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, 2015

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   x
Non-Accelerated Filer   ¨  (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 April 30, 2015, the Registrant had 25,499,639 shares of common stock outstanding.

 

 

 


Table of Contents

ARMADA HOFFLER PROPERTIES, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2015

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      30   

Part II. Other Information

     31   

Item 1.

  Legal Proceedings      31   

Item 1A.

  Risk Factors      31   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      31   

Item 3.

  Defaults Upon Senior Securities      32   

Item 4.

  Mine Safety Disclosures      32   

Item 5.

  Other Information      32   

Item 6.

  Exhibits      32   

Signatures

     33   


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,
2015
    DECEMBER 31,
2014
 
     (UNAUDITED)        

ASSETS

  

Real estate investments:

    

Income producing property

   $ 552,172      $ 513,918   

Held for development

     1,180        —    

Construction in progress

     26,251        81,082   
  

 

 

   

 

 

 
  579,603      595,000   

Accumulated depreciation

  (120,224   (116,099
  

 

 

   

 

 

 

Net real estate investments

  459,379      478,901   

Real estate investments held for sale

  27,882      8,538   

Cash and cash equivalents

  31,479      25,883   

Restricted cash

  4,026      4,224   

Accounts receivable, net

  20,788      20,548   

Construction receivables, including retentions

  28,085      19,432   

Construction contract costs and estimated earnings in excess of billings

  170      272   

Other assets

  32,192      33,108   
  

 

 

   

 

 

 

Total Assets

$ 604,001    $ 590,906   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

Indebtedness

$ 363,730    $ 359,229   

Debt secured by real estate investments held for sale

  17,342      —    

Accounts payable and accrued liabilities

  5,649      8,358   

Construction payables, including retentions

  34,264      42,399   

Billings in excess of construction contract costs and estimated earnings

  1,206      1,053   

Other liabilities

  18,942      17,961   
  

 

 

   

 

 

 

Total Liabilities

  441,133      429,000   

Stockholders’ equity:

Common stock, $0.01 par value, 500,000,000 shares authorized, 25,084,139 and 25,022,701 shares issued and outstanding as of March 31, 2015 and December 31, 2014, respectively

  251      250   

Additional paid-in capital

  51,877      51,472   

Distributions in excess of earnings

  (53,572   (54,413

Accumulated other comprehensive loss

  (495   —    
  

 

 

   

 

 

 

Total stockholders’ deficit

  (1,939   (2,691

Noncontrolling interests

  164,807      164,597   
  

 

 

   

 

 

 

Total Equity

  162,868      161,906   
  

 

 

   

 

 

 

Total Liabilities and Equity

$ 604,001    $ 590,906   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

ARMADA HOFFLER PROPERTIES, INC.

Condensed Consolidated Statements of Comprehensive Income

(In thousands, except per share data)

(Unaudited)

 

     THREE MONTHS ENDED
MARCH 31,
 
     2015     2014  

Revenues

    

Rental revenues

   $ 18,190      $ 15,193   

General contracting and real estate services revenues

     29,071        19,234   
  

 

 

   

 

 

 

Total revenues

  47,261      34,427   
  

 

 

   

 

 

 

Expenses

Rental expenses

  4,760      3,976   

Real estate taxes

  1,657      1,343   

General contracting and real estate services expenses

  28,142      17,985   

Depreciation and amortization

  4,908      3,969   

General and administrative expenses

  2,328      2,046   

Acquisition, development and other pursuit costs

  171      —    
  

 

 

   

 

 

 

Total expenses

  41,966      29,319   
  

 

 

   

 

 

 

Operating income

  5,295      5,108   

Interest expense

  (3,046   (2,565

Loss on extinguishment of debt

  (227   —    

Gain on real estate dispositions

  6,197      —    

Other (loss) income

  (132   112   
  

 

 

   

 

 

 

Income before taxes

  8,087      2,655   

Income tax benefit (provision)

  31      (149
  

 

 

   

 

 

 

Net income

  8,118      2,506   

Net income attributable to noncontrolling interests

  (3,013   (1,041
  

 

 

   

 

 

 

Net income attributable to stockholders

$ 5,105    $ 1,465   
  

 

 

   

 

 

 

Net income per share and unit:

Basic and diluted

$ 0.20    $ 0.08   
  

 

 

   

 

 

 

Weighted-average outstanding:

Common shares

  25,042      19,193   

Common units

  14,776      13,632   
  

 

 

   

 

 

 

Basic and diluted

  39,818      32,825   
  

 

 

   

 

 

 

Dividends and distributions declared per common share and unit

$ 0.17    $ 0.16   
  

 

 

   

 

 

 

Comprehensive income:

Net income

$ 8,118    $ 2,506   

Unrealized loss on cash flow hedge

  (786   —    
  

 

 

   

 

 

 

Comprehensive income

  7,332      2,506   

Comprehensive income attributable to noncontrolling interests

  (2,722   (1,041
  

 

 

   

 

 

 

Comprehensive income attributable to stockholders

$ 4,610    $ 1,465   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated 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
    Accumulated
other
comprehensive

loss
    Total
stockholders’
deficit
    Noncontrolling
interests
    Total
Equity
 

Balance, January 1, 2015

    25,022,701      $ 250      $ 51,472      $ (54,413   $ —       $ (2,691   $ 164,597      $ 161,906   

Restricted stock award grants

    61,615        1        (1     —         —         —         —         —    

Vesting of restricted stock awards

    —         —         406        —         —         406        —         406   

Restricted stock award forfeitures

    (177     —         —         —         —         —         —         —    

Unrealized loss on cash flow hedge

    —         —         —         —         (495     (495     (291     (786

Net income

    —         —         —         5,105        —         5,105        3,013        8,118   

Dividends and distributions declared

    —         —         —         (4,264     —         (4,264     (2,512     (6,776
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2015

  25,084,139    $ 251    $ 51,877    $ (53,572 $ (495 $ (1,939 $ 164,807    $ 162,868   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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ARMADA HOFFLER PROPERTIES, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

     THREE MONTHS ENDED
MARCH 31,
 
     2015     2014  

OPERATING ACTIVITIES

    

Net income

   $ 8,118      $ 2,506   

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

    

Depreciation of buildings and tenant improvements

     4,200        3,478   

Amortization of leasing costs and in-place lease intangibles

     708        491   

Accrued straight-line rental revenue

     (725     (469

Amortization of leasing incentives and above or below-market rents

     177        160   

Accrued straight-line ground rent expense

     79        79   

Bad debt expense

     34        11   

Noncash stock compensation

     379        329   

Noncash interest expense

     318        133   

Loss on extinguishment of debt

     227        —    

Gain on real estate dispositions

     (6,197     —    

Change in the fair value of derivatives

     147        (93

Changes in operating assets and liabilities, net of acquisitions:

    

Property assets

     (1,101     (1,311

Property liabilities

     381        11   

Construction assets

     (8,551     (109

Construction liabilities

     1,402        (2,003
  

 

 

   

 

 

 

Net cash (used for) provided by operating activities

  (404 )   3,213   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

Development of real estate investments

  (20,951   (20,320

Tenant and building improvements

  (1,203   (2,495

Acquisitions of real estate investments, net of cash acquired

  —       (2,895

Dispositions of real estate investments

  15,224      —    

Decrease (increase) in restricted cash

  762      (35

Leasing costs

  (1,337   (153

Leasing incentives

  (825   —    
  

 

 

   

 

 

 

Net cash used for investing activities

  (8,330   (25,898
  

 

 

   

 

 

 

FINANCING ACTIVITIES

Debt issuances, credit facility and construction loan borrowings

  125,467      23,269   

Debt and credit facility payments, including principal amortization

  (103,637   (714

Debt issuance costs

  (1,132   (4

Offering costs

  —       (149

Dividends and distributions

  (6,368   (5,155
  

 

 

   

 

 

 

Net cash provided by financing activities

  14,330      17,247   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

  5,596      (5,438

Cash and cash equivalents, beginning of period

  25,883      18,882   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

$ 31,479    $ 13,444   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

ARMADA HOFFLER PROPERTIES, INC.

