Property Disposition
On May 29, 2020, the Company sold a portfolio of 7 retail properties for $90.0 million. The portfolio consists of Alexander Pointe, Bermuda Crossroads, Gainsborough Square, Harper Hill Commons, Indian Lakes Crossing, Renaissance Square, and Stone House Square. The gain on sale was $2.8 million. In connection with the sale of this portfolio, the Company repaid $61.9 million on the revolving credit facility, resulting in net proceeds of $25.9 million.
The Company has designated proceeds from the sale of Alexander Pointe, Bermuda Crossroads, and Gainsborough Square as part of a like-kind exchange for tax purposes. The Company plans to use these proceeds for its purchase of Nexton Square in the third or fourth quarter of 2020. In the event that all or some of these proceeds are not used for the purchase of Nexton Square or another suitable acquisition, the Company may be subject to tax indemnification payments under the terms of the Company's tax protection agreements with certain limited partners in the Operating Partnership.
| Wendover Village additional outparcel | One City Center | 1405 Point | Red Mill Commons | Marketplace at Hilltop | Thames Street Wharf | |||||||||||||||||||
| Land | $ | 1,633 | $ | 2,678 | $ | — | (a) | $ | 44,252 | $ | 2,023 | (b) | $ | 15,861 | ||||||||||
| Site improvements | 50 | 163 | 298 | 2,558 | 691 | 150 | ||||||||||||||||||
| Building and improvements | 888 | 28,039 | 92,866 | 27,790 | 19,195 | 64,539 | ||||||||||||||||||
| Furniture and fixtures | — | — | 2,302 | — | — | — | ||||||||||||||||||
| In-place leases | 101 | 15,140 | 3,371 | 9,973 | 4,565 | 24,385 | ||||||||||||||||||
| Above-market leases | 111 | — | — | 1,463 | 599 | — | ||||||||||||||||||
| Below-market leases | — | — | — | (6,221 | ) | (1,136 | ) | (3,636 | ) | |||||||||||||||
| Finance lease liabilities | — | — | (8,671 | ) | — | (9,200 | ) | — | ||||||||||||||||
| Finance lease right-of-use assets | — | — | 11,730 | (a) | — | 12,770 | (b) | — | ||||||||||||||||
| Net assets acquired | $ | 2,783 | $ | 46,020 | $ | 101,896 | $ | 79,815 | $ | 29,507 | $ | 101,299 | ||||||||||||
The Company had the following notes receivable outstanding as of SeptemberJune 30, 20192020 and December 31, 20182019 ($ in thousands):
| Outstanding loan amount | Maximum loan commitment | Interest rate | Interest compounding | Outstanding loan amount | Interest compounding | |||||||||||||||||||||||||||||
| Development Project | September 30, 2019 | December 31, 2018 | June 30, 2020 | December 31, 2019 | Maximum loan commitment | Interest rate | ||||||||||||||||||||||||||||
| 1405 Point | $ | — | $ | 30,238 | $ | 31,032 | 8.0 | % | Monthly | |||||||||||||||||||||||||
| The Residences at Annapolis Junction | 38,571 | 36,361 | 48,105 | 10.0 | % | Monthly | $ | 42,767 | $ | 40,049 | $ | 48,105 | 10.0 | % | (a) | Monthly | ||||||||||||||||||
| North Decatur Square | — | 18,521 | 29,673 | 15.0 | % | Annually | ||||||||||||||||||||||||||||
| Delray Plaza | 12,526 | 7,032 | 15,000 | 15.0 | % | Annually | 15,484 | 12,995 | 17,000 | 15.0 | % | (a)(b) | Annually | |||||||||||||||||||||
| Nexton Square | 14,718 | 14,855 | 17,000 | 15.0 | % | Monthly | 16,309 | 15,097 | 17,000 | 10.0 | % | Monthly | ||||||||||||||||||||||
| Interlock Commercial | 54,112 | 18,269 | 95,000 | 15.0 | % | None | 79,082 | 59,224 | 103,000 | 15.0 | % | None | ||||||||||||||||||||||
| Solis Apartments at Interlock | 22,544 | 13,821 | 41,100 | 13.0 | % | Annually | 27,263 | 25,588 | 41,100 | 13.0 | % | Annually | ||||||||||||||||||||||
| Total mezzanine | 142,471 | 139,097 | $ | 276,910 | 180,905 | 152,953 | $ | 226,205 | ||||||||||||||||||||||||||
| Other notes receivable | 1,333 | 1,275 | 14 | 1,147 | ||||||||||||||||||||||||||||||
| Notes receivable guarantee premium | 5,702 | 2,800 | 4,411 | 5,271 | ||||||||||||||||||||||||||||||
Notes receivable discount, net (a) | (762 | ) | (4,489 | ) | ||||||||||||||||||||||||||||||
| Allowance for credit losses | (3,085 | ) | — | |||||||||||||||||||||||||||||||
| Total notes receivable | $ | 148,744 | $ | 138,683 | $ | 182,245 | $ | 159,371 | ||||||||||||||||||||||||||
(a) Loan was placed on nonaccrual status effective April 1, 2020.
(b) $2.0 million of this loan is subject to an interest rate of 6%.
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 ninesix months ended SeptemberJune 30, 20192020 and 20182019 as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||
| Development Project | 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
| 1405 Point | $ | — | $ | 547 | $ | 783 | $ | 1,483 | $ | — | $ | 173 | $ | — | $ | 783 | |||||||||||||||||
| North Decatur Square | — | 693 | — | 1,331 | |||||||||||||||||||||||||||||
| The Residences at Annapolis Junction | 2,340 | (a) | 1,166 | 6,536 | (a) | 3,374 | — | (a) | 2,173 | (b) | 2,468 | (a)(c) | 4,196 | (b) | |||||||||||||||||||
| North Decatur Square | 178 | 569 | 1,509 | 1,561 | |||||||||||||||||||||||||||||
| Delray Plaza | 429 | 228 | 1,153 | 676 | — | (a) | 414 | 489 | (a) | 724 | |||||||||||||||||||||||
| Nexton Square | 550 | 19 | 1,584 | 19 | 405 | 524 | 797 | 1,033 | |||||||||||||||||||||||||
| Interlock Commercial | 1,595 | — | 3,425 | — | 3,157 | (c) | 1,086 | 6,175 | (c) | 1,830 | |||||||||||||||||||||||
| Solis Apartments at Interlock | 596 | — | 1,567 | — | 838 | 508 | 1,675 | 972 | |||||||||||||||||||||||||
| Total mezzanine | 5,688 | 2,529 | 16,557 | 7,113 | 4,400 | 5,571 | 11,604 | 10,869 | |||||||||||||||||||||||||
| Other interest income | 22 | 16 | 65 | 39 | 12 | 22 | 34 | 43 | |||||||||||||||||||||||||
| Total interest income | $ | 5,710 | $ | 2,545 | $ | 16,622 | $ | 7,152 | $ | 4,412 | $ | 5,593 | $ | 11,638 | $ | 10,912 | |||||||||||||||||
(a) Loan was placed on nonaccrual status effective April 1, 2020.
(b) Includes amortization of the $5.0 million loan modification fee paid by the borrower in November 2018.
(c) Includes partial recognition of interest income related to an exit fee that is due upon repayment of the loan.
Delray Plaza
On March 3, 2020, the Delray Plaza loan was modified to increase the maximum amount of the loan to $17.0 million, with $2.0 million of additional funds borrowed at an interest rate of 6% in order to fund final development activities. The borrower pledged 125,832 Class A Units as additional collateral for this loan.
12
Interlock Commercial
In May 2020, the Company modified the Interlock Commercial loan to allow for an additional $8.0 million of loan funding; this additional loan funding may be available for cost overruns as well as the building of townhome units as an additional phase of this development project. The borrower also modified the senior construction loan on the project. As part of this modification, the Company agreed to increase its payment guaranty for this senior loan to $34.3 million.
Current Expected Credit Losses
The Company is exposed to credit losses primarily through its mezzanine lending activities. As of SeptemberJune 30, 20192020, the Company had 5 mezzanine loans, all of which are secured by second liens on development projects in various stages of completion or lease-up. Each of these projects is subject to a loan that is senior to the Company’s mezzanine loan. Interest on these loans is paid in kind and December 31, 2018, there was 0 allowance for loan losses. During the three and nine months ended September 30, 2019 and 2018, there was 0 provision for loan losses recorded for anyis generally not expected to be paid until a sale of the Company's notes receivable. project after completion of the development.
The Company's management performs a quarterly analysis of the loan portfolio to determine if an impairment has occurredthe risk of credit loss based on the progress of development activities including leasing activities, projected development costs, and current and projected mezzanine and senior construction loan balances.
Special Mention: loans in this category show signs that the economic performance of the project may suffer as a result of slower-than-expected leasing activity or an extended development or marketing timeline. Loans in this category warrant increased monitoring by management.
Substandard: loans in this category may not be fully collected by the Company unless remediation actions are taken. Remediation actions may include obtaining additional collateral or assisting the borrower with asset management activities to prepare the project for sale. The Company agreedmay also consider placing the loan on nonaccrual status if it does not believe that additional interest accruals will ultimately be collected.
On a quarterly basis, the Company compares the risk inherent in its loans to guarantee $8.3 millionindustry loan loss data experienced during past business cycles. The Company updated the risk ratings for each of its notes receivable during the three months ended June 30, 2020. The Company obtained industry loan loss data relative to these risk ratings as of March 31, 2020.
The following table presents amortized cost basis of the new senior loan;portfolio by year of origination and risk rating as of June 30, 2020 (in thousands):
| Year of Origination | ||||||||||||||||||||||||
| Risk Ratings | 2020 | 2019 | 2018 | 2017 | 2016 | Total | ||||||||||||||||||
| Pass | $ | — | $ | — | $ | 124,939 | $ | — | $ | — | $ | 124,939 | ||||||||||||
| Special Mention | — | — | — | — | — | — | ||||||||||||||||||
| Substandard | — | — | — | 14,776 | 42,516 | 57,292 | ||||||||||||||||||
| Total amortized cost basis | $ | — | $ | — | $ | 124,939 | $ | 14,776 | $ | 42,516 | $ | 182,231 | ||||||||||||
As of December 31, 2019, there was 0 allowance for loan losses. At June 30, 2020, the Company reported $182.2 million of notes receivable, net of allowances of $3.1 million. Changes in the allowance for the six months ended June 30, 2020 were as follows (in thousands):
| Six Months Ended June 30, 2020 | ||||
| Beginning balance (December 31, 2019) | $ | — | ||
| Cumulative effect of accounting change | 2,825 | |||
| Unrealized credit loss provision | 260 | |||
| Ending balance | $ | 3,085 | ||
13
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 project. The Company expects to bill and collect substantially all construction contract costs and estimated earnings in excess of billings as of SeptemberJune 30, 20192020 during the next twelve months.
Billings in excess of construction contract costs and estimated earnings represent billings or collections on contracts made in advance of revenue recognized.
The following table summarizes the changes to the balances in the Company’s construction contract costs and estimated earnings in excess of billings account and the billings in excess of construction contract costs and estimated earnings account for the ninesix months ended SeptemberJune 30, 20192020 and 20182019 (in thousands):
| Nine Months Ended September 30, 2019 | Nine Months Ended September 30, 2018 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | |||||||||||||||||||||||||||||
| Construction contract costs and estimated earnings in excess of billings | Billings in excess of construction contract costs and estimated earnings | Construction contract costs and estimated earnings in excess of billings | Billings in excess of construction contract costs and estimated earnings | Construction contract costs and estimated earnings in excess of billings | Billings in excess of construction contract costs and estimated earnings | Construction contract costs and estimated earnings in excess of billings | Billings in excess of construction contract costs and estimated earnings | |||||||||||||||||||||||||
| Beginning balance | $ | 1,358 | $ | 3,037 | $ | 245 | $ | 3,591 | $ | 249 | $ | 5,306 | $ | 1,358 | $ | 3,037 | ||||||||||||||||
| Revenue recognized that was included in the balance at the beginning of the period | — | (3,037 | ) | — | (3,591 | ) | — | (5,306 | ) | — | (3,037 | ) | ||||||||||||||||||||
| Increases due to new billings, excluding amounts recognized as revenue during the period | — | 4,256 | — | 2,400 | — | 9,320 | — | 2,541 | ||||||||||||||||||||||||
| Transferred to receivables | (2,015 | ) | — | (245 | ) | — | (285 | ) | — | (1,890 | ) | — | ||||||||||||||||||||
| Construction contract costs and estimated earnings not billed during the period | 624 | — | 576 | — | 333 | — | 461 | — | ||||||||||||||||||||||||
| Changes due to cumulative catch-up adjustment arising from changes in the estimate of the stage of completion | 657 | (923 | ) | 151 | (633 | ) | 36 | — | 532 | (752 | ) | |||||||||||||||||||||
| Ending balance | $ | 624 | $ | 3,333 | $ | 727 | $ | 1,767 | $ | 333 | $ | 9,320 | $ | 461 | $ | 1,789 | ||||||||||||||||
The Company defers pre-contract costs when such costs are directly associated with specific anticipated contracts and their recovery is probable. Pre-contract costs of $1.0 million and $1.4$0.9 million were deferred as of SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively. Amortization of pre-contract costs for the ninesix months ended SeptemberJune 30, 2020 and 2019 and 2018 was $0.1$0.4 million and zero,$0.3 million, respectively.
Construction receivables and payables include retentions, amounts that are generally withheld until the completion of the contract or the satisfaction of certain restrictive conditions such as fulfillment guarantees. As of SeptemberJune 30, 20192020 and December 31, 2018,2019, construction receivables included retentions of $5.4$13.9 million and $8.5$9.0 million, respectively. The Company expects to collect substantially all construction receivables outstanding as of SeptemberJune 30, 20192020 during the next twelve months. As of SeptemberJune 30, 20192020 and December 31, 2018,2019, construction payables included retentions of $15.8
$17.4 million and $21.6$18.0 million, respectively. The Company expects to pay substantially all construction payables outstanding as of SeptemberJune 30, 20192020 during the next twelve months.
14
The Company’s net position on uncompleted construction contracts comprised the following as of SeptemberJune 30, 20192020 and December 31, 20182019 (in thousands):
| September 30, 2019 | December 31, 2018 | June 30, 2020 | December 31, 2019 | |||||||||||
| Costs incurred on uncompleted construction contracts | $ | 656,874 | $ | 594,006 | $ | 796,457 | $ | 695,564 | ||||||
| Estimated earnings | 23,527 | 20,375 | 28,275 | 24,553 | ||||||||||
| Billings | (683,110 | ) | (616,060 | ) | (833,719 | ) | (725,174 | ) | ||||||
| Net position | $ | (2,709 | ) | $ | (1,679 | ) | $ | (8,987 | ) | $ | (5,057 | ) | ||
| Construction contract costs and estimated earnings in excess of billings | $ | 624 | $ | 1,358 | $ | 333 | $ | 249 | ||||||
| Billings in excess of construction contract costs and estimated earnings | (3,333 | ) | (3,037 | ) | (9,320 | ) | (5,306 | ) | ||||||
| Net position | $ | (2,709 | ) | $ | (1,679 | ) | $ | (8,987 | ) | $ | (5,057 | ) | ||
The Company’s balances and changes in construction contract price allocated to unsatisfied performance obligations (backlog) as of SeptemberJune 30, 20192020 and 20182019 were as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
| Beginning backlog | $ | 178,632 | $ | 37,921 | $ | 165,863 | $ | 49,167 | $ | 235,642 | $ | 160,871 | $ | 242,622 | $ | 165,863 | ||||||||||||||||
| New contracts/change orders | 22,054 | 7,138 | 73,250 | 39,514 | 15,490 | 39,177 | 55,930 | 51,196 | ||||||||||||||||||||||||
| Work performed | (27,594 | ) | (19,879 | ) | (66,021 | ) | (63,501 | ) | (57,390 | ) | (21,416 | ) | (104,810 | ) | (38,427 | ) | ||||||||||||||||
| Ending backlog | $ | 173,092 | $ | 25,180 | $ | 173,092 | $ | 25,180 | $ | 193,742 | $ | 178,632 | $ | 193,742 | $ | 178,632 | ||||||||||||||||
The Company expects to complete a majority of the uncompleted contracts in place as of SeptemberJune 30, 20192020 during the next 12 to 18 months.
Credit Facility
The Company has a senior credit facility that was modifiedamended and restated on January 31,October 3, 2019, using the accordion feature to increase the maximum total commitments towhich provides for a $355.0 million credit facility comprised of a $150.0 million senior unsecured revolving credit facility (the "revolving credit facility") and a $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$700.0 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,January 24, 2024, with 2 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.January 24, 2025.
