases by tenants, including significant tenants;

bankruptcy or insolvency of a significant tenant or a substantial number of smaller tenants;

difficulties in identifying or completing development or acquisition opportunities, including our proposed acquisition of Liberty Apartments;

our failure to successfully operate developed and acquired properties;

our failure to generate income in our general contracting and real estate sources segment in amounts that we anticipate;

fluctuations in interest rates and increased operating costs;

our failure to obtain necessary outside financing on favorable terms or at all;

general economic conditions;

financial market fluctuations;

risks that affect the general retail environment or the market for office properties or multifamily units;

the competitive environment in which we operate;

decreased rental rates or increased vacancy rates;

conflicts of interests with our officers and directors;

lack or insufficient amounts of insurance;

environmental uncertainties and risks related to adverse weather conditions and natural disasters;

other factors affecting the real estate industry generally;

our failure to qualify and maintain our qualification as a real estate investment trust ("REIT") for U.S. federal income tax purposes;

limitations imposed on our business and our ability to satisfy complex rules in order for us to qualify and maintain our qualification as a REIT for U.S. federal income tax purposes; and

changes in governmental regulations or interpretations thereof, such as real estate and zoning laws and increases in real property tax rates and taxation of REITs.


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Business Description

We are a full-service real estate company with extensive experience developing, building, owning and managing high-quality, institutional-grade office, retail and multifamily properties in attractive markets in the Mid-Atlantic United States. As of September 30, 2013, our portfolio comprised 7 office properties, 15 retail properties and 2 multifamily properties located in Virginia and North Carolina.

We are a Maryland corporation formed on October 12, 2012 to acquire the entities in which Daniel A. Hoffler and his affiliates, certain of our other officers, directors and their affiliates and other third parties owned a direct or indirect interest (the "Formation Transactions"). We did not have any operating activity until the consummation of our initial public offering of our shares of common stock (the "IPO") and the Formation Transactions on May 13, 2013. Upon completing our IPO and the Formation Transactions, we carry on our operations through Armada Hoffler, L.P. (our "Operating Partnership"), whose assets, liabilities and results of operations we consolidate.

Our "Predecessor" is not a single legal entity, but rather a combination of real estate and construction entities that were under common control by our Executive Chairman, Daniel A. Hoffler. These entities include: (i) controlling interests in entities that owned 7 office properties, 14 retail properties and 1 multifamily property, (ii) non-controlling interests in entities that owned one retail and one multifamily property (Bermuda Crossroads and Smith's Landing, respectively), (iii) the property development and asset management businesses of Armada Hoffler Holding Company, Inc. and (iv) the general commercial construction businesses of Armada Hoffler Construction Company and Armada Hoffler Construction Company of Virginia.

The results of operations of the properties and entities acquired by us in connection with our IPO and the Formation Transactions are included in our results beginning on May 13, 2013. Accordingly, the results of operations for the three and nine months ended September 30, 2012 reflect those of our Predecessor. The results of operations for the nine months ended September 30, 2013 reflect our results together with those of our Predecessor, while the results of operations for the three months ended September 30, 2013 are solely ours.

Third Quarter 2013 Highlights

Reported net income of approximately $1.3 million, or $0.04 per share, for the three months ended September 30, 2013, compared to net income of approximately $1.8 million for the corresponding period in 2012. Net income for the three months ended September 30, 2013 includes debt extinguishment losses of approximately $1.1 million and non-cash stock compensation of approximately $0.2 million.

Generated funds from operations ("FFO") of approximately $5.2 million, or $0.16 per share, for the three months ended September 30, 2013, compared to FFO of approximately $4.5 million for the corresponding period in 2012. See "Non-GAAP Financial Measures."

Increased occupancy across all segments as of September 30, 2013 compared to September 30, 2012:

Office occupancy up to 93.4% compared to 91.5%

Retail occupancy up to 93.6% compared to 93.4%

Multifamily occupancy up to 92.7% compared to 92.4%

Increased net operating income across all segments compared to the third quarter of 2012.

Increased office and multifamily same store net operating income compared to the third quarter of 2012.

Executed approximately $25.3 million of new construction contracts during the third quarter of 2013.

Generated approximately $11.3 million of cash flows from operations during the third quarter of 2013.

Invested approximately $14.2 million in new real estate development projects during the third quarter of 2013.