Notes to Condensed Consolidated 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, 2015, the Company’s operating property portfolio comprised the following:

 

Property

   Segment   

Location

4525 Main Street    Office    Virginia Beach, Virginia
Armada Hoffler Tower    Office    Virginia Beach, Virginia
Commonwealth of Virginia – Chesapeake    Office    Chesapeake, Virginia
Commonwealth of Virginia – Virginia Beach    Office    Virginia Beach, Virginia
Oceaneering    Office    Chesapeake, Virginia
One Columbus    Office    Virginia Beach, Virginia
Oyster Point    Office    Newport News, Virginia
Richmond Tower    Office    Richmond, Virginia
Two Columbus    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
Dimmock Square    Retail    Colonial Heights, Virginia
Fountain Plaza Retail    Retail    Virginia Beach, Virginia
Gainsborough Square    Retail    Chesapeake, Virginia
Greentree Shopping Center    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
Sandbridge Commons    Retail    Virginia Beach, Virginia
South Retail    Retail    Virginia Beach, Virginia
Studio 56 Retail    Retail    Virginia Beach, Virginia
Tyre Neck Harris Teeter    Retail    Portsmouth, Virginia
Encore Apartments    Multifamily    Virginia Beach, Virginia
Liberty Apartments    Multifamily    Newport News, Virginia
Smith’s Landing    Multifamily    Blacksburg, Virginia
The Cosmopolitan    Multifamily    Virginia Beach, Virginia
Whetstone Apartments    Multifamily    Durham, North Carolina

As of March 31, 2015, the following properties were either under development or construction:

 

Property

   Segment    Location
Lightfoot Marketplace    Retail    Williamsburg, Virginia
Johns Hopkins Village    Multifamily    Baltimore, Maryland

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.

 

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Table of Contents
2. Summary of Significant Accounting Policies

Basis of Presentation

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

The condensed 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.

In the opinion of management, the condensed consolidated 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 condensed consolidated 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 financial statements of the Company included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.

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 condensed consolidated 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, 2014, among others.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued a new standard that provides a single, comprehensive model for recognizing revenue from contracts with customers. While the new standard does not supersede the guidance on accounting for leases, it could change the way the Company recognizes revenue from construction and development contracts with third party customers. The new standard will be effective for the Company beginning on January 1, 2017. Early adoption is not permitted. Management is currently evaluating the potential impact of the new revenue recognition standard on the Company’s consolidated financial statements.

Current accounting guidance requires debt issuance costs to be presented in the balance sheet as an asset. On April 7, 2015, the FASB issued new guidance that requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation of a debt discount, rather than as an asset. The new guidance is effective for the Company on January 1, 2016 and will be applied on a retrospective basis. Management does not expect the adoption of the new guidance to have a material effect on the Company’s financial position or results of operations.

 

3. Segments

Net operating income (segment revenues minus segment expenses) is the measure used by the Company’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 income in the same manner. The Company 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 the Company’s real estate and construction businesses.

 

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Table of Contents

Net operating income of the Company’s reportable segments for the three months ended March 31, 2015 and 2014 was as follows (in thousands):

 

     Three Months Ended
March 31,
 
     2015      2014  
     (Unaudited)  

Office real estate

     

Rental revenues

   $ 7,703       $ 6,549   

Rental expenses

     1,754         1,587   

Real estate taxes

     691         544   
  

 

 

    

 

 

 

Segment net operating income

  5,258      4,418   
  

 

 

    

 

 

 

Retail real estate

Rental revenues

  6,625      5,770   

Rental expenses

  1,399      1,322   

Real estate taxes

  566      503   
  

 

 

    

 

 

 

Segment net operating income

  4,660      3,945   
  

 

 

    

 

 

 

Multifamily residential real estate

Rental revenues

  3,862      2,874   

Rental expenses

  1,607      1,067   

Real estate taxes

  400      296   
  

 

 

    

 

 

 

Segment net operating income

  1,855      1,511   
  

 

 

    

 

 

 

General contracting and real estate services

Segment revenues

  29,071      19,234   

Segment expenses

  28,142      17,985   
  

 

 

    

 

 

 

Segment net operating income

  929      1,249   
  

 

 

    

 

 

 

Net operating income

$ 12,702    $ 11,123   
  

 

 

    

 

 

 

General contracting and real estate services revenues for the three months ended March 31, 2015 and 2014 exclude revenue related to intercompany construction contracts of $8.5 million and $18.7 million, respectively. General contracting and real estate services expenses for the three months ended March 31, 2015 and 2014 exclude expenses related to intercompany construction contracts of $8.4 million and $18.5 million, respectively. General contracting and real estate services expenses for both the three months ended March 31, 2015 and 2014 include 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, 2015 and 2014 (in thousands):

 

     Three Months Ended
March 31,
 
     2015      2014  
     (Unaudited)  

Net operating income

   $ 12,702       $ 11,123   

Depreciation and amortization

     (4,908      (3,969

General and administrative expenses

     (2,328      (2,046

Acquisition, development and other pursuit costs

     (171      —    

Interest expense

     (3,046      (2,565

Loss on extinguishment of debt

     (227      —    

Gain on real estate dispositions

     6,197         —    

Other (loss) income

     (132      112   

Income tax benefit (provision)

     31         (149
  

 

 

    

 

 

 

Net income

$ 8,118    $ 2,506   
  

 

 

    

 

 

 

General and administrative expenses represent costs not directly associated with the operation and management of the Company’s real estate properties and general contracting and real estate services businesses. 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, 2015 and 2014 include noncash stock compensation of $0.3 million and $0.2 million, respectively.

 

4. Real Estate Investments

On January 5, 2015, the Company completed the sale of the Sentara Williamsburg office property for $15.4 million in cash. Net proceeds to the Company after transaction costs were $15.2 million. The Company recognized a gain on the disposition of the Sentara Williamsburg office property of $6.2 million.

On January 9, 2015, the Company entered into an agreement to purchase a 57,000 square foot grocery store anchored retail center in Myrtle Beach, South Carolina for $8.7 million, including the assumption of approximately $5.1 million of debt. The transaction is subject to customary closing conditions and is expected to close in the second quarter of 2015.

On February 13, 2015, the Company agreed to the future sale of the Oyster Point office property for $6.5 million in cash. The Company intends to complete the sale on January 15, 2017.

