Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 FORM 10-Q
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2018
 
or
 
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                     
 
Commission file number: 001-35908
 
ARMADA HOFFLER PROPERTIES, INC.
(Exact Name of Registrant as Specified in its Charter)
 
Maryland
46-1214914
(State of Organization)
(IRS Employer
Identification No.)
 
 
222 Central Park Avenue, Suite 2100
Virginia Beach, Virginia
23462
(Address of Principal Executive Offices)
(Zip Code)
 
(757) 366-4000
(Registrant’s Telephone Number, Including Area Code)
 
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes     ◻  No
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    x  Yes     ◻  No
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. 
Large Accelerated Filer
 ◻ 
Accelerated Filer
x
 
 
 
 
Non-Accelerated Filer
 ◻ (Do not check if a smaller reporting company)
Smaller Reporting Company
 ◻ 
 
 
Emerging Growth Company
 x 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   x
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  
◻ Yes     x  No


 
As of July 31, 2018, the Registrant had 48,891,867 shares of common stock outstanding.

Table of Contents

ARMADA HOFFLER PROPERTIES, INC.
 
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2018
 
Table of Contents
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




Table of Contents

PART I. Financial Information
 
Item 1.    Financial Statements
 
ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Balance Sheets
 
(In thousands, except par value and share data)
 
 
June 30,
2018
 
December 31,
2017
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Real estate investments:
 
 
 
 
Income producing property
 
$
934,929

 
$
910,686

Held for development
 
1,474

 
680

Construction in progress
 
157,795

 
83,071

 
 
1,094,198

 
994,437

Accumulated depreciation
 
(177,966
)
 
(164,521
)
Net real estate investments
 
916,232

 
829,916

Cash and cash equivalents
 
12,279

 
19,959

Restricted cash
 
3,139

 
2,957

Accounts receivable, net
 
16,444

 
15,691

Notes receivable
 
93,478

 
83,058

Construction receivables, including retentions
 
19,868

 
23,933

Construction contract costs and estimated earnings in excess of billings
 
1,287

 
245

Equity method investments
 
14,538

 
11,411

Other assets
 
55,106

 
55,953

Total Assets
 
$
1,132,371

 
$
1,043,123

LIABILITIES AND EQUITY
 
 
 
 
Indebtedness, net
 
$
580,446

 
$
517,272

Accounts payable and accrued liabilities
 
11,525

 
15,180

Construction payables, including retentions
 
40,719

 
47,445

Billings in excess of construction contract costs and estimated earnings
 
1,711

 
3,591

Other liabilities
 
41,000

 
39,352

Total Liabilities
 
675,401

 
622,840

 
 
 
 
 
Stockholders’ equity:
 
 
 
 
Preferred stock, $0.01 par value, 100,000,000 shares authorized, none issued and outstanding as of June 30, 2018 and December 31, 2017
 
—

 
—

Common stock, $0.01 par value, 500,000,000 shares authorized, 48,768,363 and 44,937,763 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively
 
488

 
449

Additional paid-in capital
 
338,577

 
287,407

Distributions in excess of earnings
 
(70,648
)
 
(61,166
)
Total stockholders’ equity
 
268,417

 
226,690

Noncontrolling interests
 
188,553

 
193,593

Total Equity
 
456,970

 
420,283

Total Liabilities and Equity
 
$
1,132,371

 
$
1,043,123


See Notes to Condensed Consolidated Financial Statements.

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ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statements of Income 

(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
 
Rental revenues
 
$
28,598

 
$
26,755

 
$
57,297

 
$
53,987

General contracting and real estate services revenues
 
20,654

 
56,671

 
43,704

 
120,190

Total revenues
 
49,252

 
83,426

 
101,001

 
174,177

 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
Rental expenses
 
6,522

 
6,171

 
12,946

 
12,239

Real estate taxes
 
2,735

 
2,595

 
5,548

 
5,104

General contracting and real estate services expenses
 
20,087

 
54,015

 
42,501

 
115,211

Depreciation and amortization
 
9,179

 
9,304

 
18,457

 
18,779

General and administrative expenses
 
2,764

 
2,678

 
5,725

 
5,664

Acquisition, development and other pursuit costs
 
9

 
369

 
93

 
416

Impairment charges
 
98

 
27

 
98

 
31

Total expenses
 
41,394

 
75,159

 
85,368

 
157,444

Operating income
 
7,858

 
8,267

 
15,633

 
16,733

Interest income
 
2,375

 
1,658

 
4,607

 
3,056

Interest expense
 
(4,497
)
 
(4,494
)
 
(8,870
)
 
(9,029
)
Gain on real estate dispositions
 
—

 
—

 
—

 
3,395

Change in fair value of interest rate derivatives
 
(11
)
 
(81
)
 
958

 
213

Other income
 
54

 
43

 
168

 
80

Income before taxes
 
5,779

 
5,393

 
12,496

 
14,448

Income tax benefit (provision)
 
166

 
(450
)
 
432

 
(752
)
Net income
 
5,945

 
4,943

 
12,928

 
13,696

Net income attributable to noncontrolling interests
 
(1,626
)
 
(1,472
)
 
(3,569
)
 
(4,289
)
Net income attributable to stockholders
 
$
4,319

 
$
3,471

 
$
9,359

 
$
9,407

Net income attributable to stockholders per share (basic and diluted)
 
$
0.09

 
$
0.08

 
$
0.21

 
$
0.24

Weighted-average common shares outstanding (basic and diluted)
 
45,928

 
42,091

 
45,532

 
39,869

Dividends and distributions declared per common share and unit
 
$
0.20

 
$
0.19

 
$
0.40

 
$
0.38


See Notes to Condensed Consolidated Financial Statements.

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Table of Contents

ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statement of Equity
 
(In thousands, except share data)
(Unaudited)
 
 
 
Shares of common stock
 
Common Stock
 
Additional paid-in capital
 
Distributions in excess of earnings
 
Total stockholders' equity
 
Noncontrolling interests
 
Total Equity
Balance, January 1, 2018
 
44,937,763

 
$
449

 
$
287,407

 
$
(61,166
)
 
$
226,690

 
$
193,593

 
$
420,283

Net income
 
—

 
—

 
—

 
9,359

 
9,359

 
3,569

 
12,928

Net proceeds from sales of common stock
 
3,542,178

 
35

 
48,946

 
—

 
48,981

 
—

 
48,981

Restricted stock awards, net of tax withholding
 
126,050

 
2

 
902

 
—

 
904

 
—

 
904

Restricted stock award forfeitures
 
(628
)
 
—

 
(4
)
 
—

 
(4
)
 
—

 
(4
)
Issuance of operating partnership units for acquisitions
 
—

 
—

 
(5
)
 
—

 
(5
)
 
2,201

 
2,196

Redemption of operating partnership units
 
163,000

 
2

 
1,331

 
—

 
1,333

 
(3,864
)
 
(2,531
)
Dividends and distributions declared
 
—

 
—

 
—

 
(18,841
)
 
(18,841
)
 
(6,946
)
 
(25,787
)
Balance, June 30, 2018
 
48,768,363

 
$
488

 
$
338,577

 
$
(70,648
)
 
$
268,417

 
$
188,553

 
$
456,970

 
See Notes to Condensed Consolidated Financial Statements.

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Table of Contents

ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
Six Months Ended 
 June 30,
 
 
2018
 
2017
OPERATING ACTIVITIES
 
 
 
 
Net income
 
$
12,928

 
$
13,696

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation of buildings and tenant improvements
 
13,540

 
12,930

Amortization of leasing costs and in-place lease intangibles
 
4,917

 
5,849

Accrued straight-line rental revenue
 
(1,029
)
 
(640
)
Amortization of leasing incentives and above or below-market rents
 
(141
)
 
(90
)
Accrued straight-line ground rent expense
 
136

 
273

Bad debt expense
 
112

 
166

Noncash stock compensation
 
820

 
832

Impairment charges
 
98

 
31

Noncash interest expense
 
557

 
560

Gain on real estate dispositions
 
—

 
(3,395
)
Change in the fair value of interest rate derivatives
 
(958
)
 
(213
)
Changes in operating assets and liabilities:
 
 
 
 
Property assets
 
(2,505
)
 
(1,009
)
Property liabilities
 
(1,973
)
 
(2,489
)
Construction assets
 
4,443

 
(6,495
)
Construction liabilities
 
(15,081
)
 
21

Interest receivable
 
(4,604
)
 
(3,053
)
Net cash provided by operating activities
 
11,260

 
16,974

INVESTING ACTIVITIES
 
 
 
 
Development of real estate investments
 
(57,741
)
 
(14,997
)
Tenant and building improvements
 
(5,599
)
 
(4,338
)
Acquisitions of real estate investments, net of cash received
 
(32,967
)
 
(6,767
)
Dispositions of real estate investments
 
4,271

 
4,441

Notes receivable issuances
 
(5,816
)
 
(10,783
)
Leasing costs
 
(2,060
)
 
(807
)
Leasing incentives
 
(79
)
 
(2
)
Contributions to equity method investments
 
(3,127
)
 
(715
)
Net cash used for investing activities
 
(103,118
)
 
(33,968
)
FINANCING ACTIVITIES
 
 
 
 
Proceeds from sales of common stock
 
49,730

 
96,044

Offering costs
 
(749
)
 
(4,663
)
Common shares tendered for tax withholding
 
(343
)
 
(289
)
Debt issuances, credit facility and construction loan borrowings
 
147,248

 
73,906

Debt and credit facility repayments, including principal amortization
 
(84,277
)
 
(130,674
)
Debt issuance costs
 
(381
)
 
(471
)
Redemption of operating partnership units
 
(2,531
)
 
(229
)
Dividends and distributions
 
(24,337
)
 
(20,097
)
Net cash provided by financing activities
 
84,360

 
13,527

Net decrease in cash and cash equivalents
 
(7,498
)
 
(3,467
)
Cash, cash equivalents, and restricted cash, beginning of period
 
22,916

 
25,193

Cash, cash equivalents, and restricted cash, end of period
 
$
15,418

 
$
21,726

Supplemental Disclosures (noncash transactions):
 
 
 
 
Increase in dividends payable
 
$
1,450

 
$
1,973

Increase in accounts payable and accrued liabilities for capital expenditures
 
$
6,692

 
$
4,608

Issuance of operating partnership units for acquisitions

 
$
1,702

 
$
982

Operating Partnership units redeemed for common shares
 
$
1,804

 
$
—

Redeemable noncontrolling interest from development
 
$
—

 
$
2,000

Deferred payment for land acquisition
 
$
—

 
$
600

See Notes to Condensed Consolidated Financial Statements.

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Table of Contents

ARMADA HOFFLER PROPERTIES, INC.
Notes to Condensed Consolidated Financial Statements
 
(Unaudited)
 
1. Business of Organization
 
Armada Hoffler Properties, Inc. (the “Company”) is a full service real estate company with extensive experience developing, building, owning and managing high-quality, institutional-grade office, retail and multifamily properties in attractive markets primarily throughout the Mid-Atlantic and Southeastern United States. The Company is the sole general partner of Armada Hoffler, L.P. (the “Operating Partnership”), and as of June 30, 2018 owned 73.8% of the economic interest in the Operating Partnership, of which 0.1% is held as general partnership units. The operations of the Company are carried on primarily through the Operating Partnership and the wholly owned subsidiaries of the Operating Partnership.
 
As of June 30, 2018, the Company's property portfolio consisted of 49 operating properties and 8 development properties.

Refer to Note 4 for information related to the Company's recent acquisitions and dispositions of operating properties.

Refer to Note 5 for information related to the Company’s investment in Durham City Center II, LLC, which is an unconsolidated subsidiary that the Company accounts for using the equity method of accounting.

Subsequent to June 30, 2018

On July 2, 2018, the Company entered into a ground lease for a land parcel at Wills Wharf, located at the Harbor Point area in Baltimore, Maryland. The Company plans to develop a mixed-use building on the site.
 
2. Summary of Significant Accounting Policies
 
Basis of Presentation
 
The accompanying condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).
 
The condensed consolidated financial statements include the financial position and results of operations of the Company and its consolidated subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
 
In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for the fair presentation of the financial condition and results of operations for the interim periods presented.

The accompanying condensed consolidated financial statements were prepared in accordance with the requirements for interim financial information. Accordingly, these interim financial statements have not been audited and exclude certain disclosures required for annual financial statements. Also, the operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These interim financial statements should be read in conjunction with the audited consolidated financial statements of the Company included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
 
Use of Estimates
 
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed. Such estimates are based on management’s historical experience and best judgment after considering past, current and expected events and economic conditions. Actual results could differ significantly from management’s estimates.

