Armada Hoffler Properties, Inc. (the “Company”"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 a real estate investment trust ("REIT"), the sole general partner of Armada Hoffler, L.P. (the “Operating Partnership”"Operating Partnership"), and, as of June 30, 2018March 31, 2019, owned 73.8%75.5% 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.

As of June 30, 2018,March 31, 2019, the Company's property portfolio consisted of 4948 operating properties and 811 properties either under development properties.or not yet stabilized.

Refer to Note 45 for information related to the Company's recent acquisitions and dispositions of operating properties.

 

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

 

The condensed consolidated financial statements include the financial position and results of operations of the Company and its consolidated subsidiaries.subsidiaries, including the Operating Partnership, its wholly-owned subsidiaries, and any interests in variable interest entities ("VIEs") where the Company has been determined to be the primary beneficiary. 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, 2017.2018.

 

 

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.

 

In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company to use certain transition relief. Management is currently evaluatingnot reassess whether any expired or existing contracts are or contain leases, not reassess the potential impactlease classification for any expired or existing leases, and not reassess initial direct costs for existing leases. As of March 31, 2019, Company does not have any leases classified as finance leases. The Company also elected a practical expedient that allowed it to not separate non-lease components from lease components and instead to account for each lease and non-lease component as a single lease component. The adoption of the new standard as of January 1, 2019 did not impact the Company's consolidated results of operations and had no impact on cash flows.

As a lessee, the Company’s consolidated financial statements.Company has six ground leases on five properties with initial terms that range from 20 to 65 years and options to extend up to an additional 70 years in certain cases. The exercise of lease renewal options is at the Company's sole discretion. The depreciable life of assets and leasehold improvements are limited by the expected lease term. The Company isrecognizes lease expense on a straight-line basis over the lessee on certainlease term. The Company's lease agreements do not contain any residual value guarantees or material restrictive covenants.

The long-term ground leases and equipment leases, which representsrepresent a majority of the Company's current operating lease payments, and expects to recordpayments. The Company recorded right-of-use assets totaling $32.2 million and lease liabilities for these leases under the new standard.

As a lessor, the Company leases its properties under operating leases and recognizes base rents on December 31, 2017, applying it retrospectively to each period presented.a straight-line basis over the lease term. The new guidance requires thatCompany also recognizes revenue from tenant recoveries, through which tenants reimburse the statementCompany on an accrual basis for certain expenses such as utilities, janitorial services, repairs and maintenance, security and alarms, parking lot and ground maintenance, administrative services, management fees, insurance, and real estate taxes. Rental revenues are reduced by the amount of cash flows show changes in restricted cash in addition to changes in cash and cash equivalents. No additional changes were required to be made toany leasing incentives amortized on a straight-line basis over the Company's consolidated statements of cash flows as a resultterm of the new guidance. The following table sets forthapplicable lease. In addition, the items fromCompany recognizes contingent rental revenue (e.g., percentage rents based on tenant sales thresholds) when the Company's consolidated balance sheets thatsales thresholds are included in cash, cash equivalents, and restricted cash in the consolidated statements of cash flows (in thousands):

renewal terms that can extend the lease term from one to 15 years or more. The following table summarizesexercise of lease renewal options is at the changes made to net cash provided by operating activities, net cash used for investing activities, and net cash provided by financing activitiestenant's sole discretion. The Company includes a renewal period in the consolidated statementlease term only if it appears at lease inception that the renewal is reasonably assured.

See the FASB issued new guidance that simplifies some ofCompany's Annual Report on Form 10-K for the requirements relating to accounting for derivatives and hedging. The new guidance eliminates the requirement to separately measure and report hedge ineffectivenessyear ended December 31, 2018 for a highly effective hedge and also simplifies certain documentation and assessment requirements relating todescription of other accounting principles upon which basis the determination of hedge effectiveness. The new guidance will be effective for the Company on January 1, 2019, with early adoption permitted. As of June 30, 2018, the Company does not currently have any derivatives designated as hedging instruments for accounting purposes but may designate new derivative contracts as hedging instruments in the future. The application of this guidance to future hedging relationships could reduce or eliminate the gains and losses that would otherwise be recorded for these derivative instruments.accompanying consolidated financial statements were prepared.

