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 September 30, 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 October 30, 2015, the Registrant had 26,520,311 shares of common stock outstanding.

 

 

 


Table of Contents

ARMADA HOFFLER PROPERTIES, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 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

     17   

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

     32   

Item 4.

  

Controls and Procedures

     32   

Part II. Other Information

     33   

Item 1.

  

Legal Proceedings

     33   

Item 1A.

  

Risk Factors

     33   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     33   

Item 3.

  

Defaults Upon Senior Securities

     33   

Item 4.

  

Mine Safety Disclosures

     33   

Item 5.

  

Other Information

     33   

Item 6.

  

Exhibits

     33   

Signatures

     34   


Table of Contents

PART I. Financial Information

 

Item 1. Financial Statements

ARMADA HOFFLER PROPERTIES, INC.

Condensed Consolidated Balance Sheets

(In thousands, except par value and share data)

 

     SEPTEMBER 30,
2015
    DECEMBER 31,
2014
 
     (UNAUDITED)        

ASSETS

  

Real estate investments:

    

Income producing property

   $ 649,029      $ 513,918   

Held for development

     1,180        —    

Construction in progress

     35,407        81,082   
  

 

 

   

 

 

 
     685,616        595,000   

Accumulated depreciation

     (129,996     (116,099
  

 

 

   

 

 

 

Net real estate investments

     555,620        478,901   

Real estate investments held for sale

     —         8,538   

Cash and cash equivalents

     15,191        25,883   

Restricted cash

     4,243        4,224   

Accounts receivable, net

     22,006        20,548   

Construction receivables, including retentions

     48,097        19,432   

Construction contract costs and estimated earnings in excess of billings

     289        272   

Other assets

     48,647        33,108   
  

 

 

   

 

 

 

Total Assets

   $ 694,093      $ 590,906   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Indebtedness

   $ 420,145      $ 359,229   

Accounts payable and accrued liabilities

     6,278        8,358   

Construction payables, including retentions

     54,159        42,399   

Billings in excess of construction contract costs and estimated earnings

     2,512        1,053   

Other liabilities

     25,350        17,961   
  

 

 

   

 

 

 

Total Liabilities

     508,444        429,000   

Stockholders’ equity:

    

Common stock, $0.01 par value, 500,000,000 shares authorized, 26,260,685 and 25,022,701 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively

     262        250   

Additional paid-in capital

     64,027        51,472   

Distributions in excess of earnings

     (53,225     (54,413

Accumulated other comprehensive loss

     (972     —    
  

 

 

   

 

 

 

Total stockholders’ equity (deficit)

     10,092        (2,691

Noncontrolling interests

     175,557        164,597   
  

 

 

   

 

 

 

Total Equity

     185,649        161,906   
  

 

 

   

 

 

 

Total Liabilities and Equity

   $ 694,093      $ 590,906   
  

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

1


Table of Contents

ARMADA HOFFLER PROPERTIES, INC.

Condensed Consolidated Statements of Comprehensive Income

(In thousands, except per share data)

(Unaudited)

 

     THREE MONTHS ENDED
SEPTEMBER 30,
    NINE MONTHS ENDED
SEPTEMBER 30,
 
     2015     2014     2015     2014  

Revenues

        

Rental revenues

   $ 21,303      $ 16,713      $ 59,401      $ 47,225   

General contracting and real estate services revenues

     53,822        31,532        129,959        71,261   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     75,125        48,245        189,360        118,486   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

        

Rental expenses

     4,865        4,414        14,256        12,230   

Real estate taxes

     2,056        1,480        5,672        4,231   

General contracting and real estate services expenses

     51,716        30,468        125,141        67,807   

Depreciation and amortization

     6,317        4,567        16,991        12,593   

General and administrative expenses

     1,873        1,741        6,297        5,768   

Acquisition, development and other pursuit costs

     288        174        1,050        174   

Impairment charges

     —         15        23        15   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     67,115        42,859        169,430        102,818   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     8,010        5,386        19,930        15,668   

Interest expense

     (3,518     (2,734     (9,922     (7,977

Loss on extinguishment of debt

     (3     —         (410     —    

Gain on real estate dispositions

     —         —         13,407        —    

Other income (loss)

     (34     59        (182     (23
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

     4,455        2,711        22,823        7,668   

Income tax benefit (provision)

     (118     43        (83     (135
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     4,337        2,754        22,740        7,533   

Net income attributable to noncontrolling interests

     (1,649     (1,139     (8,426     (3,128
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to stockholders

   $ 2,688      $ 1,615      $ 14,314      $ 4,405   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share and unit:

        

Basic and diluted

   $ 0.10      $ 0.08      $ 0.56      $ 0.23   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average outstanding:

        

Common shares

     25,958        20,266        25,532        19,574   

Operating partnership units

     15,919        14,291        15,159        13,905   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted

     41,877        34,557        40,691        33,479   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per common share and unit

   $ 0.17      $ 0.16      $ 0.51      $ 0.48   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income:

        

Net income

   $ 4,337      $ 2,754      $ 22,740      $ 7,533   

Unrealized cash flow hedge losses

     (1,026     —         (1,574     —    

Realized cash flow hedge losses reclassified to net income

     13        —         13        —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     3,324        2,754        21,179        7,533   

Comprehensive income attributable to noncontrolling interests

     (1,264     (1,139     (7,837     (3,128
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to stockholders

   $ 2,060      $ 1,615      $ 13,342      $ 4,405   
  

 

 

   

 

 

   

 

 

   

 

 

 

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’
equity
(deficit)
    Noncontrolling
interests
    Total
Equity
 

Balance, January 1, 2015

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

Net income

     —          —          —          14,314        —         14,314        8,426        22,740   

Unrealized cash flow hedge losses

     —          —          —          —         (980     (980     (594     (1,574

Realized cash flow hedge losses reclassified to net income

     —          —          —          —         8        8        5        13   

Net proceeds from sales of common stock

     747,163         7         7,359         —         —         7,366        —         7,366   

Restricted stock awards

     75,321         1         763         —         —         764        —         764   

Acquisitions of real estate investments

     415,500         4         4,429         —         —         4,433        10,736        15,169   

Redemption of operating partnership units

     —          —          4         —         —         4        (83     (79

Dividends and distributions declared

     —          —          —          (13,126     —         (13,126     (7,530     (20,656
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2015

     26,260,685       $ 262       $ 64,027       $ (53,225   $ (972   $ 10,092      $ 175,557      $ 185,649   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

ARMADA HOFFLER PROPERTIES, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

     NINE MONTHS ENDED
SEPTEMBER 30,
 
     2015     2014  

OPERATING ACTIVITIES

    

Net income

   $ 22,740      $ 7,533   

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

    

Depreciation of buildings and tenant improvements

     13,998        10,611   

Amortization of leasing costs and in-place lease intangibles

     2,993        1,982   

Accrued straight-line rental revenue

     (1,724     (1,730

Amortization of leasing incentives and above or below-market rents

     564        461   

Accrued straight-line ground rent expense

     224        236   

Bad debt expense

     123        48   

Noncash stock compensation

     755        720   

Impairment charges

     23        15   

Noncash interest expense

     791        410   

Loss on extinguishment of debt

     410        —    

Gain on real estate dispositions

     (13,407     —    

Change in the fair value of derivatives

     238        123   

Changes in operating assets and liabilities, net of acquisitions:

    

Property assets

     (2,524     (1,932

Property liabilities

     2,369        234   

Construction assets

     (29,027     (4,298

Construction liabilities

     19,078        6,879   
  

 

 

   

 

 

 

Net cash provided by operating activities

     17,624        21,292   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Development of real estate investments

     (40,293     (77,094

Tenant and building improvements

     (3,794     (4,622

Acquisitions of real estate investments

     (64,945     (2,754

Dispositions of real estate investments

     50,613        —    

Government development grants

     300        300   

Decrease (increase) in restricted cash

     742        (1,713

Leasing costs

     (1,715     (1,524

Leasing incentives

     (1,563     (63
  

 

 

   

 

 

 

Net cash used for investing activities

     (60,655     (87,470
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Proceeds from sales of common stock

     7,687        49,566   

Offering costs

     (321     (320

Debt issuances, credit facility and construction loan borrowings

     200,267        92,409   

Debt and credit facility payments, including principal amortization

     (153,321     (61,494

Debt issuance costs

     (1,844     (35

Redemption of operating partnership units

     (79     —    

Dividends and distributions

     (20,050     (15,729
  

 

 

   

 

 

 

Net cash provided by financing activities

     32,339        64,397   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (10,692     (1,781

Cash and cash equivalents, beginning of period

     25,883        18,882   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 15,191      $ 17,101   
  

 

 

   

 

 

 

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. 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 and certain related formation transactions on May 13, 2013.

