10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2014

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number: 001-35908

 

 

ARMADA HOFFLER PROPERTIES, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Maryland   46-1214914
(State of Organization)  

(IRS Employer

Identification No.)

222 Central Park Avenue, Suite 2100

Virginia Beach, Virginia

  23462
(Address of Principal Executive Offices)   (Zip Code)

(757) 366-4000

(Registrant’s Telephone Number, Including Area Code)

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer   ¨    Accelerated Filer   ¨
Non-Accelerated Filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

As of May 12, 2014, the Registrant had 19,253,660 shares of common stock outstanding.

 

 

 


Table of Contents

ARMADA HOFFLER PROPERTIES, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2014

Table of Contents

 

         Page  

Part I. Financial Information

     1   

Item 1.

 

Financial Statements

     1   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     15   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     30   

Item 4.

 

Controls and Procedures

     31   

Part II. Other Information

     32   

Item 1.

 

Legal Proceedings

     32   

Item 1A.

 

Risk Factors

     32   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     32   

Item 3.

 

Defaults Upon Senior Securities

     33   

Item 4.

 

Mine Safety Disclosures

     33   

Item 5.

 

Other Information

     33   

Item 6.

 

Exhibits

     33   

Signatures

     34   


Table of Contents

PART I. Financial Information

 

Item 1. Financial Statements

ARMADA HOFFLER PROPERTIES, INC.

Condensed Consolidated Balance Sheets

(In Thousands, except par value and share data)

 

     MARCH 31,
2014
    DECEMBER 31,
2013
 
     (UNAUDITED)        

ASSETS

  

Real estate investments:

    

Income producing property

   $ 434,281      $ 406,239   

Construction in progress

     78,536        56,737   
  

 

 

   

 

 

 
     512,817        462,976   

Accumulated depreciation

     (108,706 )     (105,228 )
  

 

 

   

 

 

 

Net real estate investments

     404,111        357,748   

Cash and cash equivalents

     13,444        18,882   

Restricted cash

     2,754        2,160   

Accounts receivable, net

     18,884        18,272   

Construction receivables, including retentions

     12,736        12,633   

Construction contract costs and estimated earnings in excess of billings

     1,184        1,178   

Other assets

     25,799        24,409   
  

 

 

   

 

 

 

Total Assets

   $ 478,912      $ 435,282   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Indebtedness

   $ 317,271      $ 277,745   

Accounts payable and accrued liabilities

     7,158        6,463   

Construction payables, including retentions

     27,047        28,139   

Billings in excess of construction contract costs and estimated earnings

     1,134        1,541   

Other liabilities

     16,264        15,873   
  

 

 

   

 

 

 

Total Liabilities

     368,874        329,761   

Stockholders’ equity:

    

Common stock, $0.01 par value, 500,000,000 shares authorized, 19,254,365 and 19,163,413 shares issued and outstanding as of March 31, 2014 and December 31, 2013, respectively

     193        192   

Additional paid-in capital

     1,473        1,247   

Distributions in excess of earnings

     (49,550 )     (47,934 )
  

 

 

   

 

 

 

Total stockholders’ deficit

     (47,884 )     (46,495 )

Noncontrolling interests

     157,922        152,016   
  

 

 

   

 

 

 

Total Equity

     110,038        105,521   
  

 

 

   

 

 

 

Total Liabilities and Equity

   $ 478,912      $ 435,282   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated and Combined Financial Statements.

 

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Table of Contents

ARMADA HOFFLER PROPERTIES, INC. AND PREDECESSOR

Condensed Consolidated and Combined Statements of Income

(In Thousands, except per share data)

(Unaudited)

 

     THREE MONTHS ENDED
MARCH 31,
 
     2014     2013  
           PREDECESSOR  

Revenues

    

Rental revenues

   $ 15,193      $ 13,398   

General contracting and real estate services revenues

     19,234        17,956   
  

 

 

   

 

 

 

Total revenues

     34,427        31,354   
  

 

 

   

 

 

 

Expenses

    

Rental expenses

     3,976        3,229   

Real estate taxes

     1,343        1,212   

General contracting and real estate services expenses

     17,985        17,458   

Depreciation and amortization

     3,969        3,159   

General and administrative expenses

     2,046        717   
  

 

 

   

 

 

 

Total expenses

     29,319        25,775   
  

 

 

   

 

 

 

Operating income

     5,108        5,579   

Interest expense

     (2,565 )     (3,915 )

Other income

     112        267   
  

 

 

   

 

 

 

Income before taxes

     2,655        1,931   

Income tax provision

     (149 )     —    
  

 

 

   

 

 

 

Net income

     2,506      $ 1,931   
    

 

 

 

Net income attributable to noncontrolling interests

     (1,041 )  
  

 

 

   

Net income attributable to stockholders

   $ 1,465     
  

 

 

   

Net income per share and unit:

    

Basic and diluted

   $ 0.08     
  

 

 

   

Weighted-average outstanding:

    

Common shares

     19,193     

Common units

     13,632     
  

 

 

   

Basic and diluted

     32,825     
  

 

 

   

Dividends and distributions declared per common share and unit

   $ 0.16     
  

 

 

   

See Notes to Condensed Consolidated and Combined Financial Statements.

 

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Table of Contents

ARMADA HOFFLER PROPERTIES, INC.

Condensed Consolidated Statement of Equity

(In Thousands, except share data)

(Unaudited)

 

     Shares of common
stock
    Common
stock
     Additional
paid-
in capital
    Distributions
in excess of
earnings
    Total
stockholders’
deficit
    Noncontrolling
interests
    Total
Equity
 

Balance, January 1, 2014

     19,163,413      $ 192       $ 1,247      $ (47,934 )   $ (46,495 )   $ 152,016      $ 105,521   

Restricted stock award grants

     99,289        1         (1 )     —         —         —         —    

Vesting of restricted stock awards

     —         —           610        —          610        —          610   

Minimum tax withholding

     (8,337 )     —           (82 )     —          (82 )     —          (82 )

Acquisitions

     —          —           —          —          —          6,769        6,769   

Exchange of owners’ equity for common units

     —          —           (301 )     —          (301 )     301        —     

Net income

     —          —           —          1,465        1,465        1,041        2,506   

Dividends and distributions declared

     —          —           —          (3,081 )     (3,081 )     (2,205 )     (5,286 )
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2014

     19,254,365      $ 193       $ 1,473      $ (49,550 )   $ (47,884 )   $ 157,922      $ 110,038   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated and Combined Financial Statements.

 

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ARMADA HOFFLER PROPERTIES, INC. AND PREDECESSOR

Condensed Consolidated and Combined Statements of Cash Flows

(In Thousands)

(Unaudited)

     THREE MONTHS ENDED
MARCH 31,
 
     2014     2013  
           PREDECESSOR  

OPERATING ACTIVITIES

    

Net income

   $ 2,506      $ 1,931   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation of buildings and tenant improvements

     3,478        2,845   

Amortization of deferred leasing costs and in-place lease intangibles

     491        314   

Accrued straight-line rental revenue

     (469 )     (300 )

Amortization of lease incentives and above or below-market rents

     160        196   

Accrued straight-line ground rent expense

     79        85   

Bad debt expense

     11        117   

Noncash stock compensation

     329        —     

Noncash interest expense

     133        172   

Change in the fair value of derivatives

     (93 )     (110 )

Income from real estate joint ventures

     —          (93 )

Changes in operating assets and liabilities, net of acquisitions:

    

Property assets

     (1,311 )     (692 )

Property liabilities

     11        1,661   

Construction assets

     (109 )     (3,009 )

Construction liabilities

     (2,003 )     1,170   
  

 

 

   

 

 

 

Net cash provided by operating activities

     3,213        4,287   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Development of real estate investments

     (20,320 )     (2,200 )

Tenant and building improvements

     (2,495 )     (746 )

Acquisitions of real estate investments, net of cash acquired

     (2,895 )     —     

Increase in restricted cash

     (35 )     (95 )

Return of capital from real estate joint ventures, net

     —          49   

Deferred leasing costs

     (153 )     (150 )

Leasing incentives

     —          (40 )
  

 

 

   

 

 

 

Net cash used for investing activities

     (25,898 )     (3,182 )
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Offering costs

     (149 )     (2,587 )

Credit facility and construction loan borrowings

     23,269        —     

Debt and credit facility payments, including principal amortization

     (714 )     (1,453 )

Debt issuance costs

     (4 )     —     

Predecessor distributions, net

     —          (2,364 )

Dividends and distributions

     (5,155 )     —     
  

 

 

   

 

 

 

Net cash provided by (used for) financing activities

     17,247        (6,404 )
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (5,438 )     (5,299 )

Cash and cash equivalents, beginning of period

     18,882        9,400   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 13,444      $ 4,101   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Cash paid for interest

   $ 2,794      $ 3,748   

See Notes to Condensed Consolidated and Combined Financial Statements.

 

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Table of Contents

ARMADA HOFFLER PROPERTIES, INC. AND PREDECESSOR

Notes to Condensed Consolidated and Combined Financial Statements

(Unaudited)

 

1. Business and Organization

Armada Hoffler Properties, Inc. (the “Company”) is 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 throughout the Mid-Atlantic United States.