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Development Pipeline

Our development pipeline consists of the following office, retail and
multifamily properties ($ in thousands):



                      Property Information                                       Estimated(1)                                                 Schedule(1)
                                                                                                                 Cost Incurred                 Anchor
                                                                                   Number of                         as of                    Tenant or
                                                                     Square        Apartment                     September 30,                 Initial    Stabilized
Name                               Location              Type         Feet           Units          Cost             2013            Start    Occupancy   Operation
4525 Main Street(2)           Virginia Beach, VA        Office        234,000             N/A     $  50,000     $        17,851     Q1 2013    Q3 2014     Q3 2015
Encore Apartments(3)          Virginia Beach, VA      Multifamily         N/A             286        33,500               5,831     Q1 2013    Q3 2014     Q1 2016
Whetstone Apartments(4)           Durham, NC          Multifamily         N/A             203        27,500               4,893     Q3 2013    Q3 2014     Q1 2016
Sandbridge Commons            Virginia Beach, VA        Retail         70,000             N/A        12,500               5,666     Q4 2013    Q2 2015     Q2 2016
Brooks Crossing                Newport News, VA         Office         54,000             N/A        12,500                 832     Q2 2014    Q3 2015     Q3 2015
Greentree Shopping Center       Chesapeake, VA          Retail         18,000             N/A         6,000                 583     Q4 2013    Q1 2015     Q4 2015

Total                                                                 376,000             489     $ 142,000     $        35,656

(1) Subject to change as the development process proceeds. Construction commencement is subject to, among other factors, regulatory approvals, financing availability and suitable market conditions.

(2) Previously referred to as Main Street Office.

(3) Previously referred to as Main Street Apartments.

(4) Previously referred to as Jackson Street Apartments.

4525 Main Street is our most recent addition to the Town Center of Virginia Beach and is located across from The Cosmopolitan, One Columbus and Armada Hoffler Tower. This 15-story office tower is the future home of Clark Nexsen, an international architecture and engineering firm, which has agreed to lease approximately 83,000 square feet. Additionally, the City of Virginia Beach Development Authority has agreed to lease approximately 23,000 square feet of office space. 4525 Main Street will also feature approximately 21,000 square feet of ground floor retail space. On July 30, 2013, we closed on a $63.0 million loan of which approximately $37.8 million is available to fund construction.

Encore Apartments are also located in the Town Center of Virginia Beach and sit adjacent to 4525 Main Street. Encore Apartments will feature free covered parking, a private pool, concierge service, a business center and meeting space. On July 30, 2013, we closed on a $63.0 million loan of which approximately $25.2 million is available to fund construction.

Whetstone Apartments are conveniently located near Duke University and are scheduled to open in time for the fall 2014 semester. On June 4, 2013, we purchased the underlying land for approximately $2.6 million and commenced construction in the third quarter of 2013. On October 8, 2013, we closed on an $18.5 million loan to fund construction.

Sandbridge Commons continues our long-standing relationship with Harris Teeter, which has agreed to anchor the shopping center. In addition to a 53,000 square foot Harris Teeter grocery store, Sandbridge Commons will include approximately 22,000 square feet of small shop retail space. On August 27, 2013, we purchased the underlying land for approximately $5.2 million. The site includes two outparcels that we plan to either lease or sell.

Brooks Crossing is a new multi-phased commercial center designed to revitalize the east end of Newport News, Virginia. The first phase of this project will feature 60,000 square feet of office space and we are currently negotiating leases with both Huntington Ingalls Industries and the City of Newport News to be our principal tenants.

Greentree Shopping Center is a retail power center that will feature a Wawa convenience store and gas station adjacent to a new Walmart Neighborhood Market. We have long term ground lease with Wawa and are under contract to deliver to Walmart their pad-ready site.

Next Generation Development Pipeline

JHU Charles Village is the latest in our long history of public/private real estate development projects. In November 2012, we were selected by Johns Hopkins University, after an extensive competitive selection process, to join with the university in the redevelopment of a 1.12 acre property adjacent to the university's Homewood campus in Baltimore, Maryland. The project is expected to include market-rate student housing, a hotel, retail space, restaurants and parking. The goal of the completed project will be to complement the Homewood campus and nearby Charles Village neighborhood and provide a catalyst for future development in the area. The Johns Hopkins project is moving through the conceptual and programming phases with the intent to finalize a program, execute a ground lease with the university and begin design in the fourth quarter of 2013.

Acquisitions

Liberty Apartments features 197 apartment units and approximately 28,000 square feet of retail space and is located next to the Newport News Apprentice School of Shipbuilding, another one of our public/private partnership projects. We have entered into a contribution agreement to acquire Liberty Apartments, previously referred to as the Apprentice School Apartments, from affiliates of our Predecessor. Pursuant to the contribution agreement, we expect to acquire Liberty Apartments when certain conditions, including


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the completion of the project's overall construction, have been met. We expect to acquire Liberty Apartments for approximately $31.9 million comprised of approximately 695,000 common units of our Operating Partnership, repayment of a $3.0 million mezzanine loan, which affiliates of our Predecessor borrowed to fund the equity portion of the project, and the assumption of approximately $20.9 million of debt that bears interest at 5.66% and matures in 2042. We expect to close on the acquisition of Liberty Apartments in the first quarter of 2014.