As of September 30, 2015, the Company owned 100% of the interests in each of the following properties in its operating property portfolio:

 

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
Columbus Village    Retail    Virginia Beach, 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
Perry Hall Marketplace    Retail    Perry Hall, Maryland
Providence Plaza    Retail    Charlotte, North Carolina
Sandbridge Commons    Retail    Virginia Beach, Virginia
Socastee Commons    Retail    Myrtle Beach, South Carolina
South Retail    Retail    Virginia Beach, Virginia*
Stone House Square    Retail    Hagerstown, Maryland
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*

 

* Located in the Town Center of Virginia Beach

 

5


Table of Contents

As of September 30, 2015, the following properties were under development or construction:

 

Property

  

Segment

  

Location

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

The Company owns a 60% controlling financial interest in Lightfoot Marketplace. Subject to the occurrence of certain events, the Company’s ownership interest in Lightfoot Marketplace may increase to 70%. The Company owns an 80% controlling financial interest in Johns Hopkins Village. The noncontrolling interest holder of Johns Hopkins Village has the right to exchange its 20% ownership interest for Class A units of limited partnership interest in the Operating Partnership (“Class A Units”) upon and for a period of one year after the project’s completion.

 

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

On May 28, 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 on January 1, 2018. Management is currently evaluating the potential impact of the new revenue recognition standard on the Company’s consolidated financial statements.

On February 18, 2015, the FASB issued new consolidation guidance that changes: (i) the identification of variable interests, (ii) the variable interest entity (“VIE”) characteristics for a limited partnership or similar entity and (iii) primary beneficiary determination. The amended guidance also eliminates the presumption that a general partner controls a limited partnership. The amended guidance will be effective for the Company on January 1, 2016. Management is currently evaluating the potential impact of the new guidance on the Company’s consolidated financial statements.

 

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Table of Contents

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. However, with respect to line of credit arrangements, the Securities and Exchange Commission staff have stated that they would not object to the presentation of issuance costs as an asset, regardless of whether there were any outstanding borrowings under such arrangements. The new guidance will be 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.

Net operating income of the Company’s reportable segments for the three and nine months ended September 30, 2015 and 2014 was as follows (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  
     (Unaudited)  

Office real estate

           

Rental revenues

   $ 8,092       $ 7,295       $ 23,847       $ 20,363   

Rental expenses

     1,758         1,742         5,216         4,756   

Real estate taxes

     734         609         2,228         1,697   
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment net operating income

     5,600         4,944         16,403         13,910   
  

 

 

    

 

 

    

 

 

    

 

 

 

Retail real estate

           

Rental revenues

     8,523         6,086         22,715         17,559   

Rental expenses

     1,478         1,255         4,223         3,764   

Real estate taxes

     810         540         2,080         1,546   
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment net operating income

     6,235         4,291         16,412         12,249   
  

 

 

    

 

 

    

 

 

    

 

 

 

Multifamily residential real estate

           

Rental revenues

     4,688         3,332         12,839         9,303   

Rental expenses

     1,629         1,417         4,817         3,710   

Real estate taxes

     512         331         1,364         988   
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment net operating income

     2,547         1,584         6,658         4,605   
  

 

 

    

 

 

    

 

 

    

 

 

 

General contracting and real estate services

           

Segment revenues

     53,822         31,532         129,959         71,261   

Segment expenses

     51,716         30,468         125,141         67,807   
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment net operating income

     2,106         1,064         4,818         3,454   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net operating income

   $ 16,488       $ 11,883       $ 44,291       $ 34,218   
  

 

 

    

 

 

    

 

 

    

 

 

 

General contracting and real estate services revenues for the three and nine months ended September 30, 2015 exclude revenue related to intercompany construction contracts of $11.4 million and $27.9 million, respectively. General contracting and real estate services expenses for the three and nine months ended September 30, 2015 exclude expenses related to intercompany construction contracts of $11.3 million and $27.7 million, respectively. General contracting and real estate services expenses for the three and nine months ended September 30, 2015 include noncash stock compensation expense of less than $0.1 million and $0.2 million, respectively.

General contracting and real estate services revenues for the three and nine months ended September 30, 2014 exclude revenue from intercompany construction contracts of $24.2 million and $68.8 million, respectively. General contracting and real estate services expenses for the three and nine months ended September 30, 2014 exclude expenses for intercompany construction

 

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contracts of $24.1 million and $68.2 million, respectively. General contracting and real estate services expenses for the three and nine months ended September 30, 2014 include noncash stock compensation expense of less than $0.1 million and $0.2 million, respectively.

The following table reconciles net operating income to net income for the three and nine months ended September 30, 2015 and 2014 (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  
     (Unaudited)  

Net operating income

   $ 16,488       $ 11,883       $ 44,291       $ 34,218   

Depreciation and amortization

     (6,317      (4,567      (16,991      (12,593

General and administrative expenses

     (1,873      (1,741      (6,297      (5,768

Acquisition, development and other pursuit costs

     (288      (174      (1,050      (174

Impairment charges

     —          (15      (23      (15

Interest expense

     (3,518      (2,734      (9,922      (7,977

Loss on extinguishment of debt

     (3      —          (410      —    

Gain on real estate dispositions

     —          —          13,407         —    

Other income (loss)

     (34      59         (182      (23

Income tax benefit (provision)

     (118      43         (83      (135
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 4,337       $ 2,754       $ 22,740       $ 7,533   
  

 

 

    

 

 

    

 

 

    

 

 

 

General and administrative expenses for the three and nine months ended September 30, 2015 include noncash stock compensation expense of $0.2 million and $0.6 million, respectively. General and administrative expenses for the three and nine months ended September 30, 2014 include noncash stock compensation expense of $0.2 million and $0.5 million, respectively.

 

4. Real Estate Investments

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

Operating Property Acquisitions

In connection with operating property acquisitions, the Company identifies and recognizes all assets acquired and liabilities assumed at their estimated fair values as of the acquisition date. The purchase price allocations to tangible assets, such as land, site improvements and buildings and improvements are presented within income producing property in the condensed consolidated balance sheet and depreciated over their estimated useful lives. Acquired lease intangibles are presented within other assets and liabilities in the condensed consolidated balance sheet and amortized over their respective lease terms. The Company expenses all costs incurred related to operating property acquisitions. The Company values land based on a market approach, looking to recent sales of similar properties, adjusting for differences due to location, the state of entitlement as well as the shape and size of the parcel. Improvements to land are valued using a replacement cost approach. The approach applies industry standard replacement costs adjusted for geographic specific considerations and reduced by estimated depreciation. The value of buildings acquired is estimated using the replacement cost approach, assuming the buildings were vacant at acquisition. The replacement cost approach considers the composition of the structures acquired, adjusted for an estimate of depreciation. The estimate of depreciation is made considering industry standard information and depreciation curves for the identified asset classes. The value of acquired lease intangibles considers the estimated cost of leasing the properties as if the acquired buildings were vacant, as well as the value of the current leases relative to market-rate leases. The in-place lease value is determined using an estimated total lease-up time and lost rental revenues during such time. The value of current leases relative to market-rate leases is based on market rents obtained for market comparables. Given the significance of unobservable inputs used in the valuation of acquired real estate assets, the Company classifies them as Level 3 inputs in the fair value hierarchy.

