UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 20172018
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, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth 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 | ◻ |
| | Emerging Growth Company | x |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x
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 August 1, 2017,July 31, 2018, the Registrant had 44,932,24148,891,867 shares of common stock outstanding.
ARMADA HOFFLER PROPERTIES, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 20172018
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) | | | | June 30, 2017 | | December 31, 2016 | | June 30, 2018 | | December 31, 2017 |
| | (Unaudited) | | | | (Unaudited) | | |
ASSETS | | | | | | | | |
Real estate investments: | | | | | | | | |
Income producing property | | $ | 900,782 |
| | $ | 894,078 |
| | $ | 934,929 |
| | $ | 910,686 |
|
Held for development | | 680 |
| | 680 |
| | 1,474 |
| | 680 |
|
Construction in progress | | 39,361 |
| | 13,529 |
| | 157,795 |
| | 83,071 |
|
| | 940,823 |
| | 908,287 |
| | 1,094,198 |
| | 994,437 |
|
Accumulated depreciation | | (152,438 | ) | | (139,553 | ) | | (177,966 | ) | | (164,521 | ) |
Net real estate investments | | 788,385 |
| | 768,734 |
| | 916,232 |
| | 829,916 |
|
Cash and cash equivalents | | 18,587 |
| | 21,942 |
| | 12,279 |
| | 19,959 |
|
Restricted cash | | 3,139 |
| | 3,251 |
| | 3,139 |
| | 2,957 |
|
Accounts receivable, net | | 15,027 |
| | 15,052 |
| | 16,444 |
| | 15,691 |
|
Notes receivable | | 73,382 |
| | 59,546 |
| | 93,478 |
| | 83,058 |
|
Construction receivables, including retentions | | 45,820 |
| | 39,433 |
| | 19,868 |
| | 23,933 |
|
Construction contract costs and estimated earnings in excess of billings | | 53 |
| | 110 |
| | 1,287 |
| | 245 |
|
Equity method investments | | 10,950 |
| | 10,235 |
| | 14,538 |
| | 11,411 |
|
Other assets | | 58,995 |
| | 64,165 |
| | 55,106 |
| | 55,953 |
|
Total Assets | | $ | 1,014,338 |
| | $ | 982,468 |
| | $ | 1,132,371 |
| | $ | 1,043,123 |
|
LIABILITIES AND EQUITY | | | | | | | | |
Indebtedness, net | | $ | 465,291 |
| | $ | 522,180 |
| | $ | 580,446 |
| | $ | 517,272 |
|
Accounts payable and accrued liabilities | | 9,311 |
| | 10,804 |
| | 11,525 |
| | 15,180 |
|
Construction payables, including retentions | | 58,546 |
| | 51,130 |
| | 40,719 |
| | 47,445 |
|
Billings in excess of construction contract costs and estimated earnings | | 6,780 |
| | 10,167 |
| | 1,711 |
| | 3,591 |
|
Other liabilities | | 39,889 |
| | 39,209 |
| | 41,000 |
| | 39,352 |
|
Total Liabilities | | $ | 579,817 |
| | $ | 633,490 |
| | 675,401 |
| | 622,840 |
|
| | | | | | | | |
Redeemable noncontrolling interest | | 2,000 |
| | — |
| |
| | | | | |
Stockholders’ equity: | | | | | | | | |
Preferred stock, $0.01 par value, 100,000,000 shares authorized, none issued and outstanding as of June 30, 2017 and December 31, 2016 | | — |
| | — |
| |
Common stock, $0.01 par value, 500,000,000 shares authorized, 44,932,241 and 37,490,361 shares issued and outstanding as of June 30, 2017 and December 31, 2016, respectively | | 449 |
| | 374 |
| |
Preferred stock, $0.01 par value, 100,000,000 shares authorized, none issued and outstanding as of June 30, 2018 and December 31, 2017 | | | — |
| | — |
|
Common stock, $0.01 par value, 500,000,000 shares authorized, 48,768,363 and 44,937,763 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively | | | 488 |
| | 449 |
|
Additional paid-in capital | | 288,162 |
| | 197,114 |
| | 338,577 |
| | 287,407 |
|
Distributions in excess of earnings | | (55,709 | ) | | (49,345 | ) | | (70,648 | ) | | (61,166 | ) |
Total stockholders’ equity | | 232,902 |
| | 148,143 |
| | 268,417 |
| | 226,690 |
|
Noncontrolling interests | | 199,619 |
| | 200,835 |
| | 188,553 |
| | 193,593 |
|
Total Equity | | 432,521 |
| | 348,978 |
| | 456,970 |
| | 420,283 |
|
Total Liabilities and Equity | | $ | 1,014,338 |
| | $ | 982,468 |
| | $ | 1,132,371 |
| | $ | 1,043,123 |
|
See Notes to Condensed Consolidated Financial Statements.
ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
| | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
Revenues | | | | | | | | | | | | | | | | |
Rental revenues | | $ | 26,755 |
| | $ | 24,251 |
| | $ | 53,987 |
| | $ | 47,534 |
| | $ | 28,598 |
| | $ | 26,755 |
| | $ | 57,297 |
| | $ | 53,987 |
|
General contracting and real estate services revenues | | 56,671 |
| | 33,200 |
| | 120,190 |
| | 70,003 |
| | 20,654 |
| | 56,671 |
| | 43,704 |
| | 120,190 |
|
Total revenues | | 83,426 |
| | 57,451 |
| | 174,177 |
| | 117,537 |
| | 49,252 |
| | 83,426 |
| | 101,001 |
| | 174,177 |
|
| | | | | | | | | | | | | | | | |
Expenses | | | | | | | | | | | | | | | | |
Rental expenses | | 6,171 |
| | 5,071 |
| | 12,239 |
| | 10,400 |
| | 6,522 |
| | 6,171 |
| | 12,946 |
| | 12,239 |
|
Real estate taxes | | 2,595 |
| | 2,382 |
| | 5,104 |
| | 4,731 |
| | 2,735 |
| | 2,595 |
| | 5,548 |
| | 5,104 |
|
General contracting and real estate services expenses | | 54,015 |
| | 32,025 |
| | 115,211 |
| | 67,062 |
| | 20,087 |
| | 54,015 |
| | 42,501 |
| | 115,211 |
|
Depreciation and amortization | | 9,304 |
| | 8,602 |
| | 18,779 |
| | 16,751 |
| | 9,179 |
| | 9,304 |
| | 18,457 |
| | 18,779 |
|
General and administrative expenses | | 2,678 |
| | 2,224 |
| | 5,664 |
| | 4,708 |
| | 2,764 |
| | 2,678 |
| | 5,725 |
| | 5,664 |
|
Acquisition, development and other pursuit costs | | 369 |
| | 437 |
| | 416 |
| | 1,141 |
| | 9 |
| | 369 |
| | 93 |
| | 416 |
|
Impairment charges | | 27 |
| | — |
| | 31 |
| | 35 |
| | 98 |
| | 27 |
| | 98 |
| | 31 |
|
Total expenses | | 75,159 |
| | 50,741 |
| | 157,444 |
| | 104,828 |
| | 41,394 |
| | 75,159 |
| | 85,368 |
| | 157,444 |
|
Operating income | | 8,267 |
| | 6,710 |
| | 16,733 |
| | 12,709 |
| | 7,858 |
| | 8,267 |
| | 15,633 |
| | 16,733 |
|
Interest income | | 1,658 |
| | 722 |
| | 3,056 |
| | 904 |
| | 2,375 |
| | 1,658 |
| | 4,607 |
| | 3,056 |
|
Interest expense | | (4,494 | ) | | (3,978 | ) | | (9,029 | ) | | (7,769 | ) | | (4,497 | ) | | (4,494 | ) | | (8,870 | ) | | (9,029 | ) |
Gain on real estate dispositions | | — |
| | 13 |
| | 3,395 |
| | 26,687 |
| | — |
| | — |
| | — |
| | 3,395 |
|
Change in fair value of interest rate derivatives | | (81 | ) | | (373 | ) | | 213 |
| | (2,762 | ) | | (11 | ) | | (81 | ) | | 958 |
| | 213 |
|
Other income | | 43 |
| | 43 |
| | 80 |
| | 119 |
| | 54 |
| | 43 |
| | 168 |
| | 80 |
|
Income before taxes | | 5,393 |
| | 3,137 |
| | 14,448 |
| | 29,888 |
| | 5,779 |
| | 5,393 |
| | 12,496 |
| | 14,448 |
|
Income tax provision | | (450 | ) | | (6 | ) | | (752 | ) | | (224 | ) | |
Income tax benefit (provision) | | | 166 |
| | (450 | ) | | 432 |
| | (752 | ) |
Net income | | 4,943 |
| | 3,131 |
| | 13,696 |
| | 29,664 |
| | 5,945 |
| | 4,943 |
| | 12,928 |
| | 13,696 |
|
Net income attributable to noncontrolling interests | | (1,472 | ) | | (1,097 | ) | | (4,289 | ) | | (10,260 | ) | | (1,626 | ) | | (1,472 | ) | | (3,569 | ) | | (4,289 | ) |
Net income attributable to stockholders | | $ | 3,471 |
| | $ | 2,034 |
| | $ | 9,407 |
| | $ | 19,404 |
| | $ | 4,319 |
| | $ | 3,471 |
| | $ | 9,359 |
| | $ | 9,407 |
|
Net income attributable to stockholders per share (basic and diluted) | | $ | 0.08 |
| | $ | 0.06 |
| | $ | 0.24 |
| | $ | 0.62 |
| | $ | 0.09 |
| | $ | 0.08 |
| | $ | 0.21 |
| | $ | 0.24 |
|
Weighted-average common shares outstanding (basic and diluted) | | 42,091 |
| | 31,736 |
| | 39,869 |
| | 30,964 |
| | 45,928 |
| | 42,091 |
| | 45,532 |
| | 39,869 |
|
Dividends and distributions declared per common share and unit | | $ | 0.19 |
| | $ | 0.18 |
| | $ | 0.38 |
| | $ | 0.36 |
| | $ | 0.20 |
| | $ | 0.19 |
| | $ | 0.40 |
| | $ | 0.38 |
|
See Notes to Condensed Consolidated Financial Statements.
ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statement of Equity
(In thousands, except share data)
(Unaudited)
| | | | Shares of common stock | | Common Stock | | Additional paid-in capital | | Distributions in excess of earnings | | Total stockholders' equity | | Noncontrolling interests | | Total Equity | | Shares of common stock | | Common Stock | | Additional paid-in capital | | Distributions in excess of earnings | | Total stockholders' equity | | Noncontrolling interests | | Total Equity |
Balance, January 1, 2017 | | 37,490,361 |
| | $ | 374 |
| | $ | 197,114 |
| | $ | (49,345 | ) | | $ | 148,143 |
| | $ | 200,835 |
| | $ | 348,978 |
| |
Balance, January 1, 2018 | | | 44,937,763 |
| | $ | 449 |
| | $ | 287,407 |
| | $ | (61,166 | ) | | $ | 226,690 |
| | $ | 193,593 |
| | $ | 420,283 |
|
Net income | | — |
| | — |
| | — |
| | 9,407 |
| | 9,407 |
| | 4,289 |
| | 13,696 |
| | — |
| | — |
| | — |
| | 9,359 |
| | 9,359 |
| | 3,569 |
| | 12,928 |
|
Net proceeds from sales of common stock | | 7,350,690 |
| | 74 |
| | 91,307 |
| | — |
| | 91,381 |
| | — |
| | 91,381 |
| | 3,542,178 |
| | 35 |
| | 48,946 |
| | — |
| | 48,981 |
| | — |
| | 48,981 |
|
Restricted stock awards | | 112,097 |
| | 1 |
| | 1,058 |
| | — |
| | 1,059 |
| | — |
| | 1,059 |
| |
Restricted stock awards, net of tax withholding | | | 126,050 |
| | 2 |
| | 902 |
| | — |
| | 904 |
| | — |
| | 904 |
|
Restricted stock award forfeitures | | (20,907 | ) | | — |
| | (289 | ) | | — |
| | (289 | ) | | — |
| | (289 | ) | | (628 | ) | | — |
| | (4 | ) | | — |
| | (4 | ) | | — |
| | (4 | ) |
Acquisitions of noncontrolling interests in real estate investments | | — |
| | — |
| | (987 | ) | | — |
| | (987 | ) | | 982 |
| | (5 | ) | |
Issuance of operating partnership units for acquisitions | | | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) | | 2,201 |
| | 2,196 |
|
Redemption of operating partnership units | | — |
| | — |
| | (41 | ) | | — |
| | (41 | ) | | (188 | ) | | (229 | ) | | 163,000 |
| | 2 |
| | 1,331 |
| | — |
| | 1,333 |
| | (3,864 | ) | | (2,531 | ) |
Dividends and distributions declared | | — |
| | — |
| | — |
| | (15,771 | ) | | (15,771 | ) | | (6,299 | ) | | (22,070 | ) | | — |
| | — |
| | — |
| | (18,841 | ) | | (18,841 | ) | | (6,946 | ) | | (25,787 | ) |
Balance, June 30, 2017 | | 44,932,241 |
| | $ | 449 |
| | $ | 288,162 |
| | $ | (55,709 | ) | | $ | 232,902 |
| | $ | 199,619 |
| | $ | 432,521 |
| |
Balance, June 30, 2018 | | | 48,768,363 |
| | $ | 488 |
| | $ | 338,577 |
| | $ | (70,648 | ) | | $ | 268,417 |
| | $ | 188,553 |
| | $ | 456,970 |
|
See Notes to Condensed Consolidated Financial Statements.
ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
| | | | Six Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2018 | | 2017 |
OPERATING ACTIVITIES | | | | | | | | |
Net income | | $ | 13,696 |
| | $ | 29,664 |
| | $ | 12,928 |
| | $ | 13,696 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | |
Depreciation of buildings and tenant improvements | | 12,930 |
| | 11,105 |
| | 13,540 |
| | 12,930 |
|
Amortization of leasing costs and in-place lease intangibles | | 5,849 |
| | 5,646 |
| | 4,917 |
| | 5,849 |
|
Accrued straight-line rental revenue | | (640 | ) | | (448 | ) | | (1,029 | ) | | (640 | ) |
Amortization of leasing incentives and above or below-market rents | | (90 | ) | | (49 | ) | | (141 | ) | | (90 | ) |
Accrued straight-line ground rent expense | | 273 |
| | 132 |
| | 136 |
| | 273 |
|
Bad debt expense | | 166 |
| | 95 |
| | 112 |
| | 166 |
|
Noncash stock compensation | | 832 |
| | 652 |
| | 820 |
| | 832 |
|
Impairment charges | | 31 |
| | 35 |
| | 98 |
| | 31 |
|
Noncash interest expense | | 560 |
| | 475 |
| | 557 |
| | 560 |
|
Gain on real estate dispositions | | (3,395 | ) | | (26,687 | ) | | — |
| | (3,395 | ) |
Change in the fair value of derivatives | | (213 | ) | | 2,762 |
| |
Change in the fair value of interest rate derivatives | | | (958 | ) | | (213 | ) |
Changes in operating assets and liabilities: | | | | | | | | |
Property assets | | (861 | ) | | (2,019 | ) | | (2,505 | ) | | (1,009 | ) |
Property liabilities | | (2,778 | ) | | (1,543 | ) | | (1,973 | ) | | (2,489 | ) |
Construction assets | | (6,495 | ) | | 3,264 |
| | 4,443 |
| | (6,495 | ) |
Construction liabilities | | 21 |
| | (4,136 | ) | | (15,081 | ) | | 21 |
|
Interest receivable | | | (4,604 | ) | | (3,053 | ) |
Net cash provided by operating activities | | 19,886 |
| | 18,948 |
| | 11,260 |
| | 16,974 |
|
INVESTING ACTIVITIES | | | | | | | | |
Development of real estate investments | | (14,997 | ) | | (32,669 | ) | | (57,741 | ) | | (14,997 | ) |
Tenant and building improvements | | (4,338 | ) | | (2,875 | ) | | (5,599 | ) | | (4,338 | ) |
Acquisitions of real estate investments, net of cash received | | (6,767 | ) | | (164,978 | ) | | (32,967 | ) | | (6,767 | ) |
Dispositions of real estate investments | | 4,441 |
| | 92,775 |
| | 4,271 |
| | 4,441 |
|
Notes receivable issuances | | (13,836 | ) | | (31,486 | ) | | (5,816 | ) | | (10,783 | ) |
Decrease in restricted cash | | (36 | ) | | (179 | ) | |
Leasing costs | | (807 | ) | | (1,003 | ) | | (2,060 | ) | | (807 | ) |
Leasing incentives | | (2 | ) | | (87 | ) | | (79 | ) | | (2 | ) |
Contributions to equity method investments | | (715 | ) | | (8,887 | ) | | (3,127 | ) | | (715 | ) |
Net cash used for investing activities | | (37,057 | ) | | (149,389 | ) | | (103,118 | ) | | (33,968 | ) |
FINANCING ACTIVITIES | | | | | | | | |
Proceeds from sales of common stock | | 96,044 |
| | 31,180 |
| | 49,730 |
| | 96,044 |
|
Offering costs | | (4,663 | ) | | (793 | ) | | (749 | ) | | (4,663 | ) |
Common shares tendered for tax withholding | | | (343 | ) | | (289 | ) |
Debt issuances, credit facility and construction loan borrowings | | 73,906 |
| | 185,239 |
| | 147,248 |
| | 73,906 |
|
Debt and credit facility repayments, including principal amortization | | (130,674 | ) | | (75,700 | ) | | (84,277 | ) | | (130,674 | ) |
Debt issuance costs | | (471 | ) | | (559 | ) | | (381 | ) | | (471 | ) |
Redemption of operating partnership units | | (229 | ) | | (58 | ) | | (2,531 | ) | | (229 | ) |
Dividends and distributions | | (20,097 | ) | | (15,873 | ) | | (24,337 | ) | | (20,097 | ) |
Net cash provided by financing activities | | 13,816 |
| | 123,436 |
| | 84,360 |
| | 13,527 |
|
Net decrease in cash and cash equivalents | | (3,355 | ) | | (7,005 | ) | | (7,498 | ) | | (3,467 | ) |
Cash and cash equivalents, beginning of period | | 21,942 |
| | 26,989 |
| |
Cash and cash equivalents, end of period | | $ | 18,587 |
| | $ | 19,984 |
| |
Supplemental Disclosures: | | | | | |
Noncash transactions: | | | | | |
Cash, cash equivalents, and restricted cash, beginning of period | | | 22,916 |
| | 25,193 |
|
Cash, cash equivalents, and restricted cash, end of period | | | $ | 15,418 |
| | $ | 21,726 |
|
Supplemental Disclosures (noncash transactions): | | | | | |
Increase in dividends payable | | | $ | 1,450 |
| | $ | 1,973 |
|
Increase in accounts payable and accrued liabilities for capital expenditures | | | $ | 6,692 |
| | $ | 4,608 |
|
Issuance of operating partnership units for acquisitions
| | | $ | 1,702 |
| | $ | 982 |
|
Operating Partnership units redeemed for common shares | | | $ | 1,804 |
| | $ | — |
|
Redeemable noncontrolling interest from development | | $ | 2,000 |
| | $ | — |
| | $ | — |
| | $ | 2,000 |
|
Deferred payment for land acquisition | | $ | 600 |
| | $ | — |
| | $ | — |
| | $ | 600 |
|
See Notes to Condensed Consolidated Financial Statements.