Reclassifications

During the second quarter of 2018, the Company identified certain immaterial classification errors on the Company's Consolidated Statements of Cash Flows and has determined that, in this Quarterly Report on Form 10-Q and future

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periodic reports, the Company will correct these classification errors. One classification error will be corrected by including within the changes in operating assets and liabilities in the operating activities section a new line item for "Interest receivable." A corresponding adjustment will be recorded to reduce the amount of "Notes receivable issuances" within investing activities on the statement of cash flows. These reclassifications totaled $7.1 million, $3.2 million, and $0.1 million during the years ended December 31, 2017, 2016, and 2015, respectively, $2.2 million and $1.4 million for the three months ended March 31, 2018 and 2017, respectively, and $3.1 million for the six months ended June 30, 2017. These reclassifications will decrease "Net cash provided by operating activities" and "Net cash used for investing activities" by an equal and offsetting amount. These reclassifications will not have any impact on the Consolidated Balance Sheets, Consolidated Statements of Income, Consolidated Statement of Equity, or any other operating measure for the periods affected.

These amounts were previously presented as "Notes receivable issuances," a component of net cash used for investing activities on the Consolidated Statements of Cash Flows, resulting in overstatements in cash provided by operating activities and overstatements of cash used in investing activities. These amounts represent interest earned on mezzanine loans that were funded by the interest reserve accounts provided for in the mezzanine loan agreements. These amounts are now classified as changes in interest receivable, a non-cash adjustment to calculate net cash provided by operating activities.

The second classification error will be corrected by including within financing activities on the Consolidated Statements of Cash Flows a new line item for “Common shares tendered for tax withholding.” A corresponding adjustment will be recorded to the "Changes in operating assets and liabilities: Property liabilities" within operating activities on the Consolidated Statements of Cash Flows. This reclassification totaled $0.3 million, $0.2 million, and $0.3 million during the years ended December 31, 2017, 2016, and 2015, respectively, $0.3 million and $0.3 million for the three months ended March 31, 2018 and 2017, respectively, and $0.3 million for the six months ended June 30, 2017. These reclassifications will increase “Net cash provided by operating activities” and decrease “Net cash provided by financing activities” by an equal and offsetting amount.
 
Significant Accounting Policies

General Contracting and Real Estate Services Revenues

On January 1, 2018, the Company adopted the new accounting standard codified in Accounting Standards Codification 606 - Revenue from Contracts with Customers (see also "Recent Accounting Pronouncements" below). The Company recognizes general contracting revenues as a customer obtains control of promised goods or services in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. For each construction contract, the Company identifies the performance obligations, which typically include the delivery of a single building constructed according to the specifications of the contract. The Company estimates the total transaction price, which generally includes a fixed contract price and may also include variable components such as early completion bonuses, liquidated damages, or cost savings to be shared with the customer. Variable components of the contract price are included in the transaction price to the extent that it is probable that a significant reversal of revenue will not occur. The Company recognizes the estimated transaction price as revenue as it satisfies its performance obligations, and the Company estimates its progress in satisfying performance obligations for each contract using the percentage-of-completion method, based on the proportion of incurred costs to total estimated construction costs at completion. Construction contract costs include all direct material, direct labor, subcontract costs, and overhead costs directly related to contract performance. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, are all significant judgments that may result in revisions to costs and income and are recognized in the period in which they are determined. Provisions for estimated losses on uncompleted contracts are recognized immediately in the period in which such losses are determined. The Company defers pre-contract costs when such costs are directly associated with specific anticipated contracts and their recovery is probable.
 
The Company recognizes real estate services revenues from property development and management services as it satisfies its performance obligations under these service arrangements.

The Company assesses whether multiple contracts with a single counterparty should be combined into a single contract for revenue recognition purposes based on factors such as the timing of the negotiation and execution of the contracts and whether the economic substance of the contracts was contemplated separately or in tandem.

See the Company's Annual Report on Form 10-K for the year ended December 31, 2017 for a description of other accounting principles upon which basis the accompanying consolidated financial statements were prepared.

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Recent Accounting Pronouncements
 
On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued a new standard that provides a single, comprehensive model for recognizing revenue from contracts with customers. While the new standard does not supersede the guidance on accounting for leases, it changes the way the Company recognizes revenue from construction and development contracts with third party customers. The Company adopted this standard on January 1, 2018 using the modified retrospective method, applying this standard to all contracts not yet completed as of that date. In applying the standard to the Company’s future construction contracts, certain pre-contract costs incurred by the Company are now deferred and amortized over the period during which construction obligations are fulfilled. Previously, these costs were immediately recorded as general contracting expenses upon commencement of construction, with the corresponding general contracting revenue also recorded. Applying the standard to the Company’s uncompleted contracts as of January 1, 2018 did not result in material differences to these contracts in aggregate, and no cumulative adjustment to distributions in excess of earnings was recorded as of January 1, 2018.
 
On February 25, 2016, the FASB issued a new lease standard that requires lessees to recognize most leases in their balance sheets as lease liabilities with corresponding right-of-use assets. The new standard also makes targeted changes to lessor accounting. The new standard will be effective for the Company on January 1, 2019 and requires a modified retrospective transition approach for all leases existing at, or entered into after, the beginning of the earliest comparative period presented, with an option to use certain transition relief. Management is currently evaluating the potential impact of the new standard on the Company’s consolidated financial statements. The Company is the lessee on certain ground leases and equipment leases, which represents a majority of the Company's current operating lease payments, and expects to record right-of-use assets and lease liabilities for these leases under the new standard.
  
In 2016, the FASB issued new guidance that addresses eight classification issues related to the statement of cash flows and requires the presentation of total changes in cash, cash equivalents, restricted cash, and restricted cash equivalents in the statement of cash flows. The Company adopted this new guidance on December 31, 2017, applying it retrospectively to each period presented. The new guidance requires that the statement of cash flows show changes in restricted cash in addition to changes in cash and cash equivalents. No additional changes were required to be made to the Company's consolidated statements of cash flows as a result of the new guidance. The following table sets forth the items from the Company's consolidated balance sheets that are included in cash, cash equivalents, and restricted cash in the consolidated statements of cash flows (in thousands):
 
Balance as of
 
June 30, 2018
 
December 31, 2017
 
June 30, 2017
 
December 31, 2016
Cash and cash equivalents
$
12,279

 
$
19,959

 
$
18,587

 
$
21,942

Restricted cash
3,139

 
2,957

 
3,139

 
3,251

Cash, cash equivalents, and restricted cash
$
15,418

 
$
22,916

 
$
21,726

 
$
25,193



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The following table summarizes the changes made to net cash provided by operating activities, net cash used for investing activities, and net cash provided by financing activities in the consolidated statement of cash flows for the six months ended June 30, 2017 on a retrospective basis (in thousands) as a result of the new guidance as well as the reclassification adjustments described in the "Reclassifications" section above:
 
Six months ended
 
June 30, 2017
Operating activities as originally presented
$
19,886

Adjustment relating to restricted cash
(148
)
Adjustment for shares tendered for tax withholding
289

Adjustment relating to interest income presentation
(3,053
)
Operating activities after adjustments
$
16,974

 
 
Investing activities as originally presented
$
(37,057
)
Adjustment relating to restricted cash
36

Adjustment relating to interest income presentation
3,053

Investing activities after adjustments
$
(33,968
)
 
 
Financing activities as originally presented
$
13,816

Adjustment for shares tendered for tax withholding
(289
)
Financing activities after adjustments
$
13,527


On February 22, 2017, the FASB issued new guidance that clarifies the scope and application of guidance on sales or transfers of nonfinancial assets and in substance nonfinancial assets to customers, including partial sales. The new guidance applies to all nonfinancial assets, including real estate, and defines an in substance nonfinancial asset. The Company adopted the new guidance on January 1, 2018, and it did not have a material impact on the Company’s consolidated financial statements.

On August 28, 2017, the FASB issued new guidance that simplifies some of the requirements relating to accounting for derivatives and hedging. The new guidance eliminates the requirement to separately measure and report hedge ineffectiveness for a highly effective hedge and also simplifies certain documentation and assessment requirements relating to the determination of hedge effectiveness. The new guidance will be effective for the Company on January 1, 2019, with early adoption permitted. As of June 30, 2018, the Company does not currently have any derivatives designated as hedging instruments for accounting purposes but may designate new derivative contracts as hedging instruments in the future. The application of this guidance to future hedging relationships could reduce or eliminate the gains and losses that would otherwise be recorded for these derivative instruments.

3. Segments
 
Net operating income (segment revenues minus segment expenses) is the measure used by the Company’s chief operating decision-maker to assess segment performance. Net operating income is not a measure of operating income or cash flows from operating activities as measured by GAAP and is not indicative of cash available to fund cash needs. As a result, net operating income should not be considered an alternative to cash flows as a measure of liquidity. Not all companies calculate net operating income in the same manner. The Company considers net operating income to be an appropriate supplemental measure to net income because it assists both investors and management in understanding the core operations of the Company’s real estate and construction businesses.

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Net operating income of the Company’s reportable segments for the three and six months ended June 30, 2018 and 2017 was as follows (in thousands): 
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(Unaudited)
Office real estate
 
 
 
 
 
 
 
 
Rental revenues
 
$
5,288

 
$
4,759

 
$
10,388

 
$
9,665

Rental expenses
 
1,430

 
1,366

 
2,876

 
2,692

Real estate taxes
 
502

 
450

 
1,004

 
900

Segment net operating income
 
3,356

 
2,943

 
6,508

 
6,073

Retail real estate
 
 
 
 
 
 
 
 
Rental revenues
 
16,608

 
15,578

 
33,319

 
31,209

Rental expenses
 
2,563

 
2,479

 
5,220

 
4,999

Real estate taxes
 
1,656

 
1,520

 
3,339

 
2,969

Segment net operating income
 
12,389

 
11,579

 
24,760

 
23,241

Multifamily residential real estate
 
 
 
 
 
 
 
 
Rental revenues
 
6,702

 
6,418

 
13,590

 
13,113

Rental expenses
 
2,529

 
2,326

 
4,850

 
4,548

Real estate taxes
 
577

 
625

 
1,205

 
1,235

Segment net operating income
 
3,596

 
3,467

 
7,535

 
7,330

General contracting and real estate services
 
 
 
 
 
 
 
 
Segment revenues
 
20,654

 
56,671

 
43,704

 
120,190

Segment expenses
 
20,087

 
54,015

 
42,501

 
115,211

Segment gross profit
 
567

 
2,656

 
1,203

 
4,979

Net operating income
 
$
19,908

 
$
20,645

 
$
40,006

 
$
41,623

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

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

General contracting and real estate services expenses for the three months ended June 30, 2018 and 2017 include noncash stock compensation expense of less than $0.1 million and $0.1 million, respectively. General contracting and real estate services expenses for the six months ended June 30, 2018 and 2017 include noncash stock compensation expense of $0.2 million and $0.4 million, respectively.

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The following table reconciles net operating income to net income, the most directly comparable GAAP measure, for the three and six months ended June 30, 2018 and 2017 (in thousands): 
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(Unaudited)
Net operating income
 
$
19,908

 
$
20,645

 
$
40,006

 
$
41,623

Depreciation and amortization
 
(9,179
)
 
(9,304
)
 
(18,457
)
 
(18,779
)
General and administrative expenses
 
(2,764
)
 
(2,678
)
 
(5,725
)
 
(5,664
)
Acquisition, development and other pursuit costs
 
(9
)
 
(369
)
 
(93
)
 
(416
)
Impairment charges
 
(98
)
 
(27
)
 
(98
)
 
(31
)
Interest income
 
2,375

 
1,658

 
4,607

 
3,056

Interest expense
 
(4,497
)
 
(4,494
)
 
(8,870
)
 
(9,029
)
Gain on real estate dispositions
 
—

 
—

 
—

 
3,395

Change in fair value of interest rate derivatives
 
(11
)
 
(81
)
 
958

 
213

Other income
 
54

 
43

 
168

 
80

Income tax (provision) benefit
 
166

 
(450
)
 
432

 
(752
)
Net income
 
$
5,945

 
$
4,943

 
$
12,928

 
$
13,696

 
General and administrative expenses for the three months ended June 30, 2018 and 2017 include noncash stock compensation expense of $0.2 million and $0.2 million, respectively. General and administrative expenses for the six months ended June 30, 2018 and 2017 include noncash stock compensation expense of $0.7 million and $0.6 million, respectively.

4. Real Estate Investment
 
Property Acquisitions
 
On January 9, 2018, the Company acquired Indian Lakes Crossing, a Harris Teeter-anchored shopping center in Virginia Beach, Virginia, for a contract price of $14.7 million plus capitalized acquisition costs of $0.2 million.

On January 29, 2018, the Company acquired Parkway Centre, a newly developed Publix-anchored shopping center in Moultrie, Georgia for total consideration of $11.3 million (comprised of $9.6 million in cash and $1.7 million in the form of Class A units of limited partnership interest in the Operating Partnership ("Class A Units")) plus capitalized acquisition costs of $0.3 million.