On April 8, 2015, the Company completed the acquisitions of Stone House Square in Hagerstown, Maryland and Perry Hall Marketplace in Perry Hall, Maryland. In exchange for both properties, the Company paid $35.4 million of cash and issued 415,500 shares of common stock. The acquisition date fair value of the total consideration transferred in exchange for Stone House Square and Perry Hall Marketplace was $39.8 million.

On July 1, 2015, the Company completed the acquisition of Socastee Commons, a 57,000 square foot retail center in Myrtle Beach, South Carolina. The total consideration for Socastee Commons was $8.7 million, which was comprised of $3.7 million of cash and the assumption of debt with an outstanding principal balance of $5.0 million.

 

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On July 10, 2015, the Company acquired Columbus Village, a 65,000 square foot retail center in Virginia Beach, Virginia. In exchange for Columbus Village, the Company assumed debt with an aggregate outstanding principal balance of $8.8 million, issued 1,000,000 Class B units of limited partnership interest in the Operating Partnership (“Class B Units”) and agreed to issue 275,000 Class C units of limited partnership interest in the Operating Partnership (“Class C Units”) on January 10, 2017. Subject to the occurrence of certain events, the Class B Units and Class C Units will not earn or accrue distributions until July 10, 2017 and January 10, 2018, respectively, at which time each may be redeemed in exchange for cash equal to the market price of shares of the Company’s common stock or, at the Company’s option and sole discretion, shares of the Company’s common stock on a one-for-one basis. The estimated fair value of the Class B Units and Class C Units includes a discount for their lack of marketability and distributions until July 10, 2017 and January 10, 2017, respectively. The acquisition date fair value of the total consideration transferred in exchange for Columbus Village was $19.2 million.

On September 1, 2015, the Company acquired Providence Plaza in Charlotte, North Carolina for $26.2 million of cash. Providence Plaza is a mixed-use property comprised of three buildings totaling 103,000 square feet, a two-level parking garage and approximately one acre of land zoned for multifamily development.

The following table summarizes the acquisition date fair values of the assets acquired and liabilities assumed during the nine months ended September 30, 2015 (in thousands):

 

Land

   $ 29,500   

Site improvements

     3,290   

Building and improvements

     49,260   

In-place leases

     14,160   

Above-market leases

     2,260   

Below-market leases

     (4,420

Indebtedness

     (13,935
  

 

 

 

Net assets acquired

   $ 80,115   
  

 

 

 

The following table summarizes the consolidated results of operations of the Company on a pro forma basis, as if each of these properties had been acquired on January 1, 2014 (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  
     (Unaudited)  

Rental revenues

   $ 21,781       $ 18,838       $ 63,392       $ 53,601   

Net income

     4,657         2,999         24,158         7,322   

The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if each of these acquisitions had taken place on January 1, 2014. The pro forma financial information includes adjustments to rental revenues for above and below-market leases and adjustments to depreciation and amortization expense for acquired property and in-place lease assets.

Rental revenues and net income from the acquired properties for the period from the respective acquisition dates to September 30, 2015 included in the consolidated statement of comprehensive income was $2.6 million and $0.4 million, respectively.

Real Estate Dispositions

On January 5, 2015, the Company completed the sale of the Sentara Williamsburg office property for $15.4 million. 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 February 13, 2015, the Company agreed to the future sale of the Oyster Point office property for $6.5 million. The Company intends to complete the sale on January 15, 2017.

On May 20, 2015, the Company completed the sale of Whetstone Apartments for $35.6 million. Net proceeds to the Company after transaction costs were $35.5 million. The Company recognized a gain on the disposition of Whetstone Apartments of $7.2 million.

 

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Subsequent to September 30, 2015

Brooks Crossing

On October 5, 2015, the Company purchased 3.24 acres of land in Newport News, Virginia for $0.1 million for the development of Brooks Crossing, a new urban, mixed-use and low-rise development project, in partnership with the City of Newport News.

Point Street Apartments

On October 15, 2015, the Company agreed to invest up to $23.0 million in the Point Street Apartments project in the Harbor Point area of Baltimore, Maryland. Point Street Apartments is an estimated $93.0 million development project with plans for a 17-story building comprising 289 residential units and 18,000 square feet of street-level retail space. Beatty Development Group (“BDG”) is the developer of the project and has engaged the Company to serve as construction general contractor. Point Street Apartments is scheduled to open in 2017; however, management can provide no assurances that Point Street Apartments will open on the anticipated timeline.

BDG is responsible for securing a senior construction loan of up to $70.0 million to fund the development and construction of Point Street Apartments. The Company has agreed to guarantee up to $25.0 million of the senior construction loan in exchange for the option to purchase up to an 88% controlling interest in Point Street Apartments upon completion of the project as follows: (i) an option to purchase a 79% indirect interest in Point Street Apartments for $27.3 million, exercisable within one year from the project’s completion (the “First Option”) and (ii) provided that the Company has exercised the First Option, an option to purchase an additional 9% indirect interest in Point Street Apartments for $3.1 million, exercisable within 27 months from the project’s completion (the “Second Option”).

The Company’s investment in the Point Street Apartments project is in the form of a loan under which BDG may borrow up to $23.0 million (the “BDG loan”). Interest on the BDG loan accrues at 8.0% per annum and matures on the earlier of: (i) November 1, 2018, which may be extended by BDG under two one-year extension options, (ii) the maturity date or earlier termination of the senior construction loan or (iii) the date the Company exercises the Second Option as described further below.

In the event the Company exercises the First Option, BDG is required to simultaneously pay down the senior construction loan by $7.4 million and the BDG loan by $19.9 million, at which time the interest rate on the BDG loan will automatically be reduced to the interest rate on the senior construction loan plus 200 basis points. In the event the Company exercises the Second Option, BDG is required to simultaneously repay any remaining amounts outstanding under the BDG loan, with any excess proceeds received from the exercise of the Second Option applied against the senior construction loan. In the event the Company does not exercise either the First Option or the Second Option, the interest rate on the BDG loan will automatically be reduced to the interest rate on the senior construction loan for the remaining term of the BDG loan. In the event BDG is unable to secure a senior construction loan on or before June 30, 2016, the interest rate on the BDG loan will be reduced to one-month LIBOR plus 200 basis points.

As of the date of this report, the Company had funded $6.1 million under the BDG loan.

Oceaneering International facility sale

On October 30, 2015, the Company completed the sale of the Oceaneering International facility for $30.0 million. Net assets of $5.7 million associated with the Oceaneering International facility were included in the condensed consolidated balance sheet as of September 30, 2015.

Richmond Tower sale

On November 2, 2015, the Company entered into an agreement to sell the Richmond Tower office building for $78.0 million. The Company expects to complete the disposition in 2015, subject to the satisfaction of certain customary closing conditions including satisfactory completion of the buyer’s due diligence. There can be no assurances that these conditions will be satisfied or that the Company will complete the disposition on the terms described herein or at all. Net assets of $51.4 million associated with the Richmond Tower office building were included in the condensed consolidated balance sheet as of September 30, 2015.

 

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5. Indebtedness

Credit Facility

On January 23, 2015, the Operating Partnership borrowed $5.0 million under its prior credit facility. This credit facility was scheduled to mature on May 13, 2016; however, the Operating Partnership repaid all amounts due under this credit facility with proceeds from a new credit facility and terminated the prior 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, entered into 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 prior $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 September 30, 2015, the interest rates on the revolving credit facility and the term loan facility were 1.75% and 1.70%, respectively. The revolving credit facility has a scheduled maturity date of February 20, 2019, with a one-year extension option, subject to certain conditions, 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.

As of September 30, 2015, the outstanding balances on the revolving credit facility and the term loan facility were $106.0 million and $50.0 million, respectively.

Other Financing Activity

On May 20, 2015, the Company repaid the $17.8 million construction loan secured by Whetstone Apartments and recognized a loss on extinguishment of debt of $0.1 million representing unamortized debt issuance costs.

On May 27, 2015, the Company repaid the existing $24.4 million mortgage secured by Smith’s Landing and refinanced the property with a new $21.6 million loan that bears interest at 4.05% and matures on June 1, 2035. As a result of the refinancing, the Company recognized a $0.1 million loss on extinguishment of debt representing the unamortized debt issuance costs associated with the repaid mortgage.