As of March 31, 2014, the Company’s operating property portfolio consisted of the following properties:

 

Name

  

Segment

  

Location

Armada Hoffler Tower    Office    Virginia Beach, Virginia
One Columbus    Office    Virginia Beach, Virginia
Oyster Point    Office    Newport News, Virginia
Richmond Tower    Office    Richmond, Virginia
Sentara Williamsburg    Office    Williamsburg, Virginia
Two Columbus    Office    Virginia Beach, Virginia
Virginia Natural Gas    Office    Virginia Beach, Virginia
249 Central Park Retail    Retail    Virginia Beach, Virginia
Bermuda Crossroads    Retail    Chester, Virginia
Broad Creek Shopping Center    Retail    Norfolk, Virginia
Commerce Street Retail    Retail    Virginia Beach, Virginia
Courthouse 7-Eleven    Retail    Virginia Beach, Virginia
Dick’s at Town Center    Retail    Virginia Beach, Virginia
Fountain Plaza Retail    Retail    Virginia Beach, Virginia
Gainsborough Square    Retail    Chesapeake, Virginia
Hanbury Village    Retail    Chesapeake, Virginia
Harrisonburg Regal    Retail    Harrisonburg, Virginia
North Point Center    Retail    Durham, North Carolina
Parkway Marketplace    Retail    Virginia Beach, Virginia
South Retail    Retail    Virginia Beach, Virginia
Studio 56 Retail    Retail    Virginia Beach, Virginia
Tyre Neck Harris Teeter    Retail    Portsmouth, Virginia
Liberty Apartments    Multifamily    Newport News, Virginia
Smith’s Landing    Multifamily    Blacksburg, Virginia
The Cosmopolitan    Multifamily    Virginia Beach, Virginia

As of March 31, 2014, the Company had the following properties under development (the “Development Pipeline”):

 

Name

  

Segment

  

Location

4525 Main Street    Office    Virginia Beach, Virginia
Brooks Crossing    Office    Newport News, Virginia
Oceaneering    Office    Chesapeake, Virginia
Greentree Shopping Center    Retail    Chesapeake, Virginia
Sandbridge Commons    Retail    Virginia Beach, Virginia
Encore Apartments    Multifamily    Virginia Beach, Virginia
Whetstone Apartments    Multifamily    Durham, North Carolina

The Company is the sole general partner of Armada Hoffler, L.P. (the “Operating Partnership”). The operations of the Company are carried on primarily through the Operating Partnership and the wholly owned subsidiaries of the Operating Partnership. Both the Company and the Operating Partnership were formed on October 12, 2012 and commenced operations upon completion of the underwritten initial public offering of shares of the Company’s common stock (the “IPO”) and certain related formation transactions (the “Formation Transactions”) on May 13, 2013.

Armada Hoffler Properties, Inc. Predecessor (the “Predecessor”) was not a single legal entity, but rather a combination of real estate and construction entities under common ownership by their individual partners, members and stockholders and under common control or significant influence of Daniel A. Hoffler prior to the IPO and the Formation Transactions. The financial position and results of operations of the entities under common control of Mr. Hoffler have been combined in the Predecessor financial statements for the periods prior to the completion of the IPO and the Formation Transactions. The Predecessor accounted for its investments in the entities under significant influence of Mr. Hoffler using the equity method of accounting.

 

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Pursuant to the Formation Transactions, the Operating Partnership: (i) acquired 100% of the interests in the entities comprising the Predecessor, (ii) succeeded to the ongoing construction and development businesses of the Predecessor, (iii) assumed asset management of certain of the properties acquired from the Predecessor, (iv) succeeded to the third party asset management business of the Predecessor, (v) succeeded to the projects under development by the Predecessor, (vi) received options to acquire nine parcels of developable land from the Predecessor and (vii) entered into a contribution agreement to acquire Liberty Apartments, a 197-unit multifamily property located in Newport News, Virginia, upon satisfaction of certain conditions and transferability restrictions including completion of the project’s construction by the Company. The Operating Partnership completed the acquisition of Liberty Apartments on January 17, 2014.

Because of the timing of the IPO and the Formation Transactions, the results of operations for the three months ended March 31, 2013 reflect those of the Predecessor. The financial condition as of March 31, 2014 and December 31, 2013 and the results of operations for the three months ended March 31, 2014 reflect those of the Company. References to “Armada Hoffler” in these notes to consolidated and combined financial statements signify the Company for the period after the completion of the IPO and the Formation Transactions on May 13, 2013 and the Predecessor for all prior periods.

 

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated and combined financial statements were prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).

The consolidated financial statements include the financial position and results of operations of the Company, the Operating Partnership and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

The results of operations of the entities comprising the Predecessor have been combined because they were under common ownership by their individual partners, members and stockholders and under common control of Mr. Hoffler. All significant intercompany transactions and balances have been eliminated in combination.

In the opinion of management, the consolidated and combined financial statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for the fair presentation of the financial condition and results of operations for the interim periods presented.

The accompanying consolidated and combined financial statements were prepared in accordance with the requirements for interim financial information. Accordingly, these interim financial statements have not been audited and exclude certain disclosures required for annual financial statements. Also, the operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These interim financial statements should be read in conjunction with the audited consolidated and combined financial statements of the Company included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed. Such estimates are based on management’s historical experience and best judgment after considering past, current and expected events and economic conditions. Actual results could differ from management’s estimates.

Significant Accounting Policies

The accompanying consolidated and combined financial statements were prepared on the basis of the accounting principles described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, among others.

 

3. Segments

Net operating income (segment revenues minus segment expenses) is the measure used by Armada Hoffler’s chief operating decision-maker to assess segment performance. Net operating income is not a measure of operating income or cash flows from operating activities as measured by GAAP and is not indicative of cash available to fund cash needs. As a result, net operating income should not be considered an alternative to cash flows as a measure of liquidity. Not all companies calculate net operating

 

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income in the same manner. Armada Hoffler considers net operating income to be an appropriate supplemental measure to net income because it assists both investors and management in understanding the core operations of Armada Hoffler’s real estate and construction businesses.

Net operating income of Armada Hoffler’s reportable segments for the three months ended March 31, 2014 and 2013 was as follows (in thousands):

 

     Three Months Ended
March 31,
 
     2014      2013  
     (Unaudited)  

Office real estate

     

Rental revenues

   $ 6,549       $ 6,486   

Property expenses

     2,131         1,946   
  

 

 

    

 

 

 

Segment net operating income

     4,418         4,540   
  

 

 

    

 

 

 

Retail real estate

     

Rental revenues

     5,770         5,005   

Property expenses

     1,825         1,680   
  

 

 

    

 

 

 

Segment net operating income

     3,945         3,325   
  

 

 

    

 

 

 

Multifamily residential real estate

     

Rental revenues

     2,874         1,907   

Property expenses

     1,363         815   
  

 

 

    

 

 

 

Segment net operating income

     1,511         1,092   
  

 

 

    

 

 

 

General contracting and real estate services

     

Segment revenues

     19,234         17,956   

Segment expenses

     17,985         17,458   
  

 

 

    

 

 

 

Segment net operating income

     1,249         498   
  

 

 

    

 

 

 

Net operating income

   $ 11,123       $ 9,455   
  

 

 

    

 

 

 

General contracting and real estate services revenues for the three months ended March 31, 2014 and 2013 exclude revenue related to intercompany construction contracts of $18.7 million and $2.0 million, respectively. General contracting and real estate services expenses for the three months ended March 31, 2014 and 2013 exclude expenses related to intercompany construction contracts of $18.5 million and $2.0 million, respectively. General contracting and real estate services expenses for the three months ended March 31, 2014 includes noncash stock compensation of $0.1 million.

 

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The following table reconciles net operating income to net income for the three months ended March 31, 2014 and 2013 (in thousands):

 

     Three Months Ended
March 31,
 
     2014     2013  
     (Unaudited)  

Net operating income

   $ 11,123      $ 9,455   

Depreciation and amortization

     (3,969 )     (3,159 )

General and administrative expenses

     (2,046 )     (717 )

Interest expense

     (2,565 )     (3,915 )

Other income

     112        267   

Income tax provision

     (149 )     —     
  

 

 

   

 

 

 

Net income

   $ 2,506      $ 1,931   
  

 

 

   

 

 

 

General and administrative expenses represent costs not directly associated with the operation and management of Armada Hoffler’s real estate properties and general contracting business. General and administrative expenses include office personnel salaries and benefits, bank fees, accounting fees, legal fees and other corporate office expenses. General and administrative expenses for the three months ended March 31, 2014 include noncash stock compensation of $0.2 million.

Rental revenues of Armada Hoffler’s reportable segments for the three months ended March 31, 2014 and 2013 comprised the following (in thousands):

 

     Three Months Ended
March 31,
 
     2014      2013  
     (Unaudited)  

Minimum rents

     

Office

   $ 6,152       $ 6,100   

Retail

     4,774         4,365   

Multifamily

     2,450         1,627   

Percentage rents (1)

     

Office

     45         104   

Retail

     91         24   

Multifamily

     35         42   

Other (2)

     

Office

     352         282   

Retail

     905         616   

Multifamily

     389         238   
  

 

 

    

 

 

 

Rental revenues

   $ 15,193       $ 13,398   
  

 

 

    

 

 

 

 

(1) Percentage rents are based on tenants’ sales.
(2) Other rental revenue includes cost reimbursements for real estate taxes, property insurance and common area maintenance as well as termination fees.