The following table summarizes the purchase price allocation (including acquisition costs) based on relative fair value of the assets acquired and liabilities assumed for the two operating properties purchased during the six months ended June 30, 2018 (in thousands):
 
 
Indian Lakes Crossing
 
Parkway Centre
Land
 
$
10,926

 
$
1,372

Site improvements
 
531

 
696

Building and improvements
 
1,913

 
7,168

In-place leases
 
1,648

 
2,346

Above-market leases
 
11

 
—

Below-market leases
 
(175
)
 
(10
)
Net assets acquired
 
$
14,854

 
$
11,572


On November 30, 2017, the Company entered into a lease agreement with Bottling Group, LLC for a new distribution facility that the Company will develop and construct for expected delivery in the fourth quarter of 2018. On January 29, 2018, the Company acquired undeveloped land in Chesterfield, Virginia, a portion of which will serve as the site for this facility, for a contract price of $2.4 million plus capitalized acquisition costs of $0.1 million.

On January 18, 2018, the Company entered into an operating agreement with a partner to develop a Lowes Foods-anchored shopping center in Mount Pleasant, South Carolina. The Company has a 70% ownership interest in the partnership. The partnership, Market at Mill Creek Partners, LLC acquired undeveloped land on February 16, 2018 for a contract price of $2.9 million plus capitalized acquisition costs of $0.1 million. The Company is responsible for funding the equity requirements of this development. As of June 30, 2018, the Company's investment in the project totaled $9.4 million. Management has concluded that this entity is a variable interest entity ("VIE") as it lacks sufficient equity to fund its operations without additional financial support. The Company is the developer of the shopping center and has the power to direct the activities of the project that most significantly impact its performance and is the party most closely associated with the project. Therefore, the Company is the project's primary beneficiary and consolidates the project in its consolidated financial statements.

On April 2, 2018, the Company acquired undeveloped land in Newport News, Virginia for less than $0.1 million. This land parcel is being used in the development of the Brooks Crossing office tower.

Property Disposition

On May 24, 2018, the Company completed the sale of the Wawa outparcel at Indian Lakes Crossing for a contract price of $4.4 million. There was no gain or loss on the disposition.

5. Equity Method Investment

City Center

On February 25, 2016, the Company acquired a 37% interest in Durham City Center II, LLC (“City Center”) for purposes of developing a 22-story mixed use tower in Durham, North Carolina. During the six months ended June 30, 2018, the Company invested an additional $3.2 million in City Center. As of June 30, 2018 and December 31, 2017, the Company had invested $13.8 million and $10.9 million, respectively, in City Center, and the carrying value of the Company's investment was $14.5 million and $11.4 million, respectively. The Company has agreed to guarantee 37% of the construction loan for City Center; however, the loan is collateralized by 100% of the assets of City Center. As of June 30, 2018 and December 31, 2017, $38.9 million and $29.2 million, respectively, had been drawn against the construction loan, of which $13.2 million and $11.2 million, respectively, was attributable to the Company's portion of the loan.
 
For the three and six months ended June 30, 2018 and 2017, City Center did not have any operating activity, and therefore the Company did not receive any distributions or allocated income. 
 
Based on the terms of City Center’s operating agreement, the Company has concluded that City Center is a VIE and that the Company holds a variable interest. The Company does not have the power to direct the activities of the project that most significantly impact its performance. Accordingly, the Company is not the project’s primary beneficiary and, therefore, does not consolidate City Center in its consolidated financial statements.


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6. Notes Receivable

The Company had the following mezzanine loans outstanding as of June 30, 2018 and December 31, 2017 (in thousands):

 
 
Outstanding loan amount
 
Maximum loan commitment
 
Interest rate
Development Project
 
June 30, 2018
 
December 31, 2017
 
1405 Point
 
$
25,633

 
$
22,444

 
$
28,232

 
8.0
%
The Residences at Annapolis Junction
 
45,230

 
43,021

 
48,105

 
10.0
%
North Decatur Square
 
15,134

 
11,790

 
25,712

 
15.0
%
Delray Plaza
 
6,551

 
5,379

 
13,123

 
15.0
%
Total
 
$
92,548

 
$
82,634

 
$
115,172

 
 

Interest on the mezzanine loans is accrued and funded utilizing the interest reserves for each loan, which are components of the respective maximum loan commitments, and such accrued interest is added to the loan receivable balances. The Company recognized interest income for the three and six months ended June 30, 2018 and 2017 as follows:

 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
Development Project
 
2018
 
2017
 
2018
 
2017
1405 Point
 
$
483

 
$
429

 
$
936

 
$
845

The Residences at Annapolis Junction
 
1,124

 
1,016

 
2,209

 
1,997

North Decatur Square
 
531

 
211

 
992

 
211

Delray Plaza
 
225

 
—

 
448

 
—

Total
 
$
2,363

 
$
1,656

 
$
4,585

 
$
3,053


1405 Point

1405 Point (also known as Point Street Apartments) opened during the first quarter of 2018.
 
The developer of 1405 Point secured a senior construction loan of up to $67.0 million to fund the development and construction of 1405 Point on November 10, 2016. The Company has agreed to guarantee $25.0 million of the senior construction loan in exchange for the option to purchase up to an 88% controlling interest in 1405 Point upon completion of the project. The Company currently has a $2.1 million letter of credit for the guarantee of the senior construction loan.
 
The Residences at Annapolis Junction

The developer of The Residences at Annapolis Junction secured a senior construction loan of up to $60.0 million to fund the development and construction of Annapolis Junction's residential component on September 30, 2016. The Company has agreed to guarantee up to $25.0 million of the senior construction loan in exchange for the option to purchase up to an 88% controlling interest in Annapolis Junction.

In July 2018, the Company entered into an agreement regarding the sale of its at-cost purchase option to the developer of The Residences at Annapolis Junction.

7. Construction Contracts

Construction contract costs and estimated earnings in excess of billings represent reimbursable costs and amounts earned under contracts in progress as of the balance sheet date. Such amounts become billable according to contract terms, which usually consider the passage of time, achievement of certain milestones or completion of the project. The Company expects to bill and collect substantially all construction contract costs and estimated earnings in excess of billings as of June 30, 2018 during the next twelve months.  
 

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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 six months ended June 30, 2018 (in thousands):

 
 
Construction contract costs and estimated earnings in excess of billings
 
Billings in excess of construction contract costs and estimated earnings
Balance as of January 1, 2018
 
$
245

 
$
3,591

Revenue recognized that was included in the balance at the beginning of the period
 
—

 
(3,591
)
Increases due to new billings, excluding amounts recognized as revenue during the period
 
—

 
1,898

Transferred to receivables
 
(245
)
 
—

Construction contract costs and estimated earnings not billed during the period
 
1,287

 
—

Changes due to cumulative catch-up adjustment arising from changes in the estimate of the stage of completion
 
—

 
(187
)
Balance as of June 30, 2018
 
$
1,287

 
$
1,711


The Company defers pre-contract costs when such costs are directly associated with specific anticipated contracts and their recovery is probable. Pre-contract costs of $0.5 million and $0.6 million were deferred as of June 30, 2018 and December 31, 2017, respectively.
 
Construction receivables and payables include retentions, amounts that are generally withheld until the completion of the contract or the satisfaction of certain restrictive conditions such as fulfillment guarantees. As of June 30, 2018 and December 31, 2017, construction receivables included retentions of $8.9 million and $9.9 million, respectively. The Company expects to collect substantially all construction receivables as of June 30, 2018 during the next twelve months. As of June 30, 2018 and December 31, 2017, construction payables included retentions of $17.4 million and $17.4 million, respectively. The Company expects to pay substantially all construction payables as of June 30, 2018 during the next twelve months.

The Company’s net position on uncompleted construction contracts comprised the following as of June 30, 2018 and December 31, 2017 (in thousands):

 
June 30,
2018
 
December 31,
2017
Costs incurred on uncompleted construction contracts
$
562,879

 
$
520,368

Estimated earnings
19,222

 
18,070

Billings
(582,525
)
 
(541,784
)
Net position
$
(424
)
 
$
(3,346
)

 
June 30,
2018
 
December 31,
2017
Construction contract costs and estimated earnings in excess of billings
$
1,287

 
$
245

Billings in excess of construction contract costs and estimated earnings
(1,711
)
 
(3,591
)
Net position
$
(424
)
 
$
(3,346
)


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The Company’s balances and changes in construction contract price allocated to unsatisfied performance obligations (backlog) as of June 30, 2018 and December 31, 2017 were as follows (in thousands):

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Beginning backlog
 
$
30,733

 
$
157,722

 
$
49,167

 
$
217,718

New contracts/change orders
 
27,807

 
15,519

 
32,376

 
18,960

Work performed
 
(20,619
)
 
(56,584
)
 
(43,622
)
 
(120,021
)
Ending backlog
 
$
37,921

 
$
116,657

 
$
37,921

 
$
116,657


The Company expects to complete a majority of the uncompleted contracts as of June 30, 2018 during the next 12 to 18 months.
8. Indebtedness
 
Credit Facility
 
On October 26, 2017, the Operating Partnership entered into an amended and restated credit agreement (the “credit agreement”), which provides for a $300.0 million senior credit facility comprised of a $150.0 million senior unsecured revolving credit facility (the "revolving credit facility") and a $150.0 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 increased to $450.0 million, subject to certain conditions, including obtaining commitments from any one or more lenders. The revolving credit facility has a scheduled maturity date of October 26, 2021, with two six-month extension options, subject to certain conditions, including payment of a 0.075% extension fee at each extension. The term loan facility has a scheduled maturity date of October 26, 2022.
 
On March 28, 2018, the Operating Partnership increased the maximum commitments under the credit facility to $330.0 million using the accordion feature, with an increase of the term loan facility to $180.0 million.

The revolving credit facility bears interest at LIBOR (the London Inter-Bank Offered Rate) plus a margin ranging from 1.40% to 2.00% and the term loan facility bears interest at LIBOR plus a margin ranging from 1.35% to 1.95%, in each case depending on the Company's total leverage. The Company is also obligated to pay an unused commitment fee of 15 or 25 basis points on the unused portions of the commitments under the revolving credit facility, depending on the amount of borrowings under the credit facility.

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

The Operating Partnership is the borrower under the credit facility, and its obligations under the credit facility are guaranteed by the Company and certain of its subsidiaries that are not otherwise prohibited from providing such guaranty. The credit agreement contains customary representations and warranties and financial and other affirmative and negative covenants. The Company's ability to borrow under the credit facility is subject to ongoing compliance with a number of financial covenants, affirmative covenants and other restrictions. The credit agreement includes customary events of default, in certain cases subject to customary cure periods. The occurrence of an event of default, if not cured within the applicable cure period, would permit the lenders to, among other things, declare the unpaid principal, accrued and unpaid interest and all other amounts payable under the credit facility to be immediately due and payable.

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


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Table of Contents

Subsequent to June 30, 2018

In July 2018, the Company increased its borrowings under the revolving credit facility by $20.0 million.

Other Financing Activity
 
On January 22, 2018, the Company extended and modified the Sandbridge Commons note. The note bears interest at a rate of LIBOR plus a spread of 1.75% and will mature on January 17, 2023.

On March 27, 2018, the Company paid off Columbus Village Note 1 and Columbus Village Note 2 in full for an aggregate amount of $8.3 million.

On May 31, 2018, the Company modified the Southgate Square note. The principal amount of the note was increased to $22 million, and the note now bears interest at a rate of LIBOR plus a spread of 1.60%. This note will still mature on April 29, 2021.

On June 1, 2018, the Company entered into a $16.3 million construction loan for the River City industrial development project in Chesterfield, Virginia. The loan bears interest at a rate of LIBOR plus a spread of 1.50% and will mature on May 31, 2019.

On June 14, 2018, the Company extended and modified the note secured by 249 Central Park Retail, Fountain Plaza Retail, and South Retail. The principal amount of the note was increased to $35.0 million. The note bears interest at a rate of LIBOR plus a spread of 1.60% and will mature on August 10, 2023.

On June 29, 2018, the Company entered into a $15.6 million construction loan for the Brooks Crossing office tower development project. The loan bears interest at a rate of LIBOR plus a spread of 1.60% and will mature on July 1, 2025.

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

Subsequent to June 30, 2018

On July 12, 2018, the Company entered into a $16.2 million construction loan for the Market at Mill Creek development project in Mt. Pleasant, South Carolina. The loan bears interest at a rate of LIBOR plus a spread of 1.55% and will mature on July 12, 2025.

On July 27, 2018, the Company extended and modified the Johns Hopkins Village note. The principal amount of the note was increased to $53.0 million. The note bears interest at a rate of LIBOR plus a spread of 1.25% and will mature on August 7, 2025. The Company simultaneously entered into an interest rate swap agreement that effectively fixes the interest rate at 4.19% for the term of the loan.

9. Derivative Financial Instruments
 
The Company may enter into interest rate derivative contracts to manage exposure to interest rate risks. The Company does not use derivative financial instruments for trading or speculative purposes. Derivative financial instruments are recognized at fair value and presented within other assets and liabilities in the condensed consolidated balance sheets. Gains and losses resulting from changes in the fair value of derivatives that are neither designated nor qualify as hedging instruments are recognized within the change in fair value of interest rate derivatives in the condensed consolidated statements of income. For derivatives that qualify as cash flow hedges, the effective portion of the gain or loss is reported as a component of other comprehensive loss and reclassified into earnings in the periods during which the hedged forecasted transaction affects earnings.