On July 1, 2015, the Company assumed debt with an outstanding principal balance of $5.0 million in connection with the acquisition of Socastee Commons. The mortgage bears interest at 4.57% and matures on January 6, 2023.

On July 10, 2015, the Company assumed two loans with an aggregate outstanding principal balance of $8.8 million in connection with the acquisition of Columbus Village. Both loans bear interest at LIBOR plus 2.00% and mature on April 5, 2018.

On July 30, 2015, the Company entered into a $50.0 million loan agreement to fund the development and construction of Johns Hopkins Village. The construction loan bears interest at LIBOR plus 1.90% and matures on July 30, 2018.

On September 1, 2015, the Company repaid the $6.1 million mortgage secured by the Oyster Point office building.

During the nine months ended September 30, 2015, the Company borrowed $17.7 million under its construction loans to fund new development and construction.

Subsequent to September 30, 2015

On October 6, 2015, the Operating Partnership secured the Oyster Point office building with a $6.4 million note that bears interest at LIBOR plus 1.40% to 2.00% and matures on February 28, 2017.

On October 30, 2015, the Company repaid the $18.7 million construction loan secured by the Oceaneering International 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 neither designated nor 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.

On July 13, 2015, the Operating Partnership entered into a $6.5 million floating-to-fixed interest rate swap attributable to one-month LIBOR indexed interest payments. The $6.5 million interest rate swap has a fixed rate of 3.05%, an effective date of July 13, 2015 and a maturity date of April 5, 2018. 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 were comprised of the following as of September 30, 2015 and December 31, 2014 (in thousands):

 

     September 30, 2015      December 31, 2014  
     (Unaudited)         
     Notional
Amount
     Fair Value      Notional
Amount
     Fair Value  
            Asset      Liability             Asset      Liability  

Interest rate swaps

   $ 57,140       $ —         $ (1,585    $ 685       $ —        $ (11

Interest rate caps

     171,546         22         —           180,434         260         —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 228,686       $ 22       $ (1,585    $ 181,119       $ 260       $ (11
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The changes in the fair value of the Company’s derivatives during the three and nine months ended September 30, 2015 and 2014 were comprised of the following (in thousands):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  
     (Unaudited)  

Interest rate swaps

   $ (1,026    $ 4       $ (1,574    $ 5   

Interest rate caps

     (51      42         (238      (128
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (1,077    $ 46       $ (1,812    $ (123
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income statement presentation:

           

Other income (loss)

   $ (51    $ 46       $ (238    $ (123

Unrealized gain (loss) on cash flow hedge

     (1,026      —           (1,574      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (1,077    $ 46       $ (1,812    $ (123
  

 

 

    

 

 

    

 

 

    

 

 

 

Subsequent to September 30, 2015

On October 26, 2015, the Operating Partnership entered into a LIBOR interest rate cap agreement on a notional amount of $75.0 million at a strike rate of 1.25% for a premium of $0.1 million. The interest rate cap agreement expires on October 15, 2017.

 

7. Equity

Stockholders’ Equity

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

 

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On May 5, 2015, the Company commenced an at-the-market continuous equity program through which the Company may, from time to time, issue and sell shares of its common stock having an aggregate offering price of up to $50.0 million. During the nine months ended September 30, 2015, the Company issued and sold an aggregate of 747,163 shares of common stock at a weighted average price of $10.29 per share. Net proceeds to the Company after offering costs and commissions were $7.4 million.

As of September 30, 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 26.3 million and 25.0 million shares of common stock issued and outstanding as of September 30, 2015 and December 31, 2014, respectively. No shares of preferred stock were issued and outstanding as of September 30, 2015 or December 31, 2014.

Noncontrolling Interests

As of September 30, 2015 and December 31, 2014, the Company held a 62.5% and 62.9% interest in the Operating Partnership, respectively. As the sole general partner and the majority interest holder, the Company consolidates the financial position and results of operations of the Operating Partnership. Noncontrolling interests in the Company represent units of limited partnership interest not held by the Company.

As of September 30, 2015, there were 14,768,507 Class A Units not held by the Company.

As partial consideration for Columbus Village, the Operating Partnership issued 1,000,000 Class B Units on July 10, 2015 and agreed to issue 275,000 Class C Units on January 10, 2017. Subject to the occurrence of certain events, the Class B Units and Class C Units will not earn or accrue distributions until July 10, 2017 and January 10, 2018, respectively, at which time each automatically convert to Class A Units.

Common Stock Dividends and Class A 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 Class A Units.

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 Class A Units.

On July 9, 2015, the Company paid cash dividends of $4.4 million to common stockholders and the Operating Partnership paid cash distributions of $2.5 million to holders of Class A Units.

On August 6, 2015, the Board of Directors declared a cash dividend of $0.17 per share to stockholders of record on October 1, 2015.

Subsequent to September 30, 2015

On October 8, 2015, the Company paid cash dividends of $4.5 million to common stockholders and the Operating Partnership paid cash distributions of $2.5 million to holders of Class A Units.

 

8. Stock-Based Compensation

During the nine months ended September 30, 2015, the Company granted an aggregate of 104,779 shares of restricted stock to employees and nonemployee directors with a weighted average grant date fair value of $10.85 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 the three and nine months ended September 30, 2015, the Company recognized $0.2 million and $1.0 million of stock-based compensation, respectively. During the three and nine months ended September 30, 2014, the Company recognized $0.3 million and $1.2 million of stock-based compensation, respectively. As of September 30, 2015, there were 102,322 nonvested restricted shares outstanding; the total unrecognized compensation related to nonvested restricted shares was $0.5 million, which the Company expects to recognize over the next 18 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—quoted prices in active markets for identical assets or liabilities

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

Level 3—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 swaps and caps. 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 September 30, 2015 and December 31, 2014 were as follows (in thousands):

 

     September 30, 2015      December 31, 2014  
     Carrying
Value
     Fair
Value
     Carrying
Value
     Fair
Value
 
     (Unaudited)                

Indebtedness

   $ 420,145       $ 426,848       $ 359,229       $ 366,095   

Interest rate swap liabilities

     1,585         1,585         11         11   

Interest rate cap assets

     22         22         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 $5.5 million for the three and nine months ended September 30, 2015, respectively. Gross profit from such contracts was less than $0.1 million and $0.2 million for the three and nine months ended September 30, 2015, respectively. Revenue from construction contracts with related party entities of the Company was $1.1 million and $5.0 million for the three and nine months ended September 30, 2014, respectively. Gross profit from such contracts was less than $0.1 million and $0.3 million for the three and nine months ended September 30, 2014, respectively. Real estate services fees from affiliated entities of the Company were not significant for either the three or nine months ended September 30, 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 or nine months ended September 30, 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 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 the Company’s 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 $204.7 million and $192.2 million as of September 30, 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 September 30, 2015 and December 31, 2014, the Operating Partnership had total outstanding letters of credit of $8.0 million and $8.5 million, respectively.

 

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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 September 30, 2015, and the related condensed consolidated statements of comprehensive income for the three and nine-month periods ended September 30, 2015 and 2014, the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2015 and 2014 and the condensed consolidated statement of equity for the nine-month period ended September 30, 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

November 4, 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 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;

 

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

 

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    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 U.S. 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 September 30, 2015, we owned 100% of the interests in each of the following properties in our operating property portfolio:

 

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
Columbus Village    Retail    Virginia Beach, 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
Perry Hall Marketplace    Retail    Perry Hall, Maryland
Providence Plaza    Retail    Charlotte, North Carolina
Sandbridge Commons    Retail    Virginia Beach, Virginia
Socastee Commons    Retail    Myrtle Beach, South Carolina
South Retail    Retail    Virginia Beach, Virginia*
Stone House Square    Retail    Hagerstown, Maryland
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*

 

* Located in the Town Center of Virginia Beach

 

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As of September 30, 2015, the following properties were either under development or construction:

 

Property

  

Segment

  

Location

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

We own a 60% controlling financial interest in Lightfoot Marketplace. Subject to the occurrence of certain events, our ownership interest in Lightfoot Marketplace may increase to 70%. We own an 80% controlling financial interest in Johns Hopkins Village. The noncontrolling interest holder of Johns Hopkins Village has the right to exchange its 20% ownership interest for common units of limited partnership interest in the Operating Partnership upon and for a period of one year after the project’s completion.