 

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Property expenses of Armada Hoffler’s reportable segments for the three months ended March 31, 2014 and 2013 comprised the following (in thousands):

 

     Three Months Ended
March 31,
 
     2014      2013  
     (Unaudited)  

Rental expenses

     

Office

   $ 1,587       $ 1,405   

Retail

     1,322         1,220   

Multifamily

     1,067         604   
  

 

 

    

 

 

 

Total

     3,976         3,229   
  

 

 

    

 

 

 

Real estate taxes

     

Office

     544         541   

Retail

     503         460   

Multifamily

     296         211   
  

 

 

    

 

 

 

Total

     1,343         1,212   
  

 

 

    

 

 

 

Property expenses

   $ 5,319       $ 4,441   
  

 

 

    

 

 

 

Rental expenses represent costs directly associated with the operation and management of Armada Hoffler’s real estate properties. Rental expenses include asset management fees, property management fees, repairs and maintenance, insurance and utilities.

 

4. Real Estate Investments

The Company’s real estate investments comprised the following as of March 31, 2014 and December 31, 2013 (in thousands):

 

     March 31,
2014
    December 31,
2013
 
     (Unaudited)        

Land

   $ 44,893      $ 41,313   

Land improvements

     12,895        12,562   

Buildings and improvements

     390,069        365,941   

Construction in progress

     64,960        43,160  
  

 

 

   

 

 

 
     512,817        462,976   
  

 

 

   

 

 

 

Accumulated depreciation

     (108,706 )     (105,228 )
  

 

 

   

 

 

 

Net real estate investments

   $ 404,111      $ 357,748   
  

 

 

   

 

 

 

As discussed in Note 1, the Company completed the acquisition of Liberty Apartments on January 17, 2014. The fair value of the total consideration transferred at the acquisition date to acquire Liberty Apartments was $26.7 million, consisting of 695,652 common units of the Operating Partnership, $3.0 million in cash to affiliates of the Predecessor and the assumption of $17.0 million of debt. The fair value adjustment to the assumed debt of Liberty Apartments was a $1.5 million discount. The outstanding principal balance of the assumed debt of Liberty Apartments at the acquisition date was $18.5 million. An additional $2.4 million is available under the Liberty Apartments loan and will be used to fund current and future obligations of the Company.

 

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The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands):

 

     Liberty Apartments  
     (Unaudited)  

Land

   $ 3,580   

Site improvements

     280   

Building and improvements

     23,214   

In-place leases

     340   

Indebtedness

     (16,966 )

Net working capital

     (679 )
  

 

 

 

Net assets acquired

   $ 9,769   
  

 

 

 

Liberty Apartments did not have any operations during the three months ended March 31, 2013. Rental revenues and net loss from Liberty Apartments for the period from the acquisition date to March 31, 2014 included in the consolidated statement of income was $0.1 million and $(0.5) million, respectively.

Subsequent to March 31, 2014

On April 16, 2014, the Company purchased $7.4 million of land in Williamsburg, Virginia for the development and construction of Lightfoot Marketplace.

On May 1, 2014, the Company purchased $0.3 million of land in Chesapeake, Virginia for the development and construction of a new administrative building for the Commonwealth of Virginia.

 

5. Indebtedness

On January 17, 2014, the Company assumed $17.0 million of debt at fair value in connection with the acquisition of Liberty Apartments. The fair value adjustment to the assumed debt of Liberty Apartments was a $1.5 million discount. The outstanding principal balance of the assumed debt of Liberty Apartments at the acquisition date was $18.5 million. An additional $2.4 million is available under the Liberty Apartments loan and will be used to fund current and future obligations of the Company. The loan amortizes over 30 years, bears interest at 5.66% and matures on November 1, 2043.

On February 28, 2014, the Company closed on a $19.5 million loan to fund the development and construction of the Oceaneering International facility. The construction loan bears interest at LIBOR plus 1.75% and matures on February 28, 2018. As of March 31, 2014, the Company did not have any amounts outstanding on the construction loan.

During the three months ended March 31, 2014, the Operating Partnership borrowed an additional $10.0 million under the credit facility. As of March 31, 2014, the outstanding balance on the credit facility was $80.0 million.

During the three months ended March 31, 2014, the Company borrowed an additional $13.3 million under its existing construction loans to fund the construction of 4525 Main Street, Encore Apartments, Whetstone Apartments and Sandbridge Commons.

Subsequent to March 31, 2014

On April 14, 2014, the Operating Partnership borrowed an additional $8.0 million under the credit facility.

On April 22, 2014, the Operating Partnership amended the maximum leverage ratio covenant requirement in the credit facility to be 65% as of the last day of each fiscal quarter through maturity.

 

6. Derivative Financial Instruments

On March 14, 2014, the Company executed a LIBOR interest rate cap agreement on a notional amount of $50.0 million and a strike price of 1.25% for a premium of $0.4 million. The interest rate cap agreement expires on March 1, 2017.

 

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The Company’s derivatives comprised the following as of March 31, 2014 and December 31, 2013 (in thousands):

 

     March 31, 2014     December 31, 2013  
            (Unaudited)                      
     Notional
Amount
     Fair Value     Notional
Amount
     Fair Value  
            Asset      Liability            Asset      Liability  

Pay fixed interest rate swaps

   $ 700       $ —         $ (14 )   $ 705       $ —         $ (16 )

Interest rate caps

     180,614         589         —          130,672         102         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 181,314       $ 589       $ (14 )   $ 131,377       $ 102       $ (16 )
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

The changes in the fair value of Armada Hoffler’s derivatives during the three months ended March 31, 2014 and 2013 comprised the following (in thousands):

 

     Three Months Ended
March 31,
 
     2014      2013  
     (Unaudited)  

Pay fixed interest rate swaps

   $ 2       $ 108   

Interest rate caps

     91         2   
  

 

 

    

 

 

 

Other income

   $ 93       $ 110   
  

 

 

    

 

 

 

 

7. Equity

Stockholders’ Equity

As of March 31, 2014 and December 31, 2013, the Company’s authorized capital was 500 million shares of common stock and 100 million shares of preferred stock. The Company had 19.3 million and 19.2 million shares of common stock issued and outstanding as of March 31, 2014 and December 31, 2013, respectively. No shares of preferred stock were issued and outstanding as of March 31, 2014 or December 31, 2013.

Noncontrolling Interests

As of March 31, 2014 and December 31, 2013, the Company held a 58.2% and 59.5% interest in the Operating Partnership, respectively. As the sole general partner and the majority interest holder, the Company consolidates the financial position and results of operations of the Operating Partnership. Noncontrolling interests in the Company represent common units of the Operating Partnership not held by the Company.

On January 17, 2014, the Operating Partnership issued 695,652 common units as partial consideration for Liberty Apartments.

On March 31, 2014, the Operating Partnership issued 30,000 common units in exchange for all noncontrolling interests in Sandbridge Commons. The Company recognized the difference between the fair value of the common units issued and the adjustment to the carrying amount of the noncontrolling interests in Sandbridge Commons directly in equity as additional paid-in capital.

Common Stock Dividends and Common Unit Distributions

On January 9, 2014, the Company paid cash dividends of $3.1 million to common stockholders and cash distributions of $2.1 million to common unitholders.

On February 18, 2014, the Company’s Board of Directors declared a cash dividend/distribution of $0.16 per share/unit payable on April 10, 2014 to common stockholders and common unitholders of record on April 1, 2014.

Subsequent to March 31, 2014

On April 10, 2014, the Company paid cash dividends of $3.1 million to common stockholders and cash distributions of $2.2 million to common unitholders.

On May 9, 2014, the Company’s Board of Directors declared a cash dividend/distribution of $0.16 per share/unit payable on July 10, 2014 to common stockholders and common unitholders of record on July 1, 2014.

 

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8. Stock-Based Compensation

On March 3, 2014, the Company granted 99,289 shares of restricted stock to employees with a grant date fair value of $9.94 per share. Restricted stock awards vest over a period of two years: one-third immediately on the grant date and the remaining two-thirds in equal amounts on the first two anniversaries following the grant date, subject to continued service to the Company.

During the three months ended March 31, 2014, the Company recognized $0.6 million of stock-based compensation using the accelerated attribution method. As of March 31, 2014, there were 178,123 nonvested restricted shares outstanding; the total unrecognized compensation related to nonvested restricted shares was $1.1 million, which the Company expects to recognize over the next 23 months.

 

9. Fair Value of Financial Instruments

Fair value measurements are based on assumptions that market participants would use in pricing an asset or a liability. The hierarchy for inputs used in measuring fair value is as follows:

Level 1 Inputs—quoted prices in active markets for identical assets or liabilities

Level 2 Inputs—observable inputs other than quoted prices in active markets for identical assets and liabilities

Level 3 Inputs—unobservable inputs

Except as disclosed below, the carrying amounts of Armada Hoffler’s financial instruments approximate their fair value. Financial assets and liabilities whose fair values are measured on a recurring basis using Level 2 inputs consist of interest rate swap and cap agreements. Armada Hoffler measures the fair values of these assets and liabilities based on prices provided by independent market participants that are based on observable inputs using market-based valuation techniques.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. For disclosure purposes, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

The fair value of Armada Hoffler’s secured debt is sensitive to fluctuations in interest rates. Discounted cash flow analysis based on Level 2 inputs is generally used to estimate the fair value of Armada Hoffler’s secured debt.