The revolving credit facility bears interest at LIBOR (the London Inter-Bank Offered Rate) plus a margin ranging from 1.40%1.30% to 2.00%1.85% and the term loan facility bears interest at LIBOR plus a margin ranging from 1.35%1.25% to 1.95%1.80%, 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 SeptemberJune 30, 20192020 and December 31, 2018,2019, the outstanding balance on the revolving credit facility was $110.0$80.0 million and $126.0$110.0 million, respectively, and the outstanding balance on the term loan facility was $205.0 million, and $180.0 million, respectively.as of both of those dates. As of SeptemberJune 30, 2019,2020, the effective interest rates on the revolving credit facility and the term loan facility were 3.57%1.76% and 3.52%1.71%, 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 governing the credit facility.
Other 20192020 Financing Activity
| Loan name | Note balance at assumption | Fair value of loan at assumption | Loan maturity date | Loan interest rate | |||||||||
| Red Mill North | $ | 4,451 | $ | 4,520 | 12/31/2028 | 4.73 | % | ||||||
| Red Mill South | 6,310 | 6,090 | 5/1/2025 | 3.57 | % | ||||||||
| Red Mill Central | 2,640 | 2,690 | 6/17/2024 | 4.80 | % | ||||||||
| Red Mill West | 11,548 | 11,540 | 6/1/2022 | 4.23 | % | ||||||||
| Marketplace at Hilltop | 10,740 | 10,790 | 10/1/2022 | 4.42 | % | ||||||||
| $ | 35,689 | $ | 35,630 | ||||||||||
During the ninesix months ended SeptemberJune 30, 2019,2020, the Company borrowed $77.8$31.6 million under its existing construction loans to fund new development and construction.
In October 2019,June 2020, the Company exercised its option to purchase the remaining 21% ownership interest in 1405 Point in exchange for increased its borrowings underground lease payments to be made over the revolving credit facility by $12.0 million.approximately 42-year remaining lease term. The Company recorded a note payable of $6.1 million, which represents the present value of these payments. The ground lessor is an affiliate of our former joint venture partner.
The Company may enterenters into interest rate derivative contracts to manage exposure to interest rate risks. The Company does not use derivative financial instruments for trading or speculative purposes. Derivative financial instruments are recognized at fair value and presented within other assets and other liabilities in the condensed consolidated balance sheets. Gains and losses resulting from changes in the fair value of derivatives that are neither designated nor qualify as hedging instruments are recognized within the change in fair value of interest rate derivatives in the condensed consolidated statements of comprehensive income. For derivatives that qualify as cash flow hedges, the gain or loss is reported as a component of other comprehensive income (loss) and reclassified into earnings in the periods during which the hedged forecasted transaction affects earnings.
As of SeptemberJune 30, 2019,2020, the Company had the following LIBOR interest rate caps ($ in thousands), which are not designated:
| Origination Date | Expiration Date | Notional Amount | Strike Rate | Premium Paid | |||||||||
| 7/16/2018 | 8/1/2020 | $ | 50,000 | 2.50 | % | $ | 319 | ||||||
| 12/11/2018 | 1/1/2021 | 50,000 | 2.75 | % | 210 | ||||||||
| 5/15/2019 | 6/1/2022 | 100,000 | 2.50 | % | 288 | ||||||||
| 1/10/2020 | 2/1/2022 | 50,000 | (a) | 1.75 | % | 87 | |||||||
| 1/28/2020 | 2/1/2022 | 50,000 | (a) | 1.75 | % | 62 | |||||||
| 2/28/2020 | 3/1/2022 | 100,000 | (a) | 1.50 | % | 111 | |||||||
| 6/29/2020 | 7/1/2023 | 100,000 | (a) | 0.50 | % | 232 | |||||||
| Total | $ | 500,000 | $ | 1,309 | |||||||||
(a) Designated as a cash flow hedges for accounting purposes:hedge.
| Origination Date | Expiration Date | Notional Amount | Strike Rate | Premium Paid | |||||||||
| 9/18/2017 | 10/1/2019 | $ | 50,000 | 1.50 | % | $ | 199 | ||||||
| 11/28/2017 | 12/1/2019 | 50,000 | 1.50 | % | 359 | ||||||||
| 3/7/2018 | 4/1/2020 | 50,000 | 2.25 | % | 310 | ||||||||
| 7/16/2018 | 8/1/2020 | 50,000 | 2.50 | % | 319 | ||||||||
| 12/11/2018 | 1/1/2021 | 50,000 | 2.75 | % | 210 | ||||||||
| 5/15/2019 | 6/1/2022 | 100,000 | 2.50 | % | 288 | ||||||||
| Total | $ | 350,000 | $ | 1,685 | |||||||||
As of SeptemberJune 30, 2019,2020, the Company held the following floating-to-fixed interest rate swaps ($ in thousands):
| Related Debt | Notional Amount | Index | Swap Fixed Rate | Debt effective rate | Effective Date | Expiration Date | Notional Amount | Index | Swap Fixed Rate | Debt effective rate | Effective Date | Expiration Date | ||||||||||||||||||||||
| Senior unsecured term loan | $ | 50,000 | 1-month LIBOR | 2.00 | % | 3.50 | % | 3/1/2016 | 2/20/2020 | |||||||||||||||||||||||||
| Senior unsecured term loan | 50,000 | 1-month LIBOR | 2.78 | % | 4.28 | % | 5/1/2018 | 5/1/2023 | $ | 50,000 | 1-month LIBOR | 2.78 | % | 4.33 | % | 5/1/2018 | 5/1/2023 | |||||||||||||||||
| John Hopkins Village | 52,032 | (a) | 1-month LIBOR | 2.94 | % | 4.19 | % | 8/7/2018 | 8/7/2025 | 51,335 | (a) | 1-month LIBOR | 2.94 | % | 4.19 | % | 8/7/2018 | 8/7/2025 | ||||||||||||||||
| Senior unsecured term loan | 10,500 | (a)(b) | 1-month LIBOR | 3.02 | % | 4.52 | % | 10/12/2018 | 10/12/2023 | 10,500 | (a) | 1-month LIBOR | 3.02 | % | 4.57 | % | 10/12/2018 | 10/12/2023 | ||||||||||||||||
| 249 Central Park Retail, South Retail, and Fountain Plaza Retail | 34,456 | (a) | 1-month LIBOR | 2.25 | % | 3.85 | % | 4/1/2019 | 8/10/2023 | 34,114 | (a) | 1-month LIBOR | 2.25 | % | 3.85 | % | 4/1/2019 | 8/10/2023 | ||||||||||||||||
| Senior unsecured term loan | 50,000 | (a) | 1-month LIBOR | 2.26 | % | 3.76 | % | 4/1/2019 | 10/22/2022 | 50,000 | (a) | 1-month LIBOR | 2.26 | % | 3.81 | % | 4/1/2019 | 10/26/2022 | ||||||||||||||||
| Thames Street Wharf | 70,000 | (a) | 1-month LIBOR | 0.51 | % | 1.81 | % | 3/26/2020 | 6/26/2024 | |||||||||||||||||||||||||
| Senior unsecured term loan | 25,000 | (a) | 1-month LIBOR | 0.50 | % | 2.05 | % | 4/1/2020 | 4/1/2024 | |||||||||||||||||||||||||
| Senior unsecured term loan | 25,000 | (a) | 1-month LIBOR | 0.50 | % | 2.05 | % | 4/1/2020 | 4/1/2024 | |||||||||||||||||||||||||
| Senior unsecured term loan | 25,000 | (a) | 1-month LIBOR | 0.55 | % | 2.10 | % | 4/1/2020 | 4/1/2024 | |||||||||||||||||||||||||
| Total | $ | 246,988 | $ | 340,949 | ||||||||||||||||||||||||||||||
(a) Designated as a cash flow hedge.
For the interest rate swaps designated as cash flow hedges, realized losses are reclassified out of accumulated other comprehensive loss to interest expense in the Condensed Consolidated Statements of Comprehensive Income due to payments made to the swap counterparty. During the next 12 months, the Company anticipates reclassifying approximately $1.3$4.3 million of net hedging losses from accumulated other comprehensive loss into earnings to offset the variability of the hedged items during this period.
The Company’s derivatives were comprised of the following as of SeptemberJune 30, 20192020 and December 31, 20182019 (in thousands):
| September 30, 2019 | December 31, 2018 | June 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||
| (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 | |||||||||||||||||||||||||||||||||||||||||
| Derivatives not designated as accounting hedges | ||||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate swaps | $ | 100,000 | $ | — | $ | (2,416 | ) | $ | 100,000 | $ | 303 | $ | (749 | ) | $ | 50,000 | $ | — | $ | (3,730 | ) | $ | 100,000 | $ | — | $ | (1,992 | ) | ||||||||||||||||||||
| Interest rate caps | 350,000 | 122 | — | 350,000 | 1,790 | — | 200,000 | 21 | — | 250,000 | 25 | — | ||||||||||||||||||||||||||||||||||||
| Total derivatives not designated as accounting hedges | 450,000 | 122 | (2,416 | ) | 450,000 | 2,093 | (749 | ) | 250,000 | 21 | (3,730 | ) | 350,000 | 25 | (1,992 | ) | ||||||||||||||||||||||||||||||||
| Derivatives designated as accounting hedges | ||||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate swaps | 146,988 | — | (7,204 | ) | 63,208 | — | (1,725 | ) | 290,948 | — | (14,082 | ) | 146,642 | — | (5,728 | ) | ||||||||||||||||||||||||||||||||
| Interest rate caps | 300,000 | 216 | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
| Total derivatives | $ | 596,988 | $ | 122 | $ | (9,620 | ) | $ | 513,208 | $ | 2,093 | $ | (2,474 | ) | $ | 840,948 | $ | 237 | $ | (17,812 | ) | $ | 496,642 | $ | 25 | $ | (7,720 | ) | ||||||||||||||||||||
The changes in the fair value of the Company’s derivatives during the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 were comprised of the following (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
| Interest rate swaps | $ | (1,477 | ) | $ | 319 | $ | (7,679 | ) | $ | 673 | $ | (2,147 | ) | $ | (4,549 | ) | $ | (11,230 | ) | $ | (6,201 | ) | ||||||||||
| Interest rate caps | (299 | ) | (151 | ) | (1,956 | ) | 453 | (138 | ) | (843 | ) | (280 | ) | (1,657 | ) | |||||||||||||||||
| Total change in fair value of interest rate derivatives | $ | (1,776 | ) | $ | 168 | $ | (9,635 | ) | $ | 1,126 | $ | (2,285 | ) | $ | (5,392 | ) | $ | (11,510 | ) | $ | (7,858 | ) | ||||||||||
| Comprehensive income statement presentation: | ||||||||||||||||||||||||||||||||
| Change in fair value of interest rate derivatives | $ | (529 | ) | $ | 298 | $ | (3,926 | ) | $ | 1,256 | $ | (6 | ) | $ | (1,933 | ) | $ | (1,742 | ) | $ | (3,396 | ) | ||||||||||
| Unrealized cash flow hedge gains losses | (1,247 | ) | (130 | ) | (5,709 | ) | (130 | ) | (2,279 | ) | (3,459 | ) | (9,768 | ) | (4,462 | ) | ||||||||||||||||
| Total change in fair value of interest rate derivatives | $ | (1,776 | ) | $ | 168 | $ | (9,635 | ) | $ | 1,126 | $ | (2,285 | ) | $ | (5,392 | ) | $ | (11,510 | ) | $ | (7,858 | ) | ||||||||||
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Stockholders’ Equity
On February 26, 2018, the Company commenced an at-the-market continuous equity offering program (the "Prior ATM Program"), which was amended on August 6, 2019, through which the Company could, from time to time, issue and sell shares of its common stock having an aggregate offering price of up to $180.7 million. During the three months ended March 31, 2020, the Company issued and sold 92,577 shares of common stock at a weighted average price of $18.23 per share under the Prior ATM Program, receiving net proceeds, after offering costs and commissions, of $1.7 million.
On March 10, 2020, the Company commenced a new at-the-market continuous equity offering program (the "ATM Program") through which the Company may, from time to time, issue and sell shares of its common stock. On August 6, 2019, the Company entered into amendments (the "Amendments") to the separate sales agreements related to the ATM Program, which, among other things, increased the aggregate offering price ofstock and shares of the Company’s common stock under the ATM Program from $125.0 million to $180.7 million. Prior to the date of the Amendments, the Company had sold sharesits 6.75% Series A Cumulative Redeemable Perpetual Preferred Stock (the "Series A Preferred Stock") having an aggregate offering price of $105.7up to $300.0 million, resulting into or through its sales agents and, with respect to shares having an aggregate offering price of $75.0 million remaining available for sale underits common stock, may enter into separate forward sales agreements to or through the forward purchaser. Upon commencing the ATM Program, as of August 6, 2019.the Company simultaneously terminated the Prior ATM Program. During the ninesix months ended SeptemberJune 30, 2019,2020, the Company issued and sold 4,476,565486,727 shares of common stock at a weighted average price of $16.28$9.28 per share under the ATM Program, receiving net proceeds, after offering costs and commissions, of $71.9$4.4 million.
Noncontrolling Interests
As of SeptemberJune 30, 20192020 and December 31, 2018,2019, the Company held a 72.2%72.8% and 74.5%72.6% common interest respectively, in the Operating Partnership.Partnership, respectively. As of SeptemberJune 30, 2019,2020, the Company also held a preferred interest in the Operating Partnership in the form of preferred units with a liquidation preference of $63.3 million. 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 72.2%72.8% 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 Operating Partnership represent units of limited partnership interest in the Operating Partnership not held by the Company.
As of SeptemberJune 30, 2019,2020, there were 21,167,10421,272,962 Class A units of limited partnership interest in the Operating Partnership ("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.
Additionally, the Operating Partnership owns a majority interest in certain non-wholly-owned operating and development properties. The noncontrolling interest for investment entities of $5.5$0.6 million relates to the minority partners' interest in certain joint venture entities as of SeptemberJune 30, 2019,2020, including 1405 Point, Hoffler Place, and Lightfoot Marketplace, which was sold during the three months ended September 30, 2019 but for which proceeds have not yet been distributed to the partners.Place. The noncontrolling interest for consolidated real estate entities was 0$4.5 million as of December 31, 2018.2019.
On January 3, 2019,2, 2020, the Company paid cash dividends of $10.0$11.8 million to common stockholders, and the Operating Partnership paid cash distributions of $3.4$4.5 million to holders of Class A Units.
On April 4, 2019,January 15, 2020, the Company paid cash dividends of $11.0$1.1 million to the holders of the Series A Preferred Stock.
On April 2, 2020, the Company paid cash dividends of $12.4 million to common stockholders, and the Operating Partnership paid cash distributions of $3.6 million to holders of Class A Units.
On OctoberApril 15, 2019,2020, the Company paid cash dividends of $1.4$1.1 million to holders of shares of Series A Preferred Stock.
On April 30, 2020, the Company sold an aggregateannounced that its Board of 543,513 sharesDirectors declared a cash dividend of $0.421875 per share on its Series A Preferred Stock payable in cash on July 15, 2020 to stockholders of record on July 1, 2020.
On April 30, 2020, the Company announced that its Board of Directors suspended quarterly cash dividends on common stock at a weighted average price of $18.14 per share under the ATM Program, receiving net proceeds, after offering costs and commissions, of $9.7 million.cash distributions on Class A Units.
The Company’s Amended and Restated 2013 Equity Incentive Plan (the "Equity Plan") permits the grant of restricted stock awards, stock options, stock appreciation rights, performance units, and other equity-based awards up to an aggregate of 1,700,000 shares of common stock. As of SeptemberJune 30, 2019,2020, there were 894,680738,006 shares available for issuance under the Equity Plan.
During the ninesix months ended SeptemberJune 30, 2019,2020, the Company granted an aggregate of 153,173174,052 shares of restricted stock to employees and non-employee directors with a weighted average grant date fair value of $15.41$15.84 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. Unvested restricted stock awards are entitled to receive dividends from their grant date.
During the ninesix months ended SeptemberJune 30, 2019,2020, 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 in order to fully vest. The compensation expense and the effect on the Company’s weighted average diluted shares calculation were immaterial. During the ninesix months ended SeptemberJune 30, 2019, 10,7552020, 10,600 shares were issued with a grant date fair value of $15.42$18.08 per share due to the partial vesting of performance units awarded to certain employees in 2016.2017.
During the three months ended SeptemberJune 30, 20192020 and 2018,2019, the Company recognized $0.5 million and $0.4 million, respectively, of stock-based compensation cost.cost for each period. During the ninesix months ended SeptemberJune 30, 20192020 and 2018,2019, the Company recognized $2.0$1.8 million and $1.6$1.5 million, respectively, of stock-based compensation cost. As of SeptemberJune 30, 2019,2020, there were 144,122168,511 nonvested restricted shares outstanding; the total unrecognized compensation expense related to nonvested restricted shares was $1.1$1.7 million, which the Company expects to recognize over the next 1821 months.
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 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.
Financial assets and liabilities whose fair values are not measured at fair value but for which the fair value is disclosed include the Company's notes receivable and indebtedness. The fair value is estimated by discounting the future cash flows of each instrument at estimated market rates consistent with the maturity, credit characteristics, and other terms of the arrangements, which are Level 3 inputs under the fair value hierarchy.