ARMADA HOFFLER PROPERTIES, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Business of 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 primarily throughout the Mid-Atlantic and Southeastern United States. The Company is the sole general partner of Armada Hoffler, L.P. (the “Operating Partnership”)., and as of June 30, 2018 owned 73.8% of the economic interest in the Operating Partnership, of which 0.1% is held as general partnership units. 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 June 30, 2017, the Company's 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 | % |
Commonwealth of Virginia-Chesapeake(1)
| | Office | | Chesapeake, Virginia | | 100 | % |
Commonwealth of Virginia-Virginia Beach(1)
| | Office | | Virginia Beach, Virginia | | 100 | % |
One Columbus | | Office | | Virginia Beach, Virginia* | | 100 | % |
Two Columbus | | Office | | Virginia Beach, Virginia* | | 100 | % |
249 Central Park Retail | | Retail | | Virginia Beach, Virginia* | | 100 | % |
Alexander Pointe | | Retail | | Salisbury, North Carolina | | 100 | % |
Bermuda Crossroads | | Retail | | Chester, Virginia | | 100 | % |
Broad Creek Shopping Center | | Retail | | Norfolk, Virginia | | 100 | % |
Broadmoor Plaza | | Retail | | South Bend, Indiana | | 100 | % |
Brooks Crossing(2)
| | Retail | | Newport News, Virginia | | 65 | % |
Columbus Village | | Retail | | Virginia Beach, Virginia* | | 100 | % |
Columbus Village II | | Retail | | Virginia Beach, Virginia* | | 100 | % |
Commerce Street Retail | | Retail | | Virginia Beach, Virginia* | | 100 | % |
Courthouse 7-Eleven | | Retail | | Virginia Beach, Virginia | | 100 | % |
Dick's at Town Center | | Retail | | Virginia Beach, Virginia* | | 100 | % |
Dimmock Square | | Retail | | Colonial Heights, Virginia | | 100 | % |
Fountain Plaza Retail | | Retail | | Virginia Beach, Virginia* | | 100 | % |
Gainsborough Square | | Retail | | Chesapeake, Virginia | | 100 | % |
Greentree Shopping Center | | Retail | | Chesapeake, Virginia | | 100 | % |
Hanbury Village | | Retail | | Chesapeake, Virginia | | 100 | % |
Harper Hill Commons | | Retail | | Winston-Salem, North Carolina | | 100 | % |
Harrisonburg Regal | | Retail | | Harrisonburg, Virginia | | 100 | % |
Lightfoot Marketplace(3)
| | Retail | | Williamsburg, Virginia | | 70 | % |
North Hampton Market | | Retail | | Taylors, South Carolina | | 100 | % |
North Point Center | | Retail | | Durham, North Carolina | | 100 | % |
Oakland Marketplace | | Retail | | Oakland, Tennessee | | 100 | % |
Parkway Marketplace | | Retail | | Virginia Beach, Virginia | | 100 | % |
Patterson Place | | Retail | | Durham, North Carolina | | 100 | % |
Perry Hall Marketplace | | Retail | | Perry Hall, Maryland | | 100 | % |
Providence Plaza | | Retail | | Charlotte, North Carolina | | 100 | % |
|
| | | | | | | |
Property | | Segment | | Location | | Ownership Interest |
Renaissance Square | | Retail | | Davidson, North Carolina | | 100 | % |
Sandbridge Commons | | Retail | | Virginia Beach, Virginia | | 100 | % |
Socastee Commons | | Retail | | Myrtle Beach, South Carolina | | 100 | % |
Southgate Square | | Retail | | Colonial Heights, Virginia | | 100 | % |
Southshore Shops | | Retail | | Chesterfield, Virginia | | 100 | % |
South Retail | | Retail | | Virginia Beach, Virginia* | | 100 | % |
South Square | | Retail | | Durham, North Carolina | | 100 | % |
Stone House Square | | Retail | | Hagerstown, Maryland | | 100 | % |
Studio 56 Retail | | Retail | | Virginia Beach, Virginia* | | 100 | % |
Tyre Neck Harris Teeter | | Retail | | Portsmouth, Virginia | | 100 | % |
Waynesboro Commons | | Retail | | Waynesboro, Virginia | | 100 | % |
Wendover Village | | Retail | | Greensboro, North Carolina | | 100 | % |
Encore Apartments | | Multifamily | | Virginia Beach, Virginia* | | 100 | % |
Johns Hopkins Village(4)
| | Multifamily | | Baltimore, Maryland | | 80 | % |
Liberty Apartments | | Multifamily | | Newport News, Virginia | | 100 | % |
Smith's Landing | | Multifamily | | Blacksburg, Virginia | | 100 | % |
The Cosmopolitan | | Multifamily | | Virginia Beach, Virginia* | | 100 | % |
| | | | | | |
| |
(1) | These properties were sold on July 13, 2017. |
| |
(2) | The Company is entitled to a preferred return of 8% on its investment in Brooks Crossing. |
| |
(3) | The Company is entitled to a preferred return of 9% on its investment in Lightfoot Marketplace. |
| |
(4) | See discussion of redeemable noncontrolling interest in Note 9 for additional information. The Company is entitled to a preferred return of 9% on its investment in Johns Hopkins Village. |
*Located in the Town Center of Virginia Beach
As of June 30, 2017,2018, the followingCompany's property portfolio consisted of 49 operating properties thatand 8 development properties.
Refer to Note 4 for information related to the Company consolidates for financial statement purposes were under development or construction: Company's recent acquisitions and dispositions of operating properties.
|
| | | | | | | | | |
Property | | Segment | | Location | | Ownership Interest | |
Town Center Phase VI | | Mixed-use | | Virginia Beach, Virginia* | | 100 | % | |
Harding Place | | Multifamily | | Charlotte, North Carolina | | 80 | % | |
595 King Street | | | Multifamily | | Charleston, South Carolina | | 92.5 | % | |
530 Meeting Street | | Multifamily | | Charleston, South Carolina | | 90 | % | |
| | | | | | | | |
*Located in the Town Center of Virginia Beach
Please seeRefer to Note 5 for information related to the Company’s investment in Durham City Center II, LLC, which is an unconsolidated subsidiary that the Company accounts for using the equity method of accounting.
Subsequent to June 30, 2018
On July 2, 2018, the Company entered into a ground lease for a land parcel at Wills Wharf, located at the Harbor Point area in Baltimore, Maryland. The Company plans to develop a mixed-use building on the site.
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 and its consolidated 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, 2016.2017.
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 significantly from management’s estimates.
Reclassifications
During the second quarter of 2018, the Company identified certain immaterial classification errors on the Company's Consolidated Statements of Cash Flows and has determined that, in this Quarterly Report on Form 10-Q and future
periodic reports, the Company will correct these classification errors. One classification error will be corrected by including within the changes in operating assets and liabilities in the operating activities section a new line item for "Interest receivable." A corresponding adjustment will be recorded to reduce the amount of "Notes receivable issuances" within investing activities on the statement of cash flows. These reclassifications totaled $7.1 million, $3.2 million, and $0.1 million during the years ended December 31, 2017, 2016, and 2015, respectively, $2.2 million and $1.4 million for the three months ended March 31, 2018 and 2017, respectively, and $3.1 million for the six months ended June 30, 2017. These reclassifications will decrease "Net cash provided by operating activities" and "Net cash used for investing activities" by an equal and offsetting amount. These reclassifications will not have any impact on the Consolidated Balance Sheets, Consolidated Statements of Income, Consolidated Statement of Equity, or any other operating measure for the periods affected.
These amounts were previously presented as "Notes receivable issuances," a component of net cash used for investing activities on the Consolidated Statements of Cash Flows, resulting in overstatements in cash provided by operating activities and overstatements of cash used in investing activities. These amounts represent interest earned on mezzanine loans that were funded by the interest reserve accounts provided for in the mezzanine loan agreements. These amounts are now classified as changes in interest receivable, a non-cash adjustment to calculate net cash provided by operating activities.
The second classification error will be corrected by including within financing activities on the Consolidated Statements of Cash Flows a new line item for “Common shares tendered for tax withholding.” A corresponding adjustment will be recorded to the "Changes in operating assets and liabilities: Property liabilities" within operating activities on the Consolidated Statements of Cash Flows. This reclassification totaled $0.3 million, $0.2 million, and $0.3 million during the years ended December 31, 2017, 2016, and 2015, respectively, $0.3 million and $0.3 million for the three months ended March 31, 2018 and 2017, respectively, and $0.3 million for the six months ended June 30, 2017. These reclassifications will increase “Net cash provided by operating activities” and decrease “Net cash provided by financing activities” by an equal and offsetting amount.
Significant Accounting Policies
General Contracting and Real Estate Services Revenues
On January 1, 2018, the Company adopted the new accounting standard codified in Accounting Standards Codification 606 - Revenue from Contracts with Customers (see also "Recent Accounting Pronouncements" below). The Company recognizes general contracting revenues as a customer obtains control of promised goods or services in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. For each construction contract, the Company identifies the performance obligations, which typically include the delivery of a single building constructed according to the specifications of the contract. The Company estimates the total transaction price, which generally includes a fixed contract price and may also include variable components such as early completion bonuses, liquidated damages, or cost savings to be shared with the customer. Variable components of the contract price are included in the transaction price to the extent that it is probable that a significant reversal of revenue will not occur. The Company recognizes the estimated transaction price as revenue as it satisfies its performance obligations, and the Company estimates its progress in satisfying performance obligations for each contract using the percentage-of-completion method, based on the proportion of incurred costs to total estimated construction costs at completion. Construction contract costs include all direct material, direct labor, subcontract costs, and overhead costs directly related to contract performance. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, are all significant judgments that may result in revisions to costs and income and are recognized in the period in which they are determined. Provisions for estimated losses on uncompleted contracts are recognized immediately in the period in which such losses are determined. The Company defers pre-contract costs when such costs are directly associated with specific anticipated contracts and their recovery is probable.
The accompanying condensed consolidated financial statements were preparedCompany recognizes real estate services revenues from property development and management services as it satisfies its performance obligations under these service arrangements.
The Company assesses whether multiple contracts with a single counterparty should be combined into a single contract for revenue recognition purposes based on factors such as the basistiming of the accounting principles describednegotiation and execution of the contracts and whether the economic substance of the contracts was contemplated separately or in tandem.
See the Company’sCompany's Annual Report on Form 10-K for the year ended December 31, 2016.2017 for a description of other accounting principles upon which basis the accompanying consolidated financial statements were prepared.
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 changechanges the way the Company recognizes revenue from construction and development contracts with third party customers. The newCompany adopted this standard will be effective for the Company on January 1, 2018. The Company plans to adopt the new standard2018 using the fullmodified retrospective method. A substantial portionmethod, applying this standard to all contracts not yet completed as of that date. In applying the Company's revenue consists of rental revenues from leasing arrangements, such as base rent, which is specifically excluded from the revenue guidance. Non-lease components, such as tenant reimbursements for common area maintenance, will be subjectstandard to the Company’s future construction contracts, certain pre-contract costs incurred by the Company are now deferred and amortized over the period during which construction obligations are fulfilled. Previously, these costs were immediately recorded as general contracting expenses upon commencement of construction, with the corresponding general contracting revenue guidance. Management is currently evaluatingalso recorded. Applying the potential impact of the new revenue standard onto the Company’s consolidated financial statements. The Company doesuncompleted contracts as of January 1, 2018 did not expect the new standardresult in material differences to have a material impact on the measurethese contracts in aggregate, and recognitionno cumulative adjustment to distributions in excess of gains and losses on the saleearnings was recorded as of properties.January 1, 2018.
On February 25, 2016, the FASB issued a new lease standard that requires lessees to recognize most leases in their balance sheets as lease liabilities with corresponding right-of-use assets. The new standard also makes targeted changes to lessor accounting. The new standard will be effective for the Company on January 1, 2019 and requires a modified retrospective transition approach for all leases existing at, or entered into after, the datebeginning of initial applicationthe earliest comparative period presented, with an option to use certain transition relief. Management is currently evaluating the potential impact of the new lease standard on the Company’s consolidated financial statements. The Company is the lessee on certain ground leases and equipment leases, which represents a majority of the Company's current operating lease payments, and expects to record right-of-use assets and lease liabilities for these leases under the new standard.
On March 30, 2016, the FASB issued new guidance that will change the accounting for certain aspects of share-based payments to employees. Entities will be required to recognize the income tax effects of awards in the income statement when the awards vest or are settled, and allows the Company to account for forfeitures as they occur. The new guidance became effective for the Company on January 1, 2017. The Company adopted the guidance on January 1, 2017 and it did not have a material impact on the Company’s consolidated financial statements.
On August 26,In 2016, the FASB issued new guidance that addresses eight classification issues related to the statement of cash flows and requires the presentation of total changes in cash, cash equivalents, restricted cash, and restricted cash equivalents in the statement of cash flows. Early adoption is permitted, including adoption in an interim period. ThisThe Company adopted this new guidance should be appliedon December 31, 2017, applying it retrospectively to each period presented. ThisThe new guidance willrequires that the statement of cash flows show changes in restricted cash in addition to changes in cash and cash equivalents. No additional changes were required to be effectivemade to the Company's consolidated statements of cash flows as a result of the new guidance. The following table sets forth the items from the Company's consolidated balance sheets that are included in cash, cash equivalents, and restricted cash in the consolidated statements of cash flows (in thousands):
|
| | | | | | | | | | | | | | | |
| Balance as of |
| June 30, 2018 | | December 31, 2017 | | June 30, 2017 | | December 31, 2016 |
Cash and cash equivalents | $ | 12,279 |
| | $ | 19,959 |
| | $ | 18,587 |
| | $ | 21,942 |
|
Restricted cash | 3,139 |
| | 2,957 |
| | 3,139 |
| | 3,251 |
|
Cash, cash equivalents, and restricted cash | $ | 15,418 |
| | $ | 22,916 |
| | $ | 21,726 |
| | $ | 25,193 |
|
The following table summarizes the changes made to net cash provided by operating activities, net cash used for investing activities, and net cash provided by financing activities in the consolidated statement of cash flows for the Companysix months ended June 30, 2017 on January 1, 2018. Management is currently evaluating the potential impacta retrospective basis (in thousands) as a result of the new guidance onas well as the Company’s consolidated financial statements.reclassification adjustments described in the "Reclassifications" section above:
|
| | | |
| Six months ended |
| June 30, 2017 |
Operating activities as originally presented | $ | 19,886 |
|
Adjustment relating to restricted cash | (148 | ) |
Adjustment for shares tendered for tax withholding | 289 |
|
Adjustment relating to interest income presentation | (3,053 | ) |
Operating activities after adjustments | $ | 16,974 |
|
| |
Investing activities as originally presented | $ | (37,057 | ) |
Adjustment relating to restricted cash | 36 |
|
Adjustment relating to interest income presentation | 3,053 |
|
Investing activities after adjustments | $ | (33,968 | ) |
| |
Financing activities as originally presented | $ | 13,816 |
|
Adjustment for shares tendered for tax withholding | (289 | ) |
Financing activities after adjustments | $ | 13,527 |
|
On February 22, 2017, the FASB issued new guidance that clarifies the scope and application of guidance on sales or transfers of nonfinancial assets and in substance nonfinancial assets to customers, including partial sales. The new guidance applies to all nonfinancial assets, including real estate, and defines an in substance nonfinancial asset. The Company adopted the new guidance on January 1, 2018, and it did not have a material impact on the Company’s consolidated financial statements.
the requirements relating to accounting for derivatives and hedging. The new guidance eliminates the requirement to separately measure and report hedge ineffectiveness for a highly effective hedge and also simplifies certain documentation and assessment requirements relating to the determination of hedge effectiveness. The new guidance will be effective for the Company on January 1, 2018,2019, with early adoption permitted. Management isAs of June 30, 2018, the Company does not currently evaluatinghave any derivatives designated as hedging instruments for accounting purposes but may designate new derivative contracts as hedging instruments in the potential impactfuture. The application of this guidance to future hedging relationships could reduce or eliminate the new revenue standard on the Company’s consolidated financial statements.gains and losses that would otherwise be recorded for these derivative instruments.
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 six months ended June 30, 20172018 and 20162017 was as follows (in thousands):
| | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
| | (Unaudited) | | (Unaudited) |
Office real estate | | | | | | | | | | | | | | | | |
Rental revenues | | $ | 4,759 |
| | $ | 5,299 |
| | $ | 9,665 |
| | $ | 10,820 |
| | $ | 5,288 |
| | $ | 4,759 |
| | $ | 10,388 |
| | $ | 9,665 |
|
Rental expenses | | 1,366 |
| | 1,298 |
| | 2,692 |
| | 2,754 |
| | 1,430 |
| | 1,366 |
| | 2,876 |
| | 2,692 |
|
Real estate taxes | | 450 |
| | 526 |
| | 900 |
| | 1,065 |
| | 502 |
| | 450 |
| | 1,004 |
| | 900 |
|
Segment net operating income | | 2,943 |
| | 3,475 |
| | 6,073 |
| | 7,001 |
| | 3,356 |
| | 2,943 |
| | 6,508 |
| | 6,073 |
|
Retail real estate | | | | | | | | | | | | | | | | |
Rental revenues | | 15,578 |
| | 14,113 |
| | 31,209 |
| | 27,145 |
| | 16,608 |
| | 15,578 |
| | 33,319 |
| | 31,209 |
|
Rental expenses | | 2,479 |
| | 2,220 |
| | 4,999 |
| | 4,556 |
| | 2,563 |
| | 2,479 |
| | 5,220 |
| | 4,999 |
|
Real estate taxes | | 1,520 |
| | 1,330 |
| | 2,969 |
| | 2,614 |
| | 1,656 |
| | 1,520 |
| | 3,339 |
| | 2,969 |
|
Segment net operating income | | 11,579 |
| | 10,563 |
| | 23,241 |
| | 19,975 |
| | 12,389 |
| | 11,579 |
| | 24,760 |
| | 23,241 |
|
Multifamily residential real estate | | | | | | | | | | | | | | | | |
Rental revenues | | 6,418 |
| | 4,839 |
| | 13,113 |
| | 9,569 |
| | 6,702 |
| | 6,418 |
| | 13,590 |
| | 13,113 |
|
Rental expenses | | 2,326 |
| | 1,553 |
| | 4,548 |
| | 3,090 |
| | 2,529 |
| | 2,326 |
| | 4,850 |
| | 4,548 |
|
Real estate taxes | | 625 |
| | 526 |
| | 1,235 |
| | 1,052 |
| | 577 |
| | 625 |
| | 1,205 |
| | 1,235 |
|
Segment net operating income | | 3,467 |
| | 2,760 |
| | 7,330 |
| | 5,427 |
| | 3,596 |
| | 3,467 |
| | 7,535 |
| | 7,330 |
|
General contracting and real estate services | | | | | | | | | | | | | | | | |
Segment revenues | | 56,671 |
| | 33,200 |
| | 120,190 |
| | 70,003 |
| | 20,654 |
| | 56,671 |
| | 43,704 |
| | 120,190 |
|
Segment expenses | | 54,015 |
| | 32,025 |
| | 115,211 |
| | 67,062 |
| | 20,087 |
| | 54,015 |
| | 42,501 |
| | 115,211 |
|
Segment gross profit | | 2,656 |
| | 1,175 |
| | 4,979 |
| | 2,941 |
| | 567 |
| | 2,656 |
| | 1,203 |
| | 4,979 |
|
Net operating income | | $ | 20,645 |
| | $ | 17,973 |
| | $ | 41,623 |
| | $ | 35,344 |
| | $ | 19,908 |
| | $ | 20,645 |
| | $ | 40,006 |
| | $ | 41,623 |
|
General contracting and real estate services revenues for the three months ended June 30, 20172018 and 20162017 exclude revenue related to intercompany construction contracts of $11.6$34.2 million and $17.9$11.6 million, respectively. General contracting and real estate services revenues for the six months ended June 30, 20172018 and 20162017 exclude revenue related to intercompany construction contracts of $17.5$60.1 million and $32.9$17.5 million, respectively.