Point Street Apartments Project

On October 15, 2015, we agreed to invest up to $23.0 million in the Point Street Apartments project in the Harbor Point area of Baltimore, Maryland. Point Street Apartments is an estimated $93.0 million development project with plans for a 17-story building comprising 289 residential units and 18,000 square feet of street-level retail space. Beatty Development Group (“BDG”) is the developer of the project and has engaged us to serve as construction general contractor. Point Street Apartments is scheduled to open in 2017; however, we can provide no assurances that Point Street Apartments will open on the anticipated timeline.

BDG is responsible for securing a senior construction loan of up to $70.0 million to fund the development and construction of Point Street Apartments. We have agreed to guarantee up to $25.0 million of the senior construction loan in exchange for the option to purchase up to an 88% controlling interest in Point Street Apartments upon completion of the project as follows: (i) an option to purchase a 79% indirect interest in Point Street Apartments for $27.3 million, exercisable within one year from the project’s completion (the “First Option”) and (ii) provided that we have exercised the First Option, an option to purchase an additional 9% indirect interest in Point Street Apartments for $3.1 million, exercisable within 27 months from the project’s completion (the “Second Option”).

Our investment in the Point Street Apartments project is in the form of a loan under which BDG may borrow up to $23.0 million (the “BDG loan”). Interest on the BDG loan accrues at 8.0% per annum and matures on the earlier of: (i) November 1, 2018, which may be extended by BDG under two one-year extension options, (ii) the maturity date or earlier termination of the senior construction loan or (iii) the date we exercise the Second Option as described further below.

In the event we exercise the First Option, BDG is required to simultaneously pay down the senior construction loan by $7.4 million and the BDG loan by $19.9 million, at which time the interest rate on the BDG loan will automatically be reduced to the interest rate on the senior construction loan plus 200 basis points. In the event we exercise the Second Option, BDG is required to simultaneously repay any remaining amounts outstanding under the BDG loan, with any excess proceeds received from the exercise of the Second Option applied against the senior construction loan. In the event we do not exercise either the First Option or the Second Option, the interest rate on the BDG loan will automatically be reduced to the interest rate on the senior construction loan for the remaining term of the BDG loan. In the event BDG is unable to secure a senior construction loan on or before June 30, 2016, the interest rate on the BDG loan will be reduced to one-month LIBOR plus 200 basis points.

As of the date of this report, we had funded $6.1 million under the BDG loan.

Acquisitions and Dispositions

On October 30, 2015, we completed the sale of the Oceaneering International facility for $30.0 million.

On November 2, 2015, we entered into an agreement to sell the Richmond Tower office building for $78.0 million. We expect to complete the disposition in 2015, subject to the satisfaction of certain customary closing conditions including satisfactory completion of the buyer’s due diligence. There can be no assurances that these conditions will be satisfied or that we will complete the disposition on the terms described herein or at all.

Third Quarter 2015 Highlights

The following highlights our results of operations and significant transactions for the three months ended September 30, 2015:

 

    Net income of $4.3 million, or $0.10 per diluted share, compared to $2.8 million, or $0.08 per diluted share, for the three months ended September 30, 2014.

 

    Funds from operations (“FFO”) of $10.7 million, or $0.25 per diluted share, compared to $7.3 million, or $0.21 per diluted share, for the three months ended September 30, 2014. See “Non-GAAP Financial Measures.”

 

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    Normalized FFO of $11.0 million, or $0.26 per diluted share, compared to $7.5 million, or $0.22 per diluted share, for the three months ended September 30, 2014. See “Non-GAAP Financial Measures.”

 

    Property segment net operating income (“NOI”) of $14.4 million compared to $10.8 million for the three months ended September 30, 2014:

 

    Office NOI of $5.6 million compared to $4.9 million

 

    Retail NOI of $6.2 million compared to $4.3 million

 

    Multifamily NOI of $2.5 million compared to $1.6 million

 

    Same store NOI of $10.0 million compared to $9.7 million for the three months ended September 30, 2014:

 

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

 

    Retail same store NOI of $4.2 million compared to $4.0 million

 

    Multifamily same store NOI of $1.8 million compared to $1.6 million

 

    Completed the acquisitions of:

 

    Socastee Commons in Myrtle Beach, South Carolina for $8.7 million

 

    Columbus Village in Virginia Beach, Virginia for $19.2 million

 

    Providence Plaza in Charlotte, North Carolina for $26.2 million

 

    General contracting and real estate services segment gross profit of $2.1 million compared to $1.1 million for the three months ended September 30, 2014.

 

    Third party construction backlog of $118.2 million as of September 30, 2015.

 

    Raised $4.1 million of gross proceeds at a weighted average price of $10.11 per share under our at-the-market continuous equity offering program.

 

    Declared cash dividends of $0.17 per share.

Segment Results of Operations

As of September 30, 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 accounting principles generally accepted in the United States (“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.

 

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Office Segment Data

 

     Three Months Ended
September 30,
            Nine Months Ended
September 30,
        
     2015      2014      Change      2015      2014      Change  
     ($ in thousands)  

Rental revenues

   $ 8,092       $ 7,295       $ 797       $ 23,847       $ 20,363       $ 3,484   

Property expenses

     2,492         2,351         141         7,444         6,453         991   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Segment NOI

   $ 5,600       $ 4,944       $ 656       $ 16,403       $ 13,910       $ 2,493   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Office segment NOI for the three and nine months ended September 30, 2015 increased $0.7 million and $2.5 million, respectively, compared to the corresponding periods in 2014. During the three and nine months ended September 30, 2015, NOI from new real estate development increased $1.1 million and $3.6 million, respectively, which more than offset $0.4 million and $1.2 million of lost NOI during the same periods as a result of property dispositions.

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 and nine months ended September 30, 2015 and 2014 were as follows:

 

     Three months ended
September 30,
           Nine months ended
September 30,
        
     2015      2014      Change     2015      2014      Change  
     ($ in thousands)  

Rental revenues

   $ 6,113       $ 6,199       $ (86   $ 18,516       $ 18,372       $ 144   

Property expenses

     2,033         2,097         (64     6,162         6,123         39   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Same Store NOI

   $ 4,080       $ 4,102       $ (22   $ 12,354       $ 12,249       $ 105   

Non-Same Store NOI

     1,520         842         678        4,049         1,661         2,388   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Segment NOI

   $ 5,600       $ 4,944       $ 656      $ 16,403       $ 13,910       $ 2,493   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Office same store NOI for the three months ended September 30, 2015 was relatively unchanged compared to the corresponding period in 2014. Office same store NOI for the nine months ended September 30, 2015 increased 1% compared to the corresponding period in 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
September 30,
            Nine Months Ended
September 30,
        
     2015      2014      Change      2015      2014      Change  
     ($ in thousands)  

Rental revenues

   $ 8,523       $ 6,086       $ 2,437       $ 22,715       $ 17,559       $ 5,156   

Property expenses

     2,288         1,795         493         6,303         5,310         993   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Segment NOI

   $ 6,235       $ 4,291       $ 1,944       $ 16,412       $ 12,249       $ 4,163   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Retail segment NOI for the three and nine months ended September 30, 2015 increased $1.9 million and $4.2 million, respectively, compared to the corresponding periods in 2014. Acquisitions and new real estate development contributed $1.8 million and $3.6 million of NOI during the three and nine months ended September 30, 2015, respectively. Same store NOI growth accounted for the balance of the increases.

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. During the second quarter of 2015, we acquired Stone House Square in Hagerstown, Maryland and Perry Hall Marketplace in Perry Hall, Maryland. During the third quarter of 2015, we acquired Socastee Commons in Myrtle Beach, South Carolina, Columbus Village in Virginia Beach, Virginia and Providence Plaza in Charlotte, North Carolina.