In certain cases, the inputs used to estimate the 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.
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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 as of SeptemberJune 30, 20192020 and December 31, 20182019 were as follows (in thousands):
| September 30, 2019 | December 31, 2018 | June 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | Carrying Value | Fair Value | Carrying Value | Fair Value | |||||||||||||||||||||||||
| Indebtedness | $ | 943,371 | $ | 949,106 | $ | 694,239 | $ | 688,437 | ||||||||||||||||||||||||
| Notes receivable | 148,744 | 148,744 | 138,683 | 138,683 | ||||||||||||||||||||||||||||
| Indebtedness, net | $ | 953,753 | $ | 957,415 | $ | 950,537 | $ | 958,421 | ||||||||||||||||||||||||
| Notes receivable, net | 182,245 | 178,488 | 159,371 | 159,371 | ||||||||||||||||||||||||||||
| Interest rate swap liabilities | 9,620 | 9,620 | 2,474 | 2,474 | 17,812 | 17,812 | 7,720 | 7,720 | ||||||||||||||||||||||||
| Interest rate swap and cap assets | 122 | 122 | 2,093 | 2,093 | 237 | 237 | 25 | 25 | ||||||||||||||||||||||||
The Company provides general contracting and real estate services to certain related party entities that are included in these condensed consolidated financial statements. Revenue from construction contracts with these entities for the three months ended SeptemberJune 30, 20182020 was less than $0.1$11.0 million, and gross profit from such contracts was less than $0.1$0.4 million. Revenue from construction contracts with related partythese entities for the ninesix months ended SeptemberJune 30, 20182020 was $1.5$19.5 million, and gross profit from such contracts was $0.3$0.7 million. There was no such revenue or gross profit for the three and ninesix months ended SeptemberJune 30, 2019. As of June 30, 2020 and December 31, 2019, there was $9.8 million and $1.9 million, respectively, outstanding from related parties of the Company included in net construction receivables.
Real estate services fees from affiliated entities of the Company were not material for any of the three and six months ended June 30, 2020 and 2019. 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 material for any of the three and six months ended June 30, 2020, and 2019.
The general contracting services described above include contracts with an aggregate price of $80.4 million with the developer of a mixed-use project, including an apartment building, retail space, and a parking garage to be located in Virginia Beach, Virginia. The developer is owned in part by certain executives of the Company, not including the Chief Executive Officer and Chief Financial Officer. These contracts were executed in 2019 and are projected to result in aggregate gross profit of $3.1 million to the Company, representing a gross profit margin of 4.0%. As part of these contracts and per the requirements of the lender for this project, the Company issued a letter of credit for $9.5 million to secure certain performances of the Company's subsidiary construction company under the contracts, which remains outstanding as of June 30, 2020.
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.
Legal Proceedings
The Company is from time to time involved in various disputes, lawsuits, warranty claims, environmental and other matters arising in the ordinary course of business. Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters.
The Company currently is a party to various legal proceedings, none of which management expects will have a material adverse effect on the Company’s financial position, results of operations, or liquidity. Management accrues a liability for litigation if an unfavorable outcome is determined to be probable and the amount of loss can be reasonably estimated. If an unfavorable outcome is determined to be probable and a range of loss can be reasonably estimated, management accrues the best estimate within the range; however, if no amount within the range is a better estimate than any other, the minimum amount within the range is accrued. Legal fees related to litigation are expensed as incurred. Management does not believe
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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.
Guarantees
In connection with the Company's mezzanine lending activities, the Company has made guarantees to pay portions of certain senior loans of third parties associated with the development projects. The following table summarizes the guarantees made by the Company as of SeptemberJune 30, 20192020 (in thousands):
| Development project | Payment guarantee amount | Payment guarantee amount | ||||||
| The Residences at Annapolis Junction | $ | 8,300 | $ | 8,300 | ||||
| Delray Plaza | 5,180 | 5,180 | ||||||
| Nexton Square | 12,600 | 12,600 | ||||||
| Interlock Commercial | 30,654 | 34,300 | ||||||
Interlock-Fletcher Row (1) | 2,345 | |||||||
| Total | $ | 56,734 | $ | 62,725 | ||||
(1) There were no amounts drawn for this loan as of June 30, 2020.
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 $29.2$3.3 million and $34.8$4.3 million as of SeptemberJune 30, 20192020 and December 31, 2018,2019, respectively. In addition, as of June 30, 2020, the Company has outstanding a letter of credit for $9.5 million to secure certain performances of the Company's subsidiary construction company under a related party project.
The Company has entered into standby letters of credit using the available capacity under the credit facility. The letters of credit relate to the guarantee of future performance on certain of the Company’s construction contracts. Letters of credit generally are available for draw down in the event the Company does not perform. As
15. Subsequent Events
The Company has evaluated subsequent events through the date on which this Form 10-Q was filed, the date on which these financial statements were issued, and identified the items below for discussion.
Indebtedness
In July 2020, the Company borrowed $2.9 million on its construction loans to fund development activities.
In July 2020, the Company decreased its borrowings under the revolving credit facility by $32.0 million, bringing the outstanding balance down to $48.0 million.
Equity
On July 1, 2020, due to the holders of September 30, 2019 and December 31, 2018,Class A Units tendering an aggregate of 756,697 Class A Units for redemption by the Operating Partnership, had total outstanding lettersthe Company elected to satisfy the redemption requests through the issuance of creditan equal number of $0.3 million and $2.1 million, respectively.shares of common stock.
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On October 3, 2019,July 15, 2020, the Company canceledpaid cash dividends of $1.2 million to holders of shares of Series A Preferred Stock.
On July 30, 2020, the outstanding $0.3 million letterCompany announced that its Board of credit.Directors declared a cash dividend of $0.421875 per share of Series A Preferred Stock for the third quarter of 2020. The dividend will be payable in cash on October 15, 2020 to stockholders of record on October 1, 2020.
On July 30, 2020, the Company announced that its Board of Directors declared a cash dividend of $0.11 per common share and Class A Unit for the third quarter of 2020. The dividend will be payable in cash on October 8, 2020 to stockholders and Class A unitholders of record on September 30, 2020.
In July 2020, the Company sold an aggregate of 166,630 shares of common stock at a weighted average price of $10.16 per share under the ATM Program, receiving net proceeds, after offering costs and commissions, of $1.7 million.
In July 2020, the Company sold an aggregate of 709,588 shares of Series A Preferred Stock at a weighted average price of $22.87 per share under the ATM Program, receiving net proceeds, after offering costs and commissions, of $16.0 million.
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:
the continuing impacts of the novel coronavirus ("COVID-19") pandemic and measures intended to prevent or mitigate its spread, and our ability to accurately assess and predict such impacts on our results of operations, financial condition, acquisition and disposition activities, and growth opportunities;
| ▪ | our ability to commence or continue construction and development projects on the timeframes and terms currently anticipated; |
| ▪ | our ability and the ability of our tenants to access funding under government programs designed to provide financial relief for U.S. businesses in light of the COVID-19 pandemic; |
adverse economic or real estate developments, either nationally or in the markets in which our properties are located;
our failure to generate sufficient cash flows to service our outstanding indebtedness;
defaults on, early terminations of, or non-renewal of leases by tenants, including significant tenants;
bankruptcy or insolvency of a significant tenant or a substantial number of smaller tenants;
the inability of one or more mezzanine loan borrowers to repay mezzanine loans in accordance with their contractual terms;
difficulties in identifying or completing development, acquisition, or disposition opportunities;
our failure to successfully operate developed and acquired properties;
our failure to generate income in our general contracting and real estate services segment in amounts that we anticipate;
fluctuations in interest rates and increased operating costs;
our failure to obtain necessary outside financing on favorable terms or at all;
our inability to extend the maturity of or refinance existing debt or comply with the financial covenants in the agreements that govern our existing debt;
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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;
changes in governmental regulations or interpretations thereof, such as real estate and zoning laws and increases in real property tax rates and taxation of REITs; and
potential negative impacts from 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 our Quarterly Report on Form 10-Q for the three months ended March 31, 2020, this Quarterly Report on Form 10-Q and identified in other documents that we file from time to time with the Securities and Exchange Commission (the "SEC").
Business Description
We are a full-service real estate company with extensive experience developing, building, owning and managing high-quality, institutional-grade office, retail and multifamily properties in attractive markets primarily throughout the Mid-Atlantic and Southeastern United States. As of SeptemberJune 30, 2019,2020, our stabilized operating property portfolio consisted of the following properties:
| Property | Segment | Location | Ownership Interest | ||||
| 4525 Main Street | Office | Virginia Beach, Virginia* | 100 | % | |||
| Armada Hoffler Tower | Office | Virginia Beach, Virginia* | 100 | % | |||
| Brooks Crossing Office | Office | Newport News, Virginia | 100 | % | |||
| One City Center | Office | Durham, North Carolina | 100 | % | |||
| One Columbus | Office | Virginia Beach, Virginia* | 100 | % | |||
| Thames Street Wharf | Office | Baltimore, Maryland | 100 | % | |||
| Two Columbus | Office | Virginia Beach, Virginia* | 100 | % | |||
| 249 Central Park Retail | Retail | Virginia Beach, Virginia* | 100 | % | |||
| Retail | |||||||
| 100 | % | ||||||
| Broad Creek Shopping Center | Retail | Norfolk, Virginia | 100 | % | |||
| Broadmoor Plaza | Retail | South Bend, Indiana | 100 | % | |||
Brooks Crossing Retail (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 | % | |||
| Property | Segment | Location | Ownership Interest | ||||
| Dimmock Square | Retail | Colonial Heights, Virginia | 100 | % | |||
| Fountain Plaza Retail | Retail | Virginia Beach, Virginia* | 100 | % | |||
| Greentree Shopping Center | Retail | Chesapeake, Virginia | 100 | % | |||
| Hanbury Village | Retail | Chesapeake, Virginia | 100 | % | |||
| Harrisonburg Regal | Retail | Harrisonburg, | |||||
| 100 | % | ||||||
| Lexington Square | Retail | Lexington, South Carolina | 100 | % | |||
Market at Mill Creek (1) | Retail | Mount Pleasant, South Carolina | 70 | % | |||
| Marketplace at Hilltop | Retail | Virginia Beach, Virginia | 100 | ||||
| % | |||||||
| 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 | % | |||
| Red Mill Commons | Retail | Virginia Beach, Virginia | 100 | % | |||
| Sandbridge Commons | Retail | Virginia Beach, Virginia | 100 | % | |||
| Socastee Commons | Retail | Myrtle Beach, South Carolina | 100 | % | |||
| South Retail | Retail | Virginia Beach, Virginia* | 100 | % | |||
| South Square | Retail | Durham, North Carolina | 100 | % | |||
| Southgate Square | Retail | Colonial Heights, Virginia | 100 | % | |||
| Southshore Shops | Retail | Chesterfield, Virginia | 100 | % | |||
| Studio 56 Retail | Retail | Virginia Beach, Virginia* | 100 | % | |||
| Tyre Neck Harris Teeter | Retail | Portsmouth, Virginia | 100 | % | |||
| Wendover Village | Retail | Greensboro, North Carolina | 100 | % | |||
| 1405 Point | Multifamily | Baltimore, Maryland | % | ||||
| Encore Apartments | Multifamily | Virginia Beach, Virginia* | 100 | % | |||
| Greenside | Multifamily | Charlotte, North Carolina | 100 | % | |||
| Hoffler Place | Multifamily | Charleston, South Carolina | 93 | % | |||
| Johns Hopkins Village | Multifamily | Baltimore, Maryland | 100 | % | |||
| Liberty Apartments | Multifamily | Newport News, Virginia | 100 | % | |||
| Premier Apartments | Multifamily | Virginia Beach, Virginia* | 100 | % | |||
| Smith’s Landing | Multifamily | Blacksburg, Virginia | |||||
| 100 | % | ||||||
| The Cosmopolitan | Multifamily | Virginia Beach, Virginia* | 100 | % | |||
*Located in the Town Center of Virginia Beach
(1) Dick's Sporting Goods, one of the anchor tenants at the property currently known as "Dick’s at Town Center," has notified us that it will not renew its lease beyond January 31, 2020, the end of the current term. In October 2019, we signed a lease with a replacement tenant, Apex Entertainment, which will take the entire space currently occupied by Dick's Sporting Goods after the redevelopment and buildout of the facility is completed, which is expected to occur by the end of 2020.
this property.
As of SeptemberJune 30, 2019,2020, the following properties that we consolidate for financial reporting purposes were either under development or not yet stabilized:
| Property | Segment | Location | Ownership Interest | ||||
| Wills Wharf | Office | Baltimore, Maryland | 100 | % | |||
| Premier Retail | Retail | Virginia Beach, Virginia* | 100 | % | |||
| Summit Place | Multifamily | Charleston, South Carolina | 90 | % | |||
*Located in the Town Center of Virginia Beach
Acquisitions
On January 10, 2020, we purchased land in Charlotte, North Carolina for a purchase price of $6.3 million for the development of a mixed-use property.
On March 20, 2020, we purchased land in Belmont, North Carolina for a purchase price of $2.3 million for the development of a mixed-use property.
Dispositions
On May 29, 2020, we sold a portfolio of seven retail properties for $90.0 million. The portfolio consisted of Alexander Pointe, Bermuda Crossroads, Gainsborough Square, Harper Hill Commons, Indian Lakes Crossing, Renaissance Square, and Stone House Square. The gain on sale was $2.8 million. In connection with the sale of this portfolio, we repaid $61.9 million on the revolving credit facility, resulting in net proceeds of $25.9 million.
We have designated proceeds from the sale of Alexander Pointe, Bermuda Crossroads, and Gainsborough Square as part of a like-kind exchange for tax purposes. We plan to use these proceeds for its purchase of Nexton Square in the third or fourth quarter of 2020. In the event that all or some of these proceeds are not used for the purchase of Nexton Square or another suitable acquisition, we may be subject to tax indemnification payments under the terms of our tax protection agreements with certain limited partners in the Operating Partnership.
Impact of COVID-19 on our Business
Overview
In light of the changing nature of the COVID-19 pandemic and uncertainty regarding the duration, severity, and possible resurgence of the pandemic in future periods, the impact that the COVID-19 pandemic will have on our business is currently unknown and unquantifiable. While the full extent of the COVID-19 pandemic’s impact on the U.S. economy and the U.S. real estate industry remains to be seen, the pandemic has already presented significant challenges for us and many of our tenants. In the near-term, we and many of our tenants are focusing on implementing contingency plans to manage business disruptions caused by the pandemic and related actions intended to mitigate its spread. In the long-term, REITs and other real estate companies might need to re-assess and consider modifying their operating models, underwriting criteria, and liquidity position to mitigate the impacts of future economic downturns, including as a result of the potential resurgence of the COVID-19 pandemic in future months, the timing, severity, and duration of which cannot be predicted.
We anticipate the global health crisis caused by COVID-19 and the related actions intended to mitigate its spread will continue to adversely affect business activity, particularly relating to our retail tenants, across the markets in which we operate. We have observed the impact of COVID-19 manifest in the form of business closures or significantly limited operations in our retail portfolio, with the exception of tenants operating in certain "essential" businesses, which has resulted, and may in the future result in, a decline in on-time rental payments, increased requests from tenants for temporary rental relief and potentially permanent closure of certain businesses. We expect these conditions to continue in varying duration and severity until such time when the COVID-19 pandemic is effectively contained. When COVID-19 is contained, depending on the rate and effectiveness of the containment efforts deployed by various national, state, and local governments, we anticipate a rebound in economic activity, although we are unable to predict the nature, timing, and sustainability of an economic recovery.
In an effort to protect the health and safety of our employees, we took proactive, aggressive actions to adopt social distancing policies at our offices, properties, and construction jobsites, including: transitioning our office employees to a remote work environment during certain periods of time, which was greatly assisted by recent enhancements to our IT systems; limiting the number of employees attending in-person meetings; implementing a company-wide ban on most travel; and ensuring all construction jobsites continue to comply with state and local social distancing and other health and safety protocols implemented by the Company.
To further strengthen our financial flexibility and efficiently manage through the uncertainty caused by COVID-19, our Board of Directors temporarily suspended the payment of quarterly cash dividends on shares of our common stock and Class A common units for the second quarter of 2020. As a result of improvement in general economic conditions and the Company’s operating performance, our Board of Directors reinstated quarterly cash dividends on shares of our common stock and Class A common units with a dividend of $0.11 per share and unit, payable in cash on October 8, 2020 to stockholders and unitholders of record on September 30, 2020.
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In addition, Lou Haddad, our President and Chief Executive Officer, voluntarily elected to reduce his base compensation by 25%, and each of our directors, including Dan Hoffler and Russ Kirk, voluntarily elected to reduce their cash retainers and annual equity awards by 25%, in each case effective as of May 1, 2020.