General contracting and real estate services expenses for the three months ended June 30, 20172018 and 20162017 exclude expenses related to intercompany construction contracts of $11.6$33.9 million and $17.8$11.6 million, respectively. General contracting and real estate services expenses for the six months ended June 30, 20172018 and 20162017 exclude expenses related to intercompany construction contracts of $59.5 million and $17.3 million, and $32.6 million.respectively.
General contracting and real estate services expenses for the three months ended June 30, 20172018 and 20162017 include noncash stock compensation expense of less than $0.1 million and $0.1 million, respectively. General contracting and real estate services expenses for the six months ended June 30, 20172018 and 20162017 include noncash stock compensation expense of $0.4$0.2 million and $0.3$0.4 million, respectively.
The following table reconciles net operating income to net income, the most directly comparable GAAP measure, for the three and six months ended June 30, 20172018 and 20162017 (in thousands):
| | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
| | (Unaudited) | | (Unaudited) |
Net operating income | | $ | 20,645 |
| | $ | 17,973 |
| | $ | 41,623 |
| | $ | 35,344 |
| | $ | 19,908 |
| | $ | 20,645 |
| | $ | 40,006 |
| | $ | 41,623 |
|
Depreciation and amortization | | (9,304 | ) | | (8,602 | ) | | (18,779 | ) | | (16,751 | ) | | (9,179 | ) | | (9,304 | ) | | (18,457 | ) | | (18,779 | ) |
General and administrative expenses | | (2,678 | ) | | (2,224 | ) | | (5,664 | ) | | (4,708 | ) | | (2,764 | ) | | (2,678 | ) | | (5,725 | ) | | (5,664 | ) |
Acquisition, development and other pursuit costs | | (369 | ) | | (437 | ) | | (416 | ) | | (1,141 | ) | | (9 | ) | | (369 | ) | | (93 | ) | | (416 | ) |
Impairment charges | | (27 | ) | | — |
| | (31 | ) | | (35 | ) | | (98 | ) | | (27 | ) | | (98 | ) | | (31 | ) |
Interest income | | 1,658 |
| | 722 |
| | 3,056 |
| | 904 |
| | 2,375 |
| | 1,658 |
| | 4,607 |
| | 3,056 |
|
Interest expense | | (4,494 | ) | | (3,978 | ) | | (9,029 | ) | | (7,769 | ) | | (4,497 | ) | | (4,494 | ) | | (8,870 | ) | | (9,029 | ) |
Gain on real estate dispositions | | — |
| | 13 |
| | 3,395 |
| | 26,687 |
| | — |
| | — |
| | — |
| | 3,395 |
|
Change in fair value of interest rate derivatives | | (81 | ) | | (373 | ) | | 213 |
| | (2,762 | ) | | (11 | ) | | (81 | ) | | 958 |
| | 213 |
|
Other income | | 43 |
| | 43 |
| | 80 |
| | 119 |
| | 54 |
| | 43 |
| | 168 |
| | 80 |
|
Income tax provision | | (450 | ) | | (6 | ) | | (752 | ) | | (224 | ) | |
Income tax (provision) benefit | | | 166 |
| | (450 | ) | | 432 |
| | (752 | ) |
Net income | | $ | 4,943 |
| | $ | 3,131 |
| | $ | 13,696 |
| | $ | 29,664 |
| | $ | 5,945 |
| | $ | 4,943 |
| | $ | 12,928 |
| | $ | 13,696 |
|
General and administrative expenses for the three months ended June 30, 20172018 and 20162017 include noncash stock compensation expense of $0.2 million and $0.2 million, respectively. General and administrative expenses for the six months ended June 30, 20172018 and 20162017 include noncash stock compensation expense of $0.6$0.7 million and $0.5$0.6 million, respectively.
4. Real Estate Investment
Property Acquisitions
On January 4, 2017,9, 2018, the Company acquired undeveloped landIndian Lakes Crossing, a Harris Teeter-anchored shopping center in Charleston, South CarolinaVirginia Beach, Virginia, for a contract price of $7.1$14.7 million plus capitalized acquisition costs of $0.2 million. The Company intends to use the land for the future development of the 595 King Street property.
Subsequent to June 30, 2017
On July 11,January 29, 2018, the Company acquired Parkway Centre, a newly developed Publix-anchored shopping center in Moultrie, Georgia for total consideration of $11.3 million (comprised of $9.6 million in cash and $1.7 million in the form of Class A units of limited partnership interest in the Operating Partnership ("Class A Units")) plus capitalized acquisition costs of $0.3 million.
The following table summarizes the purchase price allocation (including acquisition costs) based on relative fair value of the assets acquired and liabilities assumed for the two operating properties purchased during the six months ended June 30, 2018 (in thousands):
|
| | | | | | | | |
| | Indian Lakes Crossing | | Parkway Centre |
Land | | $ | 10,926 |
| | $ | 1,372 |
|
Site improvements | | 531 |
| | 696 |
|
Building and improvements | | 1,913 |
| | 7,168 |
|
In-place leases | | 1,648 |
| | 2,346 |
|
Above-market leases | | 11 |
| | — |
|
Below-market leases | | (175 | ) | | (10 | ) |
Net assets acquired | | $ | 14,854 |
| | $ | 11,572 |
|
On November 30, 2017, the Company entered into a lease agreement with Bottling Group, LLC for a new distribution facility that the Company will develop and construct for expected delivery in the fourth quarter of 2018. On January 29, 2018, the Company acquired undeveloped land in Charleston, South CarolinaChesterfield, Virginia, a portion of which will serve as the site for this facility, for a contract price of $6.7$2.4 million plus capitalized acquisition costs of $0.1 million.
On January 18, 2018, the Company entered into an operating agreement with a partner to develop a Lowes Foods-anchored shopping center in Mount Pleasant, South Carolina. The Company has a 70% ownership interest in the partnership. The partnership, Market at Mill Creek Partners, LLC acquired undeveloped land on February 16, 2018 for a contract price of $2.9 million plus capitalized acquisition costs of $0.1 million. The Company intendsis responsible for funding the equity requirements of this development. As of June 30, 2018, the Company's investment in the project totaled $9.4 million. Management has concluded that this entity is a variable interest entity ("VIE") as it lacks sufficient equity to usefund its operations without additional financial support. The Company is the developer of the shopping center and has the power to direct the activities of the project that most significantly impact its performance and is the party most closely associated with the project. Therefore, the Company is the project's primary beneficiary and consolidates the project in its consolidated financial statements.
On April 2, 2018, the Company acquired undeveloped land in Newport News, Virginia for less than $0.1 million. This land parcel is being used in the future development of the 530 Meeting Street property.Brooks Crossing office tower.
Property Disposition
On July 25, 2017, the Company acquired the outparcel phase of Wendover Village in Greensboro, North Carolina for a contract price of $14.3 million plus capitalized acquisition costs of $0.2 million.
Property Dispositions
On January 20, 2017,May 24, 2018, the Company completed the sale of the Wawa outparcel at Greentree Shopping Center. Net proceeds after transaction costs wereIndian Lakes Crossing for a contract price of $4.4 million. TheThere was no gain or loss on the disposition was $3.4 million.
On April 20, 2017, the Company entered into an agreement to sell the Courthouse 7-Eleven property for $2.4 million. This agreement was subsequently terminated.
Subsequent to June 30, 2017
On July 13, 2017, the Company completed the sale of two office properties leased by the Commonwealth of Virginia in Chesapeake, Virginia and Virginia Beach, Virginia. Aggregate net proceeds after transaction costs from the dispositions of the properties were $12.8 million, and the aggregate gain on the dispositions was $4.2 million.
disposition.
5. Equity Method Investment
City Center
On February 25, 2016, the Company acquired a 37% interest in Durham City Center II, LLC (“City Center”) for purposes of developing a 22-story mixed use tower in Durham, North Carolina. During the six months ended June 30, 2018, the Company invested an additional $3.2 million in City Center. As of June 30, 20172018 and December 31, 2016,2017, the Company hashad invested $11.0$13.8 million and $10.3$10.9 million, respectively, in City Center.Center, and the carrying value of the Company's investment was $14.5 million and $11.4 million, respectively. The Company has agreed to guarantee 37% of the construction loan for City Center; however, the loan is collateralized by 100% of the assets of City Center. As of June 30, 2018 and December 31, 2017, $10.8$38.9 million hasand $29.2 million, respectively, had been drawn against the construction loan, of which $5.5$13.2 million isand $11.2 million, respectively, was attributable to the Company's portion of the loan.
As of June 30, 2017 and December 31, 2016, the difference between the carrying value of the Company’s initial investment in City Center and the amount of underlying equity was immaterial. For the three and six months ended June 30, 20172018 and 2016,2017, City Center did not have any operating activity, and therefore the Company did not receive any dividendsdistributions or allocated income.
Based on the terms of City Center’s operating agreement, the Company has concluded that City Center is a variable interest entity,VIE and that the Company holds a variable interest. The Company does not have the power to direct the activities of the project that most significantly impact its performance. Accordingly, the Company is not the project’s primary beneficiary and, therefore, does not consolidate City Center in its consolidated financial statements.
6. Notes Receivable
Point Street ApartmentsThe Company had the following mezzanine loans outstanding as of June 30, 2018 and December 31, 2017 (in thousands):
|
| | | | | | | | | | | | | | | |
| | Outstanding loan amount | | Maximum loan commitment | | Interest rate |
Development Project | | June 30, 2018 | | December 31, 2017 | |
1405 Point | | $ | 25,633 |
| | $ | 22,444 |
| | $ | 28,232 |
| | 8.0 | % |
The Residences at Annapolis Junction | | 45,230 |
| | 43,021 |
| | 48,105 |
| | 10.0 | % |
North Decatur Square | | 15,134 |
| | 11,790 |
| | 25,712 |
| | 15.0 | % |
Delray Plaza | | 6,551 |
| | 5,379 |
| | 13,123 |
| | 15.0 | % |
Total | | $ | 92,548 |
| | $ | 82,634 |
| | $ | 115,172 |
| | |
Interest on the mezzanine loans is accrued and funded utilizing the interest reserves for each loan, which are components of the respective maximum loan commitments, and such accrued interest is added to the loan receivable balances. The Company agreed to invest up to $28.2 million inrecognized interest income for the three and six months ended June 30, 2018 and 2017 as follows:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
Development Project | | 2018 | | 2017 | | 2018 | | 2017 |
1405 Point | | $ | 483 |
| | $ | 429 |
| | $ | 936 |
| | $ | 845 |
|
The Residences at Annapolis Junction | | 1,124 |
| | 1,016 |
| | 2,209 |
| | 1,997 |
|
North Decatur Square | | 531 |
| | 211 |
| | 992 |
| | 211 |
|
Delray Plaza | | 225 |
| | — |
| | 448 |
| | — |
|
Total | | $ | 2,363 |
| | $ | 1,656 |
| | $ | 4,585 |
| | $ | 3,053 |
|
1405 Point
1405 Point (also known as Point Street Apartments project inApartments) opened during the Harbor Point areafirst quarter of Baltimore, Maryland. Point Street Apartments is an estimated $92 million development project with plans for a 17-story building comprised of 289 residential units and 18,000 square feet of street-level retail space. Beatty Development Group (“BDG”) is the2018.
The developer of the project and has engaged the Company to serve as construction general contractor.1405 Point Street Apartments is scheduled to open in the fourth quarter of 2017; however, management can provide no assurances that Point Street Apartments will open on the anticipated timeline or be completed at the anticipated cost.
BDG secured a senior construction loan of up to $67.0 million to fund the development and construction of 1405 Point Street Apartments on November 10, 2016. The Company has agreed to guarantee $25.0 million of the senior construction loan in exchange for the option to purchase up to an 88% controlling interest in 1405 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”).project. The Company currently has a $2.1 million letter of credit for the guarantee of the senior construction loan.
The Company’s investment in the Point Street Apartments project is in the form of a loan pursuant to which BDG may borrow up to $28.2 million (the “BDG loan”). Interest on the BDG loan accruesResidences at 8.0% per annum and matures on the earliest 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 pay down the outstanding BDG loan in full, with the difference between the BDG loan and $28.2 million applied to the senior construction loan. 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.
As of June 30, 2017 and December 31, 2016, the Company had funded $21.5 million and $20.6 million, respectively, under the BDG loan. During the three months ended June 30, 2017 and 2016, the Company recognized $0.4 million and $0.3 million, respectively, of interest income on the BDG loan. During the six months ended June 30, 2017 and 2016, the Company recognized $0.8 million and $0.4 million, respectively, of interest income on the BDG loan. BDG is current on the BDG loan.
Management has concluded that this entity is a VIE. Because BDG is the developer of Point Street Apartments, the Company does not have the power to direct the activities of the project that most significantly impact its performance, nor is the Company the party most closely associated with the project. Therefore, the Company is not the project's primary beneficiary and does not consolidate the project in its consolidated financial statements.
Annapolis Junction
On April 21, 2016, the Company entered into a note receivable with a maximum balance of $48.1 million in connection with the Annapolis Junction residential component of the Annapolis Junction Town Center project in Maryland (“Annapolis Junction”). Annapolis Junction is an estimated $102.0 million mixed-use development project with plans for 416 residential units, 17,000 square feet of retail space and a 150-room hotel. Annapolis Junction Apartments Owner, LLC (“AJAO”) is theThe developer of the residential component and has engaged the Company to serve as construction general contractor for the residential component.The Residences at Annapolis Junction is scheduled to open in the third quarter of 2017; however, management can provide no assurances that Annapolis Junction will open on the anticipated timeline or at the anticipated cost.
AJAO secured a senior construction loan of up to $60.0 million to fund the development and construction of Annapolis Junction's residential component on September 30, 2016. 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 Annapolis Junction uponJunction.
In July 2018, the Company entered into an agreement regarding the sale of its at-cost purchase option to the developer of The Residences at Annapolis Junction.
7. Construction Contracts
Construction contract costs and estimated earnings in excess of billings represent reimbursable costs and amounts earned under contracts in progress as of the balance sheet date. Such amounts become billable according to contract terms, which usually consider the passage of time, achievement of certain milestones or completion of the projectproject. The Company expects to bill and collect substantially all construction contract costs and estimated earnings in excess of billings as follows: (i) an option to purchase an 80% indirect interest in Annapolis Junction's residential component for the lesser of the seller’s budgeted or actual cost, 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 8% indirect interest in Annapolis Junction for the lesser of the seller’s actual or budgeted cost, exercisable within 27 months from the project’s completion (the “Second Option”).
The Company’s investment in the Annapolis Junction project is in the form of a loan under which AJAO may borrow up to $48.1 million, including a $6.0 million interest reserve (the “AJAO loan”). Interest on the AJAO loan accrues at 10.0% per annum and matures on the earliest of: (i) December 21, 2020, which may be extended by AJAO 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 that the Company exercises the First Option, AJAO is required to simultaneously pay down both the senior construction loan and the AJAO loan by 80%, at which time the interest rate on the AJAO loan will automatically be reduced to the interest rate on the senior construction loan. In the event the Company exercises the Second Option, AJAO is required to simultaneously repay any remaining amounts outstanding under the AJAO loan, with any excess proceeds received from the exercise of the Second Option applied against the remaining balance of the senior construction loan. In the event that the Company does not exercise either the First Option or the Second Option, the interest rate on the AJAO loan will automatically be reduced to the interest rate on the senior construction loan for the remaining term of the AJAO loan.
As of June 30, 2017 and December 31, 2016,2018 during the Company had funded $40.9 million and $38.9 million, respectively, on the AJAO loan. During the three months ended June 30, 2017 and 2016, the Company recognized $1.0 million and $0.5 million, respectively, of interest income on the AJAO loan. During the six months ended June 30, 2017 and 2016, the Company recognized $2.0 and $0.5 million, respectively, of interest income on the AJAO loan. AJAO is current on the AJAO loan.next twelve months.
Management has concluded that this entity is a VIE. Because AJAO is the developer of Annapolis Junction, the Company does not have the power to direct the activities of the project that most significantly impact its performance, nor is the Company the party most closely associated with the project. Therefore, the Company is not the project's primary beneficiary and does not consolidate the project in its consolidated financial statements.
Decatur
On May 15, 2017, the Company invested in the development of a $34 million Whole Foods anchored center located in Decatur, Georgia. The Company's investment is in the form of a mezzanine loan of up to $21.8 million to the developer,
North Decatur Square Holdings, LLC ("NDSH"). Billings in excess of construction contract costs and estimated earnings represent billings or collections on contracts made in advance of revenue recognized.
The mezzanine loan bears interest at an annual ratefollowing table summarizes the changes to the balances in the Company’s construction contract costs and estimated earnings in excess of 15%. billings account and the billings in excess of construction contract costs and estimated earnings account for the six months ended June 30, 2018 (in thousands):
|
| | | | | | | | |
| | Construction contract costs and estimated earnings in excess of billings | | Billings in excess of construction contract costs and estimated earnings |
Balance as of January 1, 2018 | | $ | 245 |
| | $ | 3,591 |
|
Revenue recognized that was included in the balance at the beginning of the period | | — |
| | (3,591 | ) |
Increases due to new billings, excluding amounts recognized as revenue during the period | | — |
| | 1,898 |
|
Transferred to receivables | | (245 | ) | | — |
|
Construction contract costs and estimated earnings not billed during the period | | 1,287 |
| | — |
|
Changes due to cumulative catch-up adjustment arising from changes in the estimate of the stage of completion | | — |
| | (187 | ) |
Balance as of June 30, 2018 | | $ | 1,287 |
| | $ | 1,711 |
|
The note matures onCompany defers pre-contract costs when such costs are directly associated with specific anticipated contracts and their recovery is probable. Pre-contract costs of $0.5 million and $0.6 million were deferred as of June 30, 2018 and December 31, 2017, respectively.
Construction receivables and payables include retentions, amounts that are generally withheld until the earliest of (i) May 15, 2022, (ii) the maturitycompletion of the senior construction loan, (iii)contract or the salesatisfaction of NDSH or (iv) the sale of the center. NDSH is current on this loan.
certain restrictive conditions such as fulfillment guarantees. As of June 30, 2018 and December 31, 2017, theconstruction receivables included retentions of $8.9 million and $9.9 million, respectively. The Company had funded $10.8 million on this loan. During the three months endedexpects to collect substantially all construction receivables as of June 30, 2018 during the next twelve months. As of June 30, 2018 and December 31, 2017, construction payables included retentions of $17.4 million and $17.4 million, respectively. The Company expects to pay substantially all construction payables as of June 30, 2018 during the Company recognized $0.2 million of interest income on this loan.next twelve months.
The Company’s net position on uncompleted construction contracts comprised the following as of June 30, 2018 and December 31, 2017 (in thousands):
|
| | | | | | | |
| June 30, 2018 | | December 31, 2017 |
Costs incurred on uncompleted construction contracts | $ | 562,879 |
| | $ | 520,368 |
|
Estimated earnings | 19,222 |
| | 18,070 |
|
Billings | (582,525 | ) | | (541,784 | ) |
Net position | $ | (424 | ) | | $ | (3,346 | ) |
|
| | | | | | | |
| June 30, 2018 | | December 31, 2017 |
Construction contract costs and estimated earnings in excess of billings | $ | 1,287 |
| | $ | 245 |
|
Billings in excess of construction contract costs and estimated earnings | (1,711 | ) | | (3,591 | ) |
Net position | $ | (424 | ) | | $ | (3,346 | ) |
The Company’s balances and changes in construction contract price allocated to unsatisfied performance obligations (backlog) as of June 30, 2018 and December 31, 2017 were as follows (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Beginning backlog | | $ | 30,733 |
| | $ | 157,722 |
| | $ | 49,167 |
| | $ | 217,718 |
|
New contracts/change orders | | 27,807 |
| | 15,519 |
| | 32,376 |
| | 18,960 |
|
Work performed | | (20,619 | ) | | (56,584 | ) | | (43,622 | ) | | (120,021 | ) |
Ending backlog | | $ | 37,921 |
| | $ | 116,657 |
| | $ | 37,921 |
| | $ | 116,657 |
|
The Company expects to complete a majority of the uncompleted contracts as of June 30, 2018 during the next 12 to 18 months.