On February 26, 2015, the Company entered into a definitive agreement to sell Whetstone Apartments for $35.6 million. The transaction is subject to customary closing conditions and is expected to close in the second quarter of 2015. The Company has presented Whetstone Apartments as real estate held for sale in the March 31, 2015 condensed consolidated balance sheet.

On March 31, 2015, the Company purchased land held for development in Virginia Beach, Virginia for $1.2 million.

Subsequent to March 31, 2015

On April 8, 2015, the Company completed the acquisitions of Stone House Square in Hagerstown, Maryland and Perry Hall Marketplace in Perry Hall, Maryland. The total consideration transferred to acquire both retail properties was $35.4 million of cash, including the $15.2 million of net proceeds from the Sentara Williamsburg sale, and 415,500 shares of common stock. The Company is currently evaluating the accounting for these acquisitions and anticipates that the consideration transferred will primarily be allocated to the buildings, land and acquired lease intangibles.

 

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5. Indebtedness

On January 23, 2015, the Operating Partnership borrowed $5.0 million under the credit facility. The credit facility was scheduled to mature on May 13, 2016; however, the Operating Partnership repaid all amounts due under the credit facility with proceeds from a new credit facility and terminated the existing credit facility on February 20, 2015, as discussed below.

New Credit Facility

On February 20, 2015, the Operating Partnership, as borrower, and the Company as parent guarantor, agreed to a new $200.0 million senior unsecured credit facility that includes a $150.0 million senior unsecured revolving credit facility and a $50.0 million senior unsecured term loan facility. The new credit facility replaced the existing $155.0 million senior secured revolving credit facility that was scheduled to mature on May 13, 2016. On February 20, 2015, the Operating Partnership borrowed $54.0 million under the revolving credit facility and $50.0 million under the term loan facility to repay in full all outstanding amounts due under the prior credit facility and to repay approximately $39.0 million of other indebtedness secured by the following properties in the Company’s portfolio: (i) Broad Creek Shopping Center, (ii) Commerce Street Retail, (iii) Dick’s at Town Center, (iv) Hanbury Village, (v) Studio 56 Retail and (vi) Tyre Neck Harris Teeter. The Company recognized a $0.2 million loss on extinguishment of debt representing the unamortized debt issuance costs associated with the $39.0 million of other indebtedness repaid on February 20, 2015.

Depending on the Operating Partnership’s total leverage, the revolving credit facility bears interest at LIBOR plus 1.40% to 2.00% and the term loan facility bears interest at LIBOR plus 1.35% to 1.95%. As of March 31, 2015, the interest rate on the revolving credit facility and the term loan facility was 1.73% and 1.68%, respectively. The revolving credit facility has a scheduled maturity date of February 20, 2019, with a one-year extension option and the term loan facility has a scheduled maturity date of February 20, 2020. The Operating Partnership may, at any time, voluntarily prepay any loan under the new credit facility in whole or in part without premium or penalty.

On March 31, 2015, the Operating Partnership borrowed $6.0 million under the revolving credit facility. As of March 31, 2015, the outstanding balance on the revolving credit facility was $60.0 million.

During the three months ended March 31, 2015, the Company borrowed $10.5 million under its existing construction loans to fund new development and construction.

Subsequent to March 31, 2015

On April 7, 2015, the Operating Partnership borrowed $23.0 million under the revolving credit facility.

 

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6. Derivative Financial Instruments

The Company may enter into interest rate derivative contracts to manage exposure to interest rate risks. The Company does not use derivative financial instruments for trading or speculative purposes. Derivative financial instruments are recognized at fair value and presented within other assets and liabilities in the condensed consolidated balance sheets. Gains and losses resulting from changes in the fair value of derivatives that are not designated or do not qualify as hedging instruments are recognized within other income (expense) in the condensed consolidated statements of comprehensive income. For derivatives that qualify as cash flow hedges, the effective portion of the gain or loss is reported as a component of other comprehensive income and reclassified into earnings in the periods during which the hedged forecasted transaction affects earnings.

On February 20, 2015, the Operating Partnership entered into a $50.0 million floating-to-fixed interest rate swap attributable to one-month LIBOR indexed interest payments. The $50.0 million interest rate swap has a fixed rate of 2.00%, an effective date of March 1, 2016 and a maturity date of February 20, 2020. The Operating Partnership entered into this interest rate swap agreement in connection with the new $50.0 million senior unsecured term loan facility that bears interest at LIBOR plus 1.35% to 1.95%, depending on the Operating Partnership’s total leverage. The Company designated this interest rate swap as a cash flow hedge of variable interest payments based on one-month LIBOR.

The Company’s derivatives comprised the following as of March 31, 2015 and December 31, 2014 (in thousands):

 

     March 31, 2015     December 31, 2014  
     (Unaudited)                      
     Notional
Amount
     Fair Value     Notional
Amount
     Fair Value  
            Asset      Liability            Asset      Liability  

Interest rate swaps

   $ 50,680       $ —         $ (798   $ 685       $ —         $ (11

Interest rate caps

     180,373         114         —          180,434         260         —     
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

$ 231,053    $ 114    $ (798 $ 181,119    $ 260    $ (11
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

The changes in the fair value of the Company’s derivatives during the three months ended March 31, 2015 and 2014 comprised the following (in thousands):

 

     Three Months Ended
March 31,
 
     2015      2014  
     (Unaudited)  

Interest rate swaps

   $ (787 )    $ 2   

Interest rate caps

     (146 )      91   
  

 

 

    

 

 

 

Total

$ (933 ) $ 93   
  

 

 

    

 

 

 

Comprehensive income statement presentation:

Other (loss) income

$ (147 ) $ 93   

Unrealized loss on cash flow hedge

  (786 )   —     
  

 

 

    

 

 

 

Total

$ (933 ) $ 93   
  

 

 

    

 

 

 

 

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7. Equity

Stockholders’ Equity

As of March 31, 2015 and December 31, 2014, the Company’s authorized capital was 500 million shares of common stock and 100 million shares of preferred stock. The Company had 25.1 million and 25.0 million shares of common stock issued and outstanding as of March 31, 2015 and December 31, 2014, respectively. No shares of preferred stock were issued and outstanding as of March 31, 2015 or December 31, 2014.

Noncontrolling Interests

As of both March 31, 2015 and December 31, 2014, the Company held a 62.9% interest in the Operating Partnership. 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 limited partnership interest in the Operating Partnership (“OP Units”) not held by the Company.

Common Stock Dividends and OP Unit Distributions

On January 8, 2015, the Company paid cash dividends of $4.0 million to common stockholders and the Operating Partnership paid cash distributions of $2.4 million to holders of OP Units.

On January 28, 2015, the Board of Directors declared a cash dividend of $0.17 per share to stockholders of record on April 1, 2015.

Subsequent to March 31, 2015

On April 8, 2015, the Company issued 415,500 shares of common stock as partial consideration for the acquisition of Perry Hall Marketplace.

On April 9, 2015, the Company paid cash dividends of $4.3 million to common stockholders and the Operating Partnership paid cash distributions of $2.5 million to holders of OP Units.

 

8. Stock-Based Compensation

During the three months ended March 31, 2015, the Company granted 75,800 shares of restricted stock to employees and nonemployee directors with a weighted average grant date fair value of $10.97 per share. Employee restricted stock awards generally 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. Nonemployee director restricted stock awards vest either immediately upon grant or over a period of one year, subject to continued service to the Company.