From an operational perspective, we have remained in regular communication with our tenants, property managers, and vendors, and, where appropriate, have provided guidance relating to the availability of government relief programs that could support our tenants’ businesses. In response to the market and industry trends, we also have pursued, and expect to continue to pursue, cost-saving initiatives to align our overall cost structure, including proactively deferring previously announced development activity at several of our projects, postponing certain acquisition activity, slowing down redevelopment activity at The Cosmopolitan, and suspending non-essential capital expenditures. Although we believe these measures and other measures we may implement in the future will help mitigate the financial impacts of the pandemic on our business, there can be no assurances that we will accurately forecast the impact of adverse economic conditions on our business or that we will effectively align our cost structure, capital investments, and other expenditures with our revenue and spending levels in the future.
To evaluate market trends affecting public REITs across asset classes and to assess our response to COVID-19 relative to our peers, we have been monitoring information that has been released by public REITs, summary data released by the National Association of Real Estate Investment Trusts ("Nareit") and other publicly available sources, and information obtained during our regular discussions with tenants. While we view information gathered from publicly available sources as helpful in assessing broader trends affecting the commercial real estate industry, we can provide no assurances that the estimates and assumptions used in preparing this third-party information are applicable to our business or ultimately will prove to be accurate. In addition, our asset management team, together with the rest of senior management, has dedicated significant resources to monitoring detailed portfolio performance on a real-time basis, including rent collections, requests for rent relief and uncollected payments, as well as negotiating rent deferments and other relief with certain of our tenants.
We will continue to actively monitor the implications of the COVID-19 pandemic on our and our tenants’ businesses and may take further actions to alter our business practices if we determine that such changes are in the best interests of our employees, tenants, residents, stockholders, and third-party construction customers, or as required by federal, state, or local authorities. It is not clear what the potential effects of such alterations or modifications, if any, may have on our business, including the effects on our tenants and residents and the corresponding impact on our results of operations and financial condition for the remainder of fiscal 2020 and thereafter.
The Coronavirus Aid, Relief and Economic Security Act, or the CARES Act, was enacted on March 27, 2020 in the United States. We continue to assess the potential impacts of this and subsequent legislation, including our eligibility and our tenants for funding under programs designed to provide financial assistance to U.S. businesses. We have availed ourselves of the option to defer payment of the employer share of Social Security payroll taxes that would otherwise have been owed from the date of enactment of the CARES Act through December 31, 2020.
We believe the diversification of our business across multiple asset classes (i.e., office, retail and multifamily), together with our third-party construction business, will help to mitigate the impact of the pandemic on our business to a greater extent than if our business were concentrated in a single asset class. However, as discussed in greater detail below, we expect the impact of the pandemic to continue to have a particularly adverse effect on many of our retail tenants, which will continue to adversely affect our results of operations even if the performance of our office and multifamily assets and our construction business remain close to historical levels. Furthermore, if the impacts of the pandemic continue for an extended period of time, we expect that certain office tenants and multifamily residents will experience greater financial distress, which could result in late payments, requests for rental relief, business closures, decreases in occupancy, reductions in rent, or increases in rent concessions or other accommodations, as applicable.
Operating Property Portfolio
Office Tenants
As of July 31, 2020, we had collected 100% of office tenant rent due for the second quarter of 2020 and 100% of office tenant rent for the month of July 2020. Data reported corresponds to tenant type and does not correspond to the reporting segment classification of the properties as a whole.
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Retail Tenants
In an effort to contain COVID-19 or slow its spread, state and local governments have enacted various measures at various times, including orders to close all businesses not deemed essential, isolate residents to their homes or places of residence, and practice social distancing when engaging in essential activities. These government-imposed measures, coupled with customers reducing their purchasing activity in light of health concerns or personal financial distress, have resulted in significant disruptions to retail businesses around the country, including in the markets in which we own retail assets.
As of July 31, 2020, we had collected 72% of retail tenant rent due for the second quarter and 86% of retail tenant rent due for the month of July 2020. The Company recorded $0.9 million in bad debt charges for the second quarter, which is recorded as an adjustment to rental revenues and was primarily the result of retail tenant delinquencies resulting from the COVID-19 pandemic.
The chart below sets forth certain information regarding the second quarter rent collections and other information for our retail portfolio as of July 31, 2020. Data reported relates to rent charges and collections through July 31, 2020 and does not correspond to the reporting segment classification of the properties as a whole. Data reported excludes tenant base rent and common area maintenance income from the seven-property portfolio sold in second quarter of 2020 and excludes bad debt tied to non-COVID related receivable write-offs ($ in thousands):
| (1) | Amount deferred as of July 31, 2020. |
| (2) | As a percentage of second quarter 2020 rent and recovery charges. |
Multifamily Tenants
As of July 31, 2020, we had collected 99% of multifamily tenant rent due for the second quarter of 2020 and 97% of multifamily tenant rent due for the month of July 2020. Data reported corresponds to tenant type and does not correspond to the reporting segment classification of the properties as a whole.
Due to actions taken by state governments and limited working capacity for government courts and agencies, certain properties in our multifamily portfolio were subject to increased restrictions that limited our ability to evict tenants or charge late fees through June 30, 2020. Certain of those restrictions have been lifted and many government courts and agencies have re-opened; however, there may be similar restrictions and limited working capacity for government courts and agencies in the future. The restrictions that remain in place for 1405 Point and Johns Hopkins Village, both located in Baltimore, MD, are detailed below:
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| • | City restrictions in place which prohibitrent increases, notices of increases, or assessment of late fees during the Maryland state of emergency. These restrictions will be in place until the governor's state of emergency is lifted and for ninety (90) days thereafter. |
State restrictions in place which prohibit evictions of tenants affected by COVID-19. Evictions cannot be processed until the state of emergency is terminated and the catastrophic health emergency is rescinded. The governor’s state of emergency order was renewed again on July 31, 2020.
Furthermore, the restriction on evictions in the State of Maryland applies to both our commercial and residential properties located in that state.
Construction and Development Business
As of the date of this quarterly report on Form 10-Q, all of our construction jobsites remain open and operational, and we intend to continue third-party construction work unless government-imposed restrictions are implemented that prohibit or significantly restrict the continuation of construction work. As of June 30, 2020, we had a third-party construction backlog of approximately $193.7 million.
With respect to our development pipeline, we proactively deferred the Chronicle Mill, Southern Post, and Ten Tryon development projects in order to provide additional balance sheet flexibility until economic conditions stabilize, each of which had previously been scheduled to commence during the second quarter of 2020. The Summit Place project was completed in June 2020, and portions of the Wills Wharf project were completed during the second quarter of 2020. The Wills Wharf project has sufficient construction loan commitments to fund the remaining estimated costs to complete; however, the disruption in global supply chains and our desire to prioritize the health and safety of our workforce may cause delays.
Mezzanine Lending Program
We continue to monitor the development projects securing our five mezzanine loans:
Delray Plaza: The developer continues to market this project for sale to a third party, resulting in an extended hold period for this loan. Effective April 1, 2020, we have stopped recognizing interest on this loan for accounting purposes since collection of additional interest accruals is less certain. Interest will continue to accrue on this loan and will be due and payable by the developer upon a capital event.
The Residences at Annapolis Junction: The developer of this project continues to lease up the project and market it to potential buyers. These activities have taken longer than originally anticipated and include the recent appointment of a new property management company. Effective April 1, 2020, we have stopped recognizing interest on this loan for accounting purposes since collection of additional interest accruals is less certain. The developer plans to sell the project once it is stabilized.
Nexton Square: We plan to exercise our option to purchase Nexton Square once the project is stabilized. Development activities are nearing completion, and this purchase option still appears to be economically advantageous to us.
Solis Apartments at Interlock: This project is estimated to be completed during the second quarter of 2021. Current estimates of future operating results and projected sales proceeds from this project continue to support the full collection of our principal and interest upon sale of the project.
Interlock Commercial: This project is estimated to be completed during the second quarter of 2021. In May 2020, we modified the mezzanine loan to allow for an additional $8.0 million of loan funding for purposes of building townhome units as an additional phase of this development project. Current estimates of future operating results and projected sales proceeds from this project continue to support the full collection of our principal and interest upon sale of the project.
With the exception of the additional commitment for the Interlock Commercial project, there are no remaining funding commitments for the outstanding mezzanine loans. We continue to monitor leasing activity at these projects, as applicable, and will monitor the impact of COVID-19 on leasing activity and development activity at each of these projects.
Second Quarter 20192020 and Recent Highlights
The following highlights our results of operations and significant transactions for the three months ended SeptemberJune 30, 20192020 and other recent developments:
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Net income attributable to common stockholders and OP Unit holders of $9.9$11.2 million, or $0.13$0.14 per diluted share, compared to $5.7$6.0 million, or $0.09$0.08 per diluted share, for the three months ended SeptemberJune 30, 2018.2019.
Funds from operations attributable to common stockholders and OP Unit holders ("FFO") of $21.7$22.0 million, or $0.29$0.28 per diluted share, compared to $15.9$19.1 million, or $0.24$0.27 per diluted share, for the three months ended SeptemberJune 30, 2018.2019. See "Non-GAAP Financial Measures."
Normalized funds from operations available to common stockholders and OP Unit holders ("Normalized FFO") of $22.4$22.6 million, or $0.30$0.29 per diluted share, compared to $15.7$21.2 million, or $0.24$0.30 per diluted share, for the three months ended SeptemberJune 30, 2018.2019. See "Non-GAAP Financial Measures."
Core operating property portfolio occupancy at 96.4%93.6% as of SeptemberJune 30, 20192020 compared to 95.6% as of March 31, 2020. The Company's June 30, 2019.2020 occupancy includes office at 97.0%, retail at 95.1%, and multifamily at 87.9%. Without the seasonal effect of the student housing properties, multifamily occupancy was 93.9%, which is higher than the sector's occupancy of 93.5% at March 31, 2020.
Collected 93% of portfolio rents for the month of July, including 100% of office tenant rents, 97% of multifamily tenant rents, and 86% of retail tenant rents, as of July 31, 2020.
Ended the second quarter with $193.7 million of third-party construction backlog. All third-party construction sites remain active and fully operational.
Sold a portfolio of seven unencumbered retail assets comprising over 630,000 square feet, or 15% of the Company's retail portfolio, for $90 million.
Segment Results of Operations
As of SeptemberJune 30, 2019,2020, we operated our business in four segments: (i) office real estate, (ii) retail real estate, (iii) multifamily residential real estate, and (iv) general contracting and real estate services, which are conducted through our taxable REIT subsidiaries ("TRS"). Net operating income (segment revenues minus segment expenses) ("NOI") is the measure used by management to assess segment performance and allocate our resources among our segments. NOI is not a measure of operating income or cash flows from operating activities as measured by accounting principles generally accepted in the United 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. We generally consider a property to be stabilized upon the earlier of: (i) the quarter after the property reaches 80% occupancy or (ii) the thirteenth quarter after the property receives its certificate of occupancy. Additionally, any property that is fully or partially taken out of service for the purpose of redevelopment is no longer considered stabilized until the redevelopment activities are complete, the asset is placed back into service, and the occupancy criterion above is again met. A property may also be fully or partially taken out of service as a result of a partial disposition,
depending on the significance of the portion of the property disposed. Finally, any property classified as held for sale is taken out of service for the purpose of computing same store operating results.
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Office Segment Data
Office rental revenues, property expenses, and NOI for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 were as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | Change | 2019 | 2018 | Change | 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||||||||||||||||||||
| Rental revenues | $ | 10,283 | $ | 5,149 | $ | 5,134 | $ | 23,220 | $ | 15,537 | $ | 7,683 | $ | 10,494 | $ | 7,382 | $ | 3,112 | $ | 20,686 | $ | 12,938 | $ | 7,748 | ||||||||||||||||||||||||
| Property expenses | 3,894 | 2,066 | 1,828 | 8,416 | 5,954 | 2,462 | 3,519 | 2,506 | 1,013 | 7,211 | 4,518 | 2,693 | ||||||||||||||||||||||||||||||||||||
| Segment NOI | $ | 6,389 | $ | 3,083 | $ | 3,306 | $ | 14,804 | $ | 9,583 | $ | 5,221 | $ | 6,975 | $ | 4,876 | $ | 2,099 | $ | 13,475 | $ | 8,420 | $ | 5,055 | ||||||||||||||||||||||||
Office segment NOI for the three and ninesix months ended SeptemberJune 30, 20192020 increased 107.2%43.0% and 54.5%60.0%, respectively, compared to the corresponding periods in 2018.2019. The increases relate primarily to the commencement of operations at Brooks Crossing office in April 2019, the acquisition of Thames Street Wharf in June 2019, and the commencement of operations at a portion of Wills Wharf in June 2020. In addition, the acquisition of One City Center in March 2019 contributed to the commencement of operations at Brooks Crossing Office in April 2019, andincrease for the acquisition of Thames Street Wharf insix months ended June 2019, as well as increased occupancy across the rest of the office portfolio.30, 2020
Office Same Store Results
Office same store results for the three and ninesix months ended SeptemberJune 30, 2020 and 2019 exclude Brooks Crossing Office, Thames Street Wharf, and 2018Wills Wharf. In addition, office same store results for the six months ended June 30, 2020 and 2019 exclude One City Center Brooks Crossing Office, and Thames Street Wharf.(acquired in March 2019).
Office same store rental revenues, property expenses, and NOI for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 were as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | Change | 2019 | 2018 | Change | 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||||||||||||||||||||
| Rental revenues | $ | 5,394 | $ | 5,149 | $ | 245 | $ | 16,148 | $ | 15,537 | $ | 611 | $ | 6,349 | $ | 6,642 | $ | (293 | ) | $ | 10,459 | $ | 10,754 | $ | (295 | ) | ||||||||||||||||||||||
| Property expenses | 2,077 | 1,972 | 105 | 5,798 | 5,670 | 128 | 2,226 | 2,199 | 27 | 3,801 | 3,722 | 79 | ||||||||||||||||||||||||||||||||||||
| Same Store NOI | $ | 3,317 | $ | 3,177 | $ | 140 | $ | 10,350 | $ | 9,867 | $ | 483 | $ | 4,123 | $ | 4,443 | $ | (320 | ) | $ | 6,658 | $ | 7,032 | $ | (374 | ) | ||||||||||||||||||||||
| Non-Same Store NOI | 3,072 | (94 | ) | 3,166 | 4,454 | (284 | ) | 4,738 | 2,852 | 433 | 2,419 | 6,817 | 1,388 | 5,429 | ||||||||||||||||||||||||||||||||||
| Segment NOI | $ | 6,389 | $ | 3,083 | $ | 3,306 | $ | 14,804 | $ | 9,583 | $ | 5,221 | $ | 6,975 | $ | 4,876 | $ | 2,099 | $ | 13,475 | $ | 8,420 | $ | 5,055 | ||||||||||||||||||||||||
Office same store NOI for the three and ninesix months ended SeptemberJune 30, 2019 increased 4.4%2020 decreased 7.2% and 4.9%5.3%, respectively, compared to the corresponding periods in 2018.2019. The increasesdecreases relate primarily to higherthe relocation of the Company’s construction division to space within Armada Hoffler Tower which became vacant after a tenant chose to downsize. The Company’s construction division previously occupied space at an adjacent property that is classified as retail for segment reporting purposes. Rental revenue from the Company’s construction division is eliminated for consolidation purposes. This decrease was partially offset by increased occupancy across the rest of the same store office portfolio.