7.8. Indebtedness
Credit Facility
On February 20, 2015,October 26, 2017, the Operating Partnership as borrower, and the Company, as parent guarantor, entered into an amended and restated credit agreement (the “credit agreement”), which provides for a new $200.0$300.0 million senior unsecured credit facility (the "credit facility") that includescomprised of a $150.0 million senior unsecured revolving credit facility (the "revolving credit facility") and a $50.0$150.0 million senior unsecured term loan facility. During 2016,facility (the "term loan facility" and, together with the Companyrevolving credit facility, the "credit facility"), with a syndicate of banks.
The credit facility includes an accordion feature that allows the total commitments to be increased to $450.0 million, subject to certain conditions, including obtaining commitments from any one or more lenders. The revolving credit facility has a scheduled maturity date of October 26, 2021, with two six-month extension options, subject to certain conditions, including payment of a 0.075% extension fee at each extension. The term loan facility has a scheduled maturity date of October 26, 2022.
On March 28, 2018, the Operating Partnership increased the borrowingsmaximum commitments under the credit facility to $330.0 million using the accordion feature, with an increase of the term loan facility to $100.0$180.0 million. During the first quarter of 2017, the Company increased the borrowings under the term loan facility to $125.0 million, increasing the total capacity of the credit facility to $275.0 million pursuant to the accordion feature.
Depending on the Operating Partnership’s total leverage, theThe revolving credit facility bears interest at LIBOR (the London Inter-Bank Offered Rate) plus a margin ranging from 1.40% to 2.00% and the term loan facility bears interest at LIBOR plus a margin ranging from 1.35% to 1.95%, in each case depending on the Company's total leverage as definedleverage. The Company is also obligated to pay an unused commitment fee of 15 or 25 basis points on the unused portions of the commitments under the revolving credit facility, depending on the amount of borrowings under the credit agreement. facility.
As of June 30, 2018 and December 31, 2017, the outstanding balance on the revolving credit facility was $83.0 million and $66.0 million, respectively, and the outstanding balance on the term loan facility was $180.0 million and $150.0 million, respectively. As of June 30, 2018, the effective interest rates on the revolving credit facility and the term loan facility were 2.53%3.84% and 2.48%3.79%, 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 PartnershipCompany may, at any time, voluntarily prepay any loan under the credit facility in whole or in part without premium or penalty.
On February 25, 2016,The Operating Partnership is the borrower under the credit facility, and its obligations under the credit facility are guaranteed by the Company amendedand certain of its subsidiaries that are not otherwise prohibited from providing such guaranty. The credit agreement contains customary representations and warranties and financial and other affirmative and negative covenants. The Company's ability to borrow under the credit facility is subject to ongoing compliance with a number of financial covenants, affirmative covenants and other restrictions. The credit agreement includes customary events of default, in certain cases subject to customary cure periods. The occurrence of an event of default, if not cured within the applicable cure period, would permit the lenders to, among other things, declare the unpaid principal, accrued and unpaid interest and all other amounts payable under the credit facility to among other things, allowbe immediately due and payable.
The Company is currently in compliance with all covenants under the maximum leverage ratiocredit agreement.
Subsequent to June 30, 2018
In July 2018, the Company to be increased to 65% for the two consecutive quarters following any acquisition that is equal to or greater than 10% of the Company’s total asset value (as defined in the credit agreement), but only up to two times during the term of the credit facility.
As of June 30, 2017, the outstanding balances onits borrowings under the revolving credit facility and the term loan facility were $28.0 million and $125.0 million, respectively.by $20.0 million.
Other Financing Activity
On February 1, 2017,January 22, 2018, the Company extended and modified the Sandbridge Commons note. The note bears interest at a rate of LIBOR plus a spread of 1.75% and will mature on January 17, 2023.
On March 27, 2018, the Company paid off the North Point CenterColumbus Village Note 51 and Columbus Village Note 2 in full for $0.6an aggregate amount of $8.3 million.
On February 24, 2017,May 31, 2018, the Company securedmodified the Southgate Square note. The principal amount of the note was increased to $22 million, and the note now bears interest at a $29.8rate of LIBOR plus a spread of 1.60%. This note will still mature on April 29, 2021.
On June 1, 2018, the Company entered into a $16.3 million construction loan for the Harding PlaceRiver City industrial development project in Charlotte, North Carolina.Chesterfield, Virginia. The loan bears interest at a rate of LIBOR plus a spread of 1.50% and will mature on May 31, 2019.
On April 7, 2017,June 14, 2018, the Company paid offextended and modified the Harrisonburg Regal note in full for $3.2secured by 249 Central Park Retail, Fountain Plaza Retail, and South Retail. The principal amount of the note was increased to $35.0 million. The note bears interest at a rate of LIBOR plus a spread of 1.60% and will mature on August 10, 2023.
On April 19, 2017,June 29, 2018, the Company entered into a second amendment to the credit agreement for the Lightfoot Marketplace loan, which amended certain definitions and covenant requirements.
On June 29, 2017, the Company secured a $27.9$15.6 million construction loan for the Town Center Phase VI project in Virginia Beach, Virginia.Brooks Crossing office tower development project. The loan bears interest at a rate of LIBOR plus a spread of 1.60% and will mature on July 1, 2025.
During the six months ended June 30, 2017,2018, the Company borrowed $2.9$24.4 million under its existing construction loans to fund new development and construction.
Subsequent to June 30, 20172018
On July 13, 2017,12, 2018, the Company repaid in full the remaining balance of $4.9entered into a $16.2 million construction loan for the mortgage secured by the CommonwealthMarket at Mill Creek development project in Mt. Pleasant, South Carolina. The loan bears interest at a rate of Virginia building in Chesapeake, Virginia in conjunction with the saleLIBOR plus a spread of this property.1.55% and will mature on July 12, 2025.
InOn July 2017,27, 2018, the Company extended and modified the Johns Hopkins Village note. The principal amount of the note was increased its borrowings underto $53.0 million. The note bears interest at a rate of LIBOR plus a spread of 1.25% and will mature on August 7, 2025. The Company simultaneously entered into an interest rate swap agreement that effectively fixes the revolving credit facility by $30.0 million.
the loan.
8.9. 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 the change in fair value of interest rate derivatives in the condensed consolidated statements of 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 loss and reclassified into earnings in the periods during which the hedged forecasted transaction affects earnings.
On February 1, 2017, the North Point Center Note 5 was paid in full, which terminated the interest rate swap agreement associated with the note. The loss on the interest rate swap agreement was not significant.
On FebruaryMarch 7, 2017, the Operating Partnership entered into a LIBOR interest rate cap agreement on a notional amount of
$50.0 million at a strike rate of 1.50% for a premium of less than $0.2 million. The interest rate cap agreement expires on March 1, 2019.
On June 23, 2017,2018, the Operating Partnership entered into a LIBOR interest rate cap agreement on a notional amount of $50.0 million at a strike rate of 1.50%2.25% for a premium of less than $0.2$0.3 million. The interest rate cap agreement expires on JulyApril 1, 2019.2020.
On April 23, 2018, the Operating Partnership entered into a floating-to-fixed interest rate swap attributable to one-month LIBOR indexed interest payments with a notional amount of $50.0 million. The interest rate swap has a fixed rate of 2.783%, an effective date of May 1, 2018, and a maturity date of May 1, 2023.
The Company’s derivatives were comprised of the following as of June 30, 20172018 and December 31, 20162017 (in thousands):
| | | | June 30, 2017 | | December 31, 2016 | | June 30, 2018 | | December 31, 2017 |
| | (Unaudited) | | | | | | | | (Unaudited) | | | | | | |
| | Notional Amount | | Fair Value | | Notional Amount | | Fair Value | | Notional Amount | | Fair Value | | Notional Amount | | Fair Value |
| | | | Asset | | Liability | | | | Asset | | Liability | | | | Asset | | Liability | | | | Asset | | Liability |
Interest rate swaps | | $ | 56,170 |
| | $ | 13 |
| | $ | (574 | ) | | $ | 56,901 |
| | $ | — |
| | $ | (829 | ) | | $ | 100,000 |
| | $ | 431 |
| | $ | (136 | ) | | $ | 56,079 |
| | $ | 10 |
| | $ | (69 | ) |
Interest rate caps | | 320,000 |
| | 546 |
| | — |
| | 270,000 |
| | 259 |
| | — |
| | 250,000 |
| | 2,429 |
| | — |
| | 345,000 |
| | 1,515 |
| | — |
|
Total | | $ | 376,170 |
| | $ | 559 |
| | $ | (574 | ) | | $ | 326,901 |
| | $ | 259 |
| | $ | (829 | ) | | $ | 350,000 |
| | $ | 2,860 |
| | $ | (136 | ) | | $ | 401,079 |
| | $ | 1,525 |
| | $ | (69 | ) |
The changes in the fair value of the Company’s derivatives during the three and six months ended June 30, 20172018 and 20162017 were comprised of the following (in thousands):
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (Unaudited) |
Interest rate swaps | | $ | 7 |
| | $ | (244 | ) | | $ | 268 |
| | $ | (2,488 | ) |
Interest rate caps | | (88 | ) | | (129 | ) | | (55 | ) | | (274 | ) |
Total | | $ | (81 | ) | | $ | (373 | ) | | $ | 213 |
| | $ | (2,762 | ) |
Income statement presentation: | | |
| | |
| | | | |
Change in fair value of interest rate derivatives | | $ | (81 | ) | | $ | (373 | ) | | $ | 213 |
| | $ | (2,762 | ) |
Total | | $ | (81 | ) | | $ | (373 | ) | | $ | 213 |
| | $ | (2,762 | ) |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Interest rate swaps | | $ | 5 |
| | $ | 7 |
| | $ | 353 |
| | $ | 268 |
|
Interest rate caps | | (16 | ) | | (88 | ) | | 605 |
| | (55 | ) |
Total change in fair value of interest rate derivatives | | $ | (11 | ) | | $ | (81 | ) | | $ | 958 |
| | $ | 213 |
|
The Company has not designated any of its derivatives as hedging instruments under GAAP as of June 30, 2018.
Subsequent to June 30, 2018
On July 16, 2018, the Operating Partnership entered into a LIBOR interest rate cap agreement on a notional amount of $50.0 million at a strike rate of 2.50% for a premium of $0.3 million. The interest rate cap expires on August 1, 2020.
On July 27, 2018, the Company entered into an interest rate swap agreement that effectively fixes the interest rate of the new Johns Hopkins Village note payable at 4.19%.
9.10. Equity
Stockholders’ Equity
On May 4, 2016,February 26, 2018, the Company commenced an at-the-market continuous equity offering program (the “ATM Program”) through which the Company could,may, from time to time, issue and sell shares of its common stock having an aggregate offering price of up to $75.0$125.0 million. During the six months ended June 30, 2017,2018, the Company issued and sold an aggregate of 450,6903,542,178 shares of common stock at a weighted average price of $14.08$14.07 per share under the ATM Program, receiving net proceeds, after offering costs and commissions, of $6.2 million.
On May 12, 2017, the Company completed an underwritten public offering of 6.9 million shares of common stock at a public offering price of $13.00 per share, which resulted in net proceeds after offering costs and commissions of $85.3$49.1 million.
As of June 30, 20172018 and December 31, 2016,2017, the Company’s authorized capital was 500 million shares of common stock and 100 million shares of preferred stock. The Company had 44,932,24148,768,363 and 37,490,36144,937,763 shares of common stock issued and outstanding as of June 30, 20172018 and December 31, 2016,2017, respectively. No shares of preferred stock were issued and outstanding as of June 30, 20172018 or December 31, 2016.
Redeemable Noncontrolling Interests
The noncontrolling interest holder of Johns Hopkins Village has the option to redeem the 20% noncontrolling interest in that entity (the "Put Option"). Currently, the Put Option may be redeemed for $2.0 million in cash or the equivalent amount in Class A units of limited partnership interest in the Operating Partnership ("Class A Units"), which is in the holder's control. Upon the first anniversary of the certificate of occupancy, which is expected to occur in August 2017, the Put Option may be settled for the fair value of the 20% noncontrolling interest in Johns Hopkins Village, as determined by appraised value. Because the method of the Put Option's redemption is outside of the Company's control, it has been included in temporary equity. If the Put Option is exercised for redemption in the form of Class A Units, the noncontrolling interest will be reclassed into permanent equity.2017.
Noncontrolling Interests
As of June 30, 20172018 and December 31, 2016,2017, the Company held a 71.6%73.8% and 68.1%72.0% interest, respectively, in the Operating Partnership. The Company is the primary beneficiary of the Operating Partnership as it has the power to direct the activities of the Operating Partnership and the rights to absorb 71.6%73.8% of the net income of the Operating Partnership. As the primary beneficiary, 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 in the Operating Partnership not held by the Company. As of June 30, 2018, there were 17,290,403 Class A Units not held by the Company. The Company's financial position and results of operations are the same as those of the Operating Partnership. The noncontrolling interest for the consolidated entities under development or construction (see Note 1) was zero as of June 30, 20172018 and December 31, 2016.2017.
As
On January 2, 2018, due to the holders of Class A Units not heldtendering an aggregate of 163,000 Class A Units for redemption by the Company.Operating Partnership, the Company elected to satisfy the redemption request through the issuance of an equal number of shares of common stock.
As partial consideration for the acquisition of Columbus Village, the Operating Partnership issued 1,000,000 class B units of limited partnership interest in the Operating Partnership ("Class B UnitsUnits") on July 10, 2015 and issued 275,000 class C units of limited partnership interest in the Operating Partnership ("Class C UnitsUnits") on January 10, 2017. The Class B Units were automatically converted to Class A Units on July 10, 2017. Subject to the occurrence of certain events, theThe Class C Units will not earn or accrue distributions until January 10, 2018, at which time theywere automatically will convertconverted into Class A Units.Units on January 10, 2018.
On January 10, 2017,As partial consideration for the acquisition of Parkway Centre, the Operating Partnership issued 68,691117,228 Class A Units on January 29, 2018.
On April 2, 2018, due to the holders of Class A Units tendering an aggregate of 187,142 Class A Units for redemption by the Operating Partnership, the Company elected to satisfy the redemption request with an aggregate cash payment of $2.5 million.
On April 17, 2018, the Operating Partnership issued 36,684 Class A Units to acquire the remaining 20%former noncontrolling interest holder of John Hopkins Village due to the satisfaction of a contingent event that was part of the redemption of its redeemable noncontrolling interest in the Town Center Phase VI project.Johns Hopkins Village in December 2017.
Common Stock Dividends and Class A Unit Distributions
On January 5, 2017,4, 2018, the Company paid cash dividends of $6.7$8.5 million to common stockholders and the Operating Partnership paid cash distributions of $3.0$3.3 million to holders of Class A Units.
On April 6, 2017,5, 2018, the Company paid cash dividends of $7.2$9.0 million to common stockholders and the Operating Partnership paid cash distributions of $3.2$3.5 million to holders of Class A Units.
On May 5, 2017,3, 2018, the Board of Directors declared a cash dividend and distribution of $0.19$0.20 per share and unitClass A Unit payable on July 6, 20175, 2018 to stockholders and unitholders of record on June 28, 2017.27, 2018.
Subsequent to June 30, 20172018
On July 6, 2017,2, 2018, due to the holders of Class A Units tendering an aggregate of 123,504 Class A Units for redemption by the Operating Partnership, the Company elected to satisfy the redemption requests through the issuance of an equal number of shares of common stock.
On July 5, 2018, the Company paid cash dividends of $8.6$9.7 million to common stockholders and the Operating Partnership paid cash distributions of $3.1$3.5 million to holders of Class A Units.
10.11. Stock-Based Compensation
On June 14, 2017, the Company's stockholders approved the Company's Amended and Restated 2013 Equity Incentive Plan (the "Amended Plan"), which, among other things, increased the number of shares of the Company's common stock reserved for issuance under the Amended Plan by 1,000,000 shares, from 700,000 shares to 1,700,000 shares. As of June 30, 2017,2018, there were 1,085,6101,029,659 shares available for issuance under the Amended Plan.
During the six months ended June 30, 2017,2018, the Company granted an aggregate of 112,097151,844 shares of restricted stock to employees and non-employee directors with a weighted average grant date fair value of $14.05$13.53 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. Non-employee 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 six months ended June 30, 2017,2018, the Company issued performance-based awards in the form of restricted stock units to certain employees. The performance period for these awards is three years, with a required two-year service period immediately following the expiration of the performance period.period in order to fully vest. The compensation expense and the effect on the Company’s weighted average diluted shares calculation were immaterial.
During the three and six months ended June 30, 2018 and 2017, the Company recognized $0.3$0.4 million and $1.1$0.3 million, respectively, of stock-based compensation expense. During the three and six months ended June 30, 2016,2018 and 2017, the Company recognized $0.3$1.2 million and $0.9$1.1 million, respectively, of stock-based compensation expense. As of June 30, 2017,2018, there were 110,519138,971 nonvested restricted shares outstanding; the total unrecognized compensation expense related to nonvested restricted shares was $1.0$1.3 million, which the Company expects to recognize over the next 2021 months.
11.12. 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.values. 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 June 30, 20172018 and December 31, 2016,2017, were as follows (in thousands):
| | | | June 30, 2017 | | December 31, 2016 | | June 30, 2018 | | December 31, 2017 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| | (Unaudited) | | |
| | |
| | (Unaudited) | | | | |
Indebtedness | | $ | 465,291 |
| | $ | 466,032 |
| | $ | 522,180 |
| | $ | 527,414 |
| | $ | 580,446 |
| | $ | 576,270 |
| | $ | 517,272 |
| | $ | 518,417 |
|
Interest rate swap liabilities | | 574 |
| | 574 |
| | 829 |
| | 829 |
| | 136 |
| | 136 |
| | 69 |
| | 69 |
|
Interest rate swap assets | | 13 |
| | 13 |
| | — |
| | — |
| |
Interest rate cap assets | | 546 |
| | 546 |
| | 259 |
| | 259 |
| |
Interest rate swap and cap assets | | | 2,860 |
| | 2,860 |
| | 1,525 |
| | 1,525 |
|
12.13. 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 partythese entities of the Company for the three months ended June 30, 2018 and 2017 and 2016 was $11.6$0.3 million and $8.4$0.8 million, respectively, and gross profit from such contracts for the three months ended June 30, 20172018 and 20162017 was $0.1 million and $0.6$0.1 million, respectively. Revenue from construction contracts with related party entities of the Company for the six months ended June 30, 2018 and 2017 and 2016 was $17.5$1.5 million and $14.9$7.3 million, respectively, and gross profit from such contracts for the six months ended June 30, 2018 and 2017 and 2016 was $0.2$0.3 million and $0.3$0.4 million, respectively.
Real estate services fees from affiliated entities of the Company were not significant for the three and six months ended June 30, 20172018 or 2016.2017. 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 the three and six months ended June 30, 20172018 and 2016.2017.