Considerable judgment is used to estimate the fair value of financial instruments. The estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments.

The carrying amounts and fair values of our financial instruments, all of which are based on Level 2 inputs, as of March 31, 2014 and December 31, 2013 were as follows (in thousands):

 

     March 31, 2014      December 31, 2013  
     Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 
     (Unaudited)                

Secured debt

   $ 317,271       $ 321,709       $ 277,745       $ 273,310   

Interest rate swap liabilities

     14         14         16         16   

Interest rate cap assets

     589         589         102         102   

 

10. Related Party Transactions

Armada Hoffler provides general contracting and real estate services to certain related party entities that are not included in these consolidated and combined financial statements. Revenue from construction contracts with related party entities of Armada Hoffler was $2.3 million and $10.9 million for the three months ended March 31, 2014 and 2013, respectively. Operating margin from such contracts was $0.1 million and $0.3 million for the three months ended March 31, 2014 and 2013, respectively. Real estate services fees from affiliated entities of Armada Hoffler were not significant for either the three months ended March 31, 2014 or 2013. In addition, affiliated entities also reimburse Armada Hoffler for monthly maintenance and facilities management services provided to the properties. Cost reimbursements earned by Armada Hoffler from affiliated entities were not significant for either the three months ended March 31, 2014 or 2013.

 

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11. Commitments and Contingencies

Legal Proceedings

Armada Hoffler is from time to time involved in various disputes, lawsuits, warranty claims, environmental and other matters arising in the ordinary course of its business. Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters.

Armada Hoffler currently is a party to various legal proceedings, none of which management expects will have a material adverse effect on Armada Hoffler’s financial position, results of operations or liquidity. Armada Hoffler accrues a liability for litigation if an unfavorable outcome is determined by management to be probable and the amount of loss can be reasonably estimated. If an unfavorable outcome is determined by management to be probable and a range of loss can be reasonably estimated, Armada Hoffler accrues the best estimate within the range; however, if no amount within the range is a better estimate than any other, the minimum amount within the range is accrued. Legal fees related to litigation are expensed as incurred. Armada Hoffler does not believe that the ultimate outcome of these matters, either individually or in the aggregate, could have a material adverse effect on its financial position or results of operations; however, litigation is subject to inherent uncertainties.

Under Armada Hoffler’s leases, tenants are typically obligated to indemnify Armada Hoffler from and against all liabilities, costs and expenses imposed upon or asserted against it as owner of the properties due to certain matters relating to the operation of the properties by the tenant.

Commitments

Armada Hoffler has a bonding line of credit for its general contracting construction business and is contingently liable under performance and payment bonds, bonds for cancellation of mechanics liens and defect bonds. Such bonds collectively totaled $194.6 million and $35.8 million as of March 31, 2014 and December 31, 2013, respectively.

The Operating Partnership has entered into standby letters of credit using the available capacity under the credit facility. The letters of credit relate to the guarantee of future performance on certain of the Company’s construction contracts. Letters of credit generally are available for draw down in the event the Company does not perform. As of March 31, 2014 and December 31, 2013, the Operating Partnership had total outstanding letters of credit of $9.9 million and $3.0 million, respectively.

 

12. Subsequent Events

As discussed in Note 4, the Company purchased $7.4 million of land in Williamsburg, Virginia on April 16, 2014 for the development and construction of Lightfoot Marketplace. The Company purchased $0.3 million of land in Chesapeake, Virginia on May 1, 2014 for the development and construction of a new administrative building for the Commonwealth of Virginia.

As discussed in Note 5, the Operating Partnership borrowed an additional $8.0 million under the credit facility on April 14, 2014 and amended the maximum leverage ratio covenant requirement in the credit facility on April 22, 2014.

As discussed in Note 7, the Company paid cash dividends of $3.1 million to common stockholders and $2.2 million to common unitholders on April 10, 2014. The Company’s Board of Directors declared a cash dividend/distribution of $0.16 per share/unit on May 9, 2014 to common stockholders and common unitholders of record on July 1, 2014.

 

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Review Report of Independent Registered Public Accounting Firm

Board of Directors and Stockholders of

Armada Hoffler Properties, Inc.

We have reviewed the condensed consolidated balance sheet of Armada Hoffler Properties, Inc. (successor to the entities described in Note 1) as of March 31, 2014, and the related condensed consolidated and combined statements of income and cash flows for the three-month periods ended March 31, 2014 and 2013 and the condensed consolidated statement of equity for the three-month period ended March 31, 2014. These financial statements are the responsibility of the Company’s management.

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated and combined financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Armada Hoffler Properties, Inc. as of December 31, 2013, and the related consolidated and combined statements of income, equity, and cash flows for the year then ended (not presented herein) and we expressed an unqualified audit opinion on those consolidated and combined financial statements in our report dated March 31, 2014. In our opinion, the accompanying condensed consolidated balance sheet as of December 31, 2013, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

/s/ Ernst & Young LLP

Richmond, Virginia

May 15, 2014

 

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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;

 

    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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While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes after the date of this Quarterly Report on Form 10-Q, except as required by applicable law. We caution investors not to place undue reliance on these forward-looking statements and urge investors to carefully review the disclosures we make concerning risks and uncertainties in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our most recent Annual Report on Form 10-K, as well as risks, uncertainties and other factors discussed in this Quarterly Report on Form 10-Q and identified in other documents that we file from time to time with the Securities and Exchange Commission (the “SEC”).

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 throughout the Mid-Atlantic United States. As of March 31, 2014, our portfolio comprised seven office properties, 15 retail properties and three multifamily properties located in Virginia and North Carolina. As of March 31, 2014, our office and retail operating property portfolios aggregated over 2.0 million net rentable square feet and our multifamily property portfolio comprised 823 apartment units.

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 conduct 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) noncontrolling 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 months ended March 31, 2013 reflect those of our Predecessor. The results of operations for the three months ended March 31, 2014 reflect those of our company.

First Quarter 2014 Highlights

 

  Net income of $2.5 million, or $0.08 per share, for the three months ended March 31, 2014, compared to $1.9 million for the corresponding period in 2013.

 

  Funds from operations (“FFO”) of $6.5 million, or $0.20 per share, for the three months ended March 31, 2014, compared to $5.1 million for the corresponding period in 2013. See “Non-GAAP Financial Measures.”

 

  Occupancy increased to 94.5% as of March 31, 2014, compared to 94.4% as of December 31, 2013 and 93.8% as of March 31, 2013.

 

  Completed the acquisition of Liberty Apartments on January 17, 2014.

 

  Invested $20.3 million in new real estate development.

 

  Executed $165.9 million of new construction contract work, including the Harbor Point project in Baltimore, Maryland.

 

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Development Pipeline

In addition to the projects in our development pipeline, 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. This mixed-use development will include student housing, 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 continues to progress, with the program now defined and strong interest from retailers for the ground floor commercial space.

As of the date of this Quarterly Report on Form 10-Q, we had the following eleven properties under development ($ in thousands):

 

Identified Development Pipeline

                Schedule     AHH
Ownership % (1)
    Property Type  

Anchor

Tenants

  % Leased  

Office/Retail

  Location   Estimated
Square
Footage (1)
    Estimated
Cost (1)
    Cost Incurred
through
March 31, 2014
    Start     Anchor
Tenant
Occupancy
    Stabilized
Operation
         

4525 Main Street (2)

  Virginia Beach, VA     234,000  (3)    $ 50,000      $ 32,000        1Q13        3Q14        1Q16        100   Office   Clark Nexsen, Development Authority of Virginia Beach, Anthropologie (3)     46

Sandbridge Commons

  Virginia Beach, VA     70,000        13,000        6,000        4Q13        1Q15        2Q16        100   Retail   Harris Teeter     66

Brooks Crossing

  Newport News, VA     36,000        8,000        1,200        3Q14        3Q15        3Q15        65   Office   Huntington Ingalls (4)     0

Greentree Shopping Center (5)

  Chesapeake, VA     18,000        6,000        3,000        4Q13        4Q14        3Q16        100   Retail   Wawa     40
   

 

 

   

 

 

   

 

 

               
      358,000      $ 77,000      $ 42,200                 

 

                          Schedule        

Multifamily

  Location   Estimated
Apartment
Units (1)
    Estimated
Cost (1)
    Cost Incurred
through
March 31, 2014
    Start     Initial
Occupancy
    Complete (1)     Stabilized
Operation
    AHH
Ownership %
 

Encore Apartments (2)

  Virginia Beach, VA     286      $ 34,000      $ 17,000        1Q13        3Q14        4Q15        1Q16        100

Whetstone Apartments

  Durham, NC     203        28,000        13,000        2Q13        3Q14        3Q15        1Q16        100

Liberty Apartments (6)

  Newport News, VA     197        30,700        30,700        —          —          1Q14        3Q15        100
   

 

 

   

 

 

   

 

 

           
      686      $ 92,700      $ 60,700             

 

Next Generation Pipeline

                Schedule                      

Office/Retail

  Location   Estimated
Square
Footage (1)
    Estimated
Cost (1)
    Cost Incurred
through
March 31, 2014
    Start     Anchor
Tenant
Occupancy
    Stabilized
Operation
    AHH
Ownership % (1)
    Property Type   Anchor
Tenants
  % Leased  

