ARMADA HOFFLER PROPERTIES, INC. References to "we," "our," "us," and "our company" refer toArmada Hoffler Properties, Inc. , aMaryland corporation, together with our consolidated subsidiaries, includingArmada Hoffler, L.P. , aVirginia limited partnership (the "Operating Partnership"), of which we are the sole general partner. The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report.
Forward-Looking Statements
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, including as a result of the COVID-19 pandemic;
?our ability to commence or continue construction and development projects on the timeframes and terms currently anticipated;
•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;
•the inability of one or more mezzanine loan borrowers to repay mezzanine loans in accordance with their contractual terms;
•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;
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•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
•limitations imposed on our business and our ability to satisfy complex rules in order for us to maintain our qualification as a REIT forU.S. federal income tax purposes; •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; and
•potential negative impacts from changes to
While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. 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 other documents that we file from time to time with theSecurities and Exchange Commission (the "SEC").
Business Description
We are a vertically-integrated, self-managed REIT with four decades of experience developing, building, acquiring and managing high-quality office, retail and multifamily properties located primarily in the Mid-Atlantic andSoutheastern United States . We also provide general construction and development services to third-party clients, in addition to developing and building properties to be placed in our stabilized portfolio. As ofJune 30, 2022 , our operating property portfolio consisted of the following properties: Property Segment Location Ownership Interest 4525 Main Street Office Virginia Beach, Virginia* 100 % Armada Hoffler Tower Office Virginia Beach, Virginia* 100 % Brooks Crossing Office Office Newport News, Virginia 100 % Exelon Office Office Baltimore, Maryland** 79 % (1) One City Center Office Durham, North Carolina 100 % One Columbus Office Virginia Beach, Virginia* 100 % Thames Street Wharf Office Baltimore, Maryland** 100 % Two Columbus Office Virginia Beach, Virginia* 100 % 249 Central Park Retail Retail Virginia Beach, Virginia* 100 % Apex Entertainment Retail Virginia Beach, Virginia* 100 % Broad Creek Shopping Center Retail Norfolk, Virginia 100 % Broadmoor Plaza Retail South Bend, Indiana 100 % Brooks Crossing Retail Retail Newport News, Virginia 65 % (2) Columbus Village Retail Virginia Beach, Virginia* 100 % Columbus Village II Retail Virginia Beach, Virginia* 100 % Commerce Street Retail Retail Virginia Beach, Virginia* 100 % Delray Beach Plaza Retail Delray Beach, Florida 100 % Dimmock Square Retail Colonial Heights, Virginia 100 % Fountain Plaza Retail Retail Virginia Beach, Virginia* 100 % Greenbrier Square Retail Chesapeake, Virginia 100 % Greentree Shopping Center Retail Chesapeake, Virginia 100 % 25
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Property Segment Location Ownership Interest
Hanbury Village Retail Chesapeake, Virginia 100 %
Harrisonburg Regal Retail Harrisonburg, Virginia 100 %
Lexington Square Retail Lexington, South Carolina 100 %
Mount Pleasant, South
Market at Mill Creek Retail Carolina 70 % (2)
Marketplace at Hilltop Retail Virginia Beach, Virginia 100 %
Nexton Square Retail Summerville, South Carolina 100 %
North Hampton Market Retail Taylors, South Carolina 100 %
North Pointe Center Retail Durham, North Carolina 100 %
Overlook Village Retail Asheville, North Carolina 100 %
Parkway Centre Retail Moultrie, Georgia 100 %
Parkway Marketplace Retail Virginia Beach, Virginia 100 %
Patterson Place Retail Durham, North Carolina 100 %
Perry Hall Marketplace Retail Perry Hall, Maryland 100 %
Premier Retail Retail Virginia Beach, Virginia* 100 %
Providence Plaza Retail Charlotte, North Carolina 100 %
Red Mill Commons Retail Virginia Beach, Virginia 100 %
Sandbridge Commons Retail Virginia Beach, Virginia 100 % (3)
South Retail Retail Virginia Beach, Virginia* 100 %
South Square Retail Durham, North Carolina 100 %
Southgate Square Retail Colonial Heights, Virginia 100 %
Southshore Shops Retail Chesterfield, Virginia 100 %
Studio 56 Retail Retail Virginia Beach, Virginia* 100 %
Tyre Neck Harris Teeter Retail Portsmouth, Virginia 100 %
Wendover Village Retail Greensboro, North Carolina 100 %