During both the three months ended March 31, 2015 and 2014, the Company recognized $0.6 million of stock-based compensation. As of March 31, 2015, there were 159,467 nonvested restricted shares outstanding; the total unrecognized compensation related to nonvested restricted shares was $0.7 million, most of which the Company expects to recognize over the next 15 months.

 

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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 the Company’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. The Company 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 the Company’s long term 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 the Company’s long term 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 the Company’s financial instruments, all of which are based on Level 2 inputs, as of March 31, 2015 and December 31, 2014 were as follows (in thousands):

 

     March 31, 2015      December 31, 2014  
     Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 
     (Unaudited)                

Indebtedness

   $ 363,730       $ 373,618       $ 359,229       $ 366,095   

Interest rate swap liabilities

     798         798         11         11   

Interest rate cap assets

     114         114         260         260   

 

10. Related Party Transactions

The Company provides general contracting and real estate services to certain related party entities that are not included in these condensed consolidated financial statements. Revenue from construction contracts with related party entities of the Company was $1.5 million and $2.3 million for the three months ended March 31, 2015 and 2014, respectively. Operating margin from such contracts was less than $0.1 million and $0.1 million for the three months ended March 31, 2015 and 2014, respectively. Real estate services fees from affiliated entities of the Company were not significant for either the three months ended March 31, 2015 or 2014. In addition, affiliated entities also reimburse the Company for monthly maintenance and facilities management services provided to the properties. Cost reimbursements earned by the Company from affiliated entities were not significant for either the three months ended March 31, 2015 or 2014.

On March 31, 2015, the Company acquired the option to purchase land in Virginia Beach, Virginia for future development from certain of its executives, officers and directors. As consideration for the land option, the Company reimbursed such executives, officers and directors $0.2 million for the real estate taxes and insurance costs they incurred with respect to this land. On March 31, 2015, the Company exercised the option on the land, which is presented as real estate held for development in the condensed consolidated balance sheet.

 

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11. Commitments and Contingencies

Legal Proceedings

The Company 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.

The Company currently is a party to various legal proceedings, none of which management expects will have a material adverse effect on the Company’s financial position, results of operations or liquidity. Management accrues a liability for litigation if an unfavorable outcome is determined to be probable and the amount of loss can be reasonably estimated. If an unfavorable outcome is determined to be probable and a range of loss can be reasonably estimated, management 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. Management 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 the Company’s leases, tenants are typically obligated to indemnify the Company 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

The Company 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 $199.4 million and $192.2 million as of March 31, 2015 and December 31, 2014, 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 both March 31, 2015 and December 31, 2014, the Operating Partnership had total outstanding letters of credit of $8.5 million.

 

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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. as of March 31, 2015, and the related condensed consolidated statements of comprehensive income and cash flows for the three-month periods ended March 31, 2015 and 2014 and the condensed consolidated statement of equity for the three-month period ended March 31, 2015. 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 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, 2014, and the related consolidated 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 financial statements in our report dated March 16, 2015. In our opinion, the accompanying condensed consolidated balance sheet as of December 31, 2014, 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 5, 2015

 

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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 (the “Operating Partnership”), of which we are the sole general partner.

Forward-Looking Statements

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report. This report contains forward-looking statements within the meaning of the federal securities laws. We caution investors that any forward-looking statements presented in this report, or which management may make orally or in writing from time to time, are based on management’s beliefs and assumptions made by, and information currently available to, management. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “result” and similar expressions, which do not relate solely to historical matters, are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We caution you that while forward-looking statements reflect our good faith beliefs when we make them, they are not guarantees of future performance and are impacted by actual events when they occur after we make such statements. We expressly disclaim any responsibility to update forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.

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 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, acquisition or disposition opportunities;

 

    our failure to successfully operate developed and acquired properties;

 

    our failure to generate income in our general contracting and real estate services 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;

 

    our inability to extend the maturity of or refinance existing debt or comply with the financial covenants in the agreements that govern our existing debt;

 

    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;

 

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    our failure to 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 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.

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, 2015, our operating property portfolio comprised the following:

 

Property

   Segment   

Location

4525 Main Street    Office    Virginia Beach, Virginia
Armada Hoffler Tower    Office    Virginia Beach, Virginia
Commonwealth of Virginia – Chesapeake    Office    Chesapeake, Virginia
Commonwealth of Virginia – Virginia Beach    Office    Virginia Beach, Virginia
Oceaneering    Office    Chesapeake, Virginia
One Columbus    Office    Virginia Beach, Virginia
Oyster Point    Office    Newport News, Virginia
Richmond Tower    Office    Richmond, Virginia
Two Columbus    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
Dimmock Square    Retail    Colonial Heights, Virginia
Fountain Plaza Retail    Retail    Virginia Beach, Virginia
Gainsborough Square    Retail    Chesapeake, Virginia
Greentree Shopping Center    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
Sandbridge Commons    Retail    Virginia Beach, Virginia
South Retail    Retail    Virginia Beach, Virginia
Studio 56 Retail    Retail    Virginia Beach, Virginia
Tyre Neck Harris Teeter    Retail    Portsmouth, Virginia
Encore Apartments    Multifamily    Virginia Beach, Virginia
Liberty Apartments    Multifamily    Newport News, Virginia
Smith’s Landing    Multifamily    Blacksburg, Virginia
The Cosmopolitan    Multifamily    Virginia Beach, Virginia
Whetstone Apartments    Multifamily    Durham, North Carolina

 

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As of March 31, 2015, the following properties were either under development or construction:

 

Property

   Segment   

Location

Lightfoot Marketplace    Retail    Williamsburg, Virginia
Johns Hopkins Village    Multifamily    Baltimore, Maryland

First Quarter 2015 Highlights

The following highlights our results of operations and significant transactions for the three months ended March 31, 2015:

 

    Net income of $8.1 million or $0.20 per diluted share compared to $2.5 million or $0.08 per diluted share for the three months ended March 31, 2014.

 

    Funds from operations (“FFO”) of $6.8 million or $0.17 per diluted share compared to $6.5 million or $0.20 per diluted share for the three months ended March 31, 2014. See “Non-GAAP Financial Measures.”

 

    Normalized FFO of $7.4 million or $0.19 per diluted share compared to $6.4 million or $0.19 per diluted share for the three months ended March 31, 2014. See “Non-GAAP Financial Measures.”

 

    Net operating income (“NOI”) of $12.7 million compared to $11.1 million for the three months ended March 31, 2014:

 

    Office NOI of $5.3 million compared to $4.4 million

 

    Retail NOI of $4.7 million compared to $3.9 million

 

    Multifamily NOI of $1.9 million compared to $1.5 million

 

    General contracting and real estate services NOI of $0.9 million compared to $1.2 million

 

    Same store NOI of $10.0 million compared to $9.6 million for the three months ended March 31, 2014:

 

    Office same store NOI of $4.1 million compared to $4.0 million

 

    Retail same store NOI of $4.1 million compared to $3.9 million

 

    Multifamily same store NOI of $1.7 million compared to $1.6 million

 

    Delivered three new office properties – the two Commonwealth of Virginia office buildings and the Oceaneering International facility – in addition to one new retail property – Sandbridge Commons – in Hampton Roads, Virginia.

 

    Completed the disposition of the Sentara Williamsburg office building.