On March 7, 2018, the Operating Partnership entered into a LIBOR interest rate cap agreement on a notional amount of $50.0 million at a strike rate of 2.25% for a premium of $0.3 million. The interest rate cap expires on April 1, 2020.

On April 23, 2018, the Operating Partnership entered into a floating-to-fixed interest rate swap attributable to one-month LIBOR indexed interest payments with a notional amount of $50.0 million. The interest rate swap has a fixed rate of 2.783%, an effective date of May 1, 2018, and a maturity date of May 1, 2023.
 

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Table of Contents

The Company’s derivatives were comprised of the following as of June 30, 2018 and December 31, 2017 (in thousands): 
 
 
June 30, 2018
 
December 31, 2017
 
 
(Unaudited)
 
 
 
 
 
 
 
 
Notional
Amount
 
Fair Value
 
Notional
Amount
 
Fair Value
 
 
 
 
Asset
 
Liability
 
 
 
Asset
 
Liability
Interest rate swaps
 
$
100,000

 
$
431

 
$
(136
)
 
$
56,079

 
$
10

 
$
(69
)
Interest rate caps
 
250,000

 
2,429

 
—

 
345,000

 
1,515

 
—

Total
 
$
350,000

 
$
2,860

 
$
(136
)
 
$
401,079

 
$
1,525

 
$
(69
)

The changes in the fair value of the Company’s derivatives during the three and six months ended June 30, 2018 and 2017 were comprised of the following (in thousands): 
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
 
2018
 
2017
 
2018
 
2017
Interest rate swaps
 
$
5

 
$
7

 
$
353

 
$
268

Interest rate caps
 
(16
)
 
(88
)
 
605

 
(55
)
Total change in fair value of interest rate derivatives
 
$
(11
)
 
$
(81
)
 
$
958

 
$
213


The Company has not designated any of its derivatives as hedging instruments under GAAP as of June 30, 2018.

Subsequent to June 30, 2018

On July 16, 2018, the Operating Partnership entered into a LIBOR interest rate cap agreement on a notional amount of $50.0 million at a strike rate of 2.50% for a premium of $0.3 million. The interest rate cap expires on August 1, 2020.

On July 27, 2018, the Company entered into an interest rate swap agreement that effectively fixes the interest rate of the new Johns Hopkins Village note payable at 4.19%.

10. Equity
 
Stockholders’ Equity
 
On February 26, 2018, the Company commenced an 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 having an aggregate offering price of up to $125.0 million. During the six months ended June 30, 2018, the Company sold an aggregate of 3,542,178 shares of common stock at a weighted average price of $14.07 per share under the ATM Program, receiving net proceeds, after offering costs and commissions, of $49.1 million.

As of June 30, 2018 and December 31, 2017, the Company’s authorized capital was 500 million shares of common stock and 100 million shares of preferred stock. The Company had 48,768,363 and 44,937,763 shares of common stock issued and outstanding as of June 30, 2018 and December 31, 2017, respectively. No shares of preferred stock were issued and outstanding as of June 30, 2018 or December 31, 2017.
 
Noncontrolling Interests
 
As of June 30, 2018 and December 31, 2017, the Company held a 73.8% and 72.0% interest, respectively, in the Operating Partnership. The Company is the primary beneficiary of the Operating Partnership as it has the power to direct the activities of the Operating Partnership and the rights to absorb 73.8% of the net income of the Operating Partnership. As the primary beneficiary, the Company consolidates the financial position and results of operations of the Operating Partnership. Noncontrolling interests in the Company represent units of limited partnership interest in the Operating Partnership not held by the Company. As of June 30, 2018, there were 17,290,403 Class A Units not held by the Company. The Company's financial position and results of operations are the same as those of the Operating Partnership. The noncontrolling interest for the consolidated entities under development or construction (see Note 1) was zero as of June 30, 2018 and December 31, 2017.
 

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Table of Contents

On January 2, 2018, due to the holders of Class A Units tendering an aggregate of 163,000 Class A Units for redemption by the Operating Partnership, the Company elected to satisfy the redemption request through the issuance of an equal number of shares of common stock.

As partial consideration for the acquisition of Columbus Village, the Operating Partnership issued 1,000,000 class B units of limited partnership interest in the Operating Partnership ("Class B Units") on July 10, 2015 and issued 275,000 class C units of limited partnership interest in the Operating Partnership ("Class C Units") on January 10, 2017. The Class B Units were automatically converted to Class A Units on July 10, 2017. The Class C Units were automatically converted into Class A Units on January 10, 2018.

As partial consideration for the acquisition of Parkway Centre, the Operating Partnership issued 117,228 Class A Units on January 29, 2018.

On April 2, 2018, due to the holders of Class A Units tendering an aggregate of 187,142 Class A Units for redemption by the Operating Partnership, the Company elected to satisfy the redemption request with an aggregate cash payment of $2.5 million.

On April 17, 2018, the Operating Partnership issued 36,684 Class A Units to the former noncontrolling interest holder of John Hopkins Village due to the satisfaction of a contingent event that was part of the redemption of its redeemable noncontrolling interest in Johns Hopkins Village in December 2017.

Common Stock Dividends and Class A Unit Distributions
 
On January 4, 2018, the Company paid cash dividends of $8.5 million to common stockholders and the Operating Partnership paid cash distributions of $3.3 million to holders of Class A Units.

On April 5, 2018, the Company paid cash dividends of $9.0 million to common stockholders and the Operating Partnership paid cash distributions of $3.5 million to holders of Class A Units.

On May 3, 2018, the Board of Directors declared a cash dividend and distribution of $0.20 per share and Class A Unit payable on July 5, 2018 to stockholders and unitholders of record on June 27, 2018.

Subsequent to June 30, 2018

On July 2, 2018, due to the holders of Class A Units tendering an aggregate of 123,504 Class A Units for redemption by the Operating Partnership, the Company elected to satisfy the redemption requests through the issuance of an equal number of shares of common stock.

On July 5, 2018, the Company paid cash dividends of $9.7 million to common stockholders and the Operating Partnership paid cash distributions of $3.5 million to holders of Class A Units.

11. Stock-Based Compensation
 
On June 14, 2017, the Company's stockholders approved the Company's Amended and Restated 2013 Equity Incentive Plan (the "Amended Plan"), which, among other things, increased the number of shares of the Company's common stock reserved for issuance under the Amended Plan by 1,000,000 shares, from 700,000 shares to 1,700,000 shares. As of June 30, 2018, there were 1,029,659 shares available for issuance under the Amended Plan.

During the six months ended June 30, 2018, the Company granted an aggregate of 151,844 shares of restricted stock to employees and non-employee directors with a weighted average grant date fair value of $13.53 per share. Employee restricted stock awards generally vest over a period of two years: one-third immediately on the grant date and the remaining two-thirds in equal amounts on the first two anniversaries following the grant date, subject to continued service to the Company. Non-employee director restricted stock awards vest either immediately upon grant or over a period of one year, subject to continued service to the Company.
 
During the six months ended June 30, 2018, the Company issued performance-based awards in the form of restricted stock units to certain employees. The performance period for these awards is three years, with a required two-year service period immediately following the expiration of the performance period in order to fully vest. The compensation expense and the effect on the Company’s weighted average diluted shares calculation were immaterial.

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Table of Contents


During the three months ended June 30, 2018 and 2017, the Company recognized $0.4 million and $0.3 million, respectively, of stock-based compensation expense. During the six months ended June 30, 2018 and 2017, the Company recognized $1.2 million and $1.1 million, respectively, of stock-based compensation expense. As of June 30, 2018, there were 138,971 nonvested restricted shares outstanding; the total unrecognized compensation expense related to nonvested restricted shares was $1.3 million, which the Company expects to recognize over the next 21 months.
 
12. Fair Value of Financial Instruments
 
Fair value measurements are based on assumptions that market participants would use in pricing an asset or a liability. The hierarchy for inputs used in measuring fair value is as follows: 
Level 1—quoted prices in active markets for identical assets or liabilities 
Level 2—observable inputs other than quoted prices in active markets for identical assets and liabilities 
Level 3—unobservable inputs 
Except as disclosed below, the carrying amounts of the Company’s financial instruments approximate their fair values. Financial assets and liabilities whose fair values are measured on a recurring basis using Level 2 inputs consist of interest rate swaps and caps. The Company measures the fair values of these assets and liabilities based on prices provided by independent market participants that are based on observable inputs using market-based valuation techniques.
 
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. For disclosure purposes, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

The carrying amounts and fair values of the Company’s financial instruments, all of which are based on Level 2 inputs, as of June 30, 2018 and December 31, 2017, were as follows (in thousands): 
 
 
June 30, 2018
 
December 31, 2017
 
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
 
(Unaudited)
 
 
 
 
Indebtedness
 
$
580,446

 
$
576,270

 
$
517,272

 
$
518,417

Interest rate swap liabilities
 
136

 
136

 
69

 
69

Interest rate swap and cap assets
 
2,860

 
2,860

 
1,525

 
1,525

 
13. Related Party Transactions
 
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 June 30, 2018 and 2017 was $0.3 million and $0.8 million, respectively, and gross profit from such contracts for the three months ended June 30, 2018 and 2017 was $0.1 million and $0.1 million, respectively. Revenue from construction contracts with related party entities of the Company for the six months ended June 30, 2018 and 2017 was $1.5 million and $7.3 million, respectively, and gross profit from such contracts for the six months ended June 30, 2018 and 2017 was $0.3 million and $0.4 million, respectively.

Real estate services fees from affiliated entities of the Company were not significant for the three and six months ended June 30, 2018 or 2017. In addition, affiliated entities also reimburse the Company for monthly maintenance and facilities management services provided to the properties. Cost reimbursements earned by the Company from affiliated entities were not significant for the three and six months ended June 30, 2018 and 2017. 
 
The Operating Partnership entered into tax protection agreements that indemnify certain directors and executive officers of the Company from their tax liabilities resulting from the potential future sale of certain of the Company’s properties within seven (or, in a limited number of cases, ten) years of the completion of the Company’s initial public offering and formation transactions completed on May 13, 2013. In addition, the tax protection agreements provide that the Operating Partnership will offer certain of the original contributors, including certain of the Company’s directors and executive officers, the opportunity to guarantee debt, or, alternatively, to enter into a deficit restoration obligation, for ten years from the closing of the Company’s initial public offering in a manner intended to provide an allocation of Operating Partnership liabilities to the partner for U.S. federal income tax purposes. Pursuant to these tax protection agreements, certain of the Company’s executive officers have guaranteed approximately $0.3 million of the Operating Partnership’s outstanding debt as of June 30, 2018.
 

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14. Commitments and Contingencies
 
Legal Proceedings
 
The Company is from time to time involved in various disputes, lawsuits, warranty claims, environmental and other matters arising in the ordinary course of business. Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters.
 
The Company currently is a party to various legal proceedings. Management accrues a liability for litigation if an unfavorable outcome is determined to be probable and the amount of loss can be reasonably estimated. If an unfavorable outcome is determined to be probable and a range of loss can be reasonably estimated, management accrues the best estimate within the range; however, if no amount within the range is a better estimate than any other, the minimum amount within the range is accrued. Legal fees related to litigation are expensed as incurred. Management does not believe that the ultimate outcome of these matters, either individually or in the aggregate, could have a material adverse effect on the Company’s financial position or results of operations; however, litigation is subject to inherent uncertainties.
 
Under the Company’s leases, tenants are typically obligated to indemnify the Company from and against all liabilities, costs and expenses imposed upon or asserted against it as owner of the properties due to certain matters relating to the operation of the properties by the tenant.
 
Commitments
 
The Company has a bonding line of credit for its general contracting construction business and is contingently liable under performance and payment bonds, bonds for cancellation of mechanics liens and defect bonds. Such bonds collectively totaled $43.5 million and $44.9 million as of June 30, 2018 and December 31, 2017, respectively.
 
The Operating Partnership has entered into standby letters of credit using the available capacity under the credit facility. Letters of credit generally are available for draw down in the event the Company does not perform. As of both June 30, 2018 and December 31, 2017, the Operating Partnership had total outstanding letters of credit of $2.1 million. The amounts outstanding at June 30, 2018 and December 31, 2017 were comprised of a $2.1 million letter of credit related to the guarantee on the 1405 Point senior construction loan.

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Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
References to “we,” “our,” “us,” and “our company” refer to Armada Hoffler Properties, Inc., a Maryland corporation, together with our consolidated subsidiaries, including Armada Hoffler, L.P., a Virginia limited partnership (the “Operating Partnership”), of which we are the sole general partner. The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report.
 