Oceaneering

  Chesapeake, VA     155,000      $ 26,000      $ 6,000        4Q13        1Q15        1Q15        100   Office   Oceaneering     100

Commonwealth of Virginia – Chesapeake

  Chesapeake, VA     36,000        7,000        200        2Q14        1Q15        1Q15        100   Office   Commonwealth of
Virginia
    100

Commonwealth of Virginia – Virginia Beach

  Virginia Beach, VA     11,000        3,000        —          2Q14        1Q15        1Q15        100   Office   Commonwealth of
Virginia
    100

Lightfoot Marketplace

  Williamsburg, VA     88,000        24,000        500        3Q14        1Q16        2Q17        70 % (7)    Retail   Harris Teeter     60
     

 

 

   

 

 

               
      $ 60,000      $ 6,700                 
     

 

 

   

 

 

               
      Total      $ 229,700      $ 109,600                 
     

 

 

   

 

 

               

 

(1) Represents estimates that may change as the development process proceeds.
(2) This property will be located in the Town Center of Virginia Beach.
(3) Approximately 83,000 square feet is leased to Clark Nexsen, an architectural firm, approximately 23,000 square feet is leased to the City of Virginia Beach Development Authority and approximately 9,000 square feet is leased to Anthropologie.
(4) The principal tenant lease has not been signed as of the date of this Quarterly Report on Form 10-Q.
(5) The Company has completed the sale of a pad-ready site adjacent to Greentree Shopping Center to Walmart.
(6) Reflects the purchase price of the acquisition that occurred in 1Q14.
(7) The Company will earn a preferred return on equity prior to any distributions to minority partners.

Our execution on all of the projects identified in the preceding table and the Johns Hopkins project are subject to, among other factors, regulatory approvals, financing availability and suitable market conditions. During the three months ended March 31, 2014, we capitalized approximately $0.6 million of development-related compensation and overhead.

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 of office space. 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 that will be anchored by Anthropologie, which is expected to open in the fourth quarter of 2014.

 

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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. 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. We are currently negotiating a lease with Huntington Ingalls Industries to be the principal tenant in the first phase of this project.

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 a long-term ground lease with Wawa and have delivered to Walmart their pad-ready site.

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.

Whetstone Apartments are conveniently located near Duke University and are scheduled to open in time for the fall 2014 semester.

Liberty Apartments in Newport News, Virginia feature 197 apartment units and approximately 28,000 square feet of retail space. Liberty Apartments are located next to the Newport News Apprentice School of Shipbuilding, another one of our public/private partnership projects. As contemplated in our Formation Transactions, we completed our acquisition of Liberty Apartments on January 17, 2014.

Next Generation Pipeline

The Oceaneering International facility will be a 155,000 square foot office and manufacturing building located in Chesapeake, Virginia. We were selected as the developer of this new build-to-suit facility that will serve as Oceaneering International’s operational base in Virginia. Oceaneering International has agreed to a 15-year lease with us. We facilitated this public/private transaction among the City of Chesapeake, the Commonwealth of Virginia and Oceaneering International.

Commonwealth of Virginia Projects: In May 2014, we announced that we will develop two new administrative buildings for the Commonwealth of Virginia – one in Chesapeake and one in Virginia Beach – for a total of 47,000 square feet. The properties are 100% pre-leased to the Commonwealth of Virginia, which signed 12-year leases for both locations. We expect both projects to be completed by early 2015.

Lightfoot Marketplace will be a grocery-anchored shopping center in Williamsburg, Virginia. This multi-phased project is a redevelopment of the Williamsburg Outlet Mall. We expect to complete phase one of the project, consisting of approximately 88,000 square feet, in early 2016. Harris Teeter has signed a 20-year lease for approximately 53,000 square feet. Phase one of Lightfoot Marketplace will include an additional 35,000 square feet of shops and restaurants. We expect to begin construction of phase one in the third quarter of 2014. Phase two represents an opportunity for us to develop another 42,000 square feet in the future. As the majority partner in this joint venture, we are entitled to a preferred return on our equity prior to any potential distributions to minority partners.

Segment Results of Operations

As of March 31, 2014, 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 properties that we owned and operated and that were stabilized for the entirety of both periods presented. Same store properties exclude those that were in lease-up during either of 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.

 

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Office Segment Data

 

     Three Months Ended
March 31,
 
     2014     2013  
     ($ in thousands)  

Rental revenues

   $ 6,549      $ 6,486   

NOI

   $ 4,418      $ 4,540   

Properties (1)

     7        7   

Square feet (1)

     950,370        953,075   

Occupancy (1)

     95.4 %     93.9 %

 

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

Rental revenues for the three months ended March 31, 2014 increased $0.1 million while NOI for the three months ended March 31, 2014 decreased $0.1 million compared to the corresponding period in 2013. Increased utility costs due to the harsher winter more than offset increased occupancy and rental revenues at Two Columbus.

Office Same Store Results

Office same store rental revenues, property expenses and NOI for the three months ended March 31, 2014 and 2013 were as follows:

 

     Three months ended
March 31,
        
     2014      2013      Change  
     ($ in thousands)  

Rental revenues

   $ 6,549       $ 6,486       $ 63   

Property expenses

     2,131         1,946         185   
  

 

 

    

 

 

    

 

 

 

Same Store NOI

   $ 4,418       $ 4,540       $ (122 )

Non-Same Store NOI

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Segment NOI

   $ 4,418       $ 4,540       $ (122 )
  

 

 

    

 

 

    

 

 

 

Same store rental revenues for the three months ended March 31, 2014 increased $0.1 million while same store NOI for the three months ended March 31, 2014 decreased $0.1 million compared to the corresponding period in 2013. Increased utility costs due to the harsher winter more than offset increased occupancy and rental revenues at Two Columbus.

 

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Retail Segment Data

 

     Three Months Ended
March 31,
 
     2014     2013  
     ($ in thousands)  

Rental revenues

   $ 5,770      $ 5,005   

NOI

   $ 3,945      $ 3,325   

Properties (1)

     15        14   

Square feet (1)

     1,092,311        983,097   

Occupancy (1)

     93.4 %     94.2 %

 

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

Rental revenues for the three months ended March 31, 2014 increased $0.8 million compared to the corresponding period in 2013. NOI for the three months ended March 31, 2014 increased $0.6 million compared to the corresponding period in 2013. The increases in rental revenues and NOI resulted primarily from our consolidation of Bermuda Crossroads upon completion of our IPO and the Formation Transactions on May 13, 2013.

Retail Same Store Results

Retail same store rental revenues, property expenses and NOI for the three months ended March 31, 2014 and 2013 were as follows:

 

     Three months ended
March 31,
        
     2014      2013      Change  
     ($ in thousands)  

Rental revenues (1)

   $ 5,228       $ 5,005       $ 223   

Property expenses (1)

     1,687         1,680         7   
  

 

 

    

 

 

    

 

 

 

Same Store NOI (1)

   $ 3,541       $ 3,325       $ 216   

Non-Same Store NOI

     404         —          404   
  

 

 

    

 

 

    

 

 

 

Segment NOI

   $ 3,945       $ 3,325       $ 620   
  

 

 

    

 

 

    

 

 

 

 

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

Same store rental revenues for the three months ended March 31, 2014 increased $0.2 million compared to the corresponding period in 2013. Same store NOI for the three months ended March 31, 2014 increased $0.2 million compared to the corresponding period in 2013. The increases in same store rental revenues and NOI for the comparison periods resulted primarily from increased percentage rent at 249 Central Park Retail and increased occupancy at North Point Center.

 

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Multifamily Segment Data

 

     Three Months Ended
March 31,
 
     2014     2013  
     ($ in thousands)  

Rental revenues

   $ 2,874      $ 1,907   

NOI

   $ 1,511      $ 1,092   

Properties (1)

     3        1   

Apartment units (1)(2)

     626        342   

Occupancy (1)(2)

     94.2 %     87.7 %

 

(1) As of the end of the periods presented.
(2) Excludes the 197 units of Liberty Apartments, which was not stabilized as of March 31, 2014.

Rental revenues for the three months ended March 31, 2014 increased $1.0 million compared to the corresponding period in 2013. NOI for the three months ended March 31, 2014 increased $0.4 million compared to the corresponding period in 2013. The increases in rental revenues resulted from our consolidation of Smith’s Landing upon completion of our IPO and the Formation Transactions on May 13, 2013 and our acquisition of Liberty Apartments on January 17, 2014. Positive NOI from Smith’s Landing was partially offset by negative NOI from Liberty Apartments, which had not reached stabilization as of March 31, 2014.

Multifamily Same Store Results

Multifamily same store rental revenues, property expenses and NOI for the three months ended March 31, 2014 and 2013 were as follows:

 

     Three months ended
March 31,
        
     2014      2013      Change  
     ($ in thousands)  

Rental revenues (1)

   $ 1,816       $ 1,907       $ (91 )

Property expenses (1)

     831         815         16   
  

 

 

    

 

 

    

 

 

 

Same Store NOI (1)

   $ 985       $ 1,092       $ (107 )

Non-Same Store NOI

     526         —          526   
  

 

 

    

 

 

    

 

 

 

Segment NOI

   $ 1,511       $ 1,092       $ 419   
  

 

 

    

 

 

    

 

 

 

 

(1) Excludes Smith’s Landing, which was an unconsolidated property prior to May 13, 2013, and Liberty Apartments, which we acquired on January 17, 2014.