Retail Same Store Results

Retail same store results exclude new real estate development – Greentree Shopping Center and Sandbridge Commons – as well as new property acquisitions – Dimmock Square, Stone House Square, Perry Hall Marketplace, Socastee Commons, Columbus Village and Providence Plaza.

Retail same store rental revenues, property expenses and NOI for the three and nine months ended September 30, 2015 and 2014 were as follows:

 

     Three months ended
September 30,
            Nine months ended
September 30,
        
     2015      2014      Change      2015      2014      Change  
     ($ in thousands)  

Rental revenues

   $ 5,947       $ 5,765       $ 182       $ 17,818       $ 17,206       $ 612   

Property expenses

     1,786         1,739         47         5,333         5,253         80   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Same Store NOI

   $ 4,161       $ 4,026       $ 135       $ 12,485       $ 11,953       $ 532   

Non-Same Store NOI

     2,074         265         1,809         3,927         296         3,631   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Segment NOI

   $ 6,235       $ 4,291       $ 1,944       $ 16,412       $ 12,249       $ 4,163   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Retail same store NOI for the three and nine months ended September 30, 2015 increased 3% and 4%, respectively, compared to the corresponding periods in 2014 as a result of higher occupancy 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. As of September 30, 2015, the South Retail and Dick’s at Town Center properties were both 100% occupied. As of September 30, 2014, the South Retail and Dick’s at Town Center properties were 88% and 83% occupied, respectively.

 

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Multifamily Segment Data

 

     Three Months Ended
September 30,
            Nine Months Ended
September 30,
        
     2015      2014      Change      2015      2014      Change  
     ($ in thousands)  

Rental revenues

   $ 4,688       $ 3,332       $ 1,356       $ 12,839       $ 9,303       $ 3,536   

Property expenses

     2,141         1,748         393         6,181         4,698         1,483   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Segment NOI

   $ 2,547       $ 1,584       $ 963       $ 6,658       $ 4,605       $ 2,053   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Multifamily segment NOI for the three and nine months ended September 30, 2015 increased $1.0 million and $2.1 million, respectively, compared to the corresponding periods in 2014, primarily as a result of the stabilization of Encore Apartments and Liberty Apartments as well as improved leasing at The Cosmopolitan.

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 and nine months ended September 30, 2015 and 2014 were as follows:

 

     Three months ended
September 30,
          Nine months ended
September 30,
       
     2015      2014     Change     2015      2014     Change  
     ($ in thousands)  

Rental revenues

   $ 3,105       $ 2,979      $ 126      $ 9,069       $ 8,664      $ 405   

Property expenses

     1,342         1,386        (44     3,913         3,874        39   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Same Store NOI

   $ 1,763       $ 1,593      $ 170      $ 5,156       $ 4,790      $ 366   

Non-Same Store NOI

     784         (9     793        1,502         (185     1,687   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Segment NOI

   $ 2,547       $ 1,584      $ 963      $ 6,658       $ 4,605      $ 2,053   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Multifamily same store NOI for the three and nine months ended September 30, 2015 increased 11% and 8%, respectively, compared to the corresponding periods in 2014 primarily because of improved leasing at The Cosmopolitan in the Town Center of Virginia Beach.

 

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General Contracting and Real Estate Services Segment Data

 

     Three Months Ended
September 30,
           Nine Months Ended
September 30,
       
     2015     2014     Change      2015     2014     Change  
     ($ in thousands)  

Segment revenues

   $ 53,822      $ 31,532      $ 22,290       $ 129,959      $ 71,261      $ 58,698   

Segment expenses

     51,716        30,468        21,248         125,141        67,807        57,334   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Segment gross profit

   $ 2,106      $ 1,064      $ 1,042       $ 4,818      $ 3,454      $ 1,364   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating margin

     3.9     3.4        3.7     4.8  

Segment profit for the three and nine months ended September 30, 2015 increased $1.0 million and $1.4 million, respectively, compared to the corresponding periods in 2014 because of higher overall volume on our construction contracts. The increase in volume more than offset a decline in operating margin for the nine months ended September 30, 2015 compared to the corresponding period in 2014. The overall operating margin on our construction contracts for the three months ended September 30, 2015 was consistent with the overall operating margin for the corresponding period in 2014.

The changes in third party construction backlog for the three and nine months ended September 30, 2015 and 2014 were as follows:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  
     ($ in thousands)  

Beginning backlog

   $ 195,512       $ 178,987       $ 159,139       $ 46,385   

New contracts/change orders

     (23,552      5,914         88,854         177,895   

Work performed

     (53,768      (31,401      (129,801      (70,780
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending backlog

   $ 118,192       $ 153,500       $ 118,192       $ 153,500   
  

 

 

    

 

 

    

 

 

    

 

 

 

During the nine months ended September 30, 2015, we added $50.0 million to backlog for the construction of a new hotel at the Oceanfront in Virginia Beach, Virginia for a related party development group. The $50.0 million we added to backlog includes a $38.4 million deductive change order executed during the three months ended September 30, 2015. As of September 30, 2015, we had $48.7 million of backlog on the 27th Street Oceanfront hotel project, which we expect to substantially complete in 2017.

As of September 30, 2015, we had $48.7 million of backlog on the Exelon construction project at the Inner Harbor of Baltimore, Maryland, 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 and nine months ended September 30, 2015 and 2014:

 

     Three months ended
September 30,
          Nine months ended
September 30,
       
     2015     2014     Change     2015     2014     Change  
     ($ in thousands)  

Rental revenues

   $ 21,303      $ 16,713      $ 4,590      $ 59,401      $ 47,225      $ 12,176   

General contracting and real estate services revenues

     53,822        31,532        22,290        129,959        71,261        58,698   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     75,125        48,245        26,880        189,360        118,486        70,874   

Rental expenses

     4,865        4,414        451        14,256        12,230        2,026   

Real estate taxes

     2,056        1,480        576        5,672        4,231        1,441   

General contracting and real estate services expenses

     51,716        30,468        21,248        125,141        67,807        57,334   

Depreciation and amortization

     6,317        4,567        1,750        16,991        12,593        4,398   

General and administrative expenses

     1,873        1,741        132        6,297        5,768        529   

Acquisition, development and other pursuit costs

     288        174        114        1,050        174        876   

Impairment charges

     —         15        (15     23        15        8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     67,115        42,859        24,256        169,430        102,818        66,612   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     8,010        5,386        2,624        19,930        15,668        4,262   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense

     (3,518     (2,734     (784     (9,922     (7,977     (1,945

Loss on extinguishment of debt

     (3     —         (3     (410     —         (410

Gain on real estate dispositions

     —         —         —         13,407        —         13,407   

Other income (loss)

     (34     59        (93     (182     (23     (159
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before taxes

     4,455        2,711        1,744        22,823        7,668        15,155   

Income tax benefit (provision)

     (118     43        (161     (83     (135     52   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 4,337      $ 2,754      $ 1,583      $ 22,740      $ 7,533      $ 15,207   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Rental revenues for the three and nine months ended September 30, 2015 increased $4.6 million and $12.2 million, respectively, compared to the corresponding periods in 2014, as follows:

 

     Three months ended
September 30,
            Nine months ended
September 30,
        
     2015      2014      Change      2015      2014      Change  
     ($ in thousands)  

Office

   $ 8,092       $ 7,295       $ 797       $ 23,847       $ 20,363       $ 3,484   

Retail

     8,523         6,086         2,437         22,715         17,559         5,156   

Multifamily

     4,688         3,332         1,356         12,839         9,303         3,536   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 21,303       $ 16,713       $ 4,590       $ 59,401       $ 47,225       $ 12,176   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Office rental revenues for the three and nine months ended September 30, 2015 increased 11% and 17%, respectively, compared to the corresponding periods in 2014 as a result of rents from new real estate development, which more than offset lost rents from property dispositions. Aggregate increased rental revenues from 4525 Main Street and the three build-to-suit office buildings we delivered during the first quarter of 2015 were $1.3 million and $4.6 million for the three and nine months ended September 30, 2015, respectively. Office same store rental revenues grew 1% during the nine months ended September 30, 2015, driven primarily by higher occupancy at our office buildings located in the Town Center of Virginia Beach.