Segment Results of Operations

As of September 30, 2013, we operated our business in four segments: (i) office real estate, (ii) retail real estate, (iii) multifamily residential real estate and (iv) general contracting and real estate services, which are conducted through our taxable REIT subsidiaries ("TRSs"). Net operating income (segment revenues minus segment expenses) or "NOI" is the measure used by management to assess segment performance and allocate our resources among our segments. See Note 3 to Armada Hoffler Properties, Inc. and Predecessor's condensed consolidated and combined financial statements for additional discussion of our segments.

We define same store properties as those that we owned and operated and that were stabilized for the entirety of the periods presented. Same store properties exclude those that were in lease-up during the periods presented. We generally consider a property to be in lease-up until the earlier of: (i) the quarter after the property reaches 80% occupancy or (ii) the thirteenth quarter after the property receives its certificate of occupancy.

Office Segment Data



                               Three Months Ended            Nine Months Ended
                                 September 30,                 September 30,
                              2013           2012           2013           2012
                                               ($ in thousands)
          Rental revenues   $   6,364      $   6,194      $  19,270      $  19,153
          NOI               $   4,283      $   3,923      $  13,303      $  13,232
          Properties(1)             7              7              7              7
          Square feet(1)      954,594        953,385        954,594        953,385
          Occupancy(1)           93.4 %         91.5 %         93.4 %         91.5 %

(1) As of the end of the periods presented.

Rental revenues for the three and nine months ended September 30, 2013 increased approximately $0.2 million and $0.1 million, respectively, compared to the corresponding periods in 2012. NOI for the three and nine months ended September 30, 2013 increased approximately $0.4 million and $0.1 million, respectively, compared to the corresponding periods in 2012. The increases in rental revenues and NOI for the comparison periods resulted from increased occupancy at both One Columbus and Two Columbus in the Town Center of Virginia Beach.

Office Same Store Results

All of our office properties were included in our same store results for the
three and nine months ended September 30, 2013 and 2012. Office same store
rental revenues, property expenses and NOI for the three and nine months ended
September 30, 2013 and 2012 were as follows:



                         Three months ended                       Nine months ended
                            September 30,                           September 30,
                          2013          2012       Change         2013          2012        Change
                                                     ($ in thousands)
  Rental revenues      $    6,364      $ 6,194     $   170      $  19,270     $ 19,153     $    117
  Property expenses         2,081        2,271        (190 )        5,967        5,921           46

  Same Store NOI       $    4,283      $ 3,923     $   360      $  13,303     $ 13,232     $     71
  Non-Same Store NOI           -            -           -              -            -            -

  Segment NOI          $    4,283      $ 3,923     $   360      $  13,303     $ 13,232     $     71

Same store rental revenues for the three and nine months ended September 30, 2013 increased approximately $0.2 million and $0.1 million, respectively, compared to the corresponding periods in 2012. Same store NOI for the three and nine months ended September 30, 2013 increased approximately $0.4 million and $0.1 million, respectively, compared to the corresponding periods in 2012. The increases in same store rental revenues and NOI for the comparison periods resulted from increased occupancy at both One Columbus and Two Columbus in the Town Center of Virginia Beach.


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Retail Segment Data



                              Three Months Ended              Nine Months Ended
                                September 30,                   September 30,
                            2013(1)          2012           2013(1)          2012
                                               ($ in thousands)
        Rental revenues   $     5,683      $   5,297      $    16,071      $  15,584
        NOI               $     3,938      $   3,679      $    11,017      $  10,960
        Properties(2)              15             14               15             14
        Square feet(2)      1,093,319        983,107        1,093,319        983,107
        Occupancy(2)             93.6 %         93.4 %           93.6 %         93.4 %

(1) Includes Bermuda Crossroads, which was an unconsolidated property prior to May 13, 2013.

(2) As of the end of the periods presented.

Rental revenues for the three and nine months ended September 30, 2013 increased approximately $0.4 million and $0.5 million, respectively, compared to the corresponding periods in 2012. NOI for the three and nine months ended September 30, 2013 increased approximately $0.3 million and $0.1 million, respectively, compared to the corresponding periods in 2012. The increases in rental revenues and NOI for the comparison periods resulted primarily from our consolidation of Bermuda Crossroads beginning on May 13, 2013 upon completion of our IPO and the Formation Transactions. The increase in rental revenues and NOI for the nine month comparison period also resulted from the completion and stabilization of Tyre Neck Harris Teeter in the second quarter of 2012.