Forward-Looking Statements
 
This report contains forward-looking statements within the meaning of the federal securities laws. We caution investors that any forward-looking statements presented in this report, or which management may make orally or in writing from time to time, are based on beliefs and assumptions made by, and information currently available to, management. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “result” and similar expressions, which do not relate solely to historical matters, are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We caution you that while forward-looking statements reflect our good faith beliefs when we make them, they are not guarantees of future performance and are impacted by actual events when they occur after we make such statements. We expressly disclaim any responsibility to update forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.
 
Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise, and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:
 
•
adverse economic or real estate developments, either nationally or in the markets in which our properties are located; 
•
our failure to develop the properties in our development pipeline successfully, on the anticipated timeline, or at the anticipated costs; 
•
our failure to generate sufficient cash flows to service our outstanding indebtedness; 
•
defaults on, early terminations of, or non-renewal of leases by tenants, including significant tenants; 
•
bankruptcy or insolvency of a significant tenant or a substantial number of smaller tenants; 
•
difficulties in identifying or completing development, acquisition, or disposition opportunities; 
•
our failure to successfully operate developed and acquired properties; 
•
our failure to generate income in our general contracting and real estate services segment in amounts that we anticipate; 
•
fluctuations in interest rates and increased operating costs;
•
our failure to obtain necessary outside financing on favorable terms or at all; 
•
our inability to extend the maturity of or refinance existing debt or comply with the financial covenants in the agreements that govern our existing debt; 
•
financial market fluctuations; 
•
risks that affect the general retail environment or the market for office properties or multifamily units; 
•
the competitive environment in which we operate; 
•
decreased rental rates or increased vacancy rates; 
•
conflicts of interests with our officers and directors; 
•
lack or insufficient amounts of insurance; 

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•
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 this Quarterly Report on Form 10-Q and identified in other documents that we file from time to time with the U.S. Securities and Exchange Commission (the “SEC”).
 
Business Description
 
We are a full-service real estate company with extensive experience developing, building, owning and managing high-quality, institutional-grade office, retail and multifamily properties in attractive markets primarily throughout the Mid-Atlantic and Southeastern United States. As of June 30, 2018, our operating property portfolio consisted of the following properties:
Property
    
Segment
    
Location
 
Ownership Interest
4525 Main Street
 
Office
 
Virginia Beach, Virginia*
 
100
%
Armada Hoffler Tower
 
Office
 
Virginia Beach, Virginia*
 
100
%
One Columbus
 
Office
 
Virginia Beach, Virginia*
 
100
%
Two Columbus
 
Office
 
Virginia Beach, Virginia*
 
100
%
249 Central Park Retail
 
Retail
 
Virginia Beach, Virginia*
 
100
%
Alexander Pointe
 
Retail
 
Salisbury, North Carolina
 
100
%
Bermuda Crossroads
 
Retail
 
Chester, Virginia
 
100
%
Broad Creek Shopping Center
 
Retail
 
Norfolk, Virginia
 
100
%
Broadmoor Plaza
 
Retail
 
South Bend, Indiana
 
100
%
Brooks Crossing(1)
 
Retail
 
Newport News, Virginia
 
65
%
Columbus Village
 
Retail
 
Virginia Beach, Virginia*
 
100
%
Columbus Village II
 
Retail
 
Virginia Beach, Virginia*
 
100
%
Commerce Street Retail
 
Retail
 
Virginia Beach, Virginia*
 
100
%
Courthouse 7-Eleven
 
Retail
 
Virginia Beach, Virginia
 
100
%
Dick's at Town Center
 
Retail
 
Virginia Beach, Virginia*
 
100
%
Dimmock Square
 
Retail
 
Colonial Heights, Virginia
 
100
%
Fountain Plaza Retail
 
Retail
 
Virginia Beach, Virginia*
 
100
%
Gainsborough Square
 
Retail
 
Chesapeake, Virginia
 
100
%
Greentree Shopping Center
 
Retail
 
Chesapeake, Virginia
 
100
%
Hanbury Village
 
Retail
 
Chesapeake, Virginia
 
100
%
Harper Hill Commons
 
Retail
 
Winston-Salem, North Carolina
 
100
%
Harrisonburg Regal
 
Retail
 
Harrisonburg, Virginia
 
100
%
Indian Lakes Crossing
 
Retail
 
Virginia Beach, Virginia
 
100
%

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Property
    
Segment
    
Location
 
Ownership Interest
Lightfoot Marketplace(2)
 
Retail
 
Williamsburg, Virginia
 
70
%
North Hampton Market
 
Retail
 
Taylors, South Carolina
 
100
%
North Point Center
 
Retail
 
Durham, North Carolina
 
100
%
Oakland Marketplace
 
Retail
 
Oakland, Tennessee
 
100
%
Parkway Centre
 
Retail
 
Moultrie, Georgia
 
100
%
Parkway Marketplace
 
Retail
 
Virginia Beach, Virginia
 
100
%
Patterson Place
 
Retail
 
Durham, North Carolina
 
100
%
Perry Hall Marketplace
 
Retail
 
Perry Hall, Maryland
 
100
%
Providence Plaza
 
Retail
 
Charlotte, North Carolina
 
100
%
Renaissance Square
 
Retail
 
Davidson, North Carolina
 
100
%
Sandbridge Commons
 
Retail
 
Virginia Beach, Virginia
 
100
%
Socastee Commons
 
Retail
 
Myrtle Beach, South Carolina
 
100
%
Southgate Square
 
Retail
 
Colonial Heights, Virginia
 
100
%
Southshore Shops
 
Retail
 
Chesterfield, Virginia
 
100
%
South Retail
 
Retail
 
Virginia Beach, Virginia*
 
100
%
South Square
 
Retail
 
Durham, North Carolina
 
100
%
Stone House Square
 
Retail
 
Hagerstown, Maryland
 
100
%
Studio 56 Retail
 
Retail
 
Virginia Beach, Virginia*
 
100
%
Tyre Neck Harris Teeter
 
Retail
 
Portsmouth, Virginia
 
100
%
Waynesboro Commons
 
Retail
 
Waynesboro, Virginia
 
100
%
Wendover Village
 
Retail
 
Greensboro, North Carolina
 
100
%
Encore Apartments
 
Multifamily
 
Virginia Beach, Virginia*
 
100
%
Johns Hopkins Village
 
Multifamily
 
Baltimore, Maryland
 
100
%
Liberty Apartments
 
Multifamily
 
Newport News, Virginia
 
100
%
Smith's Landing
 
Multifamily
 
Blacksburg, Virginia
 
100
%
The Cosmopolitan
 
Multifamily
 
Virginia Beach, Virginia*
 
100
%
 
 
 
 
 
 
 
(1)
We are entitled to a preferred return of 8% on our investment in Brooks Crossing.
(2)
We are entitled to a preferred return of 9% on our investment in Lightfoot Marketplace.
*Located in the Town Center of Virginia Beach

As of June 30, 2018, the following properties that we consolidate for financial reporting purposes were either under development or construction: 
Property
    
Segment
    
Location
 
Ownership Interest
Premier (Town Center Phase VI)
 
Mixed-use
 
Virginia Beach, Virginia*
 
100
%
Greenside (Harding Place)(1)
 
Multifamily
 
Charlotte, North Carolina
 
80
%
Hoffler Place (King Street)
 
Multifamily
 
Charleston, South Carolina
 
92.5
%
Summit Place (Meeting Street)
 
Multifamily
 
Charleston, South Carolina
 
90
%
Brooks Crossing office tower (2)
 
Office
 
Newport News, Virginia
 
65
%
Lightfoot Outparcel (3)
 
Retail
 
Williamsburg, Virginia
 
70
%
Market at Mill Creek (4)
 
Retail
 
Mount Pleasant, South Carolina
 
70
%
River City
 
Industrial
 
Chesterfield, Virginia
 
100
%
 
 
 
 
 
 
 
(1) We are entitled to a preferred return of 9% on a portion of our investment in Harding Place.
(2) We are entitled to a preferred return of 8% on our investment in Brooks Crossing.
(3) We are entitled to a preferred return of 9% on our investment in Lightfoot Outparcel.
(4) We are entitled to a preferred return of 10% on our investment in Market at Mill Creek.
*Located in the Town Center of Virginia Beach

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Please see Note 5 to our condensed consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q for information related to our investment in Durham City Center II, LLC, which is an unconsolidated subsidiary that we account for under the equity method of accounting.

On July 2, 2018, we entered into a ground lease for a land parcel at Wills Wharf, located at the Harbor Point area in Baltimore, Maryland. We plan to develop a mixed-use building on the site.

Acquisitions

On January 9, 2018, we acquired Indian Lakes Crossing, a Harris Teeter-anchored shopping center in Virginia Beach, Virginia, for a contract price of $14.7 million plus capitalized acquisition costs of $0.2 million.

On January 29, 2018, we acquired Parkway Centre, a newly developed Publix-anchored shopping center in Moultrie, Georgia for total consideration of $11.3 million ($9.6 million in cash and $1.7 million in the form of class A units of limited partnership interest in our Operating Partnership ("Class A Units") plus capitalized acquisition costs of $0.3 million.

On November 30, 2017, we entered into a lease agreement with Bottling Group, LLC for a new distribution facility that we will develop and construct for expected delivery in the fourth quarter of 2018. On January 29, 2018, we acquired undeveloped land in Chesterfield, Virginia, a portion of which will serve as the site for this facility, for a contract price of $2.4 million plus capitalized acquisition costs of $0.1 million.

On January 18, 2018, we entered into an operating agreement with a partner to develop a Lowes Foods-anchored shopping center in Mount Pleasant, South Carolina. The partnership, Market at Mill Creek Partners, LLC acquired undeveloped land on February 16, 2018 for a contract price of $2.9 million plus capitalized acquisition costs of $0.1 million.

On April 2, 2018, we acquired undeveloped land in Newport News, Virginia for less than $0.1 million. This land parcel is being used in the development of the Brooks Crossing office tower.

Dispositions

On May 24, 2018, we completed the sale of the Wawa outparcel at Indian Lakes Crossing for a contract price of $4.4 million. There was no gain or loss on the sale of the parcel.

Second Quarter 2018 Highlights
 
The following highlights our results of operations and significant transactions for the three months ended June 30, 2018:
 
•Net income of $5.9 million, or $0.09 per diluted share, compared to $4.9 million, or $0.08 per diluted share, for the three months ended June 30, 2017. 
•Funds from operations ("FFO") of $15.1 million, or $0.24 per diluted share, compared to $14.2 million, or $0.24 per diluted share, for the three months ended June 30, 2017. See “Non-GAAP Financial Measures.” 
•Normalized funds from operations (“Normalized FFO”) of $15.2 million, or $0.24 per diluted share, compared to $14.7 million, or $0.25 per diluted share, for the three months ended June 30, 2017. See “Non-GAAP Financial Measures.”
•In July 2018, we entered into a contract to sell the build-to-suit distribution center in Chesterfield, Virginia for a sales price of $25.9 million, which is expected to close in the fourth quarter.
•In July 2018, we entered into an agreement regarding the sale of our at-cost purchase option to the developer of The Residences at Annapolis Junction. Combined with the anticipated repayment of its related mezzanine loan during the third quarter, we expect to receive aggregate proceeds from these transactions in excess of $50 million.
•In July 2018, we announced a new development project at Wills Wharf, a site in the Harbor Point area of Baltimore, Maryland. We plan to develop a 325,000 square foot mixed-use building with an estimated development cost of $117 million.
•In July 2018, we announced a new development project, the Interlock, located in West Midtown Atlanta. This public-private partnership with Georgia Tech is expected to contain 290,000 square feet of office and retail space. Our investment will be in the form of a mezzanine loan, and we will serve as the general contractor of the project.

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•During the quarter ended June 30, 2018, we raised approximately $50 million of gross proceeds through our at-the-market equity offering program at an average price of $14.07 per share.
•During the quarter ended June 30, 2018, we leased 150,000 square feet, including a 10-year lease with Shake Shack, leading the way to the re-development of the Columbus Village shopping center in the Town Center of Virginia Beach.
•We sold the Wawa parcel at Indian Lakes Crossing for a contract price of $4.4 million.
Segment Results of Operations
 
As of June 30, 2018, we operated our business in four segments: (i) office real estate, (ii) retail real estate, (iii) multifamily residential real estate and (iv) general contracting and real estate services, which are conducted through our taxable REIT subsidiaries (“TRS”). Net operating income (segment revenues minus segment expenses) ("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 and the asset is placed back into service.

Office Segment Data 
 
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
 
(unaudited, $ in thousands)
Rental revenues
 
$
5,288

 
$
4,759

 
$
529

 
$
10,388

 
$
9,665

 
$
723

Property expenses
 
1,932

 
1,816

 
116

 
3,880

 
3,592

 
288

Segment NOI
 
$
3,356

 
$
2,943

 
$
413

 
$
6,508

 
$
6,073

 
$
435

 
Office segment NOI for the three and six months ended June 30, 2018 increased 14.0% and 7.2%, respectively, compared to the corresponding periods in 2017. The increases relate primarily to a new tenant at 4525 Main Street that moved in during December 2017. The increase was partially offset by the disposition of the Commonwealth of Virginia-Chesapeake and Commonwealth of Virginia-Virginia Beach office buildings, which contributed an aggregate of $0.2 million and $0.5 million in office segment NOI for the three and six months ended June 30, 2017, respectively.