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, construction, and constructionlending businesses.

General contracting and real estate services revenues for the three months ended June 30,March 31, 2019 and 2018 and 2017 exclude revenue related to intercompany construction contracts of $34.2$30.2 million and $11.6 million, respectively. General contracting and real estate services revenues for the six months ended June 30, 2018 and 2017 exclude revenue related to intercompany construction contracts of $60.1 million and $17.5$25.9 million, respectively.

General contracting and real estate services expenses for the three months ended June 30,March 31, 2019 and 2018 and 2017 exclude expenses related to intercompany construction contracts of $33.9$29.9 million and $11.6 million, respectively. General contracting and real estate services expenses for the six months ended June 30, 2018 and 2017 exclude expenses related to intercompany construction contracts of $59.5 million and $17.3$25.6 million, respectively.

General contracting and real estate services expenses for the three months ended June 30,March 31, 2019 and 2018 and 2017 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, 2018 and 2017 include noncash stock compensation expense of $0.2 million and $0.4$0.1 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,March 31, 2019 and 2018 and 2017 (in thousands): 

 

General and administrative expenses represent costs not directly associated with the operation and management of the Company’s real estate properties and general contracting and real estate services businesses. General and administrative expenses include corporate office personnel salaries and benefits, bank fees, accounting fees, legal fees and other corporate office expenses. General and administrative expenses for the three months ended June 30,March 31, 2019 and 2018 and 2017 include noncash stock compensation expense of $0.2$0.5 million and $0.2 million, respectively. General and administrative expenses for the six months ended June 30, 2018 and 2017 include noncash stock compensation expense of $0.7 million and $0.6$0.5 million, respectively.

 

On January 9, 2018,February 6, 2019, the Company acquired Indian Lakes Crossing, a Harris Teeter-anchored shopping centeran additional outparcel phase of Wendover Village in Virginia Beach, Virginia,Greensboro, North Carolina for a contract price of $14.7$2.7 million plus capitalized acquisition costs of $0.2$0.1 million. This phase is leased by a single tenant.

On January 29, 2018,March 14, 2019, the Company acquired Parkway Centre,the office and retail portions of the One City Center project in exchange for a newly developed Publix-anchored shopping center in Moultrie, Georgia for total considerationredemption of $11.3 million (comprised of $9.6 million in cash and $1.7 millionits 37% equity ownership in the formjoint venture with Austin Lawrence Partners, which totaled $23.0 million as of Class A unitsthe acquisition date, and a cash payment of limited partnership interest in the Operating Partnership ("Class A Units")) plus$22.9 million. The Company also incurred capitalized acquisition costs of $0.3$0.1 million. The Company obtained a new loan in the amount of $25.6 million in conjunction with this acquisition, which may be increased to $27.6 million subject to certain conditions.

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 sixthree months ended June 30, 2018March 31, 2019 (in thousands):

On November 30, 2017,April 1, 2019, the Company sold Waynesboro Commons for a sale price of $1.1 million. This property was classified as held for sale as of March 31, 2019.

On April 29, 2019, the Company entered into contribution agreements with Venture Realty Group to acquire Red Mill Commons and Marketplace at Hilltop for consideration comprised of 4.1 million Class A Units (as defined below), the assumption of $36.0 million of mortgage debt, and $5.0 million in cash. The consideration to be paid was determined based on an estimated transaction price of $105.0 million. In connection with the acquisition, the Company and the Operating Partnership expect to enter into a leasetax protection agreement with Bottling Group, LLCthe contributors pursuant to which such parties will agree, subject to certain exceptions, to indemnify the contributors for up to 10 years against certain tax liabilities incurred by them, if such liabilities result from a new distribution facility thattransaction involving a direct or indirect taxable disposition of either or both of these properties or if the Company will developOperating Partnership fails to maintain and constructallocate to the sellers for expected delivery in the fourth quartertaxation purposes minimum levels of 2018. On January 29, 2018, the Company 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 February 25, 2016, the Company acquired a 37% interest in DurhamOne City Center, II, LLC (“City Center”)a joint venture with Austin Lawrence Partners, for purposes of developing a 22-story mixed use tower in Durham, North Carolina. During the sixthree months ended June 30, 2018,March 31, 2019, the Company invested an additional $3.2$0.5 million in One City Center. As of June 30, 2018 and December 31, 2017, the Company had invested $13.8 million and $10.9 million, respectively, in City 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, $38.9 million and $29.2 million, respectively, had been drawn against the construction loan, of which $13.2 million and $11.2 million, respectively, was attributable to the Company's portion of the loan.