Retail Segment Data
Retail rental revenues, property expenses, and NOI for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 were as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | Change | 2019 | 2018 | Change | 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||||||||||||||||||||
| Rental revenues | $ | 20,780 | $ | 16,932 | $ | 3,848 | $ | 57,273 | $ | 50,251 | $ | 7,022 | $ | 18,714 | $ | 19,235 | $ | (521 | ) | $ | 39,125 | $ | 36,492 | $ | 2,633 | |||||||||||||||||||||||
| Property expenses | 5,335 | 4,464 | 871 | 14,506 | 13,015 | 1,491 | 4,465 | 4,753 | (288 | ) | 9,651 | 9,164 | 487 | |||||||||||||||||||||||||||||||||||
| Segment NOI | $ | 15,445 | $ | 12,468 | $ | 2,977 | $ | 42,767 | $ | 37,236 | $ | 5,531 | $ | 14,249 | $ | 14,482 | $ | (233 | ) | $ | 29,474 | $ | 27,328 | $ | 2,146 | |||||||||||||||||||||||
Retail segment NOI for the three and nine months ended SeptemberJune 30, 2019 increased 23.9% and 14.9%, respectively,2020 decreased 1.6% compared to the corresponding periodsthree months ended June 30, 2019. The decrease relates primarily to the disposal of Lightfoot Marketplace in 2018. The increases were primarilyAugust 2019, the loss of Dick’s
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Sporting Goods at Town Center beginning in February 2020, and the disposal of the seven-property retail portfolio in May 2020 as well as a $0.8 million increase in the allowance for bad debt (recorded as an adjustment to rental revenues) as a result of the COVID-19 pandemic. The decrease was partially offset by the acquisition of Red Mill Commons and Marketplace at Hilltop in May 2019. Retail segment NOI for the additional outparcel phasesix months ended June 30, 2020 increased 7.9% compared to the six months ended June 30, 2019. The increase was primarily a result of Wendover Village in February 2019, the commencement of operations at Market at Mill Creek in April 2019 and the acquisition of Red Mill Commons and Marketplace at Hilltop in May 2019. These increases wereThe increase was partially offset by a $0.9 million increase in the allowance for bad debt (recorded as an adjustment to rental revenues) as a result of the COVID-19 pandemic as well as the disposal of the leasehold interestseven-property retail portfolio in the building previously leased by Home Depot at Broad Creek Shopping
Retail Same Store Results
Retail same store results for the three and ninesix months ended SeptemberJune 30, 2020 and 2019 and 2018 exclude Lightfoot Marketplace, Broad Creek Shopping Center,Apex Entertainment (formerly Dick’s at Town Center) due to redevelopment, Brooks Crossing Retail, Premier Retail, (part of Town Center Phase VI), Lexington Square, Columbus Village (due to redevelopment), the additional outparcel phase of Wendover Village (acquired in February 2019), Market at Mill Creek, and Red Mill Commons and(acquired in May 2019), Marketplace at Hilltop (acquired in May 2019), Waynesboro Commons (disposed in April 2019), Lightfoot Marketplace (disposed in August 2019) and the seven-property retail portfolio that was disposed in May 2020 (Alexander Pointe, Bermuda Crossroads, Gainsborough Square, Harper Hill Commons, Indian Lakes Crossing, Renaissance Square, and Stone House Square). In addition, retail same store results for the ninesix months ended SeptemberJune 30, 2020 and 2019 and 2018 exclude Parkway Centre and Indian Lakes Crossing (acquired in January 2018).the additional outparcel phase of Wendover Village.
Retail same store rental revenues, property expenses, and NOI for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 were as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | Change | 2019 | 2018 | Change | 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||||||||||||||||||||
| Rental revenues | $ | 15,006 | $ | 14,529 | $ | 477 | $ | 43,282 | $ | 42,263 | $ | 1,019 | $ | 12,563 | $ | 13,273 | $ | (710 | ) | $ | 25,620 | $ | 26,055 | $ | (435 | ) | ||||||||||||||||||||||
| Property expenses | 3,401 | 3,407 | (6 | ) | 9,865 | 9,698 | 167 | 2,908 | 3,065 | (157 | ) | 6,063 | 6,150 | (87 | ) | |||||||||||||||||||||||||||||||||
| Same Store NOI | $ | 11,605 | $ | 11,122 | $ | 483 | $ | 33,417 | $ | 32,565 | $ | 852 | $ | 9,655 | $ | 10,208 | $ | (553 | ) | $ | 19,557 | $ | 19,905 | $ | (348 | ) | ||||||||||||||||||||||
| Non-Same Store NOI | 3,840 | 1,346 | 2,494 | 9,350 | 4,671 | 4,679 | 4,594 | 4,274 | 320 | 9,917 | 7,423 | 2,494 | ||||||||||||||||||||||||||||||||||||
| Segment NOI | $ | 15,445 | $ | 12,468 | $ | 2,977 | $ | 42,767 | $ | 37,236 | $ | 5,531 | $ | 14,249 | $ | 14,482 | $ | (233 | ) | $ | 29,474 | $ | 27,328 | $ | 2,146 | |||||||||||||||||||||||
Retail same store NOI for the three and ninesix months ended SeptemberJune 30, 2019 increased 4.3%2020 decreased 5.4% and 2.6%1.7%, respectively, compared to the corresponding periods in 2018.2019. The increasesdecreases were primarily the result of higher occupancya $0.7 million and $0.8 million increase in the allowance for bad debt (recorded as wellan adjustment to rental revenues) as higher recoveries from tenantsa result of the COVID-19 pandemic for capital expenditures.the three and six months ended June 30, 2020, respectively, compared to the corresponding periods in 2019.
Multifamily Segment Data
Multifamily rental revenues, property expenses, and NOI for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 were as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | Change | 2019 | 2018 | Change | 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||||||||||||||||||||
| Rental revenues | $ | 11,157 | $ | 6,849 | $ | 4,308 | $ | 29,014 | $ | 20,439 | $ | 8,575 | $ | 10,707 | $ | 9,761 | $ | 946 | $ | 22,393 | $ | 17,857 | $ | 4,536 | ||||||||||||||||||||||||
| Property expenses | 4,875 | 3,413 | 1,462 | 12,452 | 9,468 | 2,984 | 4,558 | 4,107 | 451 | 9,388 | 7,537 | 1,851 | ||||||||||||||||||||||||||||||||||||
| Segment NOI | $ | 6,282 | $ | 3,436 | $ | 2,846 | $ | 16,562 | $ | 10,971 | $ | 5,591 | $ | 6,149 | $ | 5,654 | $ | 495 | $ | 13,005 | $ | 10,320 | $ | 2,685 | ||||||||||||||||||||||||
Multifamily segment NOI for the three and ninesix months ended SeptemberJune 30, 20192020 increased 82.8%8.8% and 51.0%26.0%, respectively, compared to the corresponding periods in 2018.2019. The increases were primarily a result of the commencement of operationshigher occupancy at Greenside Apartments and Premier Apartments, (partboth of Town Center Phase VI) duringwhich were in lease-up in the third quarterfirst six months of 2018,2019, the acquisition of 1405 Point in April 2019, and the commencement of operations at Hoffler Place in August 2019, and increases in rental rates and occupancy across the rest of the multifamily portfolio, especially at Johns Hopkins Village and Smith’s Landing.2019.
Multifamily Same Store Results
Multifamily same store results for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 exclude Greenside Premier Apartments, (part of Town Center Phase VI), 1405 Point, Hoffler Place, (placed in service in August 2019), and The Cosmopolitan (due to redevelopment).
Multifamily same store rental revenues, property expenses and NOI for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 were as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | Change | 2019 | 2018 | Change | 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||||||||||||||||||||
| Rental revenues | $ | 5,474 | $ | 4,876 | $ | 598 | $ | 16,299 | $ | 14,754 | $ | 1,545 | $ | 5,519 | $ | 5,924 | $ | (405 | ) | $ | 10,524 | $ | 10,825 | $ | (301 | ) | ||||||||||||||||||||||
| Property expenses | 2,323 | 2,167 | 156 | 6,452 | 6,204 | 248 | 2,195 | 2,238 | (43 | ) | 4,045 | 4,103 | (58 | ) | ||||||||||||||||||||||||||||||||||
| Same Store NOI | $ | 3,151 | $ | 2,709 | $ | 442 | $ | 9,847 | $ | 8,550 | $ | 1,297 | $ | 3,324 | $ | 3,686 | $ | (362 | ) | $ | 6,479 | $ | 6,722 | $ | (243 | ) | ||||||||||||||||||||||
| Non-Same Store NOI | 3,131 | 727 | 2,404 | 6,715 | 2,421 | 4,294 | 2,825 | 1,968 | 857 | 6,526 | 3,598 | 2,928 | ||||||||||||||||||||||||||||||||||||
| Segment NOI | $ | 6,282 | $ | 3,436 | $ | 2,846 | $ | 16,562 | $ | 10,971 | $ | 5,591 | $ | 6,149 | $ | 5,654 | $ | 495 | $ | 13,005 | $ | 10,320 | $ | 2,685 | ||||||||||||||||||||||||
Multifamily same store NOI for the three and ninesix months ended SeptemberJune 30, 2019 increased 16.3%2020 decreased 9.8% and 15.2%3.6%, respectively, compared to the corresponding periods in 2018.2019. The increasesdecreases were primarily the result of increases in rental rateslower occupancy at Encore and occupancy across the same store multifamily portfolio, particularly at JohnsJohn Hopkins Village and Smith’s Landing.Village.
General Contracting and Real Estate Services Segment Data
General contracting and real estate services revenues, expenses, and gross profit for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 were as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | Change | 2019 | 2018 | Change | 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||||||||||||||||||||
| Segment revenues | $ | 27,638 | $ | 19,950 | $ | 7,688 | $ | 66,118 | $ | 63,654 | $ | 2,464 | $ | 57,398 | $ | 21,444 | $ | 35,954 | $ | 104,666 | $ | 38,480 | $ | 66,186 | ||||||||||||||||||||||||
| Segment expenses | 26,446 | 18,973 | 7,473 | 62,855 | 61,474 | 1,381 | 55,342 | 20,123 | 35,219 | 100,892 | 36,409 | 64,483 | ||||||||||||||||||||||||||||||||||||
| Segment gross profit | $ | 1,192 | $ | 977 | $ | 215 | $ | 3,263 | $ | 2,180 | $ | 1,083 | $ | 2,056 | $ | 1,321 | $ | 735 | $ | 3,774 | $ | 2,071 | $ | 1,703 | ||||||||||||||||||||||||
| Operating margin | 4.3 | % | 4.9 | % | (0.6 | )% | 4.9 | % | 3.4 | % | 1.5 | % | 3.6 | % | 6.2 | % | (2.6 | )% | 3.6 | % | 5.4 | % | (1.8 | )% | ||||||||||||||||||||||||
General contracting and real estate services segment profit for the three and ninesix months ended SeptemberJune 30, 20192020 increased 22.0%55.6% and 49.7%82.2%, respectively, compared to the corresponding periods in 2018.2019. The increases were primarily attributable to the timinghigh backlog at December 31, 2019 resulting in increased activity during the first six months of commencement of new projects and the completion of other projects.2020.
The changes in third party construction backlog for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 were as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| Beginning backlog | $ | 178,632 | $ | 37,921 | $ | 165,863 | $ | 49,167 | $ | 235,642 | $ | 160,871 | $ | 242,622 | $ | 165,863 | ||||||||||||||
| New contracts/change orders | 22,054 | 7,138 | 73,250 | 39,514 | 15,490 | 39,177 | 55,930 | 51,196 | ||||||||||||||||||||||
| Work performed | (27,594 | ) | (19,879 | ) | (66,021 | ) | (63,501 | ) | (57,390 | ) | (21,416 | ) | (104,810 | ) | (38,427 | ) | ||||||||||||||
| Ending backlog | $ | 173,092 | $ | 25,180 | $ | 173,092 | $ | 25,180 | $ | 193,742 | $ | 178,632 | $ | 193,742 | $ | 178,632 | ||||||||||||||
As of SeptemberJune 30, 2019,2020, we had $54.6$55.1 million in backlog on the 27th Street project, $28.1 million in backlog on the Solis Apartments project, $22.0 million in backlog on the Interlock Commercial project $55.2 million in backlog on the Solis Apartments project, and $32.9 million in backlog on the Boulder LakeHolly Springs Apartments project.
Consolidated Results of Operations
The following table summarizes the results of operations for the three and ninesix months ended SeptemberJune 30, 20192020 and 2018:2019:
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | Change | 2019 | 2018 | Change | 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||||||||||||||||||||
| (unaudited, in thousands) | (unaudited, in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Revenues | ||||||||||||||||||||||||||||||||||||||||||||||||
| Rental revenues | $ | 42,220 | $ | 28,930 | $ | 13,290 | $ | 109,507 | $ | 86,227 | $ | 23,280 | $ | 39,915 | $ | 36,378 | $ | 3,537 | $ | 82,204 | $ | 67,287 | $ | 14,917 | ||||||||||||||||||||||||
| General contracting and real estate services revenues | 27,638 | 19,950 | 7,688 | 66,118 | 63,654 | 2,464 | 57,398 | 21,444 | 35,954 | 104,666 | 38,480 | 66,186 | ||||||||||||||||||||||||||||||||||||
| Total revenues | 69,858 | 48,880 | 20,978 | 175,625 | 149,881 | 25,744 | 97,313 | 57,822 | 39,491 | 186,870 | 105,767 | 81,103 | ||||||||||||||||||||||||||||||||||||
| Expenses | ||||||||||||||||||||||||||||||||||||||||||||||||
| Rental expenses | 9,924 | 7,103 | 2,821 | 24,615 | 20,049 | 4,566 | 8,309 | 7,915 | 394 | 17,684 | 14,640 | 3,044 | ||||||||||||||||||||||||||||||||||||
| Real estate taxes | 4,180 | 2,840 | 1,340 | 10,759 | 8,388 | 2,371 | 4,233 | 3,451 | 782 | 8,566 | 6,579 | 1,987 | ||||||||||||||||||||||||||||||||||||
| General contracting and real estate services expenses | 26,446 | 18,973 | 7,473 | 62,855 | 61,474 | 1,381 | 55,342 | 20,123 | 35,219 | 100,892 | 36,409 | 64,483 | ||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 15,452 | 10,196 | 5,256 | 38,834 | 28,653 | 10,181 | 13,777 | 13,505 | 272 | 28,056 | 23,409 | 4,647 | ||||||||||||||||||||||||||||||||||||
| Amortization of right-of-use assets - finance leases | 107 | — | 107 | 168 | — | 168 | 146 | 85 | 61 | 293 | 85 | 208 | ||||||||||||||||||||||||||||||||||||
| General and administrative expenses | 2,977 | 2,367 | 610 | 9,329 | 8,092 | 1,237 | 2,988 | 2,951 | 37 | 6,781 | 6,352 | 429 | ||||||||||||||||||||||||||||||||||||
| Acquisition, development and other pursuit costs | 93 | 69 | 24 | 550 | 162 | 388 | 502 | 57 | 445 | 529 | 457 | 72 | ||||||||||||||||||||||||||||||||||||
| Impairment charges | — | 3 | (3 | ) | — | 101 | (101 | ) | — | — | — | 158 | — | 158 | ||||||||||||||||||||||||||||||||||
| Total expenses | 59,179 | 41,551 | 17,628 | 147,110 | 126,919 | 20,191 | 85,297 | 48,087 | 37,210 | 162,959 | 87,931 | 75,028 | ||||||||||||||||||||||||||||||||||||
| Gain on real estate dispositions | 4,699 | — | 4,699 | 4,699 | — | 4,699 | 2,776 | — | 2,776 | 2,776 | — | 2,776 | ||||||||||||||||||||||||||||||||||||
| Operating income | 15,378 | 7,329 | 8,049 | 33,214 | 22,962 | 10,252 | 14,792 | 9,735 | 5,057 | 26,687 | 17,836 | 8,851 | ||||||||||||||||||||||||||||||||||||
| Interest income | 5,710 | 2,545 | 3,165 | 16,622 | 7,152 | 9,470 | 4,412 | 5,593 | (1,181 | ) | 11,638 | 10,912 | 726 | |||||||||||||||||||||||||||||||||||
| Interest expense on indebtedness | (8,828 | ) | (4,677 | ) | (4,151 | ) | (22,205 | ) | (13,547 | ) | (8,658 | ) | (6,999 | ) | (7,491 | ) | 492 | (14,958 | ) | (13,377 | ) | (1,581 | ) | |||||||||||||||||||||||||
| Interest expense on finance leases | (228 | ) | — | (228 | ) | (340 | ) | — | (340 | ) | (228 | ) | (112 | ) | (116 | ) | (457 | ) | (112 | ) | (345 | ) | ||||||||||||||||||||||||||
| Equity in income of unconsolidated real estate entities | — | — | — | 273 | — | 273 | — | — | — | — | 273 | (273 | ) | |||||||||||||||||||||||||||||||||||
| Loss on extinguishment of debt | — | (11 | ) | 11 | — | (11 | ) | 11 | ||||||||||||||||||||||||||||||||||||||||
| Change in fair value of interest rate derivatives | (530 | ) | 298 | (828 | ) | (3,926 | ) | 1,256 | (5,182 | ) | (6 | ) | (1,933 | ) | 1,927 | (1,742 | ) | (3,396 | ) | 1,654 | ||||||||||||||||||||||||||||
| Other income | 362 | 65 | 297 | 426 | 233 | 193 | ||||||||||||||||||||||||||||||||||||||||||
| Unrealized credit loss release (provision) | 117 | — | 117 | (260 | ) | — | (260 | ) | ||||||||||||||||||||||||||||||||||||||||
| Other income (expense), net | 286 | 4 | 282 | 344 | 64 | 280 | ||||||||||||||||||||||||||||||||||||||||||
| Income before taxes | 11,864 | 5,549 | 6,315 | 24,064 | 18,045 | 6,019 | 12,374 | 5,796 | 6,578 | 21,252 | 12,200 | 9,052 | ||||||||||||||||||||||||||||||||||||
| Income tax benefit | 199 | 120 | 79 | 339 | 552 | (213 | ) | |||||||||||||||||||||||||||||||||||||||||
| Income tax benefit (provision) | (65 | ) | 30 | (95 | ) | 192 | 140 | 52 | ||||||||||||||||||||||||||||||||||||||||
| Net income | 12,063 | 5,669 | 6,394 | 24,403 | 18,597 | 5,806 | 12,309 | 5,826 | 6,483 | 21,444 | 12,340 | 9,104 | ||||||||||||||||||||||||||||||||||||
| Net income attributable to noncontrolling interests in investment entities | (960 | ) | — | (960 | ) | (640 | ) | — | (640 | ) | ||||||||||||||||||||||||||||||||||||||
| Net loss attributable to noncontrolling interests in investment entities | 44 | 320 | (276 | ) | 136 | 320 | (184 | ) | ||||||||||||||||||||||||||||||||||||||||
| Preferred stock dividends | (1,234 | ) | — | (1,234 | ) | (1,388 | ) | — | (1,388 | ) | (1,175 | ) | (154 | ) | (1,021 | ) | (2,242 | ) | (154 | ) | (2,088 | ) | ||||||||||||||||||||||||||
| Net income attributable to common stockholders and OP Unit holders | $ | 9,869 | $ | 5,669 | $ | 4,200 | $ | 22,375 | $ | 18,597 | $ | 3,778 | $ | 11,178 | $ | 5,992 | $ | 5,186 | $ | 19,338 | $ | 12,506 | $ | 6,832 | ||||||||||||||||||||||||
Rental revenues for the three and ninesix months ended SeptemberJune 30, 20192020 increased $13.3$3.5 million and $23.3$14.9 million, respectively, compared to the corresponding periods in 20182019 as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | Change | 2019 | 2018 | Change | 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||||||||||||||||||||
| Office | $ | 10,283 | $ | 5,149 | $ | 5,134 | $ | 23,220 | $ | 15,537 | $ | 7,683 | $ | 10,494 | $ | 7,382 | $ | 3,112 | $ | 20,686 | $ | 12,938 | $ | 7,748 | ||||||||||||||||||||||||
| Retail | 20,780 | 16,932 | 3,848 | 57,273 | 50,251 | 7,022 | 18,714 | 19,235 | (521 | ) | 39,125 | 36,492 | 2,633 | |||||||||||||||||||||||||||||||||||
| Multifamily | 11,157 | 6,849 | 4,308 | 29,014 | 20,439 | 8,575 | 10,707 | 9,761 | 946 | 22,393 | 17,857 | 4,536 | ||||||||||||||||||||||||||||||||||||
| $ | 42,220 | $ | 28,930 | $ | 13,290 | $ | 109,507 | $ | 86,227 | $ | 23,280 | $ | 39,915 | $ | 36,378 | $ | 3,537 | $ | 82,204 | $ | 67,287 | $ | 14,917 | |||||||||||||||||||||||||
Office rental revenues for the three and ninesix months ended SeptemberJune 30, 20192020 increased 99.7%42.2% and 49.4%59.9%, respectively, compared to the corresponding periods in 2018,2019 primarily as a result of the commencement of operations at Brooks Crossing office in April 2019, the acquisition of Thames Street Wharf in June 2019, and the commencement of operations at a portion of Wills Wharf in June 2020. In addition, the acquisition of One City Center in March 2019 contributed to the commencement of operations at Brooks Crossing Office in April 2019, andincrease for the acquisition of Thames Street Wharf insix months ended June 2019, as well as increased occupancy across the rest of the office portfolio.30, 2020.