Office Same Store Results
 
Office same store results for the three and six months ended June 30, 2018 exclude 4525 Main Street as well as the Commonwealth of Virginia-Chesapeake and Commonwealth of Virginia-Virginia Beach office buildings, which were both sold in the third quarter of 2017.
 

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Office same store rental revenues, property expenses and NOI for the three and six months ended June 30, 2018 and 2017 were as follows: 
 
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
 
(unaudited, $ in thousands)
Rental revenues
 
$
3,650

 
$
3,367

 
$
283

 
$
7,103

 
$
6,880

 
$
223

Property expenses
 
1,346

 
1,283

 
63

 
2,691

 
2,514

 
177

Same Store NOI
 
$
2,304

 
$
2,084

 
$
220

 
$
4,412

 
$
4,366

 
$
46

Non-Same Store NOI
 
1,052

 
859

 
193

 
2,096

 
1,707

 
389

Segment NOI
 
$
3,356

 
$
2,943

 
$
413

 
$
6,508

 
$
6,073

 
$
435

 
Office same store NOI for the three and six months ended June 30, 2018 increased 10.6% and 1.1%, respectively, compared to the corresponding periods in 2017. The increases relate primarily to new tenants and renewals at the Armada Hoffler Tower and One Columbus.

Retail Segment Data

 
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
 
(unaudited, $ in thousands)
Rental revenues
 
$
16,608

 
$
15,578

 
$
1,030

 
$
33,319

 
$
31,209

 
$
2,110

Property expenses
 
4,219

 
3,999

 
220

 
8,559

 
7,968

 
591

Segment NOI
 
$
12,389

 
$
11,579

 
$
810

 
$
24,760

 
$
23,241

 
$
1,519

 
Retail segment NOI for the three and six months ended June 30, 2018 increased 7.0% and 6.5%, respectively, compared to the corresponding periods in 2017. The increases were a result of the acquisitions of Indian Lakes Crossing and Parkway Centre during the three months ended March 31, 2018, as well as the acquisition of the outparcel phase of Wendover Village and the completion of the Lightfoot Marketplace development subsequent to June 30, 2017.
  
Retail Same Store Results
 
Retail same store results for the three and six months ended June 30, 2018 exclude Lightfoot Marketplace, Brooks Crossing, the outparcel phase of Wendover Village, Indian Lakes Crossing, and Parkway Centre.

Retail same store rental revenues, property expenses and NOI for the three and six months ended June 30, 2018 and 2017 were as follows:
 
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
 
(unaudited, $ in thousands)
Rental revenues
 
$
15,295

 
$
15,199

 
$
96

 
$
30,717

 
$
30,421

 
$
296

Property expenses
 
3,650

 
3,621

 
29

 
7,457

 
7,200

 
257

Same Store NOI
 
$
11,645

 
$
11,578

 
$
67

 
$
23,260

 
$
23,221

 
$
39

Non-Same Store NOI
 
744

 
1

 
743

 
1,500

 
20

 
1,480

Segment NOI
 
$
12,389

 
$
11,579

 
$
810

 
$
24,760

 
$
23,241

 
$
1,519

 
Retail same store NOI was largely consistent for the three and six months ended June 30, 2018 compared to the corresponding periods in 2017.


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Table of Contents

Multifamily Segment Data
 
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
 
(unaudited, $ in thousands)
Rental revenues
 
$
6,702

 
$
6,418

 
$
284

 
$
13,590

 
$
13,113

 
$
477

Property expenses
 
3,106

 
2,951

 
155

 
6,055

 
5,783

 
272

Segment NOI
 
$
3,596

 
$
3,467

 
$
129

 
$
7,535

 
$
7,330

 
$
205

 
Multifamily segment NOI increased slightly for the three and six months ended June 30, 2018 compared to the corresponding periods in 2017. The increase was primarily a result of activity for Johns Hopkins Village, which experienced higher occupancy during the three and six months ended June 30, 2018 compared to the corresponding periods in 2017.
 
Multifamily Same Store Results
 
Multifamily same store results exclude new real estate development - specifically Johns Hopkins Village, which was placed into service in the third quarter of 2016. Multifamily same store results also exclude The Cosmopolitan, which is undergoing a redevelopment project that began on March 1, 2018.

 Multifamily same store rental revenues, property expenses and NOI for the three and six months ended June 30, 2018 and 2017 were as follows: 
 
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
 
(unaudited, $ in thousands)
Rental revenues
 
$
2,918

 
$
2,860

 
$
58

 
$
5,773

 
$
5,697

 
$
76

Property expenses
 
1,225

 
1,207

 
18

 
2,383

 
2,358

 
25

Same Store NOI
 
$
1,693

 
$
1,653

 
$
40

 
$
3,390

 
$
3,339

 
$
51

Non-Same Store NOI
 
1,903

 
1,814

 
89

 
4,145

 
3,991

 
154

Segment NOI
 
$
3,596

 
$
3,467

 
$
129

 
$
7,535

 
$
7,330

 
$
205

 
Multifamily same store NOI for the three and six months ended June 30, 2018 increased slightly compared to the corresponding periods in 2017. The increase is primarily the result of increased rental rates at Smith’s Landing.

General Contracting and Real Estate Services Segment Data
 
 
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
 
(unaudited, $ in thousands)
Segment revenues
 
$
20,654

 
$
56,671

 
$
(36,017
)
 
$
43,704

 
$
120,190

 
$
(76,486
)
Segment expenses
 
20,087

 
54,015

 
(33,928
)
 
42,501

 
115,211

 
(72,710
)
Segment gross profit
 
$
567

 
$
2,656

 
$
(2,089
)
 
$
1,203

 
$
4,979

 
$
(3,776
)
Operating margin
 
2.7
%
 
4.7
%
 
(2.0
)%
 
2.8
%
 
4.1
%
 
(1.3
)%
 
General contracting and real estate services segment profit for the three and six months ended June 30, 2018 decreased 78.7% and 75.8% compared to the compared to the corresponding periods in 2017 as there were no significant new third-party contracts during the six months ended June 30, 2018. Operating margins also decreased during these periods.

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 The changes in third party construction backlog for the three and six months ended June 30, 2018 and 2017 were as follows: 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(unaudited, $ in thousands)
Beginning backlog
$
30,733

 
$
157,722

 
$
49,167

 
$
217,718

New contracts/change orders
27,807

 
15,519

 
32,376

 
18,960

Work performed
(20,619
)
 
(56,584
)
 
(43,622
)
 
(120,021
)
Ending backlog
$
37,921

 
$
116,657

 
$
37,921

 
$
116,657

 
As of June 30, 2018, we had $5.7 million in backlog on the Dinwiddie Municipal Complex project and $6.9 million in backlog on the City Center project.
   
Consolidated Results of Operations
 
The following table summarizes the results of operations for the three and six months ended June 30, 2018 and 2017: 
 
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
 
(unaudited, $ in thousands)
Revenues
 
 

 
 

 
 

 
 

 
 

 
 

Rental revenues
 
$
28,598

 
$
26,755

 
$
1,843

 
$
57,297

 
$
53,987

 
$
3,310

General contracting and real estate services revenues
 
20,654

 
56,671

 
(36,017
)
 
43,704

 
120,190

 
(76,486
)
Total revenues
 
49,252

 
83,426

 
(34,174
)
 
101,001

 
174,177

 
(73,176
)
Expenses
 
 

 
 

 
 

 
 

 
 

 
 

Rental expenses
 
6,522

 
6,171

 
351

 
12,946

 
12,239

 
707

Real estate taxes
 
2,735

 
2,595

 
140

 
5,548

 
5,104

 
444

General contracting and real estate services expenses
 
20,087

 
54,015

 
(33,928
)
 
42,501

 
115,211

 
(72,710
)
Depreciation and amortization
 
9,179

 
9,304

 
(125
)
 
18,457

 
18,779

 
(322
)
General and administrative expenses
 
2,764

 
2,678

 
86

 
5,725

 
5,664

 
61

Acquisition, development and other pursuit costs
 
9

 
369

 
(360
)
 
93

 
416

 
(323
)
Impairment charges
 
98

 
27

 
71

 
98

 
31

 
67

Total expenses
 
41,394

 
75,159

 
(33,765
)
 
85,368

 
157,444

 
(72,076
)
Operating income
 
7,858

 
8,267

 
(409
)
 
15,633

 
16,733

 
(1,100
)
Interest income
 
2,375

 
1,658

 
717

 
4,607

 
3,056

 
1,551

Interest expense
 
(4,497
)
 
(4,494
)
 
(3
)
 
(8,870
)
 
(9,029
)
 
159

Gain on real estate dispositions
 
—

 
—

 
—

 
—

 
3,395

 
(3,395
)
Change in fair value of interest rate derivatives
 
(11
)
 
(81
)
 
70

 
958

 
213

 
745

Other income
 
54

 
43

 
11

 
168

 
80

 
88

Income before taxes
 
5,779

 
5,393

 
386

 
12,496

 
14,448

 
(1,952
)
Income tax benefit (provision)
 
166

 
(450
)
 
616

 
432

 
(752
)
 
1,184

Net income
 
$
5,945

 
$
4,943

 
$
1,002

 
$
12,928

 
$
13,696

 
$
(768
)
 

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Table of Contents

Rental revenues for the three and six months ended June 30, 2018 increased $1.8 million and $3.3 million compared to the corresponding periods in 2017 as follows: 
 
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
 
(unaudited, $ in thousands)
Office
 
$
5,288

 
$
4,759

 
$
529

 
$
10,388

 
$
9,665

 
$
723

Retail
 
16,608

 
15,578

 
1,030

 
33,319

 
31,209

 
2,110

Multifamily
 
6,702

 
6,418

 
284

 
13,590

 
13,113

 
477

 
 
$
28,598

 
$
26,755

 
$
1,843

 
$
57,297

 
$
53,987

 
$
3,310

 
Office rental revenues for the three and six months ended June 30, 2018 increased 11.1% and 7.5%, respectively, compared to the corresponding periods in 2017 primarily as a result of a new tenant at 4525 Main Street that moved in during December 2017. The increase was partially offset by the disposition of the Commonwealth of Virginia-Chesapeake and Commonwealth of Virginia-Virginia Beach office buildings, which contributed an aggregate of $0.3 million and $0.6 million in office rental revenues for the three and six months ended June 30, 2017, respectively.
 
Retail rental revenues for the three and six months ended June 30, 2018 increased 6.6% and 6.8%, respectively, compared to the corresponding periods in 2017 as a result of the acquisitions of Indian Lakes and Parkway Centre during the three months ended March 31, 2018, as well as the acquisition of the outparcel phase of Wendover Village and the completion of the Lightfoot Marketplace development during 2017.

Multifamily rental revenues for the three and six months ended June 30, 2018 increased 4.4% and 3.6%, respectively, compared to the corresponding periods in 2017 as a result of activity for Johns Hopkins Village, which was placed into service in the third quarter of 2016 and experienced higher occupancy during the three and six months ended June 30, 2018 compared to the corresponding periods in 2017.

General contracting and real estate services revenues for the three and six months ended June 30, 2018 decreased 63.6% compared to each of the corresponding periods in 2017 as there were no significant new third-party contracts during the six months ended June 30, 2018.
 
Rental expenses for the three and six months ended June 30, 2018 increased $0.4 million and $0.7 million compared to the the corresponding periods in 2017 as follows: 
 
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
 
(unaudited, $ in thousands)
Office
 
$
1,430

 
$
1,366

 
$
64

 
$
2,876

 
$
2,692

 
$
184

Retail
 
2,563

 
2,479

 
84

 
5,220

 
4,999

 
221

Multifamily
 
2,529

 
2,326

 
203

 
4,850

 
4,548

 
302

 
 
$
6,522

 
$
6,171

 
$
351

 
$
12,946

 
$
12,239

 
$
707

 
Office rental expenses for the three and six months ended June 30, 2018 increased 4.7% and 6.8%, respectively, compared to the corresponding periods in 2017 as a result of higher occupancy at 4525 Main Street and increased operating expenses across the office portfolio. Retail rental expenses for the three and six months ended June 30, 2018 increased 3.4% and 4.4%, respectively, compared to the corresponding periods in 2017 as a result of property acquisitions. Multifamily rental expenses for the three and six months ended June 30, 2018 increased 8.7% and 6.6%, respectively, compared to the corresponding periods in 2017 primarily due to higher occupancy at Johns Hopkins Village.