 

    Closed on a new $200.0 million senior unsecured credit facility that includes a $150.0 million revolving credit facility and a $50.0 million term loan.

 

    Third party construction backlog of $138.4 million as of March 31, 2015.

 

    Declared cash dividends of $0.17 per share.

 

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Segment Results of Operations

As of March 31, 2015, 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 (“TRS”). 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. NOI 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, NOI should not be considered an alternative to cash flows as a measure of liquidity. Not all companies calculate NOI in the same manner. We consider NOI to be an appropriate supplemental measure to net income because it assists both investors and management in understanding the core operations of our real estate and construction businesses. See Note 3 to our condensed consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q for a reconciliation of NOI to net income.

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.

Office Segment Data

 

     Three Months Ended
March 31,
        
     2015      2014      Change  
     ($ in thousands)         

Rental revenues

   $ 7,703       $ 6,549       $ 1,154   

Property expenses

     2,445         2,131         314   
  

 

 

    

 

 

    

 

 

 

Segment NOI

$ 5,258    $ 4,418    $ 840   
  

 

 

    

 

 

    

 

 

 

Office segment NOI for the three months ended March 31, 2015 increased $0.8 million compared to the three months ended March 31, 2014. During the first quarter of 2015, we realized $1.1 million of NOI from new real estate development, which more than offset $0.4 million of lost NOI from property dispositions. Same store NOI growth accounted for the balance of the change. During the second half of 2014, we opened the new 4525 Main Street office tower in the Town Center of Virginia Beach and during the first quarter of 2015, we delivered three new build-to-suit office buildings in Hampton Roads, Virginia. We completed the sales of the Virginia Natural Gas and Sentara Williamsburg office buildings in the fourth quarter of 2014 and the first quarter of 2015, respectively.

Office Same Store Results

Office same store results exclude new real estate development – 4525 Main Street, the two administrative buildings for the Commonwealth of Virginia in Chesapeake and Virginia Beach and the Oceaneering International facility – as well as the Virginia Natural Gas and Sentara Williamsburg office buildings, which we sold in the fourth quarter of 2014 and the first quarter of 2015, respectively.

Office same store rental revenues, property expenses and NOI for the three months ended March 31, 2015 and 2014 were as follows:

 

     Three months ended
March 31,
        
     2015      2014      Change  
     ($ in thousands)         

Rental revenues

   $ 6,249       $ 6,125       $ 124   

Property expenses

     2,106         2,095         11   
  

 

 

    

 

 

    

 

 

 

Same Store NOI

$ 4,143    $ 4,030    $ 113   

Non-Same Store NOI

  1,115      388      727   
  

 

 

    

 

 

    

 

 

 

Segment NOI

$ 5,258    $ 4,418    $ 840   
  

 

 

    

 

 

    

 

 

 

Office same store NOI for the three months ended March 31, 2015 increased 2.8% compared to the three months ended March 31, 2014 because of better leasing at the office properties in the Town Center of Virginia Beach – One Columbus, Two Columbus and Armada Hoffler Tower.

 

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Retail Segment Data

 

     Three Months Ended
March 31,
        
     2015      2014      Change  
     ($ in thousands)         

Rental revenues

   $ 6,625       $ 5,770       $ 855   

Property expenses

     1,965         1,825         140   
  

 

 

    

 

 

    

 

 

 

Segment NOI

$ 4,660    $ 3,945    $ 715   
  

 

 

    

 

 

    

 

 

 

Retail segment NOI for the three months ended March 31, 2015 increased $0.7 million compared to the three months ended March 31, 2014. Acquisitions and new real estate development added $0.5 million of NOI during the first quarter of 2015; same store NOI growth accounted for the balance of the change. During the second half of 2014, we acquired Dimmock Square in Colonial Heights, Virginia and delivered Greentree Shopping Center in Chesapeake, Virginia. At the end of the first quarter of 2015, we delivered Sandbridge Commons in Virginia Beach, Virginia.

Retail Same Store Results

Retail same store results exclude new real estate development – Greentree Shopping Center and Sandbridge Commons – as well as Dimmock Square, which we acquired in the third quarter of 2014.

Retail same store rental revenues, property expenses and NOI for the three months ended March 31, 2015 and 2014 were as follows:

 

     Three months ended
March 31,
        
     2015      2014      Change  
     ($ in thousands)         

Rental revenues

   $ 5,987       $ 5,770       $ 217   

Property expenses

     1,850         1,825         25   
  

 

 

    

 

 

    

 

 

 

Same Store NOI

$ 4,137    $ 3,945    $ 192   

Non-Same Store NOI

  523      —        523   
  

 

 

    

 

 

    

 

 

 

Segment NOI

$ 4,660    $ 3,945    $ 715   
  

 

 

    

 

 

    

 

 

 

Retail same store NOI for the three months ended March 31, 2015 increased 4.9% compared to the three months ended March 31, 2014 because of better leasing at retail properties in the Town Center of Virginia Beach, particularly South Retail and the redeveloped ground floor space at Dick’s at Town Center.

 

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Multifamily Segment Data

 

     Three Months Ended
March 31,
        
     2015      2014      Change  
     ($ in thousands)         

Rental revenues

   $ 3,862       $ 2,874       $ 988   

Property expenses

     2,007         1,363         644   
  

 

 

    

 

 

    

 

 

 

Segment NOI

$ 1,855    $ 1,511    $ 344   
  

 

 

    

 

 

    

 

 

 

Multifamily segment NOI for the three months ended March 31, 2015 increased $0.3 million compared to the three months ended March 31, 2014 because of better leasing at Liberty Apartments and The Cosmopolitan. NOI from Smith’s Landing increased 2.9% year-over-year and NOI from new real estate development was not significant for the first quarter of 2015.

Multifamily Same Store Results

Multifamily same store results exclude new real estate development – Encore Apartments and Whetstone Apartments – as well as Liberty Apartments, which was acquired during the first quarter of 2014.

Multifamily same store rental revenues, property expenses and NOI for the three months ended March 31, 2015 and 2014 were as follows:

 

     Three months ended
March 31,
        
     2015      2014      Change  
     ($ in thousands)         

Rental revenues

   $ 2,937       $ 2,791       $ 146   

Property expenses

     1,250         1,208         42   
  

 

 

    

 

 

    

 

 

 

Same Store NOI

$ 1,687    $ 1,583    $ 104   

Non-Same Store NOI

  168      (72   240   
  

 

 

    

 

 

    

 

 

 

Segment NOI

$ 1,855    $ 1,511    $ 344   
  

 

 

    

 

 

    

 

 

 

Multifamily same store NOI for the three months ended March 31, 2015 increased 6.6% compared to the three months ended March 31, 2014 because of better leasing at The Cosmopolitan in the Town Center of Virginia Beach. NOI from Smith’s Landing also increased 2.9% year-over-year.

 

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General Contracting and Real Estate Services Segment Data

 

     Three Months Ended
March 31,
       
     2015     2014     Change  
     ($ in thousands)        

Segment revenues

   $ 29,071      $ 19,234      $ 9,837   

Segment expenses

     28,142        17,985        10,157   
  

 

 

   

 

 

   

 

 

 

Segment NOI

$ 929    $ 1,249    $ (320
  

 

 

   

 

 

   

 

 

 

Operating margin

  3.2   6.5   (3.3 )% 

Segment NOI for the three months ended March 31, 2015 decreased $0.3 million compared to the three months ended March 31, 2014. While our overall construction volume was up over 51% year-over-year, we experienced lower operating margins during the first quarter of 2015.