Retail Same Store Results

Retail same store results for the three and nine months ended September 30, 2013 exclude those of Bermuda Crossroads, which was an unconsolidated property prior to May 13, 2013. Retail same store results for the nine months ended September 30, 2013 and 2012 exclude those of Tyre Neck Harris Teeter, which stabilized during the second quarter of 2012. Retail same store rental revenues, property expenses and NOI for the three and nine months ended September 30, 2013 and 2012 were as follows:

                        Three months ended                         Nine months ended
                           September 30,                             September 30,
                       2013(1)         2012       Change        2013(1)(2)      2012(2)      Change
                                                     ($ in thousands)
 Rental revenues      $    5,162      $ 5,297     $  (135 )    $     14,867     $ 15,345     $  (478 )
 Property expenses         1,643        1,618          25             4,695        4,520         175

 Same Store NOI       $    3,519      $ 3,679     $  (160 )    $     10,172     $ 10,825     $  (653 )
 Non-Same Store NOI          419           -          419               845          135         710

 Segment NOI          $    3,938      $ 3,679     $   259      $     11,017     $ 10,960     $    57

(1) Excludes Bermuda Crossroads, which was an unconsolidated property prior to May 13, 2013.

(2) Excludes Tyre Neck Harris Teeter, which was in lease-up during the period.

Same store rental revenues for the three and nine months ended September 30, 2013 decreased approximately $0.1 million and $0.5 million, respectively, compared to the corresponding periods in 2012. Same store NOI for the three and nine months ended September 30, 2013 decreased approximately $0.2 million and $0.7 million, respectively, compared to the corresponding periods in 2012. The decreases in same store rental revenues and NOI for the comparison periods resulted from decreased occupancy at three of our properties: (i) Dick's at Town Center due to the closing of a restaurant on the ground floor of the building,
(ii) Hanbury Village and (iii) South Retail in the Town Center of Virginia Beach.


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Multifamily Segment Data



                               Three Months Ended             Nine Months Ended
                                  September 30,                 September 30,
                              2013(1)         2012         2013(1)            2012
                                                ($ in thousands)
        Rental revenues      $   2,852       $ 1,827      $    7,187        $  5,577
        NOI                  $   1,521       $   881      $    3,963        $  3,124
        Properties(2)                2             1               2               1
        Apartment units(2)         626           342             626             342
        Occupancy(2)              92.7 %        92.4 %          92.7 %          92.4 %

(1) Includes Smith's Landing, which was an unconsolidated property prior to May 13, 2013.

(2) As of the end of the periods presented.

Rental revenues for the three and nine months ended September 30, 2013 increased approximately $1.0 million and $1.6 million, respectively, compared to the corresponding periods in 2012. NOI for the three and nine months ended September 30, 2013 increased approximately $0.6 million and $0.8 million, respectively, compared to the corresponding periods in 2012. The increases in rental revenues and NOI for the comparison periods resulted from our consolidation of Smith's Landing beginning on May 13, 2013 upon completion of our IPO and the Formation Transactions.

Multifamily Same Store Results

Multifamily same store results for the three and nine months ended September 30,
2013 exclude those of Smith's Landing, which was an unconsolidated property
prior to May 13, 2013. Multifamily same store rental revenues, property expenses
and NOI for the three and nine months ended September 30, 2013 and 2012 were as
follows:



                         Three months ended                        Nine months ended
                            September 30,                            September 30,
                        2013(1)         2012        Change        2013(1)        2012        Change
                                                     ($ in thousands)
  Rental revenues      $    1,874      $ 1,827     $     47      $    5,684     $ 5,577     $    107
  Property expenses           868          946          (78 )         2,558       2,453          105

  Same Store NOI       $    1,006      $   881     $    125      $    3,126     $ 3,124     $      2
  Non-Same Store NOI          515           -           515             837          -           837

  Segment NOI          $    1,521      $   881     $    640      $    3,963     $ 3,124     $    839

(1) Excludes Smith's Landing, which was an unconsolidated property prior to May 13, 2013.

Same store rental revenues for the three months ended September 30, 2013 increased slightly compared to the corresponding period in 2012. Same store rental revenues for the nine months ended September 30, 2013 increased approximately $0.1 million compared to the corresponding period in 2012. Same store NOI for the three months ended September 30, 2013 increased approximately $0.1 million compared to the corresponding periods in 2012. Same store NOI for the nine months ended September 30, 2013 increased slightly compared to the corresponding period in 2012. The increases in same store rental revenues and NOI for the comparison periods resulted from increased ground floor retail occupancy at The Cosmopolitan, which offset residential occupancy declines because of the ongoing construction of 4525 Main Street and Encore Apartments.


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