The Operating Partnership entered into tax protection agreements that indemnify certain directors and executive officers of the Company from their tax liabilities resulting from the potential future sale of certain of the Company’s properties within seven (or, in a limited number of cases, ten) years of the completion of the Company’s initial public offering and formation transactions completed on May 13, 2013. In addition, the tax protection agreements provide that the Operating Partnership will offer certain of the original contributors, including certain of the Company’s directors and executive officers, the opportunity to guarantee debt, or, alternatively, to enter into a deficit restoration obligation, for ten years from the closing of the Company’s initial public offering in a manner intended to provide an allocation of Operating Partnership liabilities to the partner for U.S. federal income tax purposes. Pursuant to these tax protection agreements, certain of the Company’s executive officers have guaranteed approximately $0.3 million of the Operating Partnership’s outstanding debt as of June 30, 2017.2018.
The loan for the City Center joint venture is underwritten by a syndicate which includes Park Sterling Bank. The Chief Executive Officer of Park Sterling Bank is the Chairman of the Company’s Audit Committee.17
14. 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. 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 $43.0$43.5 million and $40.5$44.9 million as of June 30, 20172018 and December 31, 2016,2017, respectively.
The Operating Partnership has entered into standby letters of credit using the available capacity under the senior unsecured credit facility. The letters of credit relate to the guarantee of future performance on certain of the Company’s construction contracts. Letters of credit generally are available for draw down in the event the Company does not perform. As of both June 30, 20172018 and December 31, 2016,2017, the Operating Partnership had total outstanding letters of credit of $4.1 million and $4.1 million, respectively.$2.1 million. The amounts outstanding at June 30, 20172018 and December 31, 2016 include $2.0 million relating to construction projects and2017 were comprised of a $2.1 million letter of credit related to the guarantee on the 1405 Point Street Apartments senior construction loan.
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 June 30, 2017, and the related condensed consolidated statements of income and cash flows for the three and six-month periods ended June 30, 2017 and 2016 and the condensed consolidated statement of equity for the six-month period ended June 30, 2017. 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, 2016, and the related consolidated statements of comprehensive 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 1, 2017. In our opinion, the accompanying condensed consolidated balance sheet as of December 31, 2016, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
/s/ Ernst & Young LLP
Tysons, Virginia
August 2, 2017
| |
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. 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;
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;
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.REITs; and
potential negative impacts from the recent changes to the U.S. tax laws.
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 primarily throughout the Mid-Atlantic and Southeastern United States. As of June 30, 2017,2018, 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 | % |
Commonwealth of Virginia-Chesapeake(1)
| | Office | | Chesapeake, Virginia | | 100 | % |
Commonwealth of Virginia-Virginia Beach(1)
| | Office | | Virginia Beach, Virginia | | 100 | % |
One Columbus | | Office | | Virginia Beach, Virginia* | | 100 | % |
Two Columbus | | Office | | Virginia Beach, Virginia* | | 100 | % |
249 Central Park Retail | | Retail | | Virginia Beach, Virginia* | | 100 | % |
Alexander Pointe | | Retail | | Salisbury, North Carolina | | 100 | % |
Bermuda Crossroads | | Retail | | Chester, Virginia | | 100 | % |
Broad Creek Shopping Center | | Retail | | Norfolk, Virginia | | 100 | % |
Broadmoor Plaza | | Retail | | South Bend, Indiana | | 100 | % |
Brooks Crossing(2)(1) | | Retail | | Newport News, Virginia | | 65 | % |
Columbus Village | | Retail | | Virginia Beach, Virginia* | | 100 | % |
Columbus Village II | | Retail | | Virginia Beach, Virginia* | | 100 | % |
Commerce Street Retail | | Retail | | Virginia Beach, Virginia* | | 100 | % |
Courthouse 7-Eleven | | Retail | | Virginia Beach, Virginia | | 100 | % |
Dick's at Town Center | | Retail | | Virginia Beach, Virginia* | | 100 | % |
Dimmock Square | | Retail | | Colonial Heights, Virginia | | 100 | % |
Fountain Plaza Retail | | Retail | | Virginia Beach, Virginia* | | 100 | % |
Gainsborough Square | | Retail | | Chesapeake, Virginia | | 100 | % |
Greentree Shopping Center | | Retail | | Chesapeake, Virginia | | 100 | % |
Hanbury Village | | Retail | | Chesapeake, Virginia | | 100 | % |
Harper Hill Commons | | Retail | | Winston-Salem, North Carolina | | 100 | % |
Harrisonburg Regal | | Retail | | Harrisonburg, Virginia | | 100 | % |
Indian Lakes Crossing | | Retail | | Virginia Beach, Virginia | | 100 | % |
|
| | | | | | | |
Property | | Segment | | Location | | Ownership Interest |
Lightfoot Marketplace(3)(2) | | Retail | | Williamsburg, Virginia | | 70 | % |
North Hampton Market | | Retail | | Taylors, South Carolina | | 100 | % |
North Point Center | | Retail | | Durham, North Carolina | | 100 | % |
Oakland Marketplace | | Retail | | Oakland, Tennessee | | 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 | % |
Providence Plaza | | Retail | | Charlotte, North Carolina | | 100 | % |
Renaissance Square | | Retail | | Davidson, North Carolina | | 100 | % |
Sandbridge Commons | | Retail | | Virginia Beach, Virginia | | 100 | % |
Socastee Commons | | Retail | | Myrtle Beach, South Carolina | | 100 | % |
Southgate Square | | Retail | | Colonial Heights, Virginia | | 100 | % |
Southshore Shops | | Retail | | Chesterfield, Virginia | | 100 | % |
South Retail | | Retail | | Virginia Beach, Virginia* | | 100 | % |
South Square | | Retail | | Durham, North Carolina | | 100 | % |
Stone House Square | | Retail | | Hagerstown, Maryland | | 100 | % |
Studio 56 Retail | | Retail | | Virginia Beach, Virginia* | | 100 | % |
Tyre Neck Harris Teeter | | Retail | | Portsmouth, Virginia | | 100 | % |
Waynesboro Commons | | Retail | | Waynesboro, Virginia | | 100 | % |
Wendover Village | | Retail | | Greensboro, North Carolina | | 100 | % |
Encore Apartments | | Multifamily | | Virginia Beach, Virginia* | | 100 | % |
Johns Hopkins Village(4) | | Multifamily | | Baltimore, Maryland | | 80100 | % |
Liberty Apartments | | Multifamily | | Newport News, Virginia | | 100 | % |
Smith's Landing | | Multifamily | | Blacksburg, Virginia | | 100 | % |
The Cosmopolitan | | Multifamily | | Virginia Beach, Virginia* | | 100 | % |
| | | | | | |
| |
(1) | These properties were sold on July 13, 2017. |
| |
(2) | The Company isWe are entitled to a preferred return of 8% on itsour investment in Brooks Crossing. |
| |
(3)(2) | The Company isWe are entitled to a preferred return of 9% on itsour investment in Lightfoot Marketplace. |
| |
(4) | See discussion of redeemable noncontrolling interest in Note 9 for additional information. The Company is entitled to a preferred return of 9% on its investment in Johns Hopkins Village. |
*Located in the Town Center of Virginia Beach
As of June 30, 2017,2018, the following properties that we consolidate for financial reporting purposes were either under development or construction:
|
| | | | | | | | |
Property | | Segment | | Location | | Ownership Interest | |
TownPremier (Town Center Phase VIVI) | | Mixed-use | | Virginia Beach, Virginia* | | 100 | % | |
Harding PlaceGreenside (Harding Place)(1) | | Multifamily | | Charlotte, North Carolina | | 80 | % | |
595 King StreetHoffler Place (King Street) | | Multifamily | | Charleston, South Carolina | | 92.5 | % | |
530 Meeting StreetSummit Place (Meeting Street) | | Multifamily | | Charleston, South Carolina | | 90 | % |
Brooks Crossing office tower (2) | | Office | | Newport News, Virginia | | 65 | % |
Lightfoot Outparcel (3) | | Retail | | Williamsburg, Virginia | | 70 | % |
Market at Mill Creek (4) | | Retail | | Mount Pleasant, South Carolina | | 70 | % |
River City | | Industrial | | Chesterfield, Virginia | | 100 | % |
| | | | | | |
(1) We are entitled to a preferred return of 9% on a portion of our investment in Harding Place.
(2) We are entitled to a preferred return of 8% on our investment in Brooks Crossing.
(3) We are entitled to a preferred return of 9% on our investment in Lightfoot Outparcel.
(4) We are entitled to a preferred return of 10% on our investment in Market at Mill Creek.
*Located in the Town Center of Virginia Beach
Please see Note 5 to our condensed consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q for information related to our investment in Durham City Center II, LLC, which is an unconsolidated subsidiary that we account for under the equity method of accounting.
On July 2, 2018, we entered into a ground lease for a land parcel at Wills Wharf, located at the Harbor Point area in Baltimore, Maryland. We plan to develop a mixed-use building on the site.
Acquisitions and Dispositions
On January 4, 2017,9, 2018, we acquired undeveloped landIndian Lakes Crossing, a Harris Teeter-anchored shopping center in Charleston, South CarolinaVirginia Beach, Virginia, for a contract price of $7.1 million plus capitalized acquisition costs of $0.2 million. We intend to use the land for the future development of the 595 King Street property.
On January 20, 2017, we completed the sale of the Wawa outparcel at Greentree Shopping Center. Net proceeds after transaction costs were $4.4 million. The gain on the disposition was $3.4 million.
On April 20, 2017, we entered into an agreement to sell the Courthouse 7-Eleven property for $2.4 million. This agreement was subsequently terminated.
On July 11, 2017, we acquired undeveloped land in Charleston, South Carolina for a contract price of $6.7 million plus capitalized acquisition costs of $0.1 million. We intend to use the land for the future development of the 530 Meeting Street property.
On July 13, 2017, we completed the sale of two office properties leased by the Commonwealth of Virginia in Chesapeake, Virginia and Virginia Beach, Virginia. Aggregate net proceeds after transaction costs from the dispositions of the properties were $12.8 million, and the aggregate gain on the dispositions was $4.2 million.
On July 25, 2017, we acquired the outparcel phase of Wendover Village in Greensboro, North Carolina for a contract price of $14.3$14.7 million plus capitalized acquisition costs of $0.2 million.
On January 29, 2018, we acquired Parkway Centre, a newly developed Publix-anchored shopping center in Moultrie, Georgia for total consideration of $11.3 million ($9.6 million in cash and $1.7 million in the form of class A units of limited partnership interest in our Operating Partnership ("Class A Units") plus capitalized acquisition costs of $0.3 million.
On November 30, 2017, we entered into a lease agreement with Bottling Group, LLC for a new distribution facility that we will develop and construct for expected delivery in the fourth quarter of 2018. On January 29, 2018, we acquired undeveloped land in Chesterfield, Virginia, a portion of which will serve as the site for this facility, for a contract price of $2.4 million plus capitalized acquisition costs of $0.1 million.
On January 18, 2018, we entered into an operating agreement with a partner to develop a Lowes Foods-anchored shopping center in Mount Pleasant, South Carolina. The partnership, Market at Mill Creek Partners, LLC acquired undeveloped land on February 16, 2018 for a contract price of $2.9 million plus capitalized acquisition costs of $0.1 million.
On April 2, 2018, we acquired undeveloped land in Newport News, Virginia for less than $0.1 million. This land parcel is being used in the development of the Brooks Crossing office tower.
Dispositions
On May 24, 2018, we completed the sale of the Wawa outparcel at Indian Lakes Crossing for a contract price of $4.4 million. There was no gain or loss on the sale of the parcel.
Second Quarter 20172018 Highlights
The following highlights our results of operations and significant transactions for the three months ended June 30, 2017:2018:
•Net income of $4.9$5.9 million, or $0.08$0.09 per diluted share, compared to $3.1$4.9 million, or $0.06$0.08 per diluted share, for the three months ended June 30, 2016.2017.
•Funds from operations ("FFO") of $14.2$15.1 million, or $0.24 per diluted share, compared to $11.7$14.2 million, or $0.24 per diluted share, for the three months ended June 30, 2016.2017. See “Non-GAAP Financial Measures.”
•Normalized funds from operations (“Normalized FFO”) of $14.7$15.2 million, or $0.25$0.24 per diluted share, compared to $12.5$14.7 million, or $0.26$0.25 per diluted share, for the three months ended June 30, 2016.2017. See “Non-GAAP Financial Measures.”
•Property segment net operating income (“NOI”)In July 2018, we entered into a contract to sell the build-to-suit distribution center in Chesterfield, Virginia for a sales price of $18.0$25.9 million, comparedwhich is expected to $16.9 million forclose in the three months ended June 30, 2016:
Office NOI of $2.9 million compared to $3.5 million
Retail NOI of $11.6 million compared to $10.6 million
Multifamily NOI of $3.5 million compared to $2.8 million
•Same store NOI of $14.4 million compared to $14.9 million for the three months ended June 30, 2016:
Office same store NOI of $2.3 million compared to $2.6 million
Retail same store NOI of $9.6 million compared to $9.6 million
Multifamily same store NOI of $2.5 million compared to $2.7 million
•General contracting and real estate services segment gross profit of $2.7 million compared to $1.2 million for the three months ended June 30, 2016. fourth quarter.
•Third party construction backlog of $116.7 million as of June 30, 2017.
•Raised $2.8 million of gross proceeds at a weighted average price of $13.97 per share under our at-the-market equity offering program.
•Raised $89.7 million of gross proceeds at a public offering price of $13.00 per share in a public underwritten offering of 6.9 million sharesIn July 2018, we entered into an agreement regarding the sale of our common stock. Netat-cost purchase option to the developer of The Residences at Annapolis Junction. Combined with the anticipated repayment of its related mezzanine loan during the third quarter, we expect to receive aggregate proceeds totaled $85.3from these transactions in excess of $50 million.
•Declared cash dividendsIn July 2018, we announced a new development project at Wills Wharf, a site in the Harbor Point area of $0.19 per shareBaltimore, Maryland. We plan to develop a 325,000 square foot mixed-use building with an estimated development cost of $117 million.
•In July 2018, we announced a new development project, the Interlock, located in West Midtown Atlanta. This public-private partnership with Georgia Tech is expected to contain 290,000 square feet of office and Class A unit.retail space. Our investment will be in the form of a mezzanine loan, and we will serve as the general contractor of the project.
•During the quarter ended June 30, 2018, we raised approximately $50 million of gross proceeds through our at-the-market equity offering program at an average price of $14.07 per share.
•During the quarter ended June 30, 2018, we leased 150,000 square feet, including a 10-year lease with Shake Shack, leading the way to the re-development of the Columbus Village shopping center in the Town Center of Virginia Beach.
•We sold the Wawa parcel at Indian Lakes Crossing for a contract price of $4.4 million.
Segment Results of Operations
As of June 30, 2017,2018, 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”, ("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 untilstabilized 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 and the asset is placed back into service.
Beginning with the three months ended March 31, 2017, our calculation of core occupancy included, and in future periods will include, the square footage from ground leases where we are the lessor. We did not retrospectively apply this new calculation methodology to prior periods. If we were to exclude these ground leases in the calculation of core occupancy, our core occupancy as of June 30, 2017 would have been 96.2%.
Office Segment Data
| | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change | | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
| | (unaudited, $ in thousands) | | (unaudited, $ in thousands) |
Rental revenues | | $ | 4,759 |
| | $ | 5,299 |
| | $ | (540 | ) | | $ | 9,665 |
| | $ | 10,820 |
| | $ | (1,155 | ) | | $ | 5,288 |
| | $ | 4,759 |
| | $ | 529 |
| | $ | 10,388 |
| | $ | 9,665 |
| | $ | 723 |
|
Property expenses | | 1,816 |
| | 1,824 |
| | (8 | ) | | 3,592 |
| | 3,819 |
| | (227 | ) | | 1,932 |
| | 1,816 |
| | 116 |
| | 3,880 |
| | 3,592 |
| | 288 |
|
Segment NOI | | $ | 2,943 |
| | $ | 3,475 |
| | $ | (532 | ) | | $ | 6,073 |
| | $ | 7,001 |
| | $ | (928 | ) | | $ | 3,356 |
| | $ | 2,943 |
| | $ | 413 |
| | $ | 6,508 |
| | $ | 6,073 |
| | $ | 435 |
|
Office segment NOI for the three and six months ended June 30, 2017 decreased $0.5 million2018 increased 14.0% and $0.9 million,7.2%, respectively, compared to the corresponding periods in 2016.2017. The decreases are dueincreases relate primarily to decreased occupancya new tenant at Armada Hoffler Tower and4525 Main Street that moved in during December 2017. The increase was partially offset by the salesdisposition of the Richmond TowerCommonwealth of Virginia-Chesapeake and Oyster PointCommonwealth of Virginia-Virginia Beach office buildings, which contributed $0.3an aggregate of $0.2 million and $0.7$0.5 million respectively, in office segment NOI for the three and six months ended June 30, 2016. We completed the sale of Richmond Tower in the first quarter of 2016 and the sale of the Oyster Point office building in the third quarter of 2016.2017, respectively.
Office Same Store Results
Office same store results for the three and six months ended June 30, 20172018 exclude new real estate development – 4525 Main Street – as well as the Richmond TowerCommonwealth of Virginia-Chesapeake and Oyster PointCommonwealth of Virginia-Virginia Beach office buildings, which wewere both sold in the first quarter of 2016 and the third quarter of 2016, respectively.2017.
Office same store rental revenues, property expenses and NOI for the three and six months ended June 30, 20172018 and 20162017 were as follows:
| | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change | | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
| | (unaudited, $ in thousands) | | (unaudited, $ in thousands) |
Rental revenues | | $ | 3,657 |
| | $ | 3,867 |
| | $ | (210 | ) | | $ | 7,463 |
| | $ | 7,788 |
| | $ | (325 | ) | | $ | 3,650 |
| | $ | 3,367 |
| | $ | 283 |
| | $ | 7,103 |
| | $ | 6,880 |
| | $ | 223 |
|
Property expenses | | 1,387 |
| | 1,269 |
| | 118 |
| | 2,723 |
| | 2,659 |
| | 64 |
| | 1,346 |
| | 1,283 |
| | 63 |
| | 2,691 |
| | 2,514 |
| | 177 |
|
Same Store NOI | | $ | 2,270 |
| | $ | 2,598 |
| | $ | (328 | ) | | $ | 4,740 |
| | $ | 5,129 |
| | $ | (389 | ) | | $ | 2,304 |
| | $ | 2,084 |
| | $ | 220 |
| | $ | 4,412 |
| | $ | 4,366 |
| | $ | 46 |
|
Non-Same Store NOI | | 673 |
| | 877 |
| | (204 | ) | | 1,333 |
| | 1,872 |
| | (539 | ) | | 1,052 |
| | 859 |
| | 193 |
| | 2,096 |
| | 1,707 |
| | 389 |
|
Segment NOI | | $ | 2,943 |
| | $ | 3,475 |
| | $ | (532 | ) | | $ | 6,073 |
| | $ | 7,001 |
| | $ | (928 | ) | | $ | 3,356 |
| | $ | 2,943 |
| | $ | 413 |
| | $ | 6,508 |
| | $ | 6,073 |
| | $ | 435 |
|
Office same store NOI for the three and six months ended June 30, 2017 decreased 12.6%2018 increased 10.6% and 7.6%1.1%, respectively, compared to the corresponding periods in 2016 due2017. The increases relate primarily to decreased occupancynew tenants and renewals at the Armada Hoffler Tower and the relocation of a tenant from One Columbus to 4525 Main Street during the three months ended December 31, 2016. For the three and six months ended June 30, 2017, the NOI from the tenant that relocated to 4525 Main Street is included in Non-Same Store NOI.Columbus.