The changes in third party construction backlog for the three months ended March 31, 2015 and 2014 were as follows:

 

     Three Months Ended March 31,  
     2015      2014  
     ($ in thousands)  

Beginning backlog

   $ 159,139       $ 46,385   

New contracts/change orders

     8,329         165,947   

Work performed

     (29,020      (19,014
  

 

 

    

 

 

 

Ending backlog

$ 138,448    $ 193,318   
  

 

 

    

 

 

 

As of March 31, 2015, we had $109.3 million of backlog on the Exelon construction project at the Inner Harbor of Baltimore, which we expect to substantially complete in 2016.

 

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Consolidated Results of Operations

The following table summarizes the results of operations for the three months ended March 31, 2015 and 2014:

 

     Three months ended
March 31,
        
     2015      2014      Change  
     ($ in thousands)         

Rental revenues

   $ 18,190       $ 15,193       $ 2,997   

General contracting and real estate services revenues

     29,071         19,234         9,837   
  

 

 

    

 

 

    

 

 

 

Total revenues

  47,261      34,427      12,834   

Rental expenses

  4,760      3,976      784   

Real estate taxes

  1,657      1,343      314   

General contracting and real estate services expenses

  28,142      17,985      10,157   

Depreciation and amortization

  4,908      3,969      939   

General and administrative expenses

  2,328      2,046      282   

Acquisition, development and other pursuit costs

  171      —       171   
  

 

 

    

 

 

    

 

 

 

Total expenses

  41,966      29,319      12,647   
  

 

 

    

 

 

    

 

 

 

Operating income

  5,295      5,108      187   
  

 

 

    

 

 

    

 

 

 

Interest expense

  (3,046   (2,565   (481 )

Loss on extinguishment of debt

  (227   —       (227

Gain on real estate dispositions

  6,197      —       6,197   

Other (loss) income

  (132 )   112      (244
  

 

 

    

 

 

    

 

 

 

Income before taxes

  8,087      2,655      5,432   

Income tax benefit (provision)

  31      (149   180   
  

 

 

    

 

 

    

 

 

 

Net income

$ 8,118    $ 2,506    $ 5,612   
  

 

 

    

 

 

    

 

 

 

Rental revenues for the three months ended March 31, 2015 increased $3.0 million compared to the three months ended March 31, 2014, as follows:

 

     Three months ended
March 31,
        
     2015      2014      Change  
     ($ in thousands)         

Office

   $ 7,703       $ 6,549       $ 1,154   

Retail

     6,625         5,770         855   

Multifamily

     3,862         2,874         988   
  

 

 

    

 

 

    

 

 

 
$ 18,190    $ 15,193    $ 2,997   
  

 

 

    

 

 

    

 

 

 

Office rental revenues increased 17.6% because of rents from new real estate development, which more than offset lost rents from property dispositions. Aggregate first quarter 2015 rental revenues from 4525 Main Street and the three build-to-suit office buildings we delivered during the first quarter was $1.4 million. Same store rental revenues also grew 2.0% during the first quarter of 2015, driven primarily by better leasing at our office buildings located in the Town Center of Virginia Beach. Retail rental revenues increased 14.8% as a result of our acquisition of Dimmock Square, our delivery of Greentree Shopping Center as well as organic growth in the same store property portfolio. Multifamily rental revenues increased 34.4% because of improved leasing at Liberty Apartments and The Cosmopolitan as well as our delivery of Encore Apartments.

General contracting and real estate services revenues for the three months ended March 31, 2015 increased $9.8 million compared to the three months ended March 31, 2014 as a result of higher construction volume, primarily on the Exelon construction project.

 

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Rental expenses for the three months ended March 31, 2015 increased $0.8 million compared to the three months ended March 31, 2014, as follows:

 

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

Office

   $ 1,754       $ 1,587       $ 167   

Retail

     1,399         1,322         77   

Multifamily

     1,607         1,067         540   
  

 

 

    

 

 

    

 

 

 
$ 4,760    $ 3,976    $ 784   
  

 

 

    

 

 

    

 

 

 

Office, retail and multifamily rental expenses all increased as a result of new real estate coming out of development and into operation. Retail rental expenses also increased as a result of our acquisition of Dimmock Square.

Real estate taxes for the three months ended March 31, 2015 increased $0.3 million compared to the three months ended March 31, 2014, as follows:

 

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

Office

   $ 691       $ 544       $ 147   

Retail

     566         503         63   

Multifamily

     400         296         104   
  

 

 

    

 

 

    

 

 

 
$ 1,657    $ 1,343    $ 314   
  

 

 

    

 

 

    

 

 

 

Office, retail and multifamily real estate taxes all increased as a result of new real estate coming out of development and into operation. Retail real estate taxes also increased as a result of our acquisition of Dimmock Square.

General contracting and real estate services expenses for the three months ended March 31, 2015 increased $10.2 million compared to the three months ended March 31, 2014 because of higher volume and tighter margins on our construction contracts.

Depreciation and amortization for the three months ended March 31, 2015 increased $0.9 million compared to the three months ended March 31, 2014 because of new real estate coming out of development and into operation and our acquisition of Dimmock Square.

General and administrative expenses for the three months ended March 31, 2015 increased $0.3 million compared to the three months ended March 31, 2014 because of higher regulatory and compliance costs.

Acquisition, development and other pursuit costs for the three months ended March 31, 2015 increased $0.2 million compared to the three months ended March 31, 2014. We closed on the acquisitions of Perry Hall Marketplace and Stone House Square shortly after the first quarter. We did not have any comparable acquisition activity during the first quarter of last year.

Interest expense for the three months ended March 31, 2015 increased $0.5 million compared to the three months ended March 31, 2014 primarily because of the interest expense associated with new real estate coming out of development and into operation.

During the three months ended March 31, 2015, we recognized a $0.2 million loss on extinguishment of debt representing the unamortized debt issuance costs associated with the mortgage loans we repaid in connection with the closing of our new credit facility.

During the three months ended March 31, 2015, we recognized a $6.2 million gain on our sale of the Sentara Williamsburg office building.

Other (loss) income for the three months ended March 31, 2015 decreased $0.2 million compared to the three months ended March 31, 2014 because of negative mark-to-market adjustments on our interest rate derivatives.

 

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During the three months ended March 31, 2015, we recognized a slight income tax benefit compared to a $0.1 million income tax provision during the three months ended March 31, 2014. The income tax benefit (provision) that we recognize is attributable to the taxable profits and losses of our development and construction businesses that we operate through our TRS.

Liquidity and Capital Resources

Overview

We believe our primary short-term liquidity requirements consist of general contractor 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 also may fund property development and acquisitions and capital improvements using our credit facility pending long-term financing.

As of March 31, 2015, we had unrestricted cash and cash equivalents of $31.5 million and restricted cash of $4.0 million available for both current liquidity needs as well as development activities. As of March 31, 2015, we had $81.5 million available under our new credit facility to meet our short-term liquidity requirements.