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Real estate taxes for the three and six months ended June 30, 2018 increased $0.1 million and $0.4 million compared to the corresponding periods in 2017 as follows: 
 
 
Three Months Ended June 30,
 
 
 
Six Months Ended June 30,
 
 
 
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
 
 
(unaudited, $ in thousands)
Office
 
$
502

 
$
450

 
$
52

 
$
1,004

 
$
900

 
$
104

Retail
 
1,656

 
1,520

 
136

 
3,339

 
2,969

 
370

Multifamily
 
577

 
625

 
(48
)
 
1,205

 
1,235

 
(30
)
 
 
$
2,735

 
$
2,595

 
$
140

 
$
5,548

 
$
5,104

 
$
444

 
Office real estate taxes for the three and six months ended June 30, 2018 increased 11.6% and 11.6%, respectively, compared to the corresponding periods in 2017 due to increased assessments across the office portfolio partially offset by the sale of the Commonwealth of Virginia-Chesapeake and Commonwealth of Virginia-Virginia Beach office buildings. Retail real estate taxes for the three and six months ended June 30, 2018 increased 8.9% and 12.5%, respectively, compared to the corresponding periods in 2017 as a result of acquisitions and increases from new tax assessments. Multifamily real estate taxes for the three and six months ended June 30, 2018 decreased 7.7% and 2.4%, respectively, compared to the corresponding periods in 2017 as a result of lower assessments at Liberty Apartments and The Cosmopolitan.

General contracting and real estate services expenses for the three and six months ended June 30, 2018 decreased 62.8% and 63.1%, respectively, compared to the corresponding periods in 2017 as there were no significant new third-party contracts during the six months ended June 30, 2018.
 
Depreciation and amortization for the three and six months ended June 30, 2018 decreased 1.3% and 1.7%, respectively, compared to the corresponding periods in 2017 as a result of in-place leases associated with previously acquired properties that became fully amortized subsequent to June 30, 2017, partially offset by property acquisitions that occurred subsequent to June 30, 2017.
 
General and administrative expenses for the three and six months ended June 30, 2018 remained largely consistent compared to the corresponding periods in 2017.
 
Acquisition, development and other pursuit costs for the three and six months ended June 30, 2018 decreased significantly compared to the corresponding periods in 2017. The costs incurred in the three and six months ended June 30, 2017 were primarily related to a potential acquisition that was abandoned.

Interest income for the three and six months ended June 30, 2018 increased 43.2% and 50.8%, respectively, compared to the corresponding periods in 2017 due to higher notes receivable balances, including the North Decatur Square mezzanine loan originated in May 2017 and the Delray Plaza mezzanine loan originated in October 2017.

Interest expense for the three months ended June 30, 2018 was consistent with the corresponding period in 2017. Interest expense for the six months ended June 30, 2018 decreased 1.8% compared to the corresponding period in 2017 primarily as a result of refinancing activities that lowered the interest rates on certain loans. 

During the six months ended June 30, 2017, we recognized a gain of $3.4 million on our sale of the Greentree Wawa outparcel. There were no gains on sale recognized during the three months ended June 30, 2018 or 2017 of the six months ended June 30, 2018.

The change in fair value of interest rate derivatives was not significant for the three months ended June 30, 2018 and 2017. The change in fair value of interest rate derivatives increased $0.7 million during the six months ended June 30, 2018 as compared to the six months ended June 30, 2017 due to significant changes in forward LIBOR (the London Inter-Bank Offered Rate). 

Income tax benefit and provision that we recognized during the three and six months ended June 30, 2018 and 2017, respectively, were attributable to the taxable profits and losses of our development and construction businesses that we operate through our TRS.
 

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Liquidity and Capital Resources
 
Overview
 
We believe our primary short-term liquidity requirements consist of general contractor expenses, operating expenses and other expenditures associated with our properties, including tenant improvements, leasing commissions and leasing incentives, dividend payments to our stockholders required to maintain our REIT qualification, debt service, capital expenditures, new real estate development projects and strategic acquisitions. We expect to meet our short-term liquidity requirements through net cash provided by operations, reserves established from existing cash, borrowings under construction loans to fund new real estate development and construction, borrowings available under our credit facility, and net proceeds from the sale of common stock through our at-the-market continuous equity offering program (the "ATM Program"), which is discussed below.
 
Our long-term liquidity needs consist primarily of funds necessary for the repayment of debt at or prior to maturity, general contracting expenses, property development and acquisitions, tenant improvements, and capital improvements. We expect to meet our long-term liquidity requirements with net cash from operations, long-term secured and unsecured indebtedness, and the issuance of equity and debt securities. We also may fund property development and acquisitions and capital improvements using our credit facility pending long-term financing.
 
As of June 30, 2018, we had unrestricted cash and cash equivalents of $12.3 million available for both current liquidity needs as well as development activities. We also had restricted cash of $3.1 million available for property improvements and required maintenance. As of June 30, 2018, we had $64.9 million of available borrowings under our credit facility to meet our short-term liquidity requirements and $129.7 million of available borrowings under our construction loans to fund our development projects.

During the six months ended June 30, 2018, we began to address the five loans originally scheduled to mature during 2018. Both of the Columbus Village loans were paid off, and the Sandbridge Commons loan was extended for five years. Additionally, on July 27, 2018, the Johns Hopkins Village loan was refinanced with a new loan that matures on August 7, 2025.
 
ATM Program

On February 26, 2018, we commenced our ATM Program through which we may, from time to time, issue and sell shares of our common stock having an aggregate offering price of up to $125.0 million. During the six months ended June 30, 2018, we issued and sold an aggregate of 3,542,178 shares of common stock at an average price of $14.07 per share under the ATM Program, receiving net proceeds, after offering costs and commissions, of $49.1 million.

Credit Facility
 
On October 26, 2017, we entered into an amended and restated credit agreement (the “credit agreement”), which provides for a $300.0 million credit facility comprised of a $150.0 million senior unsecured revolving credit facility (the “revolving credit facility”) and a $150.0 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 replaced our prior $150.0 million revolving credit facility, which was scheduled to mature on February 20, 2019, and our prior $125.0 million term loan facility, which was scheduled to mature on February 20, 2021. We intend to use future borrowings under the credit facility for general corporate purposes, including funding acquisitions and development and redevelopment of properties in our portfolio and for working capital.

The credit facility includes an accordion feature that allows the total commitments to be increased to $450.0 million, subject to certain conditions, including obtaining commitments from any one or more lenders. On March 28, 2018, our Operating Partnership increased the maximum commitments of the credit facility to $330.0 million using the accordion feature, with an increase of the term loan facility to $180.0 million. The revolving credit facility has a scheduled maturity date of October 26, 2021, with two six-month extension options, subject to certain conditions, including payment of a 0.075% extension fee at each extension. The term loan facility has a scheduled maturity date of October 26, 2022.

The revolving credit facility bears interest at LIBOR plus a margin ranging from 1.40% to 2.00% and the term loan facility bears interest at LIBOR plus a margin ranging from 1.35% to 1.95%, in each case depending on our total leverage. We are also obligated to pay an unused commitment fee of 15 or 25 basis points on the unused portions of the commitments under the revolving credit facility, depending on the amount of borrowings under the credit facility. If we attain investment grade

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Table of Contents

credit ratings from S&P and Moody’s, we may elect to have borrowings become subject to interest rates based on our credit ratings.

The Operating Partnership is the borrower under the credit facility, and its obligations under the credit facility are guaranteed by us and certain of its subsidiaries that are not otherwise prohibited from providing such guaranty.

The credit agreement contains customary representations and warranties and financial and other affirmative and negative covenants. Our ability to borrow under the credit facility 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 that is equal to or greater than 10% of our total asset value (as defined in the credit agreement), but only up to two times during the term of the credit facility);
•
Ratio of adjusted EBITDA (as defined in the credit agreement) to fixed charges of not less than 1.50 to 1.0;
•
Tangible net worth of not less than the sum of 75% of tangible net worth (as defined in the credit agreement) as of September 30, 2017 and 75% of the net equity proceeds received after June 30, 2017;
•
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 that is equal to or greater than 10% of our total asset value, but only up to two times during the term of the credit facility);
•
Unencumbered interest coverage ratio (as defined in the credit agreement) of not less than 1.75 to 1.0;
•
Ratio of unencumbered NOI (as defined in the credit agreement) to all unsecured debt of not less than 12%;
•
Maintenance of a minimum of at least 15 unencumbered properties (as defined in the credit agreement) with an unencumbered asset value (as defined in the credit agreement) of not less than $300.0 million at any time; and
•
Minimum occupancy rate (as defined in the credit agreement) for all unencumbered properties of not less than 80% at any time.

The credit facility limits our ability to pay cash dividends. However, so long as no default or event of default exists, the credit agreement allows us to pay cash dividends with respect to any 12-month period in an amount not to exceed the greater of: (i) 95% of adjusted funds from operations (as defined in the credit agreement) or (ii) the amount required for us (a) to maintain our status as a REIT and (b) to avoid income or excise tax under the Code. If certain defaults or events of default exist, we may pay cash dividends with respect to any 12-month period to the extent necessary to maintain our status as a REIT. The credit facility also restricts the amount of capital that we can invest in specific categories of assets, such as unimproved land holdings, development properties, notes receivable, mortgages, mezzanine loans and unconsolidated affiliates, and restricts the amount of stock and OP units that we may repurchase during the term of the credit facility.

We may, at any time, voluntarily prepay any loan under the credit facility in whole or in part without premium or penalty.

The credit agreement includes customary events of default, in certain cases subject to customary periods to cure. The occurrence of an event of default, following the applicable cure period, would permit the lenders to, among other things, declare the unpaid principal, accrued and unpaid interest and all other amounts payable under the credit facility to be immediately due and payable.

We are currently in compliance with all covenants under the credit agreement.

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Table of Contents

Consolidated Indebtedness
 
The following table sets forth our consolidated indebtedness as of June 30, 2018 ($ in thousands): 
 
 
Amount Outstanding
    
Interest Rate (a)
 
Effective Rate for Variable
Debt
    
Maturity Date
 
Balance at Maturity
Secured Debt
 
 
 
 
 
 
 
 
 
 
Johns Hopkins Village
 
$
46,698

(b)
LIBOR+1.90%

 
3.99
%
 
July 30, 2018
 
$
46,698

Lightfoot Marketplace
 
10,500

 
LIBOR+1.75%

 
3.84
%
 
November 14, 2018
 
10,500

North Point Note 1
 
9,463

 
6.45
%
 
 

 
February 5, 2019
 
9,333

Harding Place
 
14,884

 
LIBOR+2.95%

 
5.04
%
 
February 24, 2020
 
14,884

Town Center Phase VI
 
12,712

 
LIBOR+3.50%

 
5.59
%
 
June 29, 2020
 
12,712

Hoffler Place
 
1,417

 
LIBOR+3.24%

 
 
 
January 1, 2021
 
1,417

Summit Place
 
588

 
LIBOR+3.24%

 
 
 
January 1, 2021
 
588

Southgate Square
 
21,882

 
LIBOR+1.60%

 
3.69
%
 
April 29, 2021
 
19,462

4525 Main Street
 
32,034

(c)
3.25
%
 
 
 
September 10, 2021
 
30,774

Encore Apartments
 
24,966

(c)
3.25
%
 
 
 
September 10, 2021
 
24,006

Hanbury Village
 
19,262

 
3.78
%
 
 
 
August 15, 2022
 
17,109

Socastee Commons
 
4,721

(d)  
4.57
%
 
 

 
January 6, 2023
 
4,223

Sandbridge Commons
 
8,372

 
LIBOR+1.75%

 
3.84
%
 
January 17, 2023
 
7,247

249 Central Park Retail
 
17,150

(e)
LIBOR+1.60%

 
3.69
%
 
August 10, 2023
 
15,935

South Retail
 
7,529

(e)
LIBOR+1.60%

 
3.69
%
 
August 10, 2023
 
6,992

Fountain Plaza Retail
 
10,321

(e)
LIBOR+1.60%

 
3.69
%
 
August 10, 2023
 
9,594

River City
 
—

 
LIBOR+1.50%

 
—
%
 
May 31, 2019
 
—

Brooks Crossing office tower
 
131

 
LIBOR+1.60%

 
3.69
%
 
July 1, 2025
 
131

North Point Note 2
 
2,404

 
7.25
%
 
 

 
September 15, 2025
 
1,344

Smith's Landing
 
19,378

 
4.05
%
 
 

 
June 1, 2035
 
—

Liberty Apartments
 
14,567

(d)  
5.66
%
 
 

 
November 1, 2043
 
—

The Cosmopolitan
 
44,842

 
3.35
%
 
 

 
July 1, 2051
 
—

Total secured debt
 
$
323,821

 
 

 
 

 
 
 
$
232,949

Unsecured Debt
 
 

 
 

 
 

 
 
 
 

Senior unsecured revolving credit facility
 
83,000

 
LIBOR+1.40% to 2.00%

 
3.84
%
 
October 26, 2021
 
83,000

Senior unsecured term loan
 
80,000

 
LIBOR+1.35% to 1.95%

 
3.79
%
 
October 26, 2022
 
80,000

Senior unsecured term loan
 
50,000

 
LIBOR+1.35% to 1.95%

 
3.70
%
(f)
October 26, 2022
 
50,000

Senior unsecured term loan
 
50,000

 
LIBOR+1.35% to 1.95%

 
4.48
%
(f)  
October 26, 2022
 
50,000

Total unsecured debt
 
$
263,000

 
 

 
 

 
 
 
$
263,000

Total principal balances
 
586,821

 
 
 
 
 
 
 
495,949

Unamortized GAAP adjustments
 
(6,375
)
 
 

 
 

 
 
 
—

Indebtedness, net
 
$
580,446

 
 

 
 

 
 
 
$
495,949

                                                
 
 
 
 
 
 
 
 
 
 
(a)    LIBOR rate is determined by individual lenders.
(b)    Loan was refinanced on July 27, 2018.
(c)    Cross collateralized.
(d)    Principal balance excluding fair value adjustments.
(e)    Cross collateralized.
(f)    Subject to an interest rate swap agreement.