Retail Segment Data
| | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change | | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
| | (unaudited, $ in thousands) | | (unaudited, $ in thousands) |
Rental revenues | | $ | 15,578 |
| | $ | 14,113 |
| | $ | 1,465 |
| | $ | 31,209 |
| | $ | 27,145 |
| | $ | 4,064 |
| | $ | 16,608 |
| | $ | 15,578 |
| | $ | 1,030 |
| | $ | 33,319 |
| | $ | 31,209 |
| | $ | 2,110 |
|
Property expenses | | 3,999 |
| | 3,550 |
| | 449 |
| | 7,968 |
| | 7,170 |
| | 798 |
| | 4,219 |
| | 3,999 |
| | 220 |
| | 8,559 |
| | 7,968 |
| | 591 |
|
Segment NOI | | $ | 11,579 |
| | $ | 10,563 |
| | $ | 1,016 |
| | $ | 23,241 |
| | $ | 19,975 |
| | $ | 3,266 |
| | $ | 12,389 |
| | $ | 11,579 |
| | $ | 810 |
| | $ | 24,760 |
| | $ | 23,241 |
| | $ | 1,519 |
|
Retail segment NOI for the three and six months ended June 30, 20172018 increased $1.0 million7.0% and $3.3 million,6.5%, respectively, compared to the corresponding periods in 2016.2017. The increases arewere a result of the acquisitions of Southgate Square, Southshore Shops, ColumbusIndian Lakes Crossing and Parkway Centre during the three months ended March 31, 2018, as well as the acquisition of the outparcel phase of Wendover Village II, Renaissance Square, and the 11-property retail portfolio, together with the completion of the Lightfoot Marketplace and Brooks Crossing.development subsequent to June 30, 2017.
Retail Same Store Results
Retail same store results for the three and six months ended June 30, 20172018 exclude the nine-property retail portfolio, Southgate Square, Lightfoot Marketplace, Southshore Shops, Brooks Crossing, Columbusthe outparcel phase of Wendover Village, IIIndian Lakes Crossing, and Renaissance Square.Parkway Centre.
Retail same store rental revenues, property expenses and NOI for the three and six months ended June 30, 20172018 and 20162017 were as follows:
| | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change | | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
| | (unaudited, $ in thousands) | | (unaudited, $ in thousands) |
Rental revenues | | $ | 13,146 |
| | $ | 12,961 |
| | $ | 185 |
| | $ | 18,861 |
| | $ | 18,534 |
| | $ | 327 |
| | $ | 15,295 |
| | $ | 15,199 |
| | $ | 96 |
| | $ | 30,717 |
| | $ | 30,421 |
| | $ | 296 |
|
Property expenses | | 3,554 |
| | 3,325 |
| | 229 |
| | 5,300 |
| | 5,160 |
| | 140 |
| | 3,650 |
| | 3,621 |
| | 29 |
| | 7,457 |
| | 7,200 |
| | 257 |
|
Same Store NOI | | $ | 9,592 |
| | $ | 9,636 |
| | $ | (44 | ) | | $ | 13,561 |
| | $ | 13,374 |
| | $ | 187 |
| | $ | 11,645 |
| | $ | 11,578 |
| | $ | 67 |
| | $ | 23,260 |
| | $ | 23,221 |
| | $ | 39 |
|
Non-Same Store NOI | | 1,987 |
| | 927 |
| | 1,060 |
| | 9,680 |
| | 6,601 |
| | 3,079 |
| | 744 |
| | 1 |
| | 743 |
| | 1,500 |
| | 20 |
| | 1,480 |
|
Segment NOI | | $ | 11,579 |
| | $ | 10,563 |
| | $ | 1,016 |
| | $ | 23,241 |
| | $ | 19,975 |
| | $ | 3,266 |
| | $ | 12,389 |
| | $ | 11,579 |
| | $ | 810 |
| | $ | 24,760 |
| | $ | 23,241 |
| | $ | 1,519 |
|
Retail same store NOI decreased 0.5% and increased 1.4%, respectively,was largely consistent for the three and six months ended June 30, 20172018 compared to the corresponding periods in 2016. The decrease for the three months ended June 30, 2017 was the result of higher administrative expenses as well as maintenance and repair expenses. The increase for the six months ended June 30, 2017 was the result of higher occupancy, specifically at 249 Central Park Retail and Gainsborough.2017.
Multifamily Segment Data
| | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change | | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
| | (unaudited, $ in thousands) | | (unaudited, $ in thousands) |
Rental revenues | | $ | 6,418 |
| | $ | 4,839 |
| | $ | 1,579 |
| | $ | 13,113 |
| | $ | 9,569 |
| | $ | 3,544 |
| | $ | 6,702 |
| | $ | 6,418 |
| | $ | 284 |
| | $ | 13,590 |
| | $ | 13,113 |
| | $ | 477 |
|
Property expenses | | 2,951 |
| | 2,079 |
| | 872 |
| | 5,783 |
| | 4,142 |
| | 1,641 |
| | 3,106 |
| | 2,951 |
| | 155 |
| | 6,055 |
| | 5,783 |
| | 272 |
|
Segment NOI | | $ | 3,467 |
| | $ | 2,760 |
| | $ | 707 |
| | $ | 7,330 |
| | $ | 5,427 |
| | $ | 1,903 |
| | $ | 3,596 |
| | $ | 3,467 |
| | $ | 129 |
| | $ | 7,535 |
| | $ | 7,330 |
| | $ | 205 |
|
Multifamily segment NOI increased slightly for the three and six months ended June 30, 2017 increased $0.7 million and $1.9 million, respectively,2018 compared to the corresponding periods in 2016,2017. The increase was primarily as a result of activity for Johns Hopkins Village, which was placed into serviceexperienced higher occupancy during the three and six months ended June 30, 2018 compared to the corresponding periods in the third quarter of 2016.2017.
Multifamily Same Store Results
Multifamily same store results exclude new real estate development –- specifically Johns Hopkins Village, which was placed into service in the third quarter of 2016. Multifamily same store results also exclude The Cosmopolitan, which is undergoing a redevelopment project that began on March 1, 2018.
Multifamily same store rental revenues, property expenses and NOI for the three and six months ended June 30, 20172018 and 20162017 were as follows:
| | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change | | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
| | (unaudited, $ in thousands) | | (unaudited, $ in thousands) |
Rental revenues | | $ | 4,641 |
| | $ | 4,752 |
| | $ | (111 | ) | | $ | 9,437 |
| | $ | 9,482 |
| | $ | (45 | ) | | $ | 2,918 |
| | $ | 2,860 |
| | $ | 58 |
| | $ | 5,773 |
| | $ | 5,697 |
| | $ | 76 |
|
Property expenses | | 2,128 |
| | 2,074 |
| | 54 |
| | 4,239 |
| | 4,136 |
| | 103 |
| | 1,225 |
| | 1,207 |
| | 18 |
| | 2,383 |
| | 2,358 |
| | 25 |
|
Same Store NOI | | $ | 2,513 |
| | $ | 2,678 |
| | $ | (165 | ) | | $ | 5,198 |
| | $ | 5,346 |
| | $ | (148 | ) | | $ | 1,693 |
| | $ | 1,653 |
| | $ | 40 |
| | $ | 3,390 |
| | $ | 3,339 |
| | $ | 51 |
|
Non-Same Store NOI | | 954 |
| | 82 |
| | 872 |
| | 2,132 |
| | 81 |
| | 2,051 |
| | 1,903 |
| | 1,814 |
| | 89 |
| | 4,145 |
| | 3,991 |
| | 154 |
|
Segment NOI | | $ | 3,467 |
| | $ | 2,760 |
| | $ | 707 |
| | $ | 7,330 |
| | $ | 5,427 |
| | $ | 1,903 |
| | $ | 3,596 |
| | $ | 3,467 |
| | $ | 129 |
| | $ | 7,535 |
| | $ | 7,330 |
| | $ | 205 |
|
Multifamily same store NOI for the three and six months ended June 30, 2017 decreased 6.2% and 2.8%, respectively,2018 increased slightly compared to the corresponding periods in 2016.2017. The decreases areincrease is primarily due to the decrease in occupancyresult of increased rental rates at the Cosmopolitan attributed to construction activities at an adjacent property and the loss of retail tenants at that property.Smith’s Landing.
General Contracting and Real Estate Services Segment Data
| | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change | | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
| | (unaudited, $ in thousands) | | (unaudited, $ in thousands) |
Segment revenues | | $ | 56,671 |
| | $ | 33,200 |
| | $ | 23,471 |
| | $ | 120,190 |
| | $ | 70,003 |
| | $ | 50,187 |
| | $ | 20,654 |
| | $ | 56,671 |
| | $ | (36,017 | ) | | $ | 43,704 |
| | $ | 120,190 |
| | $ | (76,486 | ) |
Segment expenses | | 54,015 |
| | 32,025 |
| | 21,990 |
| | 115,211 |
| | 67,062 |
| | 48,149 |
| | 20,087 |
| | 54,015 |
| | (33,928 | ) | | 42,501 |
| | 115,211 |
| | (72,710 | ) |
Segment gross profit | | $ | 2,656 |
| | $ | 1,175 |
| | $ | 1,481 |
| | $ | 4,979 |
| | $ | 2,941 |
| | $ | 2,038 |
| | $ | 567 |
| | $ | 2,656 |
| | $ | (2,089 | ) | | $ | 1,203 |
| | $ | 4,979 |
| | $ | (3,776 | ) |
Operating margin | | 4.7 | % | | 3.5 | % | | 1.2 | % | | 4.1 | % | | 4.2 | % | | (0.1 | )% | | 2.7 | % | | 4.7 | % | | (2.0 | )% | | 2.8 | % | | 4.1 | % | | (1.3 | )% |
SegmentGeneral contracting and real estate services segment profit for the three and six months ended June 30, 2017 increased $1.5 million2018 decreased 78.7% and $2.0 million, respectively,75.8% compared to the compared to the corresponding periods in 2016 because of several2017 as there were no significant new large projects started subsequent tothird-party contracts during the first quarter of 2016.
six months ended June 30, 2018. Operating margins also decreased during these periods.
The changes in third party construction backlog for the three and six months ended June 30, 20172018 and 20162017 were as follows:
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 | | 2018 | | 2017 |
| (unaudited, $ in thousands) | (unaudited, $ in thousands) |
Beginning backlog | $ | 157,722 |
| | $ | 176,180 |
| | $ | 217,718 |
| | $ | 83,433 |
| $ | 30,733 |
| | $ | 157,722 |
| | $ | 49,167 |
| | $ | 217,718 |
|
New contracts/change orders | 15,519 |
| | 109,289 |
| | 18,960 |
| | 238,790 |
| 27,807 |
| | 15,519 |
| | 32,376 |
| | 18,960 |
|
Work performed | (56,584 | ) | | (33,151 | ) | | (120,021 | ) | | (69,905 | ) | (20,619 | ) | | (56,584 | ) | | (43,622 | ) | | (120,021 | ) |
Ending backlog | $ | 116,657 |
| | $ | 252,318 |
| | $ | 116,657 |
| | $ | 252,318 |
| $ | 37,921 |
| | $ | 116,657 |
| | $ | 37,921 |
| | $ | 116,657 |
|
As of June 30, 2017,2018, we had $27.6 million in backlog on the Point Street Apartments project, $33.4 million in backlog on the City Center project, $17.9 million in backlog on the Annapolis Junction project, and $21.3$5.7 million in backlog on the Dinwiddie Municipal Complex project and $6.9 million in backlog on the City Center project.
Consolidated Results of Operations
The following table summarizes the results of operations for the three and six months ended June 30, 20172018 and 2016:2017:
| | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change | | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
| | (unaudited, $ in thousands) | | (unaudited, $ in thousands) |
Revenues | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Rental revenues | | $ | 26,755 |
| | $ | 24,251 |
| | $ | 2,504 |
| | $ | 53,987 |
| | $ | 47,534 |
| | $ | 6,453 |
| | $ | 28,598 |
| | $ | 26,755 |
| | $ | 1,843 |
| | $ | 57,297 |
| | $ | 53,987 |
| | $ | 3,310 |
|
General contracting and real estate services revenues | | 56,671 |
| | 33,200 |
| | 23,471 |
| | 120,190 |
| | 70,003 |
| | 50,187 |
| | 20,654 |
| | 56,671 |
| | (36,017 | ) | | 43,704 |
| | 120,190 |
| | (76,486 | ) |
Total revenues | | 83,426 |
| | 57,451 |
| | 25,975 |
| | 174,177 |
| | 117,537 |
| | 56,640 |
| | 49,252 |
| | 83,426 |
| | (34,174 | ) | | 101,001 |
| | 174,177 |
| | (73,176 | ) |
Expenses | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Rental expenses | | 6,171 |
| | 5,071 |
| | 1,100 |
| | 12,239 |
| | 10,400 |
| | 1,839 |
| | 6,522 |
| | 6,171 |
| | 351 |
| | 12,946 |
| | 12,239 |
| | 707 |
|
Real estate taxes | | 2,595 |
| | 2,382 |
| | 213 |
| | 5,104 |
| | 4,731 |
| | 373 |
| | 2,735 |
| | 2,595 |
| | 140 |
| | 5,548 |
| | 5,104 |
| | 444 |
|
General contracting and real estate services expenses | | 54,015 |
| | 32,025 |
| | 21,990 |
| | 115,211 |
| | 67,062 |
| | 48,149 |
| | 20,087 |
| | 54,015 |
| | (33,928 | ) | | 42,501 |
| | 115,211 |
| | (72,710 | ) |
Depreciation and amortization | | 9,304 |
| | 8,602 |
| | 702 |
| | 18,779 |
| | 16,751 |
| | 2,028 |
| | 9,179 |
| | 9,304 |
| | (125 | ) | | 18,457 |
| | 18,779 |
| | (322 | ) |
General and administrative expenses | | 2,678 |
| | 2,224 |
| | 454 |
| | 5,664 |
| | 4,708 |
| | 956 |
| | 2,764 |
| | 2,678 |
| | 86 |
| | 5,725 |
| | 5,664 |
| | 61 |
|
Acquisition, development and other pursuit costs | | 369 |
| | 437 |
| | (68 | ) | | 416 |
| | 1,141 |
| | (725 | ) | | 9 |
| | 369 |
| | (360 | ) | | 93 |
| | 416 |
| | (323 | ) |
Impairment charges | | 27 |
| | — |
| | 27 |
| | 31 |
| | 35 |
| | (4 | ) | | 98 |
| | 27 |
| | 71 |
| | 98 |
| | 31 |
| | 67 |
|
Total expenses | | 75,159 |
| | 50,741 |
| | 24,418 |
| | 157,444 |
| | 104,828 |
| | 52,616 |
| | 41,394 |
| | 75,159 |
| | (33,765 | ) | | 85,368 |
| | 157,444 |
| | (72,076 | ) |
Operating income | | 8,267 |
| | 6,710 |
| | 1,557 |
| | 16,733 |
| | 12,709 |
| | 4,024 |
| | 7,858 |
| | 8,267 |
| | (409 | ) | | 15,633 |
| | 16,733 |
| | (1,100 | ) |
Interest income | | 1,658 |
| | 722 |
| | 936 |
| | 3,056 |
| | 904 |
| | 2,152 |
| | 2,375 |
| | 1,658 |
| | 717 |
| | 4,607 |
| | 3,056 |
| | 1,551 |
|
Interest expense | | (4,494 | ) | | (3,978 | ) | | (516 | ) | | (9,029 | ) | | (7,769 | ) | | (1,260 | ) | | (4,497 | ) | | (4,494 | ) | | (3 | ) | | (8,870 | ) | | (9,029 | ) | | 159 |
|
Gain on real estate dispositions | | — |
| | 13 |
| | (13 | ) | | 3,395 |
| | 26,687 |
| | (23,292 | ) | | — |
| | — |
| | — |
| | — |
| | 3,395 |
| | (3,395 | ) |
Change in fair value of interest rate derivatives | | (81 | ) | | (373 | ) | | 292 |
| | 213 |
| | (2,762 | ) | | 2,975 |
| | (11 | ) | | (81 | ) | | 70 |
| | 958 |
| | 213 |
| | 745 |
|
Other (expense) income | | 43 |
| | 43 |
| | — |
| | 80 |
| | 119 |
| | (39 | ) | |
Other income | | | 54 |
| | 43 |
| | 11 |
| | 168 |
| | 80 |
| | 88 |
|
Income before taxes | | 5,393 |
| | 3,137 |
| | 2,256 |
| | 14,448 |
| | 29,888 |
| | (15,440 | ) | | 5,779 |
| | 5,393 |
| | 386 |
| | 12,496 |
| | 14,448 |
| | (1,952 | ) |
Income tax provision | | (450 | ) | | (6 | ) | | (444 | ) | | (752 | ) | | (224 | ) | | (528 | ) | |
Income tax benefit (provision) | | | 166 |
| | (450 | ) | | 616 |
| | 432 |
| | (752 | ) | | 1,184 |
|
Net income | | $ | 4,943 |
| | $ | 3,131 |
| | $ | 1,812 |
| | $ | 13,696 |
| | $ | 29,664 |
| | $ | (15,968 | ) | | $ | 5,945 |
| | $ | 4,943 |
| | $ | 1,002 |
| | $ | 12,928 |
| | $ | 13,696 |
| | $ | (768 | ) |
Rental revenues for the three and six months ended June 30, 20172018 increased $2.5$1.8 million and $6.5$3.3 million respectively, compared to the corresponding periods in 2016,2017 as follows:
| | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change | | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
| | (unaudited, $ in thousands) | | (unaudited, $ in thousands) |
Office | | $ | 4,759 |
| | $ | 5,299 |
| | $ | (540 | ) | | $ | 9,665 |
| | $ | 10,820 |
| | $ | (1,155 | ) | | $ | 5,288 |
| | $ | 4,759 |
| | $ | 529 |
| | $ | 10,388 |
| | $ | 9,665 |
| | $ | 723 |
|
Retail | | 15,578 |
| | 14,113 |
| | 1,465 |
| | 31,209 |
| | 27,145 |
| | 4,064 |
| | 16,608 |
| | 15,578 |
| | 1,030 |
| | 33,319 |
| | 31,209 |
| | 2,110 |
|
Multifamily | | 6,418 |
| | 4,839 |
| | 1,579 |
| | 13,113 |
| | 9,569 |
| | 3,544 |
| | 6,702 |
| | 6,418 |
| | 284 |
| | 13,590 |
| | 13,113 |
| | 477 |
|
| | $ | 26,755 |
| | $ | 24,251 |
| | $ | 2,504 |
| | $ | 53,987 |
| | $ | 47,534 |
| | $ | 6,453 |
| | $ | 28,598 |
| | $ | 26,755 |
| | $ | 1,843 |
| | $ | 57,297 |
| | $ | 53,987 |
| | $ | 3,310 |
|
Office rental revenues for the three and six months ended June 30, 2017 decreased 10.2%2018 increased 11.1% and 10.7%7.5%, respectively, compared to the corresponding periods in 20162017 primarily as a result of decreased occupancya new tenant at Armada Hoffler Tower and as a result4525 Main Street that moved in during December 2017. The increase was partially offset by the disposition of the salesCommonwealth of the Richmond TowerVirginia-Chesapeake and Oyster PointCommonwealth of Virginia-Virginia Beach office buildings, which contributed $0.4an aggregate of $0.3 million and $1.0$0.6 million in office rental revenues for the three and six months ended June 30, 2016,2017, respectively.
Retail rental revenues for the three and six months ended June 30, 20172018 increased 10.4%6.6% and 15.0%6.8%, respectively, compared to the corresponding periods in 20162017 as a result of property acquisitions and organic growth in the same store retail portfolio due to higher occupancy rates. The acquisitions of Indian Lakes and Parkway Centre during the remaining nine propertiesthree months ended March 31, 2018, as well as the acquisition of the eleven property retail portfolio, Southgate Square, Southshore Shops, Columbusoutparcel phase of Wendover Village II and Renaissance Square, together with the completion of Brooks Crossing andthe Lightfoot Marketplace contributed $1.8 million and $4.7 million in increased retail rental revenues for the three and six months ended June 30, 2017, respectively, which was partially offset by dispositions.development during 2017.