Retail rental revenues for the three and nine months ended September 30, 2015 increased 40% and 29%, respectively, compared to the corresponding periods in 2014 as a result of property acquisitions, our delivery of Greentree Shopping Center and organic growth in the same store retail portfolio due to higher occupancy rates.

Multifamily rental revenues for the three and nine months ended September 30, 2015 increased 41% and 38%, respectively, compared to the corresponding periods in 2014 as a result of the stabilization of Encore Apartments as well as higher occupancy at Liberty Apartments and The Cosmopolitan.

 

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General contracting and real estate services revenues for the three and nine months ended September 30, 2015 increased 71% and 82%, respectively, compared to the corresponding periods in 2014 as a result of higher construction volume, primarily related to the Exelon and 27th Street Oceanfront hotel construction projects.

Rental expenses for the three and nine months ended September 30, 2015 increased $0.5 million and $2.0 million, respectively, compared to the corresponding periods in 2014, as follows:

 

     Three months ended
September 30,
            Nine months ended
September 30,
        
     2015      2014      Change      2015      2014      Change  
     ($ in thousands)  

Office

   $ 1,758       $ 1,742       $ 16       $ 5,216       $ 4,756       $ 460   

Retail

     1,478         1,255         223         4,223         3,764         459   

Multifamily

     1,629         1,417         212         4,817         3,710         1,107   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 4,865       $ 4,414       $ 451       $ 14,256       $ 12,230       $ 2,026   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Office, retail and multifamily rental expenses for the three and nine months ended September 30, 2015 all increased compared to the corresponding periods in 2014 as a result of new real estate coming out of development and into operation. Retail rental expenses also increased as a result of property acquisitions.

Real estate taxes for the three and nine months ended September 30, 2015 increased $0.6 million and $1.4 million, respectively, compared to the corresponding periods in 2014, as follows:

 

     Three months ended
September 30,
            Nine months ended
September 30,
        
     2015      2014      Change      2015      2014      Change  
     ($ in thousands)  

Office

   $ 734       $ 609       $ 125       $ 2,228       $ 1,697       $ 531   

Retail

     810         540         270         2,080         1,546         534   

Multifamily

     512         331         181         1,364         988         376   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,056       $ 1,480       $ 576       $ 5,672       $ 4,231       $ 1,441   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Office, retail and multifamily real estate taxes for the three and nine months ended September 30, 2015 all increased compared to the corresponding periods in 2014 as a result of new real estate coming out of development and into operation. Retail real estate taxes also increased as a result of property acquisitions.

General contracting and real estate services expenses for the three and nine months ended September 30, 2015 increased 70% and 85%, respectively, compared to the corresponding periods in 2014 because of higher volume on our construction contracts.

Depreciation and amortization for the three and nine months ended September 30, 2015 increased 38% and 35%, respectively, compared to the corresponding periods in 2014 because of new real estate coming out of development and into operation and property acquisitions.

General and administrative expenses for the three and nine months ended September 30, 2015 increased 8% and 9%, respectively, compared to the corresponding periods in 2014 because of higher regulatory and compliance costs.

Acquisition, development and other pursuit costs for the three and nine months ended September 30, 2015 increased compared to the corresponding periods in 2014. During the three and nine months ended September 30, 2015, we acquired three and five properties, respectively, compared to only one – Dimmock Square – during the both three and nine months ended September 30, 2014.

Impairment charges were not significant for either the three or nine months ended September 30, 2015 or 2014.

Interest expense for the three and nine months ended September 30, 2015 increased 29% and 24%, respectively, compared to the corresponding periods in 2014 primarily because of the interest expense associated with new real estate coming out of development and into operation.

During the nine months ended September 30, 2015, we recognized a $0.4 million loss on extinguishment of debt representing the unamortized debt issuance costs associated with repaid mortgages and construction loans.

 

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During the nine months ended September 30, 2015, we recognized a $6.2 million gain on our sale of the Sentara Williamsburg office building and a $7.2 million gain on our sale of Whetstone Apartments.

Other losses for the three and nine months ended September 30, 2015 and 2014 were primarily attributable to negative mark-to-market adjustments on our interest rate derivatives.

Income tax benefits (provisions) that we recognized during the three and nine months ended September 30, 2015 and 2014 were 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, borrowings available under our credit facility and proceeds from the sale of common stock through our at-the-market continuous equity offering program (“ATM Equity Offering Program”).

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 September 30, 2015, we had unrestricted cash and cash equivalents of $15.2 million and restricted cash of $4.2 million available for both current liquidity needs as well as development activities. As of September 30, 2015, we had $36.0 million available under our credit facility and $42.3 million available for future issuance under our ATM Equity Offering Program to meet our short-term liquidity requirements.

ATM Equity Offering Program

On May 5, 2015, we commenced our ATM Equity Offering Program through which we may, from time to time, issue and sell shares of common stock having an aggregate offering price of up to $50.0 million. Our sale of shares under the ATM Equity Offering Program will depend on a variety of factors, including among other things, market conditions, the trading price of our common stock, capital needs and our determination of appropriate sources of funding. We have no obligation to sell any shares and may at any time suspend or terminate the ATM Equity Offering Program. Each of our sales agents are entitled to a commission of up to 2.0% of the gross offering proceeds of shares that they sell through the ATM Equity Offering Program. We intend to use any net proceeds from the sale of shares through the ATM Equity Offering Program to fund development or redevelopment activities, fund potential acquisition opportunities, repay indebtedness, including amounts outstanding under our credit facility, or for general corporate purposes. Since the inception of the ATM Equity Offering Program to September 30, 2015, we raised $7.7 million of gross proceeds at a weighted average price of $10.29 per share. Net proceeds after offering costs and commissions were $7.4 million.

Credit Facility

On February 20, 2015, we agreed to a $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 credit facility replaced the prior $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 credit facility for general corporate purposes, including funding acquisitions, development and redevelopment of properties in our portfolio and for working capital.

The 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 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.

 

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

The 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 credit facility, depending on the amount of borrowings under the 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.

The 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 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 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 credit facility.

 

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Consolidated Indebtedness

The following table sets forth our consolidated indebtedness as of September 30, 2015 ($ in thousands):

 

Secured Debt

   Amount
Outstanding
    Interest
Rate (a)
    Effective Rate for
Variable-Rate
Debt
    Maturity Date      Balance at
Maturity
 

249 Central Park Retail

   $ 15,355        5.99       September 8, 2016       $ 15,084   

South Retail

     6,774        5.99          September 8, 2016         6,655   

Fountain Plaza Retail

     7,678        5.99          September 8, 2016         7,542   

4525 Main Street

     31,613        LIBOR+1.95        2.15     January 30, 2017         31,613   

Encore Apartments

     25,184        LIBOR+1.95        2.15     January 30, 2017         25,184   

North Point Note 5

     670        LIBOR+2.00        3.57 %(b)      February 1, 2017         641   

Harrisonburg Regal

     3,513        6.06          June 8, 2017         3,165   

Commonwealth of Virginia – Chesapeake

     4,933        LIBOR+1.90        2.10     August 28, 2017         4,933   

Hanbury Village

     21,034        6.67          October 11, 2017         20,499   

Lightfoot Marketplace

     6,374        LIBOR+1.90        2.10     November 14, 2017         6,374   

Sandbridge Commons

     8,673        LIBOR+1.85        2.05     January 17, 2018         8,188   

Oceaneering

     18,707        LIBOR+1.75        1.95     February 28, 2018         17,987   

Columbus Village Note 1

     6,470        LIBOR+2.00        3.05 %(b)      April 5, 2018         6,033   

Columbus Village Note 2

     2,321        LIBOR+2.00        2.20     April 5, 2018         2,205   

Johns Hopkins Village

     —          LIBOR+1.90        2.10     July 30, 2018         —     

North Point Note 1

     10,015        6.45          February 5, 2019         9,333   

Socastee Commons

     4,979 (c)      4.57          January 6, 2023         4,223   

North Point Note 2

     2,685        7.25          September 15, 2025         1,344   

Smith’s Landing

     21,402        4.05          June 1, 2035         —    

Liberty Apartments

     20,387 (c)      5.66          November 1, 2043         —    

The Cosmopolitan

     46,675        3.75          July 1, 2051         —    

Unamortized fair value adjustments

     (1,297            —    
  

 

 

          

 

 

 

Total secured debt

   $ 264,145             $ 171,003   

Unsecured Debt

           

Revolving credit facility

     106,000        LIBOR+1.40 to 2.00        1.75     February 20, 2019         106,000   

Term loan

     50,000        LIBOR+1.35 to 1.95        1.70 %(b)      February 20, 2020         50,000   
  

 

 

          

 

 

 

Total unsecured debt

   $ 156,000             $ 156,000   
  

 

 

          

 

 

 

Indebtedness

   $ 420,145             $ 327,003   
  

 

 

          

 

 

 

 

(a) LIBOR rate is determined by individual lenders.
(b) Subject to an interest rate swap agreement.
(c) Principal balance excluding fair value adjustments.