Retail rental revenues for the three and nine months ended SeptemberJune 30, 2019 increased 22.7% and 14.0%, respectively,2020 decreased 2.7% compared to the corresponding periods in 2018,three months ended June 30, 2019, primarily as a result of the disposal of Lightfoot Marketplace in August 2019, the loss of Dick’s Sporting Goods at Town Center beginning February 2020, and the disposal of the seven-property retail portfolio in May 2020 as well as a $0.8 million increase in the allowance for bad debt (recorded as an adjustment to rental revenues) as a result of the COVID-19 pandemic. These decreases were partially offset by the acquisition of Red Mill Commons and Marketplace at Hilltop in May 2019. Retail rental revenues for the additional outparcel phasesix months ended June 30, 2020 increased 7.2% compared to the six months ended June 30, 2019, primarily as a result of Wendover Village in February 2019, the commencement of operations at Market at Mill Creek in April 2019 and the acquisition of Red Mill Commons and Marketplace at Hilltop in May 2019. These increases wereThe increase was partially offset by a $0.9 million increase in the allowance for bad debt (recorded as an adjustment to rental revenues) as a result of the COVID-19 pandemic as well as the disposal of Lightfoot Marketplace in August 2019, the loss of Dick’s Sporting Goods at Town Center beginning February 2020, and the disposal of the leasehold interestseven-property retail portfolio in the building previously leased by Home Depot at Broad Creek Shopping Center in December 2018 as well as the disposition of Waynesboro Commons in April 2019 and Lightfoot Marketplace in August 2019.May 2020.
Multifamily rental revenues for the three and ninesix months ended SeptemberJune 30, 20192020 increased 62.9%9.7% and 42.0%25.4%, respectively, compared to the corresponding periods in 2018,2019, primarily as a result of the commencement of operationshigher occupancy at Greenside Apartments and Premier Apartments, (partboth of Town Center Phase VI) duringwhich were in lease-up in the third quarterfirst six months of 2018,2019, the acquisition of 1405 Point in April 2019, and the commencement of operations at Hoffler Place in August 2019, and increases in rental rates and occupancy across the rest of the multifamily portfolio, especially at Johns Hopkins Village and Smith’s Landing.2019.
General contracting and real estate services revenues for the three and ninesix months ended SeptemberJune 30, 20192020 increased 38.5%167.7% and 3.9%172.0%, respectively, compared to the corresponding periods in 20182019, due to the timinghigh backlog at December 31, 2019 resulting in increased activity during the first six months of commencement of new projects and the completion of other projects.2020.
Rental expenses for the three and ninesix months ended SeptemberJune 30, 20192020 increased $2.8$0.4 million and $4.6$3.0 million, respectively, compared to the corresponding periods in 20182019, as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | Change | 2019 | 2018 | Change | 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||||||||||||||||||||
| Office | $ | 2,753 | $ | 1,551 | $ | 1,202 | $ | 6,097 | $ | 4,435 | $ | 1,662 | $ | 2,291 | $ | 1,853 | $ | 438 | $ | 4,837 | $ | 3,339 | $ | 1,498 | ||||||||||||||||||||||||
| Retail | 3,116 | 2,761 | 355 | 8,583 | 7,974 | 609 | 2,458 | 2,860 | (402 | ) | 5,478 | 5,460 | 18 | |||||||||||||||||||||||||||||||||||
| Multifamily | 4,055 | 2,791 | 1,264 | 9,935 | 7,640 | 2,295 | 3,560 | 3,202 | 358 | 7,369 | 5,841 | 1,528 | ||||||||||||||||||||||||||||||||||||
| $ | 9,924 | $ | 7,103 | $ | 2,821 | $ | 24,615 | $ | 20,049 | $ | 4,566 | $ | 8,309 | $ | 7,915 | $ | 394 | $ | 17,684 | $ | 14,640 | $ | 3,044 | |||||||||||||||||||||||||
Office rental expenses for the three and ninesix months ended SeptemberJune 30, 20192020 increased 77.5%23.6% and 37.5%44.9%, respectively, compared to the corresponding periods in 2018,2019, primarily as a result of the commencement of operations at Brooks Crossing office in April 2019, the acquisition of Thames Street Wharf in June 2019, and the commencement of operations at a portion of Wills Wharf in June 2020. In addition, the acquisition of One City Center in March 2019, contributed to the commencement of operations at Brooks Crossing Office in April 2019, andincrease for the acquisition of Thames Street Wharf insix months ended June 2019.30, 2020.
Retail rental expenses for the three and nine months ended SeptemberJune 30, 2019 increased 12.9%, and 7.6%, respectively,2020 decreased 14.1% compared to the corresponding periods in 2018,three months ended June 30, 2019, primarily as a result of the acquisitiondisposal of Lightfoot Marketplace in August 2019, the loss of Dick’s Sporting Goods at Town Center beginning February 2020, and the disposal of the additional outparcel phaseseven-property retail portfolio in May 2020 as well as
35
decreased costs for repairs and maintenance and utilities as a result of the COVID-19 pandemic. Retail rental expenses for the six months ended June 30, 2020 increased 0.3% compared to the six months ended June 30, 2019, primarily as a result of the commencement of operations at Market at Mill Creek in April 2019 and the acquisition of Red Mill Commons and Marketplace at Hilltop in May 2019. TheseThose increases were partiallymostly offset by decreased costs for repairs and maintenance and utilities as a result of the COVID-19 pandemic as well as the disposal of Lightfoot Marketplace in August 2019, the loss of Dick’s Sporting Goods at Town Center beginning February 2020, and the disposal of the leasehold interestseven-property retail portfolio in the building previously leased by Home Depot at Broad Creek Shopping Center in December 2018 as well as the disposition of Waynesboro Commons in April 2019 and Lightfoot Marketplace in August 2019.May 2020.
Multifamily rental expenses for the three and ninesix months ended SeptemberJune 30, 20192020 increased 45.3%11.2% and 30.0%26.2%, respectively, compared to the corresponding periods in 2018,2019, primarily as a result of the commencement of operationshigher occupancy at
Greenside Apartments and Premier Apartments, (partboth of Town Center Phase VI) duringwhich were in lease-up in the third quarterfirst six months of 2018,2019, the acquisition of 1405 Point in April 2019, and the commencement of operations at Hoffler Place in August 2019.
Real estate taxes for the three and ninesix months ended SeptemberJune 30, 20192020 increased $1.3$0.8 million and $2.4$2.0 million, respectively, compared to the corresponding periods in 20182019, as follows (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 2018 | Change | 2019 | 2018 | Change | 2020 | 2019 | Change | 2020 | 2019 | Change | |||||||||||||||||||||||||||||||||||||
| Office | $ | 1,141 | $ | 515 | $ | 626 | $ | 2,319 | $ | 1,519 | $ | 800 | $ | 1,228 | $ | 653 | $ | 575 | $ | 2,374 | $ | 1,179 | $ | 1,195 | ||||||||||||||||||||||||
| Retail | 2,219 | 1,703 | 516 | 5,923 | 5,041 | 882 | 2,007 | 1,893 | 114 | 4,173 | 3,704 | 469 | ||||||||||||||||||||||||||||||||||||
| Multifamily | 820 | 622 | 198 | 2,517 | 1,828 | 689 | 998 | 905 | 93 | 2,019 | 1,696 | 323 | ||||||||||||||||||||||||||||||||||||
| $ | 4,180 | $ | 2,840 | $ | 1,340 | $ | 10,759 | $ | 8,388 | $ | 2,371 | $ | 4,233 | $ | 3,451 | $ | 782 | $ | 8,566 | $ | 6,579 | $ | 1,987 | |||||||||||||||||||||||||
Office real estate taxes for the three and ninesix months ended SeptemberJune 30, 20192020 increased 121.6%88.1% and 52.7%101.4%, respectively, compared to the corresponding periods in 20182019, primarily due to the commencement of operations at Brooks Crossing office in April 2019, the acquisition of Thames Street Wharf in June 2019, and the commencement of operations at a portion of Wills Wharf in June 2020. In addition, the acquisition of One City Center in March 2019 contributed to the commencement of operations at Brooks Crossing Office in April 2019, andincrease for the acquisition of Thames Street Wharf insix months ended June 2019.30, 2020.
Retail real estate taxes for the three and ninesix months ended SeptemberJune 30, 20192020 increased 30.3%6.0% and 17.5%12.7%, respectively, compared to the corresponding periods in 20182019, primarily due to the acquisition of the additional outparcel phase of Wendover Village in February 2019, the commencement of operations at Market at Mill Creek in April 2019 and the acquisition of Red Mill Commons and Marketplace at Hilltop in May 2019. These increases wereThe increase was partially offset by the disposal of the leasehold interest in the building previously leased by Home Depot at Broad Creek Shopping Center in December 2018 as well as the disposition of Waynesboro Commons in April 2019 and Lightfoot Marketplace in August 2019.2019 and the disposal of the seven-property retail portfolio in May 2020.
Multifamily real estate taxes for the three and ninesix months ended SeptemberJune 30, 20192020 increased 31.8%10.3% and 37.7%19.0%, respectively, compared to the corresponding periods in 20182019, primarily as a result of the commencement of operationsincreased assessments at Greenside and Premier Apartments (part of Town Center Phase VI) during the third quarter of 2018,and Hoffler Place as well as the acquisition of 1405 Point in April 2019, and the commencement of operations at Hoffler Place in August 2019.
General contracting and real estate services expenses for the three and ninesix months ended SeptemberJune 30, 20192020 increased 39.4%175.0% and 2.2%177.1%, respectively, compared to the corresponding periods in 20182019, due to the timinghigh backlog at December 31, 2019 resulting in increased activity during the first six months of commencement of new projects and the completion of other projects.2020.
Depreciation and amortization for the three and ninesix months ended SeptemberJune 30, 20192020 increased 51.5%2.0% and 35.5%19.9%, respectively, compared to the corresponding periods in 20182019, as a result of development properties placed in service and acquisitions of operating properties.service.
Amortization of right-of-use assets - finance leases relatesfor the three and six months ended June 30, 2020 increased 71.8% and 244.7%, respectively, compared to new ground leases acquired duringthe corresponding periods in 2019, primarily due to the expense being recognized for whichthe full period in 2020. There were no right-of-use-assets recorded by the Company isprior to the lessee, which are classified as finance leases. See "Critical Accounting Policies" below for details.second quarter of 2019.
General and administrative expenses for the three and ninesix months ended SeptemberJune 30, 20192020 increased 25.8%1.3% and 15.3%6.8%, respectively, compared to the corresponding periods in 20182019, primarily as a result of higher compensation expense and benefit costs from increased employee headcount.
Acquisition, development and other pursuit costs for the ninethree and six months ended SeptemberJune 30, 20192020 increased $0.4 million780.7% and 15.8%, respectively, compared to the nine months ended September 30, 2018 primarilycorresponding periods in 2019, due to the write off of costs relating to acertain potential development projectprojects and operating properties that was abandoned during the nine months ended September 30, 2019. Acquisition, development and other pursuit costs for the three months ended September 30, 2019 and 2018 were not significant.abandoned.
36
Impairment charges were not significant for the three and ninesix months ended SeptemberJune 30, 2019 and 2018.2020 relate to tenants that vacated prior to their lease expiration.
Gain on real estate dispositions for the three and ninesix months ended SeptemberJune 30, 20192020 relates to the sale of Lightfoot Marketplace and a non-operating land parcel.portfolio of seven retail properties on May 29, 2020. There were no real estate dispositions during the three and ninesix months ended SeptemberJune 30, 2018.
2019.
Interest income for the three and nine months ended SeptemberJune 30, 2019 increased 124.4% and 132.4%, respectively,2020 decreased 21.1% compared to the corresponding periodsthree months ended June 30, 2019, primarily as result of two loans being placed on nonaccrual status in 2018the second quarter of 2020. Interest income for the six months ended June 30, 2020 increased 6.7%, compared to the six months ended June 30, 2019, due to higher notes receivable balances due tofrom increased loan funding, particularly for Interlock Commercial, Solis Apartments at Interlock, and Nexton Square.which was partially offset by the two loans placed on nonaccrual status in the second quarter of 2020.
Interest expense on indebtedness for the three and nine months ended SeptemberJune 30, 2020 decreased 6.6% compared to the three months ended June 30, 2019, primarily due to the overall decline in variable interest rates, the disposition of several properties, and the refinance of several loans at the end of 2019 and the beginning of 2020. Interest expense on indebtedness for the six months ended June 30, 2020 increased 88.8% and 63.9%, respectively,11.8% compared to the corresponding periodsperiod in 20182019, primarily due to increased borrowings on the corporate credit facility, the increased number of construction loans, and additional borrowings on the property loans.
Interest expense on finance leases relatesfor the three and six months ended June 30, 2020 increased relative to new groundthe corresponding periods in 2019, primarily due to expense being recognized for the full period in 2020. The Company did not have finance leases acquired during 2019 for whichprior to the Company is the lessee, which are classified as finance leases. See "Critical Accounting Policies" below for details.second quarter of 2019.
Equity in income of unconsolidated real estate entities for the ninesix months ended SeptemberJune 30, 2019 relates to our investment in One City Center from January 1, 2019 to March 14, 2019, which was an unconsolidated real estate investment during this period.
The change in fair value of interest rate derivatives for the three and ninesix months ended SeptemberJune 30, 20192020 experienced significant decreases of 99.7% and 48.7%, respectively, compared to the corresponding periods in 20182019, primarily due to more significant decreases in forward LIBOR (the London Inter-Bank Offered Rate). during the 2019 periods.
Unrealized credit loss release (provision) relates to increased expected loan losses due to changes in economic conditions and changes in the status of development projects that secure our mezzanine loans. The adoption of the new credit loss standard on January 1, 2020 generally has the effect of requiring us to recognize expected loan losses sooner than under the previous standard. Adjustments to these expected losses have not been significant.