 

For the period from January 1, 2019 to March 13, 2019, One City Center had operating income of $0.3 million allocated to the Company. For the three and six months ended June 30,March 31, 2018, and 2017,One City Center did not have anyhad no operating activity, and therefore the Company did not receive any distributions orreceived no allocated income. 

 

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 recognized interest income for the three and six months ended June 30,March 31, 2019 and 2018 as follows (in thousands):

As of March 31, 2019 and 2017 as follows:December 31, 2018, there was no allowance for loan losses. During the three months ended March 31, 2019 and 2018, there was no provision for loan losses recorded for any of the Company's notes receivable. The Company's management performs a quarterly analysis of the loan portfolio to determine if an impairment has occurred based on the progress of development activities, including leasing activities, projected development costs, and current and projected loan balances.

1405 Point (also known as Point Street Apartments) opened duringOn February 8, 2019, the first quarter of 2018.

On April 25, 2019, the Company exercised its option to purchase 79% of the partnership that owns 1405 Point in exchange for extinguishing its note receivable on the optionproject and a cash payment of $0.3 million. The project is subject to purchase up to an 88% controlling interest in 1405 Point upon completiona loan payable of the project. The Company currently has a $2.1 million letter of credit for the guarantee of the senior construction loan.

 

On October 26, 2017, the Operating Partnership entered into an amended and restated credit agreement (the “credit agreement”), which provides forThe Company has a $300.0 million senior credit facility that was modified on January 31, 2019 using the accordion feature to increase the maximum total commitments to $355.0 million, comprised of a $150.0 million senior unsecured revolving credit facility (the "revolving credit facility") and a $150.0$205.0 million senior unsecured term loan facility (the "term loan facility" and, together with the revolving credit facility, the "credit facility"), with a syndicate of banks.

 

The credit facility includes an accordion feature that allows the total commitments to be further 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.

 

The 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. 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 facility.

As of June 30, 2018March 31, 2019 and December 31, 2017,2018, the outstanding balance on the revolving credit facility was $83.0$91.0 million and $66.0$126.0 million, respectively, and the outstanding balance on the term loan facility was $180.0$205.0 million and $150.0$180.0 million, respectively. As of June 30, 2018,March 31, 2019, the effective interest rates on the revolving credit facility and the term loan facility were 3.84%4.04% and 3.79%3.99%, respectively. The Company may, at any time, voluntarily prepay any loan under the credit facility in whole or in part without premium or penalty.

The Operating Partnership is the borrower under the credit facility, and its obligations under the credit facility are guaranteed by the Company 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. 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 be immediately due and payable.

The Company is currently in compliance with all covenants under the credit agreement.

 

On January 22, 2018,31, 2019, 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.paid off North Point Center Note 1.

On March 27, 2018,11, 2019, the Company paid off Columbus Village Note 1 and Columbus Village Note 2 in full for an aggregate amountreceived $7.4 million of $8.3 million.additional funding on the loan secured by Lightfoot Marketplace.

On May 31, 2018,March 14, 2019, the Company modifiedobtained a loan secured by One City Center in the Southgate Square note. The principal amount of $25.6 million in conjunction with the note wasacquisition of this property. This loan may be increased to $22$27.6 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 29, 2021.subject to certain conditions.

During the sixthree months ended June 30, 2018,March 31, 2019, the Company borrowed $24.4$31.1 million under its existing construction loans to fund new development and construction.