Credit Facility

On May 13, 2013, we agreed to a $100.0 million senior secured credit facility that included an accordion feature that allowed us to increase the borrowing capacity under the facility up to $250.0 million, subject to certain conditions. As of December 31, 2014, we had $59.0 million borrowed under the credit facility and had standby letters of credit issued under the credit facility totaling $8.5 million. As of December 31, 2014, we had $87.5 million of aggregate capacity available under the credit facility. On January 23, 2015, we borrowed an additional $5.0 million under the credit facility. The credit facility was scheduled to mature on May 13, 2016; however, we repaid all amounts due under the credit facility with proceeds from our new credit facility and terminated the existing credit facility on February 20, 2015, as discussed below.

New Credit Facility

On February 20, 2015, we agreed to a new $200.0 million senior unsecured credit facility that includes a $150.0 million senior unsecured revolving credit facility and a $50.0 million senior unsecured term loan facility. The new credit facility replaced the existing $155.0 million senior secured revolving credit facility that was scheduled to mature on May 13, 2016. On February 20, 2015, we borrowed $54.0 million under the revolving credit facility and $50.0 million under the term loan facility to repay in full all outstanding amounts due under the prior credit facility and to repay approximately $39.0 million of other indebtedness secured by properties in our portfolio for the purpose of unencumbering those properties. We intend to use future borrowings under the new credit facility for general corporate purposes, including funding acquisitions, development and redevelopment of properties in our portfolio and for working capital.

The new credit facility includes an accordion feature that allows the total commitments to be increased to $350.0 million, subject to certain conditions. The amount permitted to be borrowed under the new credit facility, together with all of our other unsecured indebtedness is generally limited to the lesser of: (i) 60% of the value of our unencumbered borrowing base properties, (ii) the maximum amount of principal that would result in a debt service coverage ratio of 1.50 to 1.0, and (iii) the maximum aggregate loan commitment, which currently is $200.0 million.

The new revolving credit facility has a scheduled maturity date of February 20, 2019, with a one-year extension option. The term loan facility has a scheduled maturity date of February 20, 2020. We may, at any time, voluntarily prepay any loan under the new credit facility in whole or in part without premium or penalty.

The new revolving credit facility bears interest at LIBOR plus 1.40% to 2.00%, depending on our total leverage. The term loan facility bears interest at LIBOR plus 1.35% to 1.95%, depending on our total leverage. We are also obligated to pay an unused commitment fee of 15 or 25 basis points on the unused portions of the commitments under the new credit facility, depending on the amount of borrowings under the new credit facility. If we attain investment grade credit ratings from S&P and Moody’s, we may elect to have borrowings become subject to interest rates based on our credit ratings.

 

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The new credit facility requires us to comply with various financial covenants, affirmative covenants and other restrictions, including the following:

 

    Total leverage ratio of the Company of not more than 60%;

 

    Ratio of adjusted EBITDA to fixed charges of the Company of not less than 1.50 to 1.0;

 

    Tangible net worth of not less than the sum of $220.0 million and 75% of the net equity proceeds received after December 31, 2014;

 

    Ratio of variable rate indebtedness to total asset value of not more than 30%;

 

    Ratio of secured indebtedness to total asset value of not more than 45%; and

 

    Ratio of secured recourse debt to total asset value of not more than 25%.

The new credit facility limits our ability to pay cash dividends. However, so long as no default or event of default exists, the credit agreements allow us to pay cash dividends with respect to any 12-month period in an amount not to exceed the greater of: (i) 95% of adjusted funds from operations (as defined in the credit agreement) or (ii) the amount required for us (a) to maintain our status as a REIT and (b) to avoid income or excise tax under the Code. If certain defaults or events of default exist, we may pay cash dividends with respect to any 12-month period to the extent necessary to maintain our status as a REIT. The new credit facility also restricts the amount of capital that we can invest in specific categories of assets, such as unimproved land holdings, development properties, notes receivable, mortgages, mezzanine loans and unconsolidated affiliates.

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

 

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Consolidated Indebtedness

The following table sets forth our consolidated indebtedness as of March 31, 2015 ($ in thousands):

 

Secured Debt    Amount
Outstanding
    Interest
Rate (1)
    Effective Rate for
Variable-Rate
Debt
as of
March 31,
2015
    Maturity Date      Balance at
Maturity
 

Oyster Point

   $ 6,223        5.41 %       December 1, 2015       $ 6,089   

249 Central Park Retail

     15,494        5.99          September 8, 2016         15,084   

South Retail

     6,835        5.99          September 8, 2016         6,655   

Fountain Plaza Retail

     7,747        5.99          September 8, 2016         7,542   

Harrisonburg Regal

     3,610        6.06          June 8, 2017         3,165   

Smith’s Landing

     24,389        LIBOR+2.15        2.33 %     January 31, 2017         23,793   

North Point Note 5

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

Hanbury Village

     21,152        6.67          October 11, 2017         20,499   

4525 Main Street

     31,151        LIBOR+1.95        2.13 %     January 30, 2017         31,151   

Encore Apartments

     23,479        LIBOR+1.95        2.13 %     January 30, 2017         23,479   

Commonwealth of Virginia – Chesapeake

     4,612        LIBOR+1.90        2.08     August 28, 2017         4,612   

Lightfoot Marketplace

     4,525        LIBOR+1.90        2.08     November 14, 2017         4,525   

Sandbridge Commons

     7,493        LIBOR+1.85        2.03 %     January 17, 2018         7,008   

Oceaneering

     17,420        LIBOR+1.75        1.93 %     February 28, 2018         16,700   

North Point Note 1

     10,105        6.45          February 5, 2019         9,333   

North Point Note 2

     2,731        7.25          September 15, 2025         1,344   

Liberty Apartments

     20,532  (3)     5.66          November 1, 2043         —    

The Cosmopolitan

     46,981        3.75          July 1, 2051         —    

Unamortized fair value adjustments

     (1,429 )            —    
  

 

 

          

 

 

 

Total secured debt

$ 253,730    $ 181,620   
Unsecured Debt                                

Revolving credit facility

     60,000        LIBOR+1.40 to 2.00        1.73     February 20, 2019         60,000   

Term loan

     50,000        LIBOR+1.35 to 1.95        1.68 %(2)      February 20, 2020         50,000   
  

 

 

          

 

 

 

Total unsecured debt

$ 110,000    $ 110,000   
  

 

 

          

 

 

 

Indebtedness

$ 363,730    $ 291,620   

Whetstone Apartments

  17,342  (4)    LIBOR+1.90      2.08 %   October 8, 2016      17,342   
  

 

 

          

 

 

 

Total debt

$ 381,072    $ 308,962   
  

 

 

          

 

 

 

 

(1) LIBOR rate is determined by individual lenders.
(2) Subject to an interest rate swap agreement.
(3) Principal balance excluding fair value adjustments.
(4) Secured by real estate held for sale.