Other income (expense), net for the three and six months ended June 30, 2020 increased over 100%, compared to the corresponding periods in 2019 primarily due to the receipt of funds from entities other than tenants, including insurers, as a result ofinsurance claims made in order to recover the costs to the Company for minor repairs made to three of our properties.
Liquidity and Capital Resources
Overview
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, capital improvements, and mezzanine loan funding requirements. As discussed below, we have proactively deferred previously announced development
37
activity at several of our projects and suspended non-essential capital expenditures. We expect to meet our long-term liquidity requirements with net cash from operations, long-term secured and unsecured indebtedness, sales of operating real estate properties, and the issuance of equity and debt securities. We alsoIn the future, subject to available borrowing capacity, we may fund property development and acquisitions and capital improvements using our credit facility pending long-term financing.
As of SeptemberJune 30, 2019,2020, we had unrestricted cash and cash equivalents of $44.2$71.0 million available for both current liquidity needs as well as development and redevelopment activities. We also had restricted cash in escrow of $3.4$4.1 million, some of which is available for capital expenditures at our operating properties. As of SeptemberJune 30, 2019,2020, we had $39.7$20.0 million of available borrowings under our credit facility to meet our short-term liquidity requirements and $76.8$27.8 million of available borrowings under our construction loans to fund development activities.
We have no loans scheduled to mature during the remainder of 2019.2020.
Responses to COVID-19
On April 28, 2020, our Board of Directors reviewed the Company’s dividend policy and determined that it would be in the best interest of the Company, its stockholders, and its OP unitholders to temporarily suspend the payment of quarterly cash dividends to common stockholders and quarterly distributions to holders of Class A common units as a measure to preserve liquidity in light of the uncertainty resulting from COVID-19. Our Board of Directors did not suspend the payment of dividends on shares of our Series A Preferred Stock.
As a result of improvement in general economic conditions and our operating performance, our Board of Directors reinstated quarterly cash dividends on shares of our common stock and Class A common units with dividend of $0.11 per share and unit, payable on October 8, 2020 to stockholders and OP unitholders of record on September 30, 2020.
Going forward we will continue to monitor our projected taxable income for 2020 and plan to distribute sufficient dividends to maintain our status as a REIT. We can provide no assurances that dividends and distributions paid per share of common stock and per Class A common unit, respectively, will return to an amount equal to the dividends and distributions paid for the quarter ended March 31, 2020.
In addition, in an effort to strengthen our financial flexibility and efficiently manage through the uncertainty caused by COVID-19, Lou Haddad, our President and Chief Executive Officer, voluntarily elected to reduce his base salary by 25%, and each of our directors, including Dan Hoffler and Russ Kirk, voluntarily elected to reduce their cash retainers and the value of their annual equity awards by 25%, in each case effective as of May 1, 2020.
We proactively deferred the Chronicle Mill, Southern Post, and Ten Tryon development projects in order to provide additional balance sheet flexibility until economic conditions stabilize. We have also slowed down redevelopment activities at The Cosmopolitan.
ATM Program
On February 26, 2018, we commenced an at-the-market continuous equity offering program (the "Prior ATM Program"), which was amended on August 6, 2019, through which we could, from time to time, issue and sell shares of our common stock having an aggregate offering price of up to $180.7 million. During the three months ended March 31, 2020, we issued and sold 92,577 shares of common stock at a weighted average price of $18.23 per share under the Prior ATM Program, receiving net proceeds after offering costs and commissions of $1.7 million.
On March 10, 2020, we commenced a new at-the-market continuous equity offering program (the "ATM Program") through which we may, from time to time, issue and sell shares of our common stock. On August 6, 2019, we entered into amendmentsstock and shares of our 6.75% Series A Cumulative Redeemable Perpetual Preferred Stock (the "ATM Amendments""Series A Preferred Stock") to the separate sales agreements related to the ATM Program, which, among other things, increased thehaving an aggregate offering price of up to $300.0 million, to or through our sales agents and, with respect to shares of our common stock, may enter into separate forward sales agreements to or through the forward purchaser. Upon commencing the ATM Program, we simultaneously terminated the Prior ATM Program.
During the six months ended June 30, 2020, we issued and sold 486,727 shares of common stock at a weighted average price of $9.28 per share under the ATM Program, receiving net proceeds after offering costs and commissions, of $4.4 million. During the six months ended June 30, 2020, we issued and sold 3,830 shares of the Series A Preferred Stock at a weighted average price of $24.14 per share, receiving net proceeds after offering costs and commissions of $0.1 million. Shares having an aggregate offering price of $277.5 million remained unsold under the ATM Program as of August 5, 2020.
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In July 2020, we had sold shares having an aggregate offering price of $105.7 million, resulting in shares having an aggregate offering price of $75.0 million remaining available for sale under the ATM Program as of August 6, 2019. During the nine months ended September 30, 2019, we issued and sold 4,476,565166,630 shares of common stock at a weighted average price of $16.28$10.16 per share under the ATM Program, receiving net proceeds, after offering costs and commissions, of $71.9$1.7 million. Shares havingIn July 2020, we sold an aggregate offeringof 709,588 shares of Series A Preferred Stock at a weighted average price of $31.6 million remained available for sale$22.87 per share under the ATM Program, as of November 4, 2019.
Credit Facility
We have a senior credit facility that was amended and restated on October 3, 2019. The total commitments are $355.0 million, comprised of a $150.0 million senior unsecured revolving credit facility (the "revolving credit facility") and a $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. WeSubject to available borrowing capacity, we intend to use future borrowings under the credit facility for general corporate purposes, including funding acquisitions, mezzanine lending, and development and redevelopment of properties in our portfolio, and for working capital. On May 29, 2020, in conjunction with the sale of seven unencumbered operating properties, we repaid $61.9 million on the revolving credit facility. As a result of the sale and related reduction in our unencumbered base, borrowing capacity under the revolving credit facility was reduced to $100.0 million as of June 30, 2020 from $150.0 million.
In July 2020, we decreased its borrowings under the revolving credit facility by $32.0 million, bringing the outstanding balance down to $48.0 million.
The credit facility includes an accordion feature that allows the total commitments to be increased to $700.0 million, subject to certain conditions, including obtaining commitments from any one or more lenders. The revolving credit facility has a scheduled maturity date of January 24, 2024, 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 January 24, 2025.
The revolving credit facility bears interest at LIBOR plus a margin ranging from 1.30% to 1.85% and the term loan facility bears interest at LIBOR plus a margin ranging from 1.25% to 1.80%, 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 revolving credit facility. If we attain investment grade credit ratings from S&P or Moody’s, we may elect to have borrowings become subject to interest rates based on our credit ratings. We 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 us and certain of our 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 is subject to our ongoing compliance with a number of financial covenants, affirmative covenants and other restrictions, including the following:
Total leverage ratio of not more than 60% (or 65% for the two consecutive quarters following any acquisition with a purchase price of at least up to $100.0 million, 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 not less than 1.50 to 1.0;
Tangible net worth of not less than the sum of $567,106,000 and amount equal to 75% of the net equity proceeds received after June 30, 2019;
Ratio of secured indebtedness to total asset value of not more than 40%;
Ratio of secured recourse debt to total asset value of not more than 20%;
Total unsecured leverage ratio of not more than 60% (or 65% for the two consecutive quarters following any acquisition with a purchase price of at least up to $100.0 million, 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;
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.time; and
Maximum aggregate rental revenue from any single tenant of not more than 30% of rental revenues with respect to all leases of unencumbered properties (as defined in the credit agreement).
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The credit agreement 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 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 agreement 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, and restricts the amount of stock and Operating Partnership 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, except for those portions subject to an interest rate swap agreement.
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 agreement. In light of the adverse effects of the COVID-19 pandemic on our business, we proactively engaged with the lenders under our credit facility to discuss our potential options should we need to obtain a waiver or modification of certain financial covenants to avoid non-compliance in future periods.
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Consolidated Indebtedness
The following table sets forth our consolidated indebtedness as of SeptemberJune 30, 20192020 ($ in thousands):
| Amount Outstanding | Interest Rate (a) | Effective Rate for Variable Debt | Maturity Date | Balance at Maturity | ||||||||||||
| Secured Debt | ||||||||||||||||
Hoffler Place (b) | $ | 30,896 | LIBOR + 3.24% | 3.40 | % | January 1, 2021 | $ | 30,896 | ||||||||
Summit Place (b) | 32,289 | LIBOR + 3.24% | 3.40 | % | January 1, 2021 | 32,289 | ||||||||||
| Southgate Square | 20,195 | LIBOR + 1.60% | 1.76 | % | April 29, 2021 | 19,462 | ||||||||||
Encore Apartments (c) | 24,591 | 3.25 | % | September 10, 2021 | 23,992 | |||||||||||
4525 Main Street (c) | 31,556 | 3.25 | % | September 10, 2021 | 30,787 | |||||||||||
| Red Mill West | 11,076 | 4.23 | % | June 1, 2022 | 10,187 | |||||||||||
| Thames Street Wharf | 70,000 | LIBOR + 1.30% | 1.81 | % | (d) | June 26, 2022 | 70,000 | |||||||||
| Hanbury Village | 18,343 | 3.78 | % | August 15, 2022 | 17,450 | |||||||||||
| Marketplace at Hilltop | 10,321 | 4.42 | % | October 1, 2022 | 9,383 | |||||||||||
| 1405 Point | 53,000 | LIBOR + 2.25% | 2.41 | % | January 1, 2023 | 51,532 | ||||||||||
| Socastee Commons | 4,513 | 4.57 | % | January 6, 2023 | 4,223 | |||||||||||
| Sandbridge Commons | 7,897 | LIBOR + 1.75% | 1.91 | % | January 17, 2023 | 7,247 | ||||||||||
| Wills Wharf | 53,660 | LIBOR + 2.25% | 2.41 | % | June 26, 2023 | 53,660 | ||||||||||
249 Central Park (e) | 16,716 | LIBOR + 1.60% | 3.85 | % | (d) | August 10, 2023 | 15,935 | |||||||||
Fountain Plaza Retail (e) | 10,059 | LIBOR + 1.60% | 3.85 | % | (d) | August 10, 2023 | 9,590 | |||||||||
South Retail (e) | 7,339 | LIBOR + 1.60% | 3.85 | % | (d) | August 10, 2023 | 6,996 | |||||||||
| One City Center | 25,016 | LIBOR + 1.85% | 2.01 | % | April 1, 2024 | 22,559 | ||||||||||
| Red Mill Central | 2,450 | 4.80 | % | June 17, 2024 | 1,765 | |||||||||||
Premier Apartments (f) | 16,750 | LIBOR + 1.55% | 1.71 | % | October 31, 2024 | 15,848 | ||||||||||
Premier Retail (f) | 8,250 | LIBOR + 1.55% | 1.71 | % | October 31, 2024 | 7,806 | ||||||||||
| Red Mill South | 5,986 | 3.57 | % | May 1, 2025 | 4,383 | |||||||||||
| Brooks Crossing Office | 15,625 | LIBOR + 1.60% | 1.76 | % | July 1, 2025 | 11,431 | ||||||||||
| Market at Mill Creek | 14,041 | LIBOR + 1.55% | 1.71 | % | July 12, 2025 | 10,804 | ||||||||||
| Johns Hopkins Village | 51,335 | LIBOR + 1.25% | 4.19 | % | (d) | August 7, 2025 | 45,967 | |||||||||
| North Point Center-Phase II | 2,161 | 7.25 | % | September 15, 2025 | 1,344 | |||||||||||
| Lexington Square | 14,569 | 4.50 | % | September 1, 2028 | 12,044 | |||||||||||
| Red Mill North | 4,345 | 4.73 | % | December 31, 2028 | 3,295 | |||||||||||
| Greenside Apartments | 33,658 | 3.17 | % | December 15, 2029 | 26,090 | |||||||||||
| Smith's Landing | 17,757 | 4.05 | % | June 1, 2035 | 384 | |||||||||||
| Liberty Apartments | 14,023 | 5.66 | % | November 1, 2043 | — | |||||||||||
| The Cosmopolitan | 43,309 | 3.35 | % | July 1, 2051 | — | |||||||||||
| Total secured debt | $ | 671,726 | $ | 557,349 | ||||||||||||
| Unsecured Debt | ||||||||||||||||
| Senior unsecured revolving credit facility | $ | 80,000 | LIBOR+1.30%-1.85% | 1.76 | % | January 24, 2024 | $ | 80,000 | ||||||||
| Senior unsecured term loan | 19,500 | LIBOR+1.25%-1.80% | 1.71 | % | January 24, 2025 | 19,500 | ||||||||||
| Senior unsecured term loan | 185,500 | LIBOR+1.25%-1.80% | 2.05%-4.57% | (d) | January 24, 2025 | 185,500 | ||||||||||
| Total unsecured debt | $ | 285,000 | $ | 285,000 | ||||||||||||
| Total principal balances | 956,726 | 842,349 | ||||||||||||||
| Unamortized GAAP adjustments | (9,101 | ) | — | |||||||||||||
Other notes payable (g) | 6,128 | — | ||||||||||||||
| Indebtedness, net | $ | 953,753 | $ | 842,349 | ||||||||||||
| Amount Outstanding | Interest Rate (a) | Effective Rate for Variable Debt | Maturity Date | Balance at Maturity | ||||||||||||
| Secured Debt | ||||||||||||||||
| Greenside Apartments | $ | 28,875 | LIBOR + 2.95% | 4.97 | % | February 24, 2020 | $ | 28,875 | ||||||||
| 1405 Point | 64,902 | LIBOR + 2.75% | 4.77 | % | May 10, 2020 | 64,902 | ||||||||||
Premier (Town Center Phase VI) (b) | 22,321 | LIBOR + 2.75% | 4.77 | % | June 29, 2020 | 22,321 | ||||||||||
Hoffler Place (c) | 26,597 | LIBOR + 3.24% | 5.26 | % | January 1, 2021 | 26,597 | ||||||||||
Summit Place (c) | 26,950 | LIBOR + 3.24% | 5.26 | % | January 1, 2021 | 26,950 | ||||||||||
| Southgate Square | 20,782 | LIBOR + 1.60% | 3.62 | % | April 29, 2021 | 19,462 | ||||||||||
4525 Main Street (d) | 32,034 | 3.25 | % | N/A | September 10, 2021 | 30,786 | ||||||||||
Encore Apartments (d) | 24,966 | 3.25 | % | N/A | September 10, 2021 | 23,993 | ||||||||||
| Red Mill West | 11,405 | 4.23 | % | N/A | June 1, 2022 | 10,187 | ||||||||||
| Thames Street Wharf | 70,000 | LIBOR + 1.30% | 3.32 | % | June 26, 2022 | 70,000 | ||||||||||
| Hanbury Village | 18,643 | 3.78 | % | N/A | August 15, 2022 | 17,121 | ||||||||||
| Marketplace at Hilltop | 10,613 | 4.42 | % | N/A | October 1, 2022 | 9,383 | ||||||||||
| Socastee Commons | 4,594 | 4.57 | % | N/A | January 6, 2023 | 4,223 | ||||||||||
| Sandbridge Commons | 8,080 | LIBOR + 1.75% | 3.77 | % | January 17, 2023 | 7,247 | ||||||||||
| Wills Wharf | 17,714 | LIBOR + 2.25% | 4.27 | % | June 26, 2023 | 17,714 | ||||||||||
249 Central Park Retail (f) | 16,884 | LIBOR + 1.60% | 3.85 | % | (e) | August 10, 2023 | 15,935 | |||||||||
South Retail (f) | 7,412 | LIBOR + 1.60% | 3.85 | % | (e) | August 10, 2023 | 6,996 | |||||||||
Fountain Plaza Retail (f) | 10,160 | LIBOR + 1.60% | 3.85 | % | (e) | August 10, 2023 | 9,590 | |||||||||
| One City Center | 25,413 | LIBOR + 1.85% | 3.87 | % | April 1, 2024 | 22,559 | ||||||||||
| Red Mill Central | 2,581 | 4.80 | % | N/A | June 17, 2024 | 1,765 | ||||||||||
| Red Mill South | 6,211 | 3.57 | % | N/A | May 1, 2025 | 4,383 | ||||||||||
| Brooks Crossing Office | 14,399 | LIBOR + 1.60% | 3.62 | % | July 1, 2025 | 11,344 | ||||||||||
| Market at Mill Creek | 15,389 | LIBOR + 1.55% | 3.57 | % | July 12, 2025 | 13,200 | ||||||||||
| Johns Hopkins Village | 52,032 | LIBOR + 1.25% | 4.19 | % | (e) | August 7, 2025 | 45,967 | |||||||||
| North Point Center Note 2 | 2,256 | 7.25 | % | N/A | September 15, 2025 | 1,344 | ||||||||||
| Lexington Square | 14,758 | 4.50 | % | N/A | September 1, 2028 | 12,044 | ||||||||||
| Red Mill North | 4,409 | 4.73 | % | N/A | December 31, 2028 | 3,295 | ||||||||||
| Smith's Landing | 18,381 | 4.05 | % | N/A | June 1, 2035 | 384 | ||||||||||
| Liberty Apartments | 14,234 | 5.66 | % | N/A | November 1, 2043 | — | ||||||||||
| The Cosmopolitan | 43,896 | 3.35 | % | N/A | July 1, 2051 | — | ||||||||||
| Total secured debt | $ | 636,891 | $ | 528,567 | ||||||||||||
| Unsecured Debt | ||||||||||||||||
Senior unsecured revolving credit facility (g) | $ | 110,000 | LIBOR+1.40%-2.00% | 3.57 | % | October 26, 2021 | $ | 110,000 | ||||||||
Senior unsecured term loan (g) | 44,500 | LIBOR+1.35%-1.95% | 3.52 | % | October 26, 2022 | 44,500 | ||||||||||
Senior unsecured term loan (g) | 160,500 | LIBOR+1.35%-1.95% | 3.50%-4.52% | (e) | October 26, 2022 | 160,500 | ||||||||||
| Total unsecured debt | $ | 315,000 | $ | 315,000 | ||||||||||||
| Total principal balances | 951,891 | 843,567 | ||||||||||||||
| Unamortized GAAP adjustments | (8,520 | ) | — | |||||||||||||
| Indebtedness, net | $ | 943,371 | $ | 843,567 | ||||||||||||
(a) LIBOR rate is determined by individual lenders.