Multifamily rental revenues for the three and six months ended June 30, 20172018 increased 32.6%4.4% and 37.0%3.6%, respectively, compared to the corresponding periods in 20162017 as a result of the completion ofactivity for Johns Hopkins Village, which was placed into service in the third quarter of 2016 and experienced higher occupancy at Encore Apartmentsduring the three and Smith's Landing.six months ended June 30, 2018 compared to the corresponding periods in 2017.
General contracting and real estate services revenues for the three and six months ended June 30, 2017 increased 70.7% and 71.7%, respectively,2018 decreased 63.6% compared to each of the corresponding periods in 2016 because of several2017 as there were no significant new large projects started subsequent tothird-party contracts during the first quarter of 2016.six months ended June 30, 2018.
Rental expenses for the three and six months ended June 30, 20172018 increased $1.1$0.4 million and $1.8$0.7 million respectively, compared to the the corresponding periods in 2016,2017 as follows:
| | | | Three Months Ended June 30, | | | Six Months Ended June 30, | | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2017 | | 2016 | | Change | 2017 | | 2016 | | Change | | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
| | (unaudited, $ in thousands) | | (unaudited, $ in thousands) |
Office | | $ | 1,366 |
| | $ | 1,298 |
| | $ | 68 |
| $ | 2,692 |
| | $ | 2,754 |
| | $ | (62 | ) | | $ | 1,430 |
| | $ | 1,366 |
| | $ | 64 |
| | $ | 2,876 |
| | $ | 2,692 |
| | $ | 184 |
|
Retail | | 2,479 |
| | 2,220 |
| | 259 |
| 4,999 |
| | 4,556 |
| | 443 |
| | 2,563 |
| | 2,479 |
| | 84 |
| | 5,220 |
| | 4,999 |
| | 221 |
|
Multifamily | | 2,326 |
| | 1,553 |
| | 773 |
| 4,548 |
| | 3,090 |
| | 1,458 |
| | 2,529 |
| | 2,326 |
| | 203 |
| | 4,850 |
| | 4,548 |
| | 302 |
|
| | $ | 6,171 |
| | $ | 5,071 |
| | $ | 1,100 |
| $ | 12,239 |
| | $ | 10,400 |
| | $ | 1,839 |
| | $ | 6,522 |
| | $ | 6,171 |
| | $ | 351 |
| | $ | 12,946 |
| | $ | 12,239 |
| | $ | 707 |
|
Office rental expenses for the three and six months ended June 30, 20172018 increased 5.2%4.7% and 6.8%, respectively, compared to the corresponding periodperiods in 20162017 as a result of higher repairsoccupancy at 4525 Main Street and maintenance costs for refurbishing elevator lobbies and higher labor expenses. Office rentalincreased operating expenses foracross the six months ended June 30, 2017 decreased 2.3% compared to the corresponding period in 2016 due to the sales of the Richmond Tower and Oyster Point office buildings.portfolio. Retail rental expenses for the three and six months ended June 30, 20172018 increased 11.7%3.4% and 9.7%4.4%, respectively, compared to the respectivecorresponding periods in 20162017 as a result of property acquisitions and the completion of development projects that were placed into service subsequent to the first quarter of 2016.acquisitions. Multifamily rental expenses for the three and six months ended June 30, 20172018 increased 49.8%8.7% and 47.2%6.6%, respectively, compared to the respectivecorresponding periods in 20162017 primarily due to placinghigher occupancy at Johns Hopkins Village into service.
Village.
Real estate taxes for the three and six months ended June 30, 20172018 increased $0.2$0.1 million and $0.4 million respectively, compared to the corresponding periods in 2016,2017 as follows:
| | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2017 | | 2016 | | Change | | 2017 | | 2016 | | Change | | 2018 | | 2017 | | Change | | 2018 | | 2017 | | Change |
| | (unaudited, $ in thousands) | | (unaudited, $ in thousands) |
Office | | $ | 450 |
| | $ | 526 |
| | $ | (76 | ) | | $ | 900 |
| | $ | 1,065 |
| | $ | (165 | ) | | $ | 502 |
| | $ | 450 |
| | $ | 52 |
| | $ | 1,004 |
| | $ | 900 |
| | $ | 104 |
|
Retail | | 1,520 |
| | 1,330 |
| | 190 |
| | 2,969 |
| | 2,614 |
| | 355 |
| | 1,656 |
| | 1,520 |
| | 136 |
| | 3,339 |
| | 2,969 |
| | 370 |
|
Multifamily | | 625 |
| | 526 |
| | 99 |
| | 1,235 |
| | 1,052 |
| | 183 |
| | 577 |
| | 625 |
| | (48 | ) | | 1,205 |
| | 1,235 |
| | (30 | ) |
| | $ | 2,595 |
| | $ | 2,382 |
| | $ | 213 |
| | $ | 5,104 |
| | $ | 4,731 |
| | $ | 373 |
| | $ | 2,735 |
| | $ | 2,595 |
| | $ | 140 |
| | $ | 5,548 |
| | $ | 5,104 |
| | $ | 444 |
|
Office real estate taxes for the three and six months ended June 30, 2017 decreased 14.4%2018 increased 11.6% and 15.5%11.6%, respectively, compared to the respectivecorresponding periods in 20162017 due to increased assessments across the salesoffice portfolio partially offset by the sale of Richmond Towerthe Commonwealth of Virginia-Chesapeake and Oyster PointCommonwealth of Virginia-Virginia Beach office buildings. Retail and multifamily real estate taxes for the three and six months ended June 30, 20172018 increased 8.9% and 12.5%, respectively, compared to the corresponding periods in 20162017 as a result of acquisitions completion of development projects that were placed into service subsequent to the first quarter of 2016 and increases from new tax assessments. Multifamily real estate taxes for the three and six months ended June 30, 2018 decreased 7.7% and 2.4%, respectively, compared to the corresponding periods in 2017 as a result of lower assessments at Liberty Apartments and The Cosmopolitan.
General contracting and real estate services expenses for the three and six months ended June 30, 2017 increased 68.7%2018 decreased 62.8% and 71.8%63.1%, respectively, compared to the corresponding periods in 20162017 as a result of severalthere were no significant new large projects started subsequent tothird-party contracts during the first quarter of 2016.six months ended June 30, 2018.
Depreciation and amortization for the three and six months ended June 30, 2017 increased 8.2%2018 decreased 1.3% and 12.1%1.7%, respectively, compared to the corresponding periods in 20162017 as a result of in-place leases associated with previously acquired properties that became fully amortized subsequent to June 30, 2017, partially offset by property acquisitions and completion of development projects that were placed into serviceoccurred subsequent to the first quarter of 2016.June 30, 2017.
General and administrative expenses for the three and six months ended June 30, 2017 increased 20.4% and 20.3%, respectively,2018 remained largely consistent compared to the corresponding periods in 2016 as a result of higher regulatory and compliance costs, higher compensation and benefit costs from increased employee headcount and franchise taxes based on our operations in certain states.2017.
Acquisition, development and other pursuit costs for the three and six months ended June 30, 20172018 decreased significantly compared to the corresponding periods in 2016. Approximately $0.1 million and $0.7 million of the acquisition2017. The costs incurred in the three and six months ended June 30, 20162017 were primarily related to thea potential acquisition of the 11-property retail portfolio in January 2016.that was abandoned.
Impairment charges for the three and six months ended June 30, 2017 and 2016 were primarily due to lease terminations.
Interest income for the three and six months ended June 30, 20172018 increased compared to the corresponding periods in 2016 due to higher notes receivable balances.
Interest expense for the three43.2% and six months ended June 30, 2017 increased 13.0% and 16.2%50.8%, respectively, compared to the corresponding periods in 2016, primarily as a result of increased borrowings2017 due to higher notes receivable balances, including the North Decatur Square mezzanine loan originated in May 2017 and higher interest rates. the Delray Plaza mezzanine loan originated in October 2017.
The change in fair value of interest rate derivativesInterest expense for the three months ended June 30, 20172018 was a decrease of $0.1 million compared to a decrease of $0.4 million forconsistent with the corresponding period in 2016 due to less dramatic changes in forward LIBOR rates. The change in fair value of interest rate derivatives for the six months ended June 30, 2017 was an increase of $0.2 million compared to a decrease of $2.8 million for the corresponding period in 2016. The2017. Interest expense for the six months ended June 30, 2016 was due2018 decreased 1.8% compared to dedesignationthe corresponding period in 2017 primarily as a result of our hedge accounting.refinancing activities that lowered the interest rates on certain loans.
During the six months ended June 30, 2017, we recognized a gain of $3.4 million on our sale of the Greentree Wawa outparcel. DuringThere were no gains on sale recognized during the three months ended June 30, 2018 or 2017 of the six months ended June 30, 2016, we recognized gains2018.
The change in fair value of $26.7interest rate derivatives was not significant for the three months ended June 30, 2018 and 2017. The change in fair value of interest rate derivatives increased $0.7 million on our sales ofduring the Richmond Tower office building andsix months ended June 30, 2018 as compared to the Newport News Economic Authority building.six months ended June 30, 2017 due to significant changes in forward LIBOR (the London Inter-Bank Offered Rate).
Income tax provisionsbenefit and provision that we recognized during the three and six months ended June 30, 2018 and 2017, and 2016respectively, 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 senior unsecured credit facility, and net proceeds from the sale of common stock.stock through our at-the-market continuous equity offering program (the "ATM Program"), which is discussed below.
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 senior unsecured credit facility pending long-term financing.
As of June 30, 2017,2018, we had unrestricted cash and cash equivalents of $18.6$12.3 million available for both current liquidity needs as well as development activities. We also had restricted cash of $3.1 million available for property improvements and required maintenance. As of June 30, 2017,2018, we had $117.9$64.9 million of available borrowings under our credit facility to meet our short-term liquidity requirements.requirements and $129.7 million of available borrowings under our construction loans to fund our development projects.
During the six months ended June 30, 2018, we began to address the five loans originally scheduled to mature during 2018. Both of the Columbus Village loans were paid off, and the Sandbridge Commons loan was extended for five years. Additionally, on July 27, 2018, the Johns Hopkins Village loan was refinanced with a new loan that matures on August 7, 2025.
ATM Program
On February 26, 2018, we commenced our ATM Program through which we may, from time to time, issue and sell shares of our common stock having an aggregate offering price of up to $125.0 million. During the six months ended June 30, 2018, we issued and sold an aggregate of 3,542,178 shares of common stock at an average price of $14.07 per share under the ATM Program, receiving net proceeds, after offering costs and commissions, of $49.1 million.
Credit Facility
On February 20, 2015,October 26, 2017, we entered into an amended and restated credit agreement (the “credit agreement”), which provides for a $200.0$300.0 million senior unsecured credit facility (the "credit facility") that includescomprised of a $150.0 million senior unsecured revolving credit facility (the “revolving credit facility”) and a $50.0$150.0 million senior unsecured term loan facility.facility (the “term loan facility” and, together with the revolving credit facility, the “credit facility”), with a syndicate of banks. The credit facility replaced our prior $150.0 million revolving credit facility, which was scheduled to mature on February 20, 2019, and our prior $125.0 million term loan facility, which was scheduled to mature on February 20, 2021. We intend to use future borrowings under the credit facility for general corporate purposes, including funding acquisitions and 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$450.0 million, subject to certain conditions.conditions, including obtaining commitments from any one or more lenders. On January 5, 2016, March 31, 2016 and February 1, 2017, we28, 2018, our Operating Partnership increased the total borrowing capacity to $225.0 million, $250.0 million and $275.0 million, respectively, using this feature. The amount permitted to be borrowed undermaximum commitments of the credit facility togetherto $330.0 million using the accordion feature, with all of our other unsecured indebtedness, is generally limited to the lesser of: (i) 60%an increase 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 1.50term loan facility to 1.0, and (iii) the maximum aggregate loan commitment, which currently is $275.0$180.0 million.
The revolving credit facility has a scheduled maturity date of February 20, 2019,October 26, 2021, with a one-yeartwo six-month extension option,options, subject to certain conditions.conditions, including payment of a 0.075% extension fee at each extension. 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.October 26, 2022.
The revolving credit facility bears interest at LIBOR plus a margin ranging from 1.40% to 2.00%, depending on our total leverage. The and the term loan facility bears interest at LIBOR plus a margin ranging from 1.35% to 1.95%, in each case 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 revolving 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.
On February 25, 2016, we entered into an amendment toThe Operating Partnership is the borrower under the credit facility, to, among other things, amendand its obligations under the maximum leverage ratio as set forth below.credit facility are guaranteed by us and certain of its subsidiaries that are not otherwise prohibited from providing such guaranty.
The credit agreement contains customary representations and warranties and financial and other affirmative and negative covenants. Our ability to borrow under the credit facility requires usis subject to complyour ongoing compliance with variousa number of financial covenants, affirmative covenants and other restrictions, including the following:
Total leverage ratio of the Company of not more than 60% (or 65% for the two consecutive quarters following any acquisition that is equal to or greater than 10% of our total asset value (as defined in the credit agreement), but only up to two times during the term of the credit facility);
Ratio of adjusted EBITDA (as defined in the credit agreement) to fixed charges of the Company of not less than 1.51.50 to 1.0;
Tangible net worth of not less than the sum of $220.0 million75% of tangible net worth (as defined in the credit agreement) as of September 30, 2017 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%;June 30, 2017;
Ratio of secured indebtedness to total asset value of not more than 45%40%; and
Ratio of secured recourse debt to total asset value of not more than 25%.20%;
Total unsecured leverage ratio of not more than 60% (or 65% for the two consecutive quarters following any acquisition that is equal to or greater than 10% of our total asset value, but only up to two times during the term of the credit facility);
Unencumbered interest coverage ratio (as defined in the credit agreement) of not less than 1.75 to 1.0;
Ratio of unencumbered NOI (as defined in the credit agreement) to all unsecured debt of not less than 12%;
Maintenance of a minimum of at least 15 unencumbered properties (as defined in the credit agreement) with an unencumbered asset value (as defined in the credit agreement) of not less than $300.0 million at any time; and
Minimum occupancy rate (as defined in the credit agreement) for all unencumbered properties of not less than 80% at any time.
The credit facility limits our ability to pay cash dividends. However, so long as no default or event of default exists, the credit agreement allows us to pay cash dividends with respect to any 12-month period in an amount not to exceed the greater of: (i) 95% of adjusted funds from operations (as defined in the credit agreement) or (ii) the amount required for us (a) to maintain our status as a REIT and (b) to avoid income or excise tax under the Internal Revenue Code of 1986, as amended.Code. If certain defaults or events of default exist, we may pay cash dividends with respect to any 12-month period to the extent necessary to maintain our status as a REIT. The credit facility also restricts the amount of capital that we can invest in specific categories of assets, such as unimproved land holdings, development properties, notes receivable, mortgages, mezzanine loans and unconsolidated affiliates.affiliates, and restricts the amount of stock and OP units that we may repurchase during the term of the credit facility.
We may, at any time, voluntarily prepay any loan under the credit facility in whole or in part without premium or penalty.
The credit agreement includes customary events of default, in certain cases subject to customary periods to cure. The occurrence of an event of default, following the applicable cure period, would permit the lenders to, among other things, declare the unpaid principal, accrued and unpaid interest and all other amounts payable under the credit facility to be immediately due and payable.
We are currently in compliance with all covenants under the credit facility.
agreement.
Consolidated Indebtedness
The following table sets forth our consolidated indebtedness as of June 30, 20172018 ($ in thousands):
| | | | Amount Outstanding | | Interest Rate(a) | | Effective Rate for Variable Debt | | Maturity Date | | Balance at Maturity | | Amount Outstanding | | Interest Rate (a) | | Effective Rate for Variable Debt | | Maturity Date | | Balance at Maturity |
Secured Debt | | | | | | | | | | | | | | | | |
Johns Hopkins Village | | | $ | 46,698 |
| (b) | LIBOR+1.90% |
| | 3.99 | % | | July 30, 2018 | | $ | 46,698 |
|
Lightfoot Marketplace | | | 10,500 |
| | LIBOR+1.75% |
| | 3.84 | % | | November 14, 2018 | | 10,500 |
|
North Point Note 1 | | | 9,463 |
| | 6.45 | % | | |
| | February 5, 2019 | | 9,333 |
|
Harding Place | | | 14,884 |
| | LIBOR+2.95% |
| | 5.04 | % | | February 24, 2020 | | 14,884 |
|
Town Center Phase VI | | | 12,712 |
| | LIBOR+3.50% |
| | 5.59 | % | | June 29, 2020 | | 12,712 |
|
Hoffler Place | | | 1,417 |
| | LIBOR+3.24% |
| | | | January 1, 2021 | | 1,417 |
|
Summit Place | | | 588 |
| | LIBOR+3.24% |
| | | | January 1, 2021 | | 588 |
|
Southgate Square | | | 21,882 |
| | LIBOR+1.60% |
| | 3.69 | % | | April 29, 2021 | | 19,462 |
|
4525 Main Street | | | 32,034 |
| (c) | 3.25 | % | | | | September 10, 2021 | | 30,774 |
|
Encore Apartments | | | 24,966 |
| (c) | 3.25 | % | | | | September 10, 2021 | | 24,006 |
|
Hanbury Village | | | 19,262 |
| | 3.78 | % | | | | August 15, 2022 | | 17,109 |
|
Socastee Commons | | | 4,721 |
| (d) | 4.57 | % | | |
| | January 6, 2023 | | 4,223 |
|
Sandbridge Commons | | | 8,372 |
| | LIBOR+1.75% |
| | 3.84 | % | | January 17, 2023 | | 7,247 |
|
249 Central Park Retail | | $ | 16,966 |
| (b) | LIBOR+1.95% |
| | 3.17 | % | | August 8, 2021 | | $ | 15,959 |
| | 17,150 |
| (e) | LIBOR+1.60% |
| | 3.69 | % | | August 10, 2023 | | 15,935 |
|
South Retail | | 7,444 |
| (b) | LIBOR+1.95% |
| | 3.17 | % | | August 8, 2021 | | 7,002 |
| | 7,529 |
| (e) | LIBOR+1.60% |
| | 3.69 | % | | August 10, 2023 | | 6,992 |
|
Fountain Plaza Retail | | 10,214 |
| (b) | LIBOR+1.95% |
| | 3.17 | % | | August 8, 2021 | | 9,608 |
| | 10,321 |
| (e) | LIBOR+1.60% |
| | 3.69 | % | | August 10, 2023 | | 9,594 |
|
4525 Main Street | | 32,034 |
| (c) | 3.25 | % | |
|
| | September 10, 2021 | | 30,774 |
| |
Encore Apartments | | 24,966 |
| (c) | 3.25 | % | |
|
| | September 10, 2021 | | 24,006 |
| |
Commonwealth of Virginia – Chesapeake | | 4,933 |
| (d) | LIBOR+1.90% |
| | 3.12 | % | | August 28, 2017 | | 4,933 |
| |
Hanbury Village | | 20,567 |
| | 6.67 | % | | |
| | October 11, 2017 | | 20,499 |
| |
Lightfoot Marketplace | | 12,894 |
| | LIBOR+1.90% |
| | 3.12 | % | | November 14, 2017 | | 12,894 |
| |
Sandbridge Commons | | 9,252 |
| | LIBOR+1.85% |
| | 3.07 | % | | January 17, 2018 | | 9,129 |
| |
Southgate Square | | 21,035 |
| | LIBOR+2.00% |
| | 3.22 | % | | April 29, 2021 | | 18,925 |
| |
Columbus Village Note 1 | | 6,169 |
| | LIBOR+2.00% |
| | 3.05 | % | (e) | April 5, 2018 | | 6,033 |
| |
Columbus Village Note 2 | | 2,244 |
| | LIBOR+2.00% |
| | 3.22 | % | | April 5, 2018 | | 2,207 |
| |
Johns Hopkins Village | | 46,048 |
| | LIBOR+1.90% |
| | 3.12 | % | | July 30, 2018 | | 46,048 |
| |
North Point Note 1 | | 9,675 |
| | 6.45 | % | | |
| | February 5, 2019 | | 9,333 |
| |
Socastee Commons | | 4,819 |
| (f) | 4.57 | % | | |
| | January 6, 2023 | | 4,223 |
| |
River City | | | — |
| | LIBOR+1.50% |
| | — | % | | May 31, 2019 | | — |
|
Brooks Crossing office tower | | | 131 |
| | LIBOR+1.60% |
| | 3.69 | % | | July 1, 2025 | | 131 |
|
North Point Note 2 | | 2,513 |
| | 7.25 | % | | |
| | September 15, 2025 | | 1,344 |
| | 2,404 |
| | 7.25 | % | | |
| | September 15, 2025 | | 1,344 |
|
Smith's Landing | | 20,140 |
| | 4.05 | % | | |
| | June 1, 2035 | | — |
| | 19,378 |
| | 4.05 | % | | |
| | June 1, 2035 | | — |
|
Liberty Apartments | | 19,845 |
| (f) | 5.66 | % | | |
| | November 1, 2043 | | — |
| | 14,567 |
| (d) | 5.66 | % | | |
| | November 1, 2043 | | — |
|
The Cosmopolitan | | 45,556 |
| | 3.75 | % | | |
| | July 1, 2051 | | — |
| | 44,842 |
| | 3.35 | % | | |
| | July 1, 2051 | | — |
|
Total secured debt | | $ | 317,314 |
| | |
| | |
| | | | $ | 222,917 |
| | $ | 323,821 |
| | |
| | |
| | | | $ | 232,949 |
|
Unsecured Debt | | |
| | |
| | |
| | | | |
| | |
| | |
| | |
| | | | |
|
Senior unsecured revolving credit facility | | 28,000 |
| | LIBOR+1.40% to 2.00% |
| | 2.77 | % | | February 20, 2019 | | 28,000 |
| | 83,000 |
| | LIBOR+1.40% to 2.00% |
| | 3.84 | % | | October 26, 2021 | | 83,000 |
|
Senior unsecured term loan | | 75,000 |
| | LIBOR+1.35% to 1.95% |
| | 2.72 | % | | February 20, 2020 | | 75,000 |
| | 80,000 |
| | LIBOR+1.35% to 1.95% |
| | 3.79 | % | | October 26, 2022 | | 80,000 |
|
Senior unsecured term loan | | 50,000 |
| | LIBOR+1.35% to 1.95% |
| | 3.50 | % | (e) | February 20, 2020 | | 50,000 |
| | 50,000 |
| | LIBOR+1.35% to 1.95% |
| | 3.70 | % | (f) | October 26, 2022 | | 50,000 |
|
Senior unsecured term loan | | | 50,000 |
| | LIBOR+1.35% to 1.95% |
| | 4.48 | % | (f) | October 26, 2022 | | 50,000 |
|
Total unsecured debt | | $ | 153,000 |
| | |
| | |
| | | | $ | 153,000 |
| | $ | 263,000 |
| | |
| | |
| | | | $ | 263,000 |
|
Total principal balances | | | 586,821 |
| | | | | | 495,949 |
|
Unamortized GAAP adjustments | | (5,023 | ) | | |
| | |
| | | | — |
| | (6,375 | ) | | |
| | |
| | | | — |
|
Indebtedness, net | | $ | 465,291 |
| | |
| | |
| | | | $ | 375,917 |
| | $ | 580,446 |
| | |
| | |
| | | | $ | 495,949 |
|
| | | | | | | | | | | | | | | | |
(a) LIBOR rate is determined by individual lenders.