1305 Dock Street Multifamily Baltimore, Maryland** 79 % (1)
1405 Point Multifamily Baltimore, Maryland** 100 %
Edison Apartments Multifamily Richmond, Virginia 100 %
Encore Apartments Multifamily Virginia Beach, Virginia* 100 %
Greenside Apartments Multifamily Charlotte, North Carolina 100 %
Liberty Apartments Multifamily Newport News, Virginia 100 %
Premier Apartments Multifamily Virginia Beach, Virginia* 100 %
Smith's Landing Multifamily Blacksburg, Virginia 100 %
The Cosmopolitan Multifamily Virginia Beach, Virginia* 100 %
The Residences at Annapolis
Junction Multifamily Annapolis Junction, Maryland 95 % (2)(4)
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*Located in theTown Center of Virginia Beach **Located atHarbor Point inBaltimore (1) We own a 90% economic interest in this property, including an 11% economic interest through a note receivable. (2) We are entitled to a preferred return on our investment in this property. (3) Held for sale as ofJune 30, 2022 . OnJuly 26, 2022 , we sold the AutoZone and Valvoline outparcels of this property. (4) Held for sale as ofJune 30, 2022 . OnJuly 22, 2022 , we sold this property. 26
-------------------------------------------------------------------------------- Table of Contents As ofJune 30, 2022 , the following properties that we consolidate for financial reporting purposes were either under development or not yet stabilized: Property Segment Location Ownership Interest Wills Wharf Office Baltimore, Maryland** 100 % Chronicle Mill Multifamily Belmont, North Carolina 85 % (1) Gainesville Apartments Multifamily Gainesville, Georgia 95 % (2) Southern Post Mixed-use Roswell, Georgia 100 %
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**Located atHarbor Point inBaltimore (1) We are entitled to a preferred return on our investment in this property. (2) We were required to purchase our partner's ownership interest after completion of the project, contingent upon obtaining a certificate of occupancy and achieving certain thresholds of net operating income. OnApril 11, 2022 , we paid a$1.1 million earn-out to the partner due to the receipt of the certificate of occupancy. The remaining earn-out is estimated at$3.1 million and is expected to be paid out by the end of this year. Additionally, we anticipate there will be cost savings related to the development of the asset to be shared with our partner. Acquisitions OnJanuary 14, 2022 , we acquired a 79% membership interest and an additional 11% economic interest in the partnership that owns theExelon Building for a purchase price of approximately$92.2 million in cash and a loan to the seller of$12.8 million .The Exelon Building is a mixed-use structure located inBaltimore's Harbor Point and is comprised of an office building, the Exelon Office, that serves as the headquarters for Constellation Energy Corp., which was spun-off from Exelon, a Fortune 100 energy company, inFebruary 2022 , as well as a multifamily component,1305 Dock Street . The Exelon Office also includes a parking garage and retail space.The Exelon Building was subject to a$156.1 million loan, which we immediately refinanced following the acquisition with a new$175.0 million loan. The new loan bears interest at a rate of the Bloomberg Short-Term Bank Yield Index ("BSBY") plus a spread of 1.50% and will mature onNovember 1, 2026 . This loan is hedged by an interest rate cap corridor of 1.00% and 3.00% as well as an interest rate cap of 4.00%.
On
On
Equity Method Investments
OnApril 1, 2022 , we acquired a 78% interest in Harbor Point Parcel 4, a real estate venture withBeatty Development Group , for purposes of developing a mixed-use project, which is planned to include multifamily units, retail space, and a parking garage. We hold an option to increase our ownership to 90%. We have a projected equity commitment of$100.0 million relating to this project, of which we had funded$19.7 million as ofJune 30, 2022 .
Dispositions
On
On
In addition to the losses recognized on the sales of theHoffler Place andSummit Place student-housing properties during the three months endedJune 30, 2022 , we recognized impairment of real estate of$18.3 million to record these properties at their fair values during the three months endedDecember 31, 2021 . OnJune 29, 2022 , we completed the sale of the Home Depot and Costco outparcels at North Pointe for a sale price of$23.9 million . The gain on disposition was$20.9 million . 27
-------------------------------------------------------------------------------- Table of Contents OnJuly 22, 2022 , we soldThe Residences at Annapolis Junction for a sale price of$150.0 million . This property was classified as held for sale as ofJune 30, 2022 .