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Table of Contents

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

As of June 30, 2018, our principal payments during the following years are as follows ($ in thousands): 
Year(1)
 
Amount Due 
 
Percentage of Total 
2018
 
$
59,337

 
10
%
2019
 
13,773

 
2
%
2020
 
33,156

 
6
%
2021
 
163,812

 
28
%
2022
 
200,590

 
34
%
Thereafter
 
116,153

 
20
%
 
 
 
$
586,821

 
100
%
 
 
 
 
 
 
(1)    Does not reflect the effect of any maturity extension options.

On January 22, 2018, we extended the maturity date of our Sandbridge Commons mortgage. The loan bears interest at a rate of LIBOR plus a spread of 1.75% and will mature on January 17, 2023.

On March 27, 2018, we paid off Columbus Village Note 1 and Columbus Village Note 2 in full for an aggregate amount of $8.3 million.

On May 31, 2018, we modified the Southgate Square note. The principal amount of the note was increased to $22 million, and the note now bears interest at a rate of LIBOR plus a spread of 1.60%. This note will still mature on April 29, 2021.

On June 1, 2018, we entered into a $16.3 million construction loan for the River City industrial development project in Chesterfield, Virginia. The loan bears interest at a rate of LIBOR plus a spread of 1.50% and will mature on May 31, 2019.

On June 14, 2018, we extended and modified the note secured by 249 Central Park Retail, Fountain Plaza Retail, and South Retail. The principal amount of the note was increased to $35.0 million and bears interest at a rate of LIBOR plus a spread of 1.60%. The note will mature on August 10, 2023.

On June 29, 2018, we entered into a $15.6 million construction loan for the Brooks Crossing office tower development project. The loan bears interest at a rate of LIBOR plus a spread of 1.60% and will mature on July 1, 2025.

On July 12, 2018, we entered into a $16.2 million construction loan for the Market at Mill Creek development project in Mt. Pleasant, South Carolina. The loan bears interest at a rate of LIBOR plus a spread of 1.55% and will mature on July 12, 2025.

On July 27, 2018, we extended and modified the Johns Hopkins Village note. The principal amount of the note was increased to $53.0 million. The note bears interest at a rate of LIBOR plus a spread of 1.25% and will mature on August 7, 2025. We simultaneously entered into an interest rate swap agreement that effectively fixes the interest rate at 4.19% for the term of the loan.

Interest Rate Derivatives
 
On February 20, 2015, we entered into a $50.0 million floating-to-fixed interest rate swap attributable to one-month LIBOR indexed interest payments. The $50.0 million interest rate swap has a fixed rate of 2.00%, an effective date of March 1, 2016 and a maturity date of February 20, 2020. We entered into this interest rate swap agreement in connection with the $50.0 million senior unsecured term loan facility that bears interest at LIBOR plus 1.35% to 1.95%, depending on our total leverage.
 
On March 7, 2018, the Operating Partnership entered into a LIBOR interest rate cap agreement on a notional amount of $50.0 million at a strike rate of 2.25% for a premium of $0.3 million. The interest rate cap expires on April 1, 2020.

On April 23, 2018, we entered into a floating-to-fixed interest rate swap attributable to one-month LIBOR indexed interest payments with a notional amount of $50.0 million. The interest rate swap has a fixed rate of 2.783%, an effective date of May 1, 2018, and a maturity date of May 1, 2023.

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Table of Contents


On July 16, 2018, the Operating Partnership entered into a LIBOR interest rate cap agreement on a notional amount of $50.0 million at a strike rate of 2.50% for a premium of $0.3 million. The interest rate cap expires on August 1, 2020.

As of June 30, 2018, we were party to the following LIBOR interest rate cap agreements ($ in thousands): 
Effective Date
 
Maturity Date
 
Strike Rate
 
Notional Amount
February 7, 2017
 
March 1, 2019
 
1.50
%
 
50,000

June 23, 2017
 
July 1, 2019
 
1.50
%
 
50,000

September 18, 2017
 
October 1, 2019
 
1.50
%
 
50,000

November 28, 2017
 
December 1, 2019
 
1.50
%
 
50,000

March 7, 2018
 
April 1, 2020
 
2.25
%
 
50,000

Total
 
 
 
 
 
$
250,000

 
Off-Balance Sheet Arrangements
 
We have entered into standby letters of credit using the available capacity under the credit facility. Letters of credit generally are available for draw down in the event we do not perform. As of June 30, 2018, we had an outstanding standby letter of credit for $2.1 million that expires during 2018. However, our standby letters of credit may be renewed for additional periods until completion of the related construction contracts. The amount outstanding at June 30, 2018 was comprised of a $2.1 million letter of credit related to the guarantee on the 1405 Point senior construction loan.
 
Cash Flows
 
 
Six Months Ended June 30,
 
 
 
 
2018
 
2017
 
Change
 
 
($ in thousands)
Operating Activities
 
$
11,260

 
$
16,974

 
$
(5,714
)
Investing Activities
 
(103,118
)
 
(33,968
)
 
(69,150
)
Financing Activities
 
84,360

 
13,527

 
70,833

Net Increase (Decrease)
 
$
(7,498
)
 
$
(3,467
)
 
$
(4,031
)
Cash, Cash Equivalents, and Restricted Cash, Beginning of Period
 
$
22,916

 
$
25,193

 
 
Cash, Cash Equivalents, and Restricted Cash, End of Period
 
$
15,418

 
$
21,726

 
 
 
Net cash provided by operating activities during the six months ended June 30, 2018 decreased 33.7% compared to the six months ended June 30, 2017, primarily as a result of timing differences in operating assets and liabilities.
 
During the six months ended June 30, 2018, we invested $69.2 million more in cash compared to the six months ended June 30, 2017 due to increased development activity and the acquisition of two operating properties.
 
Net cash provided by financing activities during the six months ended June 30, 2018 increased $70.8 million as compared to the six months ended June 30, 2017, primarily as a result of increased borrowings under the credit facility.
 
Non-GAAP Financial Measures
 
We calculate FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts (“Nareit”). Nareit defines FFO as net income (loss) (calculated in accordance with GAAP), excluding gains (or losses) from sales of depreciable operating property, real estate related depreciation and amortization (excluding amortization of deferred financing costs) and after adjustments for unconsolidated partnerships and joint ventures.
 
FFO is a supplemental non-GAAP financial measure. Management uses FFO as a supplemental performance measure because we believe that FFO is beneficial to investors as a starting point in measuring our operational performance. Specifically, in excluding real estate related depreciation and amortization and gains and losses from property dispositions, which do not relate to or are not indicative of operating performance, FFO provides a performance measure that, when compared year-over-year, captures trends in occupancy rates, rental rates and operating costs. We also believe that, as a widely recognized measure of the performance of REITs, FFO will be used by investors as a basis to compare our operating performance with that of other REITs.
 

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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, property acquisition, development and other pursuit costs, mark-to-market adjustments for interest rate derivatives, and other non-comparable items.
 
The following table sets forth a reconciliation of FFO and Normalized FFO for the three and six months ended June 30, 2018 and 2017 to net income, the most directly comparable GAAP measure: 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
 
(in thousands, except per share and unit amounts)
Net income
 
$
5,945

 
$
4,943

 
$
12,928

 
$
13,696

Depreciation and amortization
 
9,179

 
9,304

 
18,457

 
18,779

(Gain) loss on operating real estate dispositions
 
—

 
—

 
—

 
(3,395
)
Funds from operations
 
$
15,124

 
$
14,247

 
$
31,385

 
$
29,080

Acquisition, development and other pursuit costs
 
9

 
369

 
93

 
416

Impairment charges
 
98

 
27

 
98

 
31

Change in fair value of interest rate derivatives
 
11

 
81

 
(958
)
 
(213
)
Normalized funds from operations
 
$
15,242

 
$
14,724

 
$
30,618

 
$
29,314

Net income per diluted share and unit
 
$
0.09

 
$
0.08

 
$
0.21

 
$
0.24

FFO per diluted share and unit
 
$
0.24

 
$
0.24

 
$
0.50

 
$
0.50

Normalized FFO per diluted share and unit
 
$
0.24

 
$
0.25

 
$
0.49

 
$
0.51

Weighted average common shares and units - diluted
 
63,214

 
59,936

 
62,878

 
57,718

 
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, 2017.

On January 1, 2018, we adopted the new accounting standard codified in Accounting Standards Codification 606 - Revenue from Contracts with Customers. We recognize general contracting revenues as a customer obtains control of promised goods or services in an amount that reflects the consideration we expect to receive in exchange for those goods or services. For each construction contract, we identify the performance obligations, which typically include the delivery of a single building constructed according to the specifications of the contract. We estimate the total transaction price, which generally includes a fixed contract price and may also include variable components such as early completion bonuses, liquidated damages, or cost savings to be shared with the customer. Variable components of the contract price are included in the transaction price to the extent that it is probable that a significant reversal of revenue will not occur. We recognize the estimated transaction price as revenue as we satisfy our performance obligations; we estimate our progress in satisfying performance obligations for each contract using the percentage-of-completion method, based on the proportion of incurred costs to total estimated construction costs at completion. Construction contract costs include all direct material, direct labor, subcontract costs, and overhead costs

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directly related to contract performance. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, are all significant judgments that may result in revisions to costs and income and are recognized in the period in which they are determined. Provisions for estimated losses on uncompleted contracts are recognized immediately in the period in which such losses are determined. We defer pre-contract costs when such costs are directly associated with specific anticipated contracts and their recovery is probable.
 
We recognize real estate services revenues from property development and management as we satisfy our performance obligations under these service arrangements.

We assess whether multiple contracts with a single counterparty should be combined into a single contract for the revenue recognition purposes based on factors such as the timing of the negotiation and execution of the contracts and whether the economic substance of the contracts was contemplated separately or in tandem.
 
Item 3.    Quantitative and Qualitative Disclosures about Market Risk
 
The primary market risk to which we are exposed is interest rate risk. Our primary interest rate exposure is LIBOR. We primarily use fixed interest rate financing to manage our exposure to fluctuations in interest rates. On a limited basis, we also use derivative financial instruments to manage interest rate risk. We do not use these derivatives for trading or other speculative purposes.
 
At June 30, 2018, approximately $271.6 million, or 46.3%, of our debt had fixed interest rates and approximately $315.2 million, or 53.7%, had variable interest rates. At June 30, 2018, LIBOR was approximately 209 basis points. Assuming no increase in the level of our variable rate debt, if LIBOR increased by 100 basis points, our cash flow would decrease by less than $0.1 million per year as a result of the interest rate caps. Assuming no increase in the level of our variable rate debt, if LIBOR decreased by 100 basis points, our cash flow would increase by approximately $2.0 million per year.

Item 4.    Controls and Procedures
 
We maintain disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the rules and regulations of the SEC and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
 
We have carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of our disclosure controls and procedures as of June 30, 2018, the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer have concluded, as of June 30, 2018, that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in reports filed or submitted under the Exchange Act: (i) is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
 
There have been no changes to our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


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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, 2017. 
 
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
 
Unregistered Sales of Equity Securities
 
None.

Issuer Purchases of Equity Securities

None.
 
Item  3.    Defaults on Senior Securities
 
None.
 
Item 4.    Mine Safety Disclosures
 
Not applicable.

Item 5.    Other Information
 
None.
 

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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
31.1
 
 
 
 
31.2
 
 
 
 
32.1
 
 
 
 
32.2
 
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
101.DEF
 
XBRL Definition Linkbase
 
 
 
 
 
 

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Signatures
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
ARMADA HOFFLER PROPERTIES, INC.
 
 
Date: August 1, 2018
/s/ LOUIS S. HADDAD
 
Louis S. Haddad
 
President and Chief Executive Officer
 
(Principal Executive Officer)
 
 
Date: August 1, 2018
/s/ MICHAEL P. O’HARA
 
Michael P. O’Hara
 
Chief Financial Officer and Treasurer
 
(Principal Accounting and Financial Officer)

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