(b) Cross collateralized.Loan was refinanced on July 27, 2018.
(c) Cross collateralized.
(d) This loan was paid in full on July 13, 2017 in conjunction with the sale of the property.Principal balance excluding fair value adjustments.
(e) Cross collateralized.
(f) Subject to an interest rate swap agreement.
(f) Principal balance excluding fair value adjustments.
We are currently in compliance with all covenants on our outstanding indebtedness.
As of June 30, 2017,2018, our principal payments during the following years are as follows ($ in thousands):
| | Year(1) | Year(1) | | Amount Due | | Percentage of Total | Year(1) | | Amount Due | | Percentage of Total |
2017 | | $ | 40,235 |
| | 9 | % | |
2018 | 2018 | | 66,735 |
| | 14 | % | 2018 | | $ | 59,337 |
| | 10 | % |
2019 | 2019 | | 40,818 |
| | 9 | % | 2019 | | 13,773 |
| | 2 | % |
2020 | 2020 | | 129,482 |
| | 28 | % | 2020 | | 33,156 |
| | 6 | % |
2021 | 2021 | | 109,862 |
| | 23 | % | 2021 | | 163,812 |
| | 28 | % |
2022 | | 2022 | | 200,590 |
| | 34 | % |
Thereafter | Thereafter | | 83,182 |
| | 17 | % | Thereafter | | 116,153 |
| | 20 | % |
| | | $ | 470,314 |
| | 100 | % | | | $ | 586,821 |
| | 100 | % |
| | | | | | | | |
(1) Does not reflect the effect of any maturity extension options.
On February 1, 2017,January 22, 2018, we extended the maturity date of our Sandbridge Commons mortgage. The loan bears interest at a rate of LIBOR plus a spread of 1.75% and will mature on January 17, 2023.
On March 27, 2018, we paid off the North Point CenterColumbus Village Note 51 and Columbus Village Note 2 in full for $0.6an aggregate amount of $8.3 million.
On May 31, 2018, we modified the Southgate Square note. The principal amount of the note was increased to $22 million, and the note now bears interest at a rate of LIBOR plus a spread of 1.60%. This note will still mature on April 7, 2017, we paid off the Harrisonburg Regal note in full for $3.2 million.29, 2021.
On April 19, 2017,June 1, 2018, we entered into a second amendment to the credit agreement$16.3 million construction loan for the Lightfoot MarketplaceRiver City industrial development project in Chesterfield, Virginia. The loan which amended certain definitionsbears interest at a rate of LIBOR plus a spread of 1.50% and covenant requirements.will mature on May 31, 2019.
On June 14, 2018, we extended and modified the note secured by 249 Central Park Retail, Fountain Plaza Retail, and South Retail. The principal amount of the note was increased to $35.0 million and bears interest at a rate of LIBOR plus a spread of 1.60%. The note will mature on August 10, 2023.
On June 29, 2018, we entered into a $15.6 million construction loan for the Brooks Crossing office tower development project. The loan bears interest at a rate of LIBOR plus a spread of 1.60% and will mature on July 1, 2025.
On July 13, 2017,12, 2018, we paid offentered into a $16.2 million construction loan for the Market at Mill Creek development project in Mt. Pleasant, South Carolina. The loan bears interest at a rate of LIBOR plus a spread of 1.55% and will mature on July 12, 2025.
On July 27, 2018, we extended and modified the mortgage loan secured byJohns Hopkins Village note. The principal amount of the Commonwealthnote was increased to $53.0 million. The note bears interest at a rate of Virginia building in Chesapeake, VirginiaLIBOR plus a spread of 1.25% and will mature on August 7, 2025. We simultaneously entered into an interest rate swap agreement that effectively fixes the interest rate at 4.19% for $4.9 million in conjunction with the saleterm of this property.the loan.
Interest Rate Derivatives
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.
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.
On FebruaryMarch 7, 2017, we2018, the Operating Partnership entered into a LIBOR interest rate cap agreement on a notional amount of $50.0 million at a strike rate of 1.50%2.25% for a premium of less than $0.2$0.3 million. The interest rate cap agreement expires on MarchApril 1, 2019.2020.
On JuneApril 23, 2017,2018, we entered into a floating-to-fixed interest rate swap attributable to one-month LIBOR indexed interest payments with a notional amount of $50.0 million. The interest rate swap has a fixed rate of 2.783%, an effective date of May 1, 2018, and a maturity date of May 1, 2023.
On July 16, 2018, the Operating Partnership entered into a LIBOR interest rate cap agreement on a notional amount of $50.0 million at a strike rate of 1.50%2.50% for a premium of less than $0.2$0.3 million. The interest rate cap agreement expires on JulyAugust 1, 2019.2020.
As of June 30, 2017,2018, we were party to the following LIBOR interest rate cap agreements ($ in thousands):
| | Effective Date | | Maturity Date | | Strike Rate | | Notional Amount | | Maturity Date | | Strike Rate | | Notional Amount |
October 26, 2015 | | October 15, 2017 | | 1.25 | % | | 75,000 |
| |
February 25, 2016 | | March 1, 2018 | | 1.50 | % | | 75,000 |
| |
June 17, 2016 | | June 17, 2018 | | 1.00 | % | | 70,000 |
| |
February 7, 2017 | | March 1, 2019 | | 1.50 | % | | 50,000 |
| | March 1, 2019 | | 1.50 | % | | 50,000 |
|
June 23, 2017 | | July 1, 2019 | | 1.50 | % | | 50,000 |
| | July 1, 2019 | | 1.50 | % | | 50,000 |
|
September 18, 2017 | | | October 1, 2019 | | 1.50 | % | | 50,000 |
|
November 28, 2017 | | | December 1, 2019 | | 1.50 | % | | 50,000 |
|
March 7, 2018 | | | April 1, 2020 | | 2.25 | % | | 50,000 |
|
Total | | | | | | $ | 320,000 |
| | | | | | $ | 250,000 |
|
Off-Balance Sheet Arrangements
We have entered into standby letters of credit relating tousing the guarantee of future performance on certain of our construction contracts.available capacity under the credit facility. Letters of credit generally are available for draw down in the event we do not perform. As of June 30, 2017,2018, we had aggregatean outstanding standby lettersletter of credit totaling $4.1for $2.1 million that expireexpires during 2017.2018. However, any of our standby letters of credit may be renewed for additional periods until completion of the related construction contracts. The
amounts amount outstanding at June 30, 2017 include $2.0 million relating to construction projects and2018 was comprised of a $2.1 million letter of credit related to the guarantee on the 1405 Point Street Apartments senior construction loan.
Cash Flows
| | | | Six Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2017 | | 2016 | | Change | | 2018 | | 2017 | | Change |
| | ($ in thousands) | | ($ in thousands) |
Operating Activities | | $ | 19,886 |
| | $ | 18,948 |
| | $ | 938 |
| | $ | 11,260 |
| | $ | 16,974 |
| | $ | (5,714 | ) |
Investing Activities | | (37,057 | ) | | (149,389 | ) | | 112,332 |
| | (103,118 | ) | | (33,968 | ) | | (69,150 | ) |
Financing Activities | | 13,816 |
| | 123,436 |
| | (109,620 | ) | | 84,360 |
| | 13,527 |
| | 70,833 |
|
Net Increase (Decrease) | | $ | (3,355 | ) | | $ | (7,005 | ) | | $ | 3,650 |
| | $ | (7,498 | ) | | $ | (3,467 | ) | | $ | (4,031 | ) |
Cash and Cash Equivalents, Beginning of Period | | $ | 21,942 |
| | $ | 26,989 |
| | | |
Cash and Cash Equivalents, End of Period | | $ | 18,587 |
| | $ | 19,984 |
| | | |
Cash, Cash Equivalents, and Restricted Cash, Beginning of Period | | | $ | 22,916 |
| | $ | 25,193 |
| | |
Cash, Cash Equivalents, and Restricted Cash, End of Period | | | $ | 15,418 |
| | $ | 21,726 |
| | |
Net cash provided by operating activities during the six months ended June 30, 2017 increased 5.0%2018 decreased 33.7% compared to the six months ended June 30, 2016,2017, primarily as a result of timing differences in operating assets and liabilities.
During the six months ended June 30, 2017,2018, we invested 75.2% less$69.2 million more in cash compared to the six months ended June 30, 2016. The primary component of2017 due to increased development activity and the 2016 investments was our acquisition of the 11-property retail portfolio.two operating properties.
Net cash provided by financing activities during the six months ended June 30, 2017 decreased 88.8%2018 increased $70.8 million as compared to the six months ended June 30, 2016,2017, primarily as a result of debt andincreased borrowings under the credit facility repayments during the 2017 period, partially offset by increased net proceeds from equity issuances.facility.
Non-GAAP Financial Measures
We calculate FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts (“NAREIT”Nareit”). NAREITNareit 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 NAREITNareit 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’sNareit’s definition includes certain items that are not indicative of the results provided by the Company’sour operating property portfolio and affect the comparability of the Company’sour 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.
The following table sets forth a reconciliation of FFO and Normalized FFO for the three and six months ended June 30, 20172018 and 20162017 to net income, the most directly comparable GAAP equivalent:measure:
| | | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2018 | | 2017 | | 2018 | | 2017 |
| | (unaudited, $ in thousands) | | (in thousands, except per share and unit amounts) |
Net income | | $ | 4,943 |
| | $ | 3,131 |
| | $ | 13,696 |
| | $ | 29,664 |
| | $ | 5,945 |
| | $ | 4,943 |
| | $ | 12,928 |
| | $ | 13,696 |
|
Depreciation and amortization | | 9,304 |
| | 8,602 |
| | 18,779 |
| | 16,751 |
| | 9,179 |
| | 9,304 |
| | 18,457 |
| | 18,779 |
|
Gain on real estate dispositions | | — |
| | (13 | ) | | (3,395 | ) | | (26,257 | ) | |
(Gain) loss on operating real estate dispositions | | | — |
| | — |
| | — |
| | (3,395 | ) |
Funds from operations | | $ | 14,247 |
| | $ | 11,720 |
| | $ | 29,080 |
| | $ | 20,158 |
| | $ | 15,124 |
| | $ | 14,247 |
| | $ | 31,385 |
| | $ | 29,080 |
|
Acquisition, development and other pursuit costs | | 369 |
| | 437 |
| | 416 |
| | 1,141 |
| | 9 |
| | 369 |
| | 93 |
| | 416 |
|
Impairment charges | | 27 |
| | — |
| | 31 |
| | 35 |
| | 98 |
| | 27 |
| | 98 |
| | 31 |
|
Change in fair value of interest rate derivatives | | 81 |
| | 373 |
| | (213 | ) | | 2,762 |
| | 11 |
| | 81 |
| | (958 | ) | | (213 | ) |
Normalized funds from operations | | $ | 14,724 |
| | $ | 12,530 |
| | $ | 29,314 |
| | $ | 24,096 |
| | $ | 15,242 |
| | $ | 14,724 |
| | $ | 30,618 |
| | $ | 29,314 |
|
Net income per diluted share and unit | | $ | 0.08 |
| | $ | 0.06 |
| | $ | 0.24 |
| | $ | 0.62 |
| | $ | 0.09 |
| | $ | 0.08 |
| | $ | 0.21 |
| | $ | 0.24 |
|
FFO per diluted share and unit | | $ | 0.24 |
| | $ | 0.24 |
| | $ | 0.50 |
| | $ | 0.42 |
| | $ | 0.24 |
| | $ | 0.24 |
| | $ | 0.50 |
| | $ | 0.50 |
|
Normalized FFO per diluted share and unit | | $ | 0.25 |
| | $ | 0.26 |
| | $ | 0.51 |
| | $ | 0.51 |
| | $ | 0.24 |
| | $ | 0.25 |
| | $ | 0.49 |
| | $ | 0.51 |
|
Weighted average common shares and units - diluted | | 59,936 |
| | 48,849 |
| | 57,718 |
| | 47,534 |
| | 63,214 |
| | 59,936 |
| | 62,878 |
| | 57,718 |
|
The adjustment for gain on real estate dispositions excludes the gain recognized in the three months ended March 31, 2016 on the Newport News Economic Authority building because this building was sold before being placed in service.
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 then-currently 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, 2016.2017.
On January 1, 2018, we adopted the new accounting standard codified in Accounting Standards Codification 606 - Revenue from Contracts with Customers. We recognize general contracting revenues as a customer obtains control of promised goods or services in an amount that reflects the consideration we expect to receive in exchange for those goods or services. For each construction contract, we identify the performance obligations, which typically include the delivery of a single building constructed according to the specifications of the contract. We estimate the total transaction price, which generally includes a fixed contract price and may also include variable components such as early completion bonuses, liquidated damages, or cost savings to be shared with the customer. Variable components of the contract price are included in the transaction price to the extent that it is probable that a significant reversal of revenue will not occur. We recognize the estimated transaction price as revenue as we satisfy our performance obligations; we estimate our progress in satisfying performance obligations for each contract using the percentage-of-completion method, based on the proportion of incurred costs to total estimated construction costs at completion. Construction contract costs include all direct material, direct labor, subcontract costs, and overhead costs
directly related to contract performance. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, are all significant judgments that may result in revisions to costs and income and are recognized in the period in which they are determined. Provisions for estimated losses on uncompleted contracts are recognized immediately in the period in which such losses are determined. We defer pre-contract costs when such costs are directly associated with specific anticipated contracts and their recovery is probable.
We recognize real estate services revenues from property development and management as we satisfy our performance obligations under these service arrangements.
We assess whether multiple contracts with a single counterparty should be combined into a single contract for the revenue recognition purposes based on factors such as the timing of the negotiation and execution of the contracts and whether the economic substance of the contracts was contemplated separately or in tandem.
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 June 30, 2017,2018, approximately $236.3$271.6 million, or 50.2%46.3%, of our debt had fixed interest rates and approximately $234.0$315.2 million, or 49.8%53.7%, had variable interest rates. At June 30, 2017,2018, LIBOR was approximately 122209 basis points. Assuming no increase in the level of our variable rate debt, if LIBOR increased by 100 basis points, our cash flow would increasedecrease by approximately $0.4less than $0.1 million per year as a result of the interest rate caps. Assuming no increase in the level of our variable rate debt, if LIBOR decreased by 100 basis points, our cash flow would increase by approximately $2.3$2.0 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 Securities Exchange Act of 1934, as amended (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 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 June 30, 2017,2018, 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 June 30, 2017,2018, that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in reports filed or submitted under the Exchange Act: (i) is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
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 ongoing 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, 2016.2017.
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
None.
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.
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: August 2, 2017 | /s/ LOUIS S. HADDAD |
| Louis S. Haddad |
| President and Chief Executive Officer |
| (Principal Executive Officer) |
| |
Date: August 2, 2017 | /s/ MICHAEL P. O’HARA |
| Michael P. O’Hara |
| Chief Financial Officer and Treasurer |
| (Principal Accounting and Financial Officer) |
|
| | |
Exhibit No. | | Description |
10.1 | | Armada Hoffler Properties, Inc. Amended and Restated 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-8 (SEC File No. 333-218750) filed June 15, 2017) |
| | |
15.1 | | Acknowledgment of Ernst & Young LLP, Independent Registered Public Accounting Firm |
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| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
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 |
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101.DEF | | XBRL Definition Linkbase |
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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.
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| |
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| ARMADA HOFFLER PROPERTIES, INC. |
| |
Date: August 1, 2018 | /s/ LOUIS S. HADDAD |
| Louis S. Haddad |
| President and Chief Executive Officer |
| (Principal Executive Officer) |
| |
Date: August 1, 2018 | /s/ MICHAEL P. O’HARA |
| Michael P. O’Hara |
| Chief Financial Officer and Treasurer |
| (Principal Accounting and Financial Officer) |