On
Second Quarter 2022 and Recent Highlights
The following highlights our results of operations and significant transactions
for the three months ended
•Net income attributable to common stockholders and holders of units of limited partnership interest in theOperating Partnership ("OP Unitholders") of$27.8 million , or$0.31 per diluted share, compared to$5.6 million , or$0.07 per diluted share, for the three months endedJune 30, 2021 . •Funds from operations attributable to common stockholders and OP Unitholders ("FFO") of$27.0 million , or$0.31 per diluted share, compared to$22.9 million , or$0.28 per diluted share, for the three months endedJune 30, 2021 . See "Non-GAAP Financial Measures."
•Normalized funds from operations available to common stockholders and OP
Unitholders ("Normalized FFO") of
•Announced a third quarter cash dividend of
•Stabilized operating property portfolio occupancy increased to 97.3% as of
•Same Store net operating income ("NOI") increased 6.0% on a GAAP (as defined
below) basis compared to the quarter ended
•Third-party construction backlog totaling
•Positive releasing spreads during the second quarter of 9.9% on a GAAP basis for retail and 13.1% on a GAAP basis for office.
•Achieved an 8.1% increase in rental rates on apartment trade outs across the multifamily segment.
•Completed
•Appointed
•Executed a new office lease withFranklin Templeton for 60,000 square feet at theCompany's Wills Wharf office building inBaltimore's Harbor Point neighborhood. The investment management firm has agreed to lease the entire fifth floor and a portion of the fourth floor ofWills Wharf and will bring the building to 91% occupancy. Segment Results of Operations As ofJune 30, 2022 , 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) ("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 28 -------------------------------------------------------------------------------- Table of Contents 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, the most directly comparable GAAP measure. We define same store properties as those properties that we owned and operated and that were stabilized for the entirety of both periods presented. We generally consider a property to be stabilized upon 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. Additionally, any property that is fully or partially taken out of service for the purpose of redevelopment is no longer considered stabilized until the redevelopment activities are complete, the asset is placed back into service, and the occupancy criterion above is again met. A property may also be fully or partially taken out of service as a result of a partial disposition, depending on the significance of the portion of the property disposed. Finally, any property classified as held for sale is taken out of service for the purpose of computing same store operating results.
Office Segment Data
Office rental revenues, property expenses, and NOI for the three and six months
ended
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 Change 2022 2021 Change
Rental revenues $ 18,314 $ 11,756 $
6,558
6,635 4,351 2,284 12,279 8,584 3,695
Segment NOI $ 11,679 $ 7,405 $ 4,274 $ 23,058 $ 14,807 $ 8,251
Office segment NOI for the three and six months ended June 30, 2022 increased
57.7% and 55.7%, respectively, compared to the three and six months ended
June 30, 2021 primarily due to the acquisition of the Exelon Office in January
2022 .
Office Same Store Results
Office same store results for the three and six months ended
Office same store rental revenues, property expenses, and NOI for the three and
six months ended
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 Change 2022 2021 Change
Rental revenues $ 10,371 $ 10,290 $ 81 $ 20,546 $ 20,500 $ 46
Property expenses 3,697 3,527 170 7,259 7,011 248
Same Store NOI $ 6,674 $ 6,763 $ (89) $ 13,287 $ 13,489 $ (202)
Non-Same Store NOI 5,005 642 4,363 9,771 1,318 8,453
Segment NOI $ 11,679 $ 7,405 $ 4,274 $ 23,058 $ 14,807 $ 8,251 Office same store NOI for the three and six months ended
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Retail Segment Data
Retail rental revenues, property expenses, and NOI for the three and six months
ended
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 Change 2022 2021 Change
Rental revenues $ 21,544 $ 19,204 $
2,340
5,604 5,193 411 11,343 10,056 1,287
Segment NOI $ 15,940 $ 14,011 $ 1,929 $ 31,631 $ 27,403 $ 4,228
Retail segment NOI for the three and six months ended June 30, 2022 increased
13.8% and 15.4%, respectively, compared to the three and six months ended
June 30, 2021 primarily due to the acquisitions of Delray Beach Plaza ,
Greenbrier Square , and Overlook Village , as well as increased occupancy in the
same store portfolio.
Retail Same Store Results
Retail same store results for the three and six months ended June 30, 2022 and
2021 exclude Greenbrier Square , Overlook Village , the outparcels that were
classified as held for sale at Sandbridge Commons as of June 30, 2022 , and
properties that were disposed in 2021 and 2022. Retail same store results for
the six months ended June 30, 2022 and June 30, 2021 also exclude Delray Beach
Plaza and Premier Retail.