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

On October 6, 2015, we secured the Oyster Point office building with a $6.4 million note that bears interest at LIBOR plus 1.40% to 2.00% and matures on February 28, 2017.

On October 30, 2015, we completed the sale of the Oceaneering International facility and repaid the $18.7 million construction loan secured by the property.

 

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Table of Contents

As of September 30, 2015, our outstanding indebtedness matures during the following years:

 

Year

   Balance at
Maturity
     Percentage of
Total
 
     ($ in thousands)         

2015

   $ —           —  

2016

     29,281         9   

2017

     92,409         28   

2018

     34,413         11   

2019

     115,333         35   

Thereafter

     55,567         17   
  

 

 

    

 

 

 
   $ 327,003         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 $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.

On July 13, 2015, we entered into a $6.5 million floating-to-fixed interest rate swap attributable to one-month LIBOR indexed interest payments. The $6.5 million interest rate swap has a fixed rate of 3.05%, an effective date of July 13, 2015 and a maturity date of April 5, 2018. We designated this interest rate swap as a cash flow hedge of variable interest payments based on one-month LIBOR.

As of September 30, 2015, we were party to the following LIBOR interest rate cap agreements ($ in thousands):

 

Effective Date

   Maturity Date      Strike Rate     Notional Amount  

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

        $ 171,546   
       

 

 

 

As of September 30, 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%

   $ 108,500   

> 1.50%

     63,046   
  

 

 

 

Total

   $ 171,546   
  

 

 

 

On October 26, 2015, we entered into a LIBOR interest rate cap agreement on a notional amount of $75.0 million at a strike rate of 1.25% for a premium of $0.1 million. The interest rate cap agreement expires on October 15, 2017.

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 September 30, 2015, we had aggregate outstanding letters of credit totaling $8.0 million that expire during 2016. However, any of our standby letters of credit may be renewed for additional periods until completion of the underlying contractual obligation.

 

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Table of Contents

Cash Flows

 

     Nine Months Ended
September 30,
        
     2015      2014      Change  
     ($ in thousands)  

Operating activities

   $ 17,624       $ 21,292       $ (3,668

Investing activities

     (60,655      (87,470      26,815   

Financing activities

     32,339         64,397         (32,058
  

 

 

    

 

 

    

 

 

 

Net decrease

   $ (10,692    $ (1,781    $ (8,911
  

 

 

    

 

 

    

 

 

 

Cash and cash equivalents, beginning of period

   $ 25,883       $ 18,882      

Cash and cash equivalents, end of period

   $ 15,191       $ 17,101      

Net cash provided by operating activities during the nine months ended September 30, 2015 decreased 17% compared to the nine months ended September 30, 2014, primarily as a result of less net cash collected under our construction contracts.

During the nine months ended September 30, 2015, we invested 31% less cash compared to the nine months ended September 30, 2014, primarily as a result of lower investment in new real estate development.

Net cash provided by financing activities during the nine months ended September 30, 2015 decreased 50% compared to the nine months ended September 30, 2014, primarily as a result of lower net proceeds from common stock sales.

Non-GAAP Financial Measures

We calculate FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts (“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 year-over-year, captures trends in occupancy rates, rental rates and operating costs. We also believe that, as a widely recognized measure of the performance of REITs, FFO will be used by investors as a basis to compare our operating performance with that of other REITs.

However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effects and could materially impact our results from operations, the utility of FFO as a measure of our performance is limited. In addition, other equity REITs may not calculate FFO in accordance with the NAREIT definition as we do, and, accordingly, our 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. Also, FFO 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 year-over-year 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 and nine months ended September 30, 2015 and 2014 to net income, the most directly comparable GAAP equivalent:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2015      2014      2015      2014  
     (in thousands, except per share data)  

Net income

   $ 4,337       $ 2,754       $ 22,740       $ 7,533   

Depreciation and amortization

     6,317         4,567         16,991         12,593   

Gain on real estate dispositions

     —           —           (13,407      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

FFO

   $ 10,654       $ 7,321       $ 26,324       $ 20,126   

Acquisition, development and other pursuit costs

     288         174         1,050         174   

Impairment charges

     —           15         23         15   

Loss on extinguishment of debt

     3         —           410         —     

Derivative losses (income)

     51         (46      238         123   
  

 

 

    

 

 

    

 

 

    

 

 

 

Normalized FFO

   $ 10,996       $ 7,464       $ 28,045       $ 20,438   
  

 

 

    

 

 

    

 

 

    

 

 

 

FFO per diluted share

   $ 0.25       $ 0.21       $ 0.65       $ 0.60   

Normalized FFO per diluted share

   $ 0.26       $ 0.22       $ 0.69       $ 0.61   

Weighted average common shares – diluted

     41,877         34,557         40,691         33,479   

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.

 

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 September 30, 2015, approximately $166.3 million, or 39.6%, of our debt had fixed interest rates and approximately $253.8 million, or 60.4%, 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 $2.5 million per year. At September 30, 2015, LIBOR was approximately 20 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 $0.5 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 September 30, 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 September 30, 2015, that our disclosure controls and procedures were effective in ensuring

 

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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.

There have been no changes to our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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

None.

Issuer Purchases of Equity Securities

None.

 

Item 3. Defaults on Senior Securities

None.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

Item 5. Other Information

On November 2, 2015, we entered into an agreement to sell the Richmond Tower office building for $78.0 million. We expect to complete the disposition in 2015, subject to the satisfaction of certain customary closing conditions including satisfactory completion of the buyer’s due diligence. There can be no assurances that these conditions will be satisfied or that we will complete the disposition on the terms described herein or at all.

 

Item 6. Exhibits

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

 

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Signatures

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

 

    ARMADA HOFFLER PROPERTIES, INC.
Date: November 4, 2015    

/s/ LOUIS S. HADDAD

    Louis S. Haddad
   

President and Chief Executive Officer

(Principal Executive Officer)

Date: November 4, 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

  10.1    Amendment No. 2, dated as of July 10, 2015, to the First Amended and Restated Agreement of Limited Partnership of Armada Hoffler, L.P., dated as of May 13, 2013 (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed on July 16, 2015)
  10.2    Construction Loan Agreement, dated as of July 30, 2015, by and among Hopkins Village, LLC, as Borrower, Bank of America, N.A., and the other financial institutions party thereto (Incorporated by reference to the Company’s Current Report on Form 8-K, filed on August 5, 2015)
  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

 

35

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 reports dated May 5, 2015, August 5, 2015 and November 4, 2015 relating to the unaudited condensed interim consolidated financial statements of Armada Hoffler Properties, Inc. that are included in its Forms 10-Q for the quarters ended March 31, 2015, June 30, 2015 and September 30, 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

 

    333-204063 on Form S-3, dated May 11, 2015 and June 1, 2015 (Amendment No. 1)

/s/ Ernst & Young LLP

Richmond, Virginia

November 4, 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: November 4, 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: November 4, 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 September 30, 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: November 4, 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 September 30, 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: November 4, 2015    

/s/ MICHAEL P. O’HARA

    Michael P. O’Hara
    Chief Financial Officer and Treasurer