Same store rental revenues and NOI for the three months ended March 31, 2014 decreased $0.1 million compared to the corresponding period in 2013. The decreases in same store rental revenues and NOI for the comparison period resulted from higher multifamily concessions at The Cosmopolitan, which more than offset increased retail occupancy.

 

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General Contracting and Real Estate Services Segment Data

 

     Three Months Ended
March 31,
 
     2014     2013  
     ($ in thousands)  

Segment revenues

   $ 19,234      $ 17,956   

NOI

     1,249        498   

Operating margin

     6.5 %     2.8 %

Segment revenues for the three months ended March 31, 2014 increased $1.3 million compared to the corresponding period in 2013. The increase in segment revenues resulted from higher volume and better operating margins on our construction contracts. NOI increased as we experienced better operating margins during 2014.

Backlog as of March 31, 2014 was $193.3 million compared to $65.8 million as of March 31, 2013. During the three months ended March 31, 2014, we executed $165.9 million of new contract or change order work. The changes in backlog for the three months ended March 31, 2014 were as follows:

 

     Three months ended
March 31, 2014
 
     ($ in thousands)  

Beginning backlog

   $ 46,385   

New contracts/change orders

     165,947   

Work performed

     (19,014 )
  

 

 

 

Ending backlog

   $ 193,318   
  

 

 

 

During the three months ended March 31, 2014, we executed a $164.7 million contract for the construction of Harbor Point, a 900,000 square foot mixed-use tower in Baltimore, Maryland. The building will become headquarters to Exelon’s Constellation business unit. Exelon is the nation’s leading competitive energy provider. Construction is expected to start in the spring of 2014 with completion expected in the spring of 2016.

As of March 31, 2014, we had $18.5 million of backlog on the Hyatt Place Baltimore/Inner Harbor Hotel. We expect to complete construction in the fall of 2014.

 

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Consolidated and Combined Results of Operations

Because of the timing of our IPO, the results of operations for the three months ended March 31, 2014 reflect those of the Company and the results of operations for the three months ended March 31, 2013 reflect those of our Predecessor.

The following table summarizes the results of operations for the three months ended March 31, 2014 and 2013:

 

     Three months ended
March 31,
       
     2014     2013     Change  
     ($ in thousands)  

Revenues

  

Rental revenues

   $ 15,193      $ 13,398      $ 1,795   

General contracting and real estate services revenues

     19,234        17,956        1,278   
  

 

 

   

 

 

   

 

 

 

Total revenues

     34,427        31,354        3,073   

Expenses

      

Rental expenses

     3,976        3,229        747   

Real estate taxes

     1,343        1,212        131   

General contracting and real estate services expenses

     17,985        17,458        527   

Depreciation and amortization

     3,969        3,159        810   

General and administrative expenses

     2,046        717        1,329   
  

 

 

   

 

 

   

 

 

 

Total expenses

     29,319        25,775        3,544   
  

 

 

   

 

 

   

 

 

 

Operating income

     5,108        5,579        (471 )
  

 

 

   

 

 

   

 

 

 

Interest expense

     (2,565 )     (3,915 )     1,350   

Other income

     112        267        (155 )
  

 

 

   

 

 

   

 

 

 

Income before taxes

     2,655        1,931        724   

Income tax provision

     (149 )     —         (149 )
  

 

 

   

 

 

   

 

 

 

Net income

   $ 2,506      $ 1,931      $ 575   
  

 

 

   

 

 

   

 

 

 

Rental Revenues. Rental revenues for the three months ended March 31, 2014 increased $1.8 million compared to the corresponding period in 2013, as follows:

 

     Three months ended
March 31,
        
     2014      2013      Change  
     ($ in thousands)  

Office

   $ 6,549       $ 6,486       $ 63   

Retail

     5,770         5,005         765   

Multifamily

     2,874         1,907         967   
  

 

 

    

 

 

    

 

 

 
   $ 15,193       $ 13,398       $ 1,795   
  

 

 

    

 

 

    

 

 

 

Office rental revenues increased due to higher occupancy at Two Columbus. Retail rental revenues increased because of our consolidation of Bermuda Crossroads upon completion of our IPO and the Formation Transactions on May 13, 2013. Multifamily rental revenues increased because of our consolidation of Smith’s Landing upon completion of our IPO and the Formation Transactions on May 13, 2013 and our acquisition of Liberty Apartments on January 17, 2014.

General Contracting and Real Estate Services Revenues. General contracting and real estate services revenues for the three months ended March 31, 2014 increased $1.3 million compared to the corresponding period in 2013 because of higher construction volume and better operating margins on our construction contracts.

 

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Rental Expenses. Rental expenses for the three months ended March 31, 2014 increased $0.7 million compared to the corresponding period in 2013, as follows:

 

     Three months ended
March 31,
        
     2014      2013      Change  
     ($ in thousands)  

Office

   $ 1,587       $ 1,405       $ 182   

Retail

     1,322         1,220         102   

Multifamily

     1,067         604         463   
  

 

 

    

 

 

    

 

 

 
   $ 3,976       $ 3,229       $ 747   
  

 

 

    

 

 

    

 

 

 

Office rental expenses increased because of higher utility costs due to the harsher winter. Retail rental expenses increased because of our consolidation of Bermuda Crossroads upon completion of our IPO and the Formation Transactions on May 13, 2013. Multifamily rental expenses increased because of our consolidation of Smith’s Landing upon completion of our IPO and the Formation Transactions on May 13, 2013 and our acquisition of Liberty Apartments on January 17, 2014.

Real Estate Taxes. Real estate taxes for the three months ended March 31, 2014 increased $0.1 million compared to the corresponding period in 2013, as follows:

 

     Three months ended
March 31,
        
     2014      2013      Change  
     ($ in thousands)  

Office

   $ 544       $ 541       $ 3   

Retail

     503         460         43   

Multifamily

     296         211         85   
  

 

 

    

 

 

    

 

 

 
   $ 1,343       $ 1,212       $ 131   
  

 

 

    

 

 

    

 

 

 

Office real estate taxes were relatively unchanged during the comparison period. Retail real estate taxes increased because of our consolidation of Bermuda Crossroads upon completion of our IPO and the Formation Transactions on May 13, 2013. Multifamily real estate taxes increased because of our consolidation of Smith’s Landing upon completion of our IPO and the Formation Transactions on May 13, 2013 and our acquisition of Liberty Apartments on January 17, 2014.

General Contracting and Real Estate Services Expenses. General contracting and real estate services expenses for the three months ended March 31, 2014 increased $0.5 million compared to the corresponding period in 2013 because of higher volume on our construction contracts.

Depreciation and Amortization. Depreciation and amortization for the three months ended March 31, 2014 increased $0.8 million compared to the corresponding period in 2013. The increase was primarily attributable to depreciation and amortization associated with Bermuda Crossroads, Smith’s Landing and Liberty Apartments.

General and Administrative Expenses. General and administrative expenses for the three months ended March 31, 2014 increased $1.3 million compared to the corresponding period in 2013. The increase resulted from regulatory and compliance costs incurred to operate as a public company.

Interest Expense. Interest expense for the three months ended March 31, 2014 decreased $1.4 million compared to the corresponding period in 2013 because we decreased the overall leverage on our stabilized portfolio. Total indebtedness on our stabilized portfolio as of March 31, 2014 and December 31, 2013 was $188.7 million and $189.4 million, respectively, compared to $331.4 million and $332.9 million as of March 31, 2013 and December 31, 2012, respectively.

Other Income. Other income for the three months ended March 31, 2014 decreased $0.2 million compared to the corresponding period in 2013. The decrease in other income for the comparison period resulted from our consolidation of Bermuda Crossroads and Smith’s Landing beginning on May 13, 2013. We previously accounted for our noncontrolling interests in both Bermuda Crossroads and Smith’s Landing under the equity method and presented our earnings from each within other income.

Income Taxes. Prior to the completion of our IPO on May 13, 2013, we made no provision for U.S. federal, state or local income taxes because the profits and losses of our Predecessor flowed through to its respective partners, members and shareholders who were individually responsible for reporting such amounts. Subsequent to the completion of our IPO, our TRSs through which we conduct our development and construction business are subject to federal, state and local corporate income taxes. The income tax provision recognized during the three months ended March 31, 2014 is attributable to the profits of our TRSs.

 

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Liquidity and Capital Resources

Overview

We believe our primary short-term liquidity requirements consist of general contracting expenses, operating expenses and other expenditures associated with our properties, including tenant improvements, leasing commissions and leasing incentives, dividend payments to our stockholders required to maintain our REIT qualification, debt service, capital expenditures, new real estate development projects and strategic acquisitions. We expect to meet our short-term liquidity requirements through net cash provided by operations, reserves established from existing cash, borrowings under construction loans to fund new real estate development and construction and borrowings available under our credit facility.

Our long-term liquidity needs consist primarily of funds necessary for the repayment of debt at or prior to maturity, general contracting expenses, property development and acquisitions, tenant improvements and capital improvements. We expect to meet our long-term liquidity requirements with net cash from operations, long-term secured and unsecured indebtedness and the issuance of equity and debt securities. We may also fund property development, acquisitions and capital improvements using our credit facility pending long-term financing.