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

 

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As of March 31, 2015, our outstanding indebtedness matures during the following years:

 

Year

   Amount Due      Percentage of
Total
 
     ($ in thousands)         

2015

   $ 6,089         2 %

2016

     46,623         15   

2017

     111,865         36   

2018

     23,708         8   

2019

     69,333         22   

Thereafter

     51,344         17   
  

 

 

    

 

 

 
$ 308,962      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, we fixed our interest payments under North Point Center Note 5 at 3.57% through maturity on February 1, 2017. On February 20, 2015, we entered into a $50.0 million floating-to-fixed interest rate swap attributable to one-month LIBOR indexed interest payments. The $50.0 million interest rate swap has a fixed rate of 2.00%, an effective date of March 1, 2016 and a maturity date of February 20, 2020. We entered into this interest rate swap agreement in connection with the new $50.0 million senior unsecured term loan facility that bears interest at LIBOR plus 1.35% to 1.95%, depending on our total leverage. We designated this interest rate swap as a cash flow hedge of variable interest payments based on one-month LIBOR.

As of March 31, 2015, 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   $ 8,827   

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

$ 180,373   
       

 

 

 

As of March 31, 2015, 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%

   $ 117,327   

> 1.50%

     63,046   
  

 

 

 

Total

$ 180,373   
  

 

 

 

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, 2015, we had aggregate outstanding letters of credit totaling $8.5 million all of which expire during 2015. 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,         
     2015      2014      Change  
     ($ in thousands)         

Operating activities

   $ (404 )    $ 3,213       $ (3,617

Investing activities

     (8,330      (25,898      17,568   

Financing activities

     14,330         17,247         (2,917 )
  

 

 

    

 

 

    

 

 

 

Net increase (decrease)

$ 5,596    $ (5,438 $ 11,034   
  

 

 

    

 

 

    

 

 

 

Cash and cash equivalents, beginning of period

$ 25,883    $ 18,882   

Cash and cash equivalents, end of period

$ 31,479    $ 13,444   

Net cash from operating activities decreased $3.6 million during the three months ended March 31, 2015 compared to the three months ended March 31, 2014 because of higher net cash used in our construction business.

Net cash from investing activities increased $17.6 million during the three months ended March 31, 2015 compared to the three months ended March 31, 2014 because of the proceeds from our sale of the Sentara Williamsburg office building.

Net cash from financing activities decreased $2.9 million during the three months ended March 31, 2015 compared to the three months ended March 31, 2014 because of lower net borrowings and higher dividends and distributions.

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 we believe 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 period-over-period, 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 calculation of FFO may not be comparable to such other REITs’ calculation of 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.

We also believe that the computation of FFO in accordance with NAREIT’s definition includes certain items that are not indicative of the results provided by the Company’s operating property portfolio and affect the comparability of the Company’s period-over-period performance. Accordingly, management believes that Normalized FFO is a more useful performance measure that excludes certain items, including but not limited to, debt extinguishment losses and prepayment penalties, property acquisition, development and other pursuit costs, mark-to-market adjustments for interest rate derivatives and other non-comparable items.

 

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The following table sets forth a reconciliation of FFO and Normalized FFO for the three months ended March 31, 2015 and 2014 to net income, the most directly comparable GAAP equivalent:

 

     Three Months Ended
March 31,
 
     2015      2014  
     ($ in thousands)  

Net income

   $ 8,118       $ 2,506   

Depreciation and amortization

     4,908         3,969   

Gain on real estate dispositions

     (6,197 )      —    
  

 

 

    

 

 

 

FFO

$ 6,829    $ 6,475   

Acquisition, development and other pursuit costs

  171      —    

Loss on extinguishment of debt

  227   

Derivative losses (income)

  147      (93
  

 

 

    

 

 

 

Normalized FFO

$ 7,374    $ 6,382   
  

 

 

    

 

 

 

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated 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, 2014.

 

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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 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.

At March 31, 2015, approximately $140.7 million, or 37%, of our debt had fixed interest rates and approximately $240.4 million, or 63%, 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 $2.4 million per year. At March 31, 2015, LIBOR was approximately 18 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 $0.4 million per year.

 

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, 2015, 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, 2015, 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, 2014.

 

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

Unregistered Sales of Equity Securities

On April 8, 2015, Armada Hoffler Properties, Inc. (the “Company”) issued 415,500 shares of the Company’s common stock, $0.01 par value per share (“Common Stock”), as partial consideration in connection with the Company’s acquisition of the property known as Perry Hall Marketplace. The issuance of the shares of Common Stock to the seller of Perry Hall Marketplace was effected in reliance upon an exemption from registration provided by Section 4(a)(2) under the Securities Act of 1933, as amended.

Issuer Purchases of Equity Securities

During the three months ended March 31, 2015, 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, 2015.

 

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, 2015 through January 31, 2015

    —       $ —         N/A        N/A   

February 1, 2015 through February 28, 2015

    —         —         N/A        N/A   

March 1, 2015 through March 31, 2015

    14,185        10.98        N/A        N/A   
 

 

 

       

Total

  14,185   
 

 

 

       

 

(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 fair value at the time of surrender.

 

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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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Table of Contents

Signatures

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

 

ARMADA HOFFLER PROPERTIES, INC.
Date: May 5, 2015

/s/ LOUIS S. HADDAD

Louis S. Haddad

President and Chief Executive Officer

(Principal Executive Officer)

Date: May 5, 2015

/s/ MICHAEL P. O’HARA

Michael P. O’Hara

Chief Financial Officer and Treasurer

(Principal Accounting and Financial Officer)

 

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Table of Contents

Exhibit Index

 

Exhibit No.

  

Description

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

 

34

EX-15.1

Exhibit 15.1

Acknowledgment of Ernst & Young LLP,

Independent Registered Public Accounting Firm

Stockholders and Board of Directors of

Armada Hoffler Properties, Inc.

We are aware of the incorporation by reference of our report dated May 5, 2015 relating to the unaudited condensed interim consolidated financial statements of Armada Hoffler Properties, Inc. that are included in its Form 10-Q for the quarter ended March 31, 2015 in the following Registration Statements of Armada Hoffler Properties, Inc.:

 

    333-188545 on Form S-8, dated May 10, 2013

 

    333-196473 on Form S-3, dated June 2, 2014

/s/ Ernst & Young LLP

Richmond, Virginia

May 5, 2015

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT

TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Louis S. Haddad, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of Armada Hoffler Properties, Inc.

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 5, 2015

/s/ LOUIS S. HADDAD

Louis S. Haddad
President and Chief Executive Officer
EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT

TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael P. O’Hara, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of Armada Hoffler Properties, Inc.

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report.

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: May 5, 2015

/s/ MICHAEL P. O’HARA

Michael P. O’Hara
Chief Financial Officer and Treasurer
EX-32.1

Exhibit 32.1

CERTIFICATION

The undersigned, Louis S. Haddad, the President and Chief Executive Officer of Armada Hoffler Properties, Inc. (the “Company”), pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certifies that, to the best of his knowledge:

 

  1. the Quarterly Report for the period ended March 31, 2015 of the Company (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

 

  2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: May 5, 2015

/s/ LOUIS S. HADDAD

Louis S. Haddad
President and Chief Executive Officer
EX-32.2

Exhibit 32.2

CERTIFICATION

The undersigned, Michael P. O’Hara, the Chief Financial Officer and Treasurer of Armada Hoffler Properties, Inc. (the “Company”), pursuant to 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certifies that, to the best of his knowledge:

 

  1. the Quarterly Report for the period ended March 31, 2015 of the Company (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934, as amended; and

 

  2. the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: May 5, 2015

/s/ MICHAEL P. O’HARA

Michael P. O’Hara
Chief Financial Officer and Treasurer