(b) On October 29, 2019, the Company extended and modified the Premier loan. The loan bears interest at a rate of LIBOR plus a spread of 1.55% and will mature on October 31, 2024.Cross collateralized.
(c) Cross collateralized.
(d) Cross collateralized.
(e) Cross collateralized.
(f) Cross collateralized.
(g) The credit facility was amended and restatedRepresents the fair value of additional ground lease payments at 1405 Point over the approximately 42-year remaining lease term. See Note 8 to our condensed consolidated financial statements in Item 1 of this Quarterly Report on October 3, 2019. See the discussion under "Credit Facility" above.
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We are currently in compliance with all covenants on our outstanding indebtedness. In April 2020, we proactively obtained a waiver from the lender for the Premier Retail/Apartments property wherein we do not have to meet the minimum debt service coverage requirement for the period ended June 30, 2020. We also proactively obtained a waiver from the lender for the 249 Central Park, Fountain Plaza Retail, and South Retail properties wherein we do not have to meet the minimum debt service coverage requirement for the period ended June 30, 2020 and period ending December 31, 2020.
As of SeptemberJune 30, 2019,2020, 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 | ||||||||||
| 2019 (excluding nine months ended September 30, 2019) | $ | 2,184 | 1 | % | ||||||||||||
| 2020 | 125,309 | 13 | % | |||||||||||||
| 2020 (excluding six months ended June 30, 2020) | 2020 (excluding six months ended June 30, 2020) | $ | 5,279 | 1 | % | |||||||||||
| 2021 | 2021 | 246,665 | 26 | % | 2021 | 148,551 | 16 | % | ||||||||
| 2022 | 2022 | 319,268 | 33 | % | 2022 | 116,912 | 12 | % | ||||||||
| 2023 | 2023 | 68,073 | 7 | % | 2023 | 157,144 | 16 | % | ||||||||
| 2024 | 2024 | 135,166 | 14 | % | ||||||||||||
| Thereafter | Thereafter | 190,392 | 20 | % | Thereafter | 393,674 | 41 | % | ||||||||
| $ | 951,891 | 100 | % | |||||||||||||
| Total | Total | $ | 956,726 | 100 | % | |||||||||||
(1) Does not reflect the effect of any maturity extension options.
Interest Rate Derivatives
As of SeptemberJune 30, 2019, the Company held the following interest rate swap agreements ($ in thousands):
| Related Debt | Notional Amount | Index | Swap Fixed Rate | Debt effective rate | Effective Date | Expiration Date | ||||||||||
| Senior unsecured term loan | $ | 50,000 | 1-month LIBOR | 2.00 | % | 3.50 | % | 3/1/2016 | 2/20/2020 | |||||||
| Senior unsecured term loan | 50,000 | 1-month LIBOR | 2.78 | % | 4.28 | % | 5/1/2018 | 5/1/2023 | ||||||||
| John Hopkins Village | 52,032 | 1-month LIBOR | 2.94 | % | 4.19 | % | 8/7/2018 | 8/7/2025 | ||||||||
| Senior unsecured term loan | 10,500 | 1-month LIBOR | 3.02 | % | 4.52 | % | 10/12/2018 | 10/12/2023 | ||||||||
| 249 Central Park Retail, South Retail, and Fountain Plaza Retail | 34,456 | 1-month LIBOR | 2.25 | % | 3.85 | % | 4/1/2019 | 8/10/2023 | ||||||||
| Senior unsecured term loan | 50,000 | 1-month LIBOR | 2.26 | % | 3.76 | % | 4/1/2019 | 10/22/2022 | ||||||||
| Total | $ | 246,988 | ||||||||||||||
| Effective Date | Maturity Date | Strike Rate | Notional Amount | Maturity Date | Strike Rate | Notional Amount | ||||||||||||
| 9/18/2017 | 10/1/2019 | 1.50 | % | $ | 50,000 | |||||||||||||
| 11/28/2017 | 12/1/2019 | 1.50 | % | 50,000 | ||||||||||||||
| 3/7/2018 | 4/1/2020 | 2.25 | % | 50,000 | ||||||||||||||
| 7/16/2018 | 8/1/2020 | 2.50 | % | 50,000 | 8/1/2020 | 2.50 | % | $ | 50,000 | |||||||||
| 12/11/2018 | 1/1/2021 | 2.75 | % | 50,000 | 1/1/2021 | 2.75 | % | 50,000 | ||||||||||
| 5/15/2019 | 6/1/2022 | 2.50 | % | 100,000 | 6/1/2022 | 2.50 | % | 100,000 | ||||||||||
| 1/10/2020 | 2/1/2022 | 1.75 | % | 50,000 | ||||||||||||||
| 1/28/2020 | 2/1/2022 | 1.75 | % | 50,000 | ||||||||||||||
| 2/28/2020 | 3/1/2022 | 1.50 | % | 100,000 | ||||||||||||||
| 6/29/2020 | 7/1/2023 | 0.50 | % | 100,000 | ||||||||||||||
| Total | $ | 350,000 | $ | 500,000 | ||||||||||||||
As of June 30, 2020, the Company held the following interest rate swap agreements ($ in thousands):
| Related Debt | Notional Amount | Index | Swap Fixed Rate | Debt effective rate | Effective Date | Expiration Date | ||||||||||
| Senior unsecured term loan | $ | 50,000 | 1-month LIBOR | 2.78 | % | 4.33 | % | 5/1/2018 | 5/1/2023 | |||||||
| John Hopkins Village | 51,335 | 1-month LIBOR | 2.94 | % | 4.19 | % | 8/7/2018 | 8/7/2025 | ||||||||
| Senior unsecured term loan | 10,500 | 1-month LIBOR | 3.02 | % | 4.57 | % | 10/12/2018 | 10/12/2023 | ||||||||
| 249 Central Park Retail, South Retail, and Fountain Plaza Retail | 34,114 | 1-month LIBOR | 2.25 | % | 3.85 | % | 4/1/2019 | 8/10/2023 | ||||||||
| Senior unsecured term loan | 50,000 | 1-month LIBOR | 2.26 | % | 3.81 | % | 4/1/2019 | 10/26/2022 | ||||||||
| Thames Street Wharf | 70,000 | 1-month LIBOR | 0.51 | % | 1.81 | % | 3/26/2020 | 6/26/2024 | ||||||||
| Senior unsecured term loan | 25,000 | 1-month LIBOR | 0.50 | % | 2.05 | % | 4/1/2020 | 4/1/2024 | ||||||||
| Senior unsecured term loan | 25,000 | 1-month LIBOR | 0.50 | % | 2.05 | % | 4/1/2020 | 4/1/2024 | ||||||||
| Senior unsecured term loan | 25,000 | 1-month LIBOR | 0.55 | % | 2.10 | % | 4/1/2020 | 4/1/2024 | ||||||||
| Total | $ | 340,949 | ||||||||||||||
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Off-Balance Sheet Arrangements
In connection with the our mezzanine lending activities, we have guaranteed payment of portions of certain senior loans of third parties associated with the development projects. The following table summarizes the guarantees we made as of SeptemberJune 30, 20192020 (in thousands):
| Development project | Payment guarantee amount | Payment guarantee amount | ||||||
| The Residences at Annapolis Junction | $ | 8,300 | $ | 8,300 | ||||
| Delray Plaza | 5,180 | 5,180 | ||||||
| Nexton Square | 12,600 | 12,600 | ||||||
| Interlock Commercial | 30,654 | 34,300 | ||||||
Interlock-Fletcher Row (1) | 2,345 | |||||||
| Total | $ | 56,734 | $ | 62,725 | ||||
(1) There were no amounts drawn for this loan as of June 30, 2020.
Cash Flows
| Nine Months Ended September 30, | Six Months Ended June 30, | |||||||||||||||||||||||
| 2019 | 2018 | Change | 2020 | 2019 | Change | |||||||||||||||||||
| (in thousands) | (in thousands) | |||||||||||||||||||||||
| Operating Activities | $ | 45,527 | $ | 27,197 | $ | 18,330 | $ | 49,754 | $ | 28,112 | $ | 21,642 | ||||||||||||
| Investing Activities | (255,894 | ) | (183,558 | ) | (72,336 | ) | 17,652 | (246,610 | ) | 264,262 | ||||||||||||||
| Financing Activities | 233,922 | 154,093 | 79,829 | (35,874 | ) | 220,408 | (256,282 | ) | ||||||||||||||||
| Net Increase (decrease) | $ | 23,555 | $ | (2,268 | ) | $ | 25,823 | $ | 31,532 | $ | 1,910 | $ | 29,622 | |||||||||||
| Cash, Cash Equivalents, and Restricted Cash, Beginning of Period | $ | 24,051 | $ | 22,916 | $ | 43,579 | $ | 24,051 | ||||||||||||||||
| Cash, Cash Equivalents, and Restricted Cash, End of Period | $ | 47,606 | $ | 20,648 | $ | 75,111 | $ | 25,961 | ||||||||||||||||
Net cash provided by operating activities during the ninesix months ended SeptemberJune 30, 20192020 increased $18.3$21.6 million compared to the ninesix months ended SeptemberJune 30, 20182019 primarily as a result of result of timing differences in operating assets and liabilities as well as increased net operating income from the property portfolio.
During the ninesix months ended SeptemberJune 30, 2020, net cash provided by investing activities was $17.7 million compared to net cash used in investing activities of $246.6 million during the six months ended June 30, 2019. The variance was caused primarily by the decreased development activity and more cash received from disposition of operating properties in 2020 as opposed to significant operating property acquisitions during the 2019 we invested $72.3period. These changes were partially offset by more funding of notes receivable in 2019.
Net cash used by financing activities during the six months ended June 30, 2020 was $35.9 million more in cash compared to the nine months ended September 30, 2018 due to increased acquisition activity and increased funding of mezzanine loans, which was partially offset by the disposition of Lightfoot Marketplace and the collection of the Decatur mezzanine loan receivable.
Non-GAAP Financial Measures
We calculate FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts ("Nareit").Nareit. Nareit defines FFO as net income (loss) (calculated in accordance with GAAP), excluding gains (or losses) from sales of depreciable operating property, real estate related depreciation and amortization (excluding amortization of deferred financing costs), impairment of real estate assets, 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
43
recognized measure of the performance of REITs, FFO will be used by investors as a basis to compare our operating performance with that of other REITs.
However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to
maintain the operating performance of our properties, all of which have real economic effects and could materially impact our results from operations, the utility of FFO as a measure of our performance is limited. In addition, other equity REITs may not calculate FFO in accordance with the Nareit definition as we do, and, accordingly, our calculation of FFO may not be comparable to such other REITs’ calculation of FFO. Accordingly, FFO should be considered only as a supplement to net income as a measure of our performance. FFO should not be used as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or service indebtedness. Also, FFO should not be used as a supplement to or substitute for cash flow from operating activities computed in accordance with GAAP.
We also believe that the computation of FFO in accordance with Nareit’s definition includes certain items that are not indicative of the results provided by our operating property portfolio and affect the comparability of our 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, impairment of intangible assets and liabilities, property acquisition, development and other pursuit costs, mark-to-market adjustments for interest rate derivatives, provision for unrealized credit losses, amortization of right-of-use assets attributable to finance leases, severance related costs, and other non-comparable items.
The following table sets forth a reconciliation of FFO and Normalized FFO for the three and ninesix months ended SeptemberJune 30, 20192020 and 20182019 to net income, the most directly comparable GAAP measure:
| Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
| 2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
| (in thousands, except per share and unit amounts) | (in thousands, except per share and unit amounts) | |||||||||||||||||||||||||||||||
| Net income attributable to common stockholders and OP Unit holders | $ | 9,869 | $ | 5,669 | $ | 22,375 | $ | 18,597 | $ | 11,178 | $ | 5,992 | $ | 19,338 | $ | 12,506 | ||||||||||||||||
Depreciation and amortization(1) | 15,044 | 10,196 | 38,291 | 28,653 | 13,644 | 13,145 | 27,736 | 23,274 | ||||||||||||||||||||||||
Gain on operating real estate dispositions | (3,220 | ) | — | (3,220 | ) | — | (2,776 | ) | — | (2,776 | ) | — | ||||||||||||||||||||
| FFO attributable to common stockholders and OP Unit holders | $ | 21,693 | $ | 15,865 | $ | 57,446 | $ | 47,250 | 22,046 | 19,137 | 44,298 | 35,780 | ||||||||||||||||||||
| Acquisition, development and other pursuit costs | 93 | 69 | 550 | 162 | 502 | 57 | 529 | 457 | ||||||||||||||||||||||||
| Impairment of intangible assets and liabilities | — | 3 | — | 101 | — | — | 158 | — | ||||||||||||||||||||||||
| Loss on extinguishment of debt | — | 11 | — | 11 | ||||||||||||||||||||||||||||
| Unrealized credit loss provision (release) | (117 | ) | — | 260 | — | |||||||||||||||||||||||||||
| Amortization of right-of-use assets - finance leases | 107 | — | 168 | — | 146 | 85 | 293 | 85 | ||||||||||||||||||||||||
| Change in fair value of interest rate derivatives | 530 | (298 | ) | 3,926 | (1,256 | ) | 6 | 1,933 | 1,742 | 3,396 | ||||||||||||||||||||||
| Normalized FFO available to common stockholders and OP Unit holders | $ | 22,423 | $ | 15,650 | $ | 62,090 | $ | 46,268 | $ | 22,583 | $ | 21,212 | $ | 47,280 | $ | 39,718 | ||||||||||||||||
| Net income attributable to common stockholders and OP Unit holders per diluted share and unit | $ | 0.13 | $ | 0.09 | $ | 0.31 | $ | 0.29 | $ | 0.14 | $ | 0.08 | $ | 0.25 | $ | 0.18 | ||||||||||||||||
| FFO per diluted share and unit attributable to common stockholders and OP Unit holders | $ | 0.29 | $ | 0.24 | $ | 0.81 | $ | 0.74 | ||||||||||||||||||||||||
| Normalized FFO per diluted share and unit attributable to common stockholders and OP Unit holders | $ | 0.30 | $ | 0.24 | $ | 0.87 | $ | 0.72 | ||||||||||||||||||||||||
| FFO attributable to common stockholders and OP Unit holders per diluted share and unit | $ | 0.28 | $ | 0.27 | $ | 0.57 | $ | 0.51 | ||||||||||||||||||||||||
| Normalized FFO attributable to common stockholders and OP Unit holders per diluted share and unit | $ | 0.29 | $ | 0.30 | $ | 0.61 | $ | 0.57 | ||||||||||||||||||||||||
| Weighted average common shares and units - diluted | 74,543 | 66,362 | 71,256 | 64,052 | 77,941 | 71,232 | 77,806 | 69,584 | ||||||||||||||||||||||||
| (1) The adjustment for depreciation and amortization for the |
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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, 2018.2019.
We adopted the new standard on January 1, 2019,2020, using the modified retrospective approach for all leases existing at, or entered into after, the beginning of the earliest comparative period presented as permitted in Accounting Standards Codification ("ASC") Topic 842.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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 SeptemberJune 30, 2019,2020, 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 SeptemberJune 30, 2019,2020, 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 quarter ended SeptemberJune 30, 20192020 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, 20182019 and in our Quarterly Report on Form 10-Q for the period ended June 30, 2019.March 31, 2020.
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.
| Exhibit No. | Description | |
| 101* | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended | |
| 104* | Cover page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL. | |
| * | Filed herewith | |
| ** | Furnished herewith | |
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: | /s/ Louis S. Haddad |
| Louis S. Haddad | |
| President and Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: | /s/ Michael P. O’Hara |
| Michael P. O’Hara | |
| Chief Financial Officer, Treasurer and Secretary | |
| (Principal Accounting and Financial Officer) | |