As of March 31, 2014, we had unrestricted cash and cash equivalents of $13.4 million and restricted cash in escrow of $2.8 million available for both current liquidity needs as well as development activities. As of March 31, 2014, we had $65.1 million available under our credit facility to meet our short-term liquidity requirements.

Credit Facility

On May 13, 2013, we closed on a $100.0 million senior secured credit facility that includes an accordion feature that allows us to increase the borrowing capacity under the facility up to $250.0 million, subject to certain conditions. On October 10, 2013, we increased the borrowing capacity under the credit facility to $155.0 million pursuant to the accordion feature by adding six properties to the borrowing base collateral. As of March 31, 2014, the following ten properties collectively served as the borrowing base collateral for the credit facility: (i) Armada Hoffler Tower, (ii) Richmond Tower, (iii) One Columbus, (iv) Two Columbus, (v) Virginia Natural Gas, (vi) Sentara Williamsburg, (vii) a portion of North Point Center, (viii) Gainsborough Square, (ix) Parkway Marketplace and (x) Courthouse 7-Eleven.

The credit facility matures on May 13, 2016 and includes an optional one-year extension (assuming our compliance with applicable covenants and conditions) for a fee equal to 0.25% of the then applicable maximum amount of the credit facility.

The credit facility bears interest at LIBOR plus 1.60% to 2.20%, depending on our total leverage ratio. As of March 31, 2014, the interest rate on the credit facility was LIBOR plus 1.75%. In addition to interest owed under the credit facility, we are obligated to pay an annual fee based on the average unused portion of the credit facility. This fee is payable quarterly in arrears and is 0.25% of the amount of the unused portion of the credit facility if amounts borrowed are greater than 50% of the credit facility and 0.30% of the unused portion of the credit facility if amounts borrowed are less than 50% of the credit facility.

As of March 31, 2014, we had $80.0 million borrowed under the credit facility and had standby letters of credit issued under the credit facility totaling $9.9 million. As of March 31, 2014, we had $65.1 million of aggregate capacity available under the credit facility.

The credit facility requires us to comply with various financial covenants, including:

 

    Maximum leverage ratio (as amended on April 22, 2014) of 65% as of the last day of each fiscal quarter through maturity;

 

    Minimum fixed charge coverage ratio of 1.75x;

 

    Minimum tangible net worth equal to at least the sum of 80% of tangible net worth on the closing date of the credit facility plus 75% of the net proceeds of any additional equity issuances;

 

    Maximum amount of variable rate indebtedness not exceeding 30% of our total asset value; and

 

    Maximum amount of secured recourse indebtedness of 35% of our total asset value.

The credit facility permits investments in the following types of assets: (i) unimproved land holdings in an aggregate amount not exceeding 5% of our total asset value, (ii) construction in progress in an aggregate amount not exceeding 25% of our total asset value

 

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and (iii) unconsolidated affiliates in aggregate amount not exceeding 5% of our total asset value. Investments in these types of assets cannot exceed 30% of our total asset value. In addition to these financial covenants, the credit facility requires us to comply with various customary affirmative and negative covenants that restrict our ability to, among other things, incur debt and liens, make investments, dispose of properties and make distributions.

We are currently in compliance with all covenants under the credit facility.

Consolidated Indebtedness

During the three months ended March 31, 2014, we:

 

    Assumed $17.0 million of debt at fair value in connection with the acquisition of Liberty Apartments. The fair value adjustment to the assumed debt of Liberty Apartments was a $1.5 million discount. The outstanding principal balance of the assumed debt of Liberty Apartments at the acquisition date was $18.5 million. However, an additional $2.4 million is available and is expected to be used to fund current and future obligations. The loan amortizes over 30 years, bears interest at 5.66% and matures on November 1, 2043.

 

    Closed on a $19.5 million loan to fund the development and construction of the Oceaneering International facility. The construction loan bears interest at LIBOR plus 1.75% and matures on February 28, 2018. As of March 31, 2014, we did not have any amounts outstanding on the construction loan.

 

    Borrowed $10.0 million under our credit facility.

 

    Borrowed $13.3 million under our construction loans to fund our construction of 4525 Main Street, Encore Apartments, Whetstone Apartments and Sandbridge Commons.

On April 14, 2014, we borrowed an additional $8.0 million under our credit facility.

 

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The following table sets forth our consolidated indebtedness as of March 31, 2014 ($ in thousands):

 

     Amount
Outstanding
    Interest
Rate (1)
    Effective Rate for
Variable-Rate
Debt
as of
March 31,
2014
    Maturity Date      Balance at
Maturity
 

Oyster Point

   $ 6,418        5.41       December 1, 2015       $ 6,089   

Broad Creek Shopping Center

           

Note 1

     4,490        LIBOR+2.25        2.41     October 31, 2018         4,223   

Note 2

     8,244        LIBOR+2.25        2.41     October 31, 2018         7,752   

Note 3

     3,451        LIBOR+2.25        2.41     October 31, 2018         3,246   

Hanbury Village

           

Note 1

     21,388        6.67          October 11, 2017         20,499   

Note 2

     4,142        LIBOR+2.25        2.41     October 31, 2018         3,777   

Harrisonburg Regal

     3,797        6.06          June 8, 2017         3,165   

North Point Center

           

Note 1

     10,277        6.45          February 5, 2019         9,333   

Note 2

     2,817        7.25          September 15, 2025         1,344   

Note 4

     1,024        5.59          December 1, 2014         1,007   

Note 5

     700        LIBOR+2.00        3.57 % (2)      February 1, 2017         641   

Tyre Neck Harris Teeter

     2,471        LIBOR+2.25        2.41     October 31, 2018         2,235   

249 Central Park Retail

     15,765        5.99          September 8, 2016         15,084   

South Retail

     6,955        5.99          September 8, 2016         6,655   

Studio 56 Retail

     2,672        3.75          May 7, 2015         2,592   

Commerce Street Retail

     5,597        LIBOR+2.25        2.41     October 31, 2018         5,264   

Fountain Plaza Retail

     7,883        5.99          September 8, 2016         7,542   

Dick’s at Town Center

     8,292        LIBOR+2.75        2.91     October 31, 2017         7,889   

The Cosmopolitan

     47,577        3.75          July 1, 2051         —     

Smith’s Landing

     24,714        LIBOR+2.15        2.31     January 31, 2017         23,793   
  

 

 

          

 

 

 

Stabilized Portfolio

   $ 188,674             $ 132,130   

Credit Facility

     80,000        LIBOR+1.60-2.20        1.90     May 13, 2016         80,000   

4525 Main Street

     17,483        LIBOR+1.95        2.11     January 30, 2017         17,483   

Encore Apartments

     9,279        LIBOR+1.95        2.11     January 30, 2017         9,279   

Whetstone Apartments

     1,425        LIBOR+1.90        2.06     October 8, 2016         1,425   

Sandbridge Commons

     3,437        LIBOR+1.85        2.01     January 17, 2018         3,437   

Oceaneering

     —          LIBOR+1.75        1.91     February 28, 2018         —     

Liberty Apartments

     18,456  (3)      5.66          November 1, 2043         —     
  

 

 

          

 

 

 

Total

   $ 318,754             $ 243,754   
           

 

 

 

Unamortized fair value adjustments

     (1,483         
  

 

 

          

Indebtedness

   $ 317,271            
  

 

 

          

 

(1) LIBOR rate is determined by individual lenders.
(2) Subject to an interest rate swap lock.
(3) Principal balance excluding fair value adjustments.

We currently are in compliance with all covenants on our outstanding indebtedness.

 

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As of March 31, 2014, our outstanding indebtedness matures during the following years:

 

Year

   Amount Due      Percentage of
Total
 
     ($ in thousands)         

2014

   $ 1,007         <1

2015

     8,681         4   

2016

     110,706         45   

2017

     82,749         34   

2018 and thereafter

     40,611         17   
  

 

 

    

 

 

 
   $ 243,754         100
  

 

 

    

 

 

 

Interest Rate Derivatives

We may use interest rate derivatives from time to time to manage our exposure to interest rate risks. Using an interest rate swap lock, we fixed our interest payments under North Point Center Note 5 at 3.57% through maturity on February 1, 2017.

As of March 31, 2014, we were party to the following LIBOR interest rate cap agreements ($ in thousands):

 

Effective Date

   Maturity Date    Strike Rate   Notional Amount

May 31, 2012

   May 29, 2015        1.09 %     $ 9,068  

September 1, 2013

   March 1, 2016        3.50 %       25,198  

September 1, 2013

   March 1, 2016        3.50 %       37,848  

September 1, 2013

   March 1, 2016        1.50 %       40,000  

October 4, 2013

   April 1, 2016        1.50 %       18,500  

March 14, 2014

   March 1, 2017        1.25 %       50,000  
             

 

 

 

Total

            $ 180,614  
             

 

 

 

As of March 31, 2014, the notional amounts of our LIBOR interest rate cap agreements with strike rates below and above 1.50% were as follows ($ in thousands):

 

Strike Rate

   Notional Amount  

£1.50%

   $ 117,568   

>1.50%

     63,046   
  

 

 

 

Total

   $ 180,614   
  

 

 

 

Off-Balance Sheet Arrangements

We have entered into standby letters of credit relating to the guarantee of future performance on certain of our construction contracts. Letters of credit generally are available for draw down in the event we do not perform. As of March 31, 2014, we had aggregate outstanding letters of credit totaling $9.9 million all of which expire during 2014. However, all of our standby letters of credit are expected to renew for additional periods until completion of the underlying contractual obligation.