Retail same store rental revenues, property expenses, and NOI for the three and
six months ended
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 Change 2022 2021 Change
Rental revenues $ 19,736 $ 18,686 $ 1,050 $ 36,422 $ 34,063 $ 2,359
Property expenses 4,983 4,857 126 9,241 8,737 504
Same Store NOI $ 14,753 $ 13,829 $ 924 $ 27,181 $ 25,326 $ 1,855
Non-Same Store NOI 1,187 182 1,005 4,450 2,077 2,373
Segment NOI $ 15,940 $ 14,011 $ 1,929 $ 31,631 $ 27,403 $ 4,228
Retail same store NOI for the three and six months ended June 30, 2022 increased
6.7% and 7.3%, respectively, compared to the three and six months ended June 30,
2021 , primarily due to increased occupancy throughout the portfolio.
Multifamily Segment Data
Multifamily rental revenues, property expenses, and NOI for the three and six
months ended
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 Change 2022 2021 Change
Rental revenues $ 15,366 $ 16,418 $ (1,052) $ 31,548 $ 32,269 $ (721)
Property expenses 6,283 7,213 (930) 12,973 14,255 (1,282)
Segment NOI $ 9,083 $ 9,205 $ (122) $ 18,575 $ 18,014 $ 561
Multifamily segment NOI for the three months ended June 30, 2022 decreased 1.3%
compared to the three months ended June 30, 2021 primarily due to the
dispositions of Johns Hopkins Village , Hoffler Place , and Summit Place . The
decrease was partially offset by the acquisition of 1305 Dock Street ,
Gainesville Apartments beginning operations, and increased rental rates across
multiple properties. Multifamily segment NOI for the six months ended June 30,
2022 increased 3.1% compared to the six months ended June 30, 2021 primarily due
to the acquisition of 1305 Dock Street and the beginning of operations at
Gainesville Apartments as well as higher occupancy, increased rental rates
across multiple properties, and a decrease in expense per unit.
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Multifamily Same Store Results
Multifamily same store results for the three and six months ended June 30, 2022
and 2021 exclude 1305 Dock Street , Gainesville Apartments , and The Residences at
Annapolis Junction , which was classified as held for sale as of June 30, 2022 ,
as well as properties that were disposed in 2021 and 2022.
Multifamily same store rental revenues, property expenses and NOI for the three
and six months ended
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 Change 2022 2021 Change
Rental revenues $ 10,958 $ 10,131 $ 827 $ 21,679 $ 19,775 $ 1,904
Property expenses 4,085 4,022 63 8,107 7,946 161
Same Store NOI $ 6,873 $ 6,109 $ 764 $ 13,572 $ 11,829 $ 1,743
Non-Same Store NOI 2,210 3,096 (886) 5,003 6,185 (1,182)
Segment NOI $ 9,083 $ 9,205 $ (122) $ 18,575 $ 18,014 $ 561
Multifamily same store NOI for the three and six months ended June 30, 2022
increased 12.5% and 14.7%, respectively, compared to the three and six months
ended June 30, 2021 primarily due to increased rental rates and higher occupancy
rates in the same store portfolio.
General contracting and real estate services revenues, expenses, and gross
profit for the three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 Change 2022 2021 Change
Segment revenues $ 45,273 $ 18,408 $ 26,865 $ 69,923 $ 53,971 $ 15,952
Segment expenses 43,418 18,131 25,287 67,239 52,406 14,833
Segment gross profit $ 1,855 $ 277 $ 1,578 $ 2,684 $ 1,565 $ 1,119
Operating margin 4.1 % 1.5 % 2.6 % 3.8 % 2.9 % 0.9 %
General contracting and real estate services segment gross profit for the three
and six months ended June 30, 2022 increased by $1.6 million and $1.1 million ,
respectively, compared to the three and six months ended June 30, 2021 primarily
due to a greater number of third party contracts undertaken in 2022.
The changes in third party construction backlog for the three and six months
ended
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 2022 2021
Beginning backlog $ 419,439 $ 38,838 $ 215,518 $ 71,258
New contracts/change orders 167,143 50,278 395,746 53,402
Work performed (45,368) (18,897) (70,050) (54,441)
Ending backlog $ 541,214 $ 70,219 $ 541,214 $ 70,219
As of June 30, 2022 , we had $111.0 million in the backlog relating to the Harbor
Point Parcel 4 project, $155.1 million in the backlog on the Harbor Point Parcel
3 project, and $51.8 million in the backlog on the Slater Road Apartments
project. The amounts relating to our Harbor Point Parcel 3 and Harbor Point
Parcel 4 projects pertain to our equity method investments, for which a portion
of our profit margin will be eliminated in our operating results.
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