 

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Cash Flows

 

     Three Months Ended March 31,        
     2014     2013     Change  
     ($ in thousands)  

Operating activities

   $ 3,213      $ 4,287      $ (1,074 )

Investing activities

     (25,898 )     (3,182 )     (22,716 )

Financing activities

     17,247        (6,404 )     23,651   
  

 

 

   

 

 

   

 

 

 

Net increase (decrease)

   $ (5,438 )   $ (5,299 )   $ (139 )
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, beginning of period

   $ 18,882      $ 9,400     

Cash and cash equivalents, end of period

   $ 13,444      $ 4,101     

Net cash from operating activities decreased $1.1 million during the three months ended March 31, 2014 compared to the three months ended March 31, 2013. The decrease resulted primarily from cash outflows for property and construction liabilities. These decreases were partially offset by net income adjusted for noncash items, which increased $1.5 million during the three months ended March 31, 2014.

Net cash used in investing activities increased $22.7 million during the three months ended March 31, 2014 compared to the three months ended March 31, 2013. During the three months ended March 31, 2014, we invested $20.3 million on new real estate development compared to $2.2 million during the three months ended March 31, 2013. During the three months ended March 31, 2014, we invested $2.5 million in tenant and building improvements compared to $0.7 million during the three months ended March 31, 2013. On January 17, 2014, we paid $2.9 million of net cash in connection with the acquisition of Liberty Apartments.

Net cash from financing activities increased $23.7 million during the three months ended March 31, 2014 compared to the three months ended March 31, 2013. The increase resulted primarily from $23.3 million of borrowings under our credit facility and construction loans to fund our new real estate development.

Non-GAAP Financial Measures

We calculate FFO in accordance with the standards established by NAREIT. NAREIT defines FFO as net income (loss) (calculated in accordance with GAAP), excluding gains (or losses) from sales of depreciable operating property, real estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures.

FFO is a supplemental non-GAAP financial measure. Management uses FFO as a supplemental performance measure because it believes that FFO is beneficial to investors as a starting point in measuring our operational performance. Specifically, in excluding real estate related depreciation and amortization and gains and losses from property dispositions, which do not relate to or are not indicative of operating performance, FFO provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating costs. We also believe that, as a widely recognized measure of the performance of REITs, FFO will be used by investors as a basis to compare our operating performance with that of other REITs.

However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effects and could materially impact our results from operations, the utility of FFO as a measure of our performance is limited. In addition, other equity REITs may not calculate FFO in accordance with the NAREIT definition as we do, and, accordingly, our FFO may not be comparable to such other REITs’ FFO. Accordingly, FFO should be considered only as a supplement to net income as a measure of our performance. FFO should not be used as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or service indebtedness. FFO also should not be used as a supplement to or substitute for cash flow from operating activities computed in accordance with GAAP.

 

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The following table sets forth a reconciliation of FFO for the three months ended March 31, 2014 and 2013 to net income, the most directly comparable GAAP equivalent:

 

     Three Months Ended
March 31,
 
     2014      2013  
     ($ in thousands)  

Net income

   $ 2,506       $ 1,931   

Depreciation and amortization

     3,969         3,159   

Real estate joint ventures, net

     —          (7 )
  

 

 

    

 

 

 

Funds from operations

   $ 6,475       $ 5,083   
  

 

 

    

 

 

 

Net income for the three months ended March 31, 2014 includes noncash stock compensation of $0.3 million. FFO for the three months ended March 31, 2014 includes $(0.3) million of FFO from non-stabilized development projects.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated and combined financial statements that have been prepared in accordance with GAAP. The preparation of these financial statements requires us to exercise our best judgment in making estimates that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates on an ongoing basis, based upon current available information. Actual results could differ from these estimates. We discuss the accounting policies and estimates that are most critical to understanding our reported financial results in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The primary market risk to which we are exposed is interest rate risk. Our primary interest rate exposure is daily LIBOR. We primarily use fixed interest rate financing to manage our exposure to fluctuations in interest rates. On a limited basis, we also use derivative financial instruments to manage interest rate risk. We do not use these derivatives for trading or other speculative purposes. We have not designated any of our derivatives as hedges for accounting purposes.

At March 31, 2014, approximately $143.5 million, or 45%, of our debt had fixed interest rates and approximately $173.7 million, or 55%, had variable interest rates. Assuming no increase in the level of our variable rate debt, if interest rates increased by 1.0%, our cash flow would decrease by approximately $1.7 million per year. At March 31, 2014, LIBOR was approximately 16 basis points. Assuming no increase in the level of our variable rate debt, if LIBOR was reduced to 0 basis points, our cash flow would increase by approximately $0.3 million per year.

 

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Item 4. Controls and Procedures

We maintain disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

We have carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of our disclosure controls and procedures as of March 31, 2014, the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer have concluded, as of March 31, 2014, that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in reports filed or submitted under the Exchange Act: (i) is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.

No changes to our internal control over financial reporting were identified in connection with the evaluation referenced above that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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Part II. Other Information

 

Item 1. Legal Proceedings

We are not currently a party, as plaintiff or defendant, to any legal proceedings that we believe to be material or which, individually or in the aggregate, would be expected to have a material effect on our business, financial condition or results of operations if determined adversely to us. We may be subject to on-going litigation relating to our portfolio and the properties comprising our portfolio, and we expect to otherwise be party from time to time to various lawsuits, claims and other legal proceedings that arise in the ordinary course of our business.

 

Item 1A. Risk Factors

There have been no material changes from the risk factors disclosed in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2013.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

On January 17, 2014, we issued 695,652 common units of limited partnership interest in our Operating Partnership in connection with our acquisition of Liberty Apartments. On March 31, 2014, we issued 30,000 common units of limited partnership interest in our Operating Partnership in exchange for all noncontrolling interests in Sandbridge Commons. The issuance of common units in connection with our acquisition of Liberty Apartments and Sandbridge Commons was effected in reliance upon exemptions from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, and Regulation D thereunder.

Issuer Purchases of Equity Securities

During the three months ended March 31, 2014, certain of our directors and employees surrendered shares of common stock owned by them to satisfy their minimum statutory federal and state tax obligations associated with the vesting of restricted shares of common stock issued under our 2013 Equity Incentive Plan (the “2013 Plan”). The following table summarizes all of these repurchases during the three months ended March 31, 2014.

 

Period

   Total Number of
Shares Purchased (1)
     Average Price
Paid for Shares
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
     Maximum Number of
Shares that May Yet be
Purchased Under the
Plans or Programs
 

January 1, 2014 through January 31, 2014

     —          —           N/A         N/A   

February 1, 2014 through February 28, 2014

     —          —           N/A         N/A   

March 1, 2014 through March 31, 2014

     8,337       $ 9.94         N/A         N/A   
  

 

 

          

Total

     8,337            
  

 

 

          

 

(1) The number of shares purchased represents shares of common stock surrendered by certain of our employees to satisfy their statutory minimum federal and state tax obligations associated with the vesting of restricted shares of common stock issued under the 2013 Plan. With respect to these shares, the price paid per share is based on the grant date fair value of the restricted stock awards.

 

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Item 3. Defaults on Senior Securities

None.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

Item 5. Other Information

None.

 

Item 6. Exhibits

The exhibits listed in the accompanying Exhibit Index are filed, furnished or incorporated by reference (as stated therein) as part of this Quarterly Report on Form 10-Q.

 

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly cause this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

      ARMADA HOFFLER PROPERTIES, INC.
Date: May 15, 2014      

/s/ LOUIS S. HADDAD

      Louis S. Haddad
     

President and Chief Executive Officer

(Principal Executive Officer)

Date: May 15, 2014      

/s/ MICHAEL P. O’HARA

      Michael P. O’Hara
     

Chief Financial Officer and Treasurer

(Principal Accounting and Financial Officer)

 

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Exhibit Index

 

Exhibit

No.

 

Description

  10.1 *   Amendment No. 1, dated as of March 19, 2014, to the First Amended and Restated Agreement of Limited Partnership of Armada Hoffler, L.P., dated as of May 13, 2013
  10.2 *   First Amendment, dated as of April 22, 2014, to the Credit Agreement, dated as of May 13, 2013, among Armada Hoffler, L.P., as Borrower, Armada Hoffler Properties, Inc., as Parent, Bank of America, N.A., as Administrative Agent, Regions Bank, as Syndicate Agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated, as Sole Lead Arranger and Sole Bookrunner, and various other lenders
  15.1 *   Acknowledgment of Ernst & Young LLP, Independent Registered Public Accounting Firm
  31.1 *   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2 *   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.1 **   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  32.2 **   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS ***   XBRL Instance Document
101.SCH ***   XBRL Taxonomy Extension Schema Document
101.CAL ***   XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB ***   XBRL Taxonomy Extension Label Linkbase Document
101.PRE ***   XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF ***   XBRL Definition Linkbase

 

* Filed herewith
** Furnished herewith
*** Furnished herewith. Pursuant to Rule 406T of Regulation S-T, the interactive data files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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