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 September 30, 2016
 
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.    ☒  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).    ☒  Yes     ◻  No
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large Accelerated Filer
 ◻ 
Accelerated Filer
 ☒ 
 
 
 
 
Non-Accelerated Filer
 ◻ (Do not check if a smaller reporting company)
Smaller reporting company
 ◻ 
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  
◻ Yes     ☒  No
 
As of November 1, 2016, the Registrant had 36,425,422 shares of common stock outstanding.

Table of Contents

ARMADA HOFFLER PROPERTIES, INC.
 
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2016
 
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)
 
 
September 30,
2016
 
December 31,
2015
 
 
(UNAUDITED)
 
 
ASSETS
 
 
 
 
Real estate investments:
 
 
 
 
Income producing property
 
$
844,127

 
$
579,000

Held for development
 
1,933

 
1,180

Construction in progress
 
13,895

 
53,411

 
 
859,955

 
633,591

Accumulated depreciation
 
(133,288
)
 
(125,380
)
Net real estate investments
 
726,667

 
508,211

Real estate investments held for sale
 
—

 
40,232

Cash and cash equivalents
 
23,890

 
26,989

Restricted cash
 
3,471

 
2,824

Accounts receivable, net
 
15,100

 
21,982

Notes receivable
 
49,935

 
7,825

Construction receivables, including retentions
 
39,981

 
36,535

Construction contract costs and estimated earnings in excess of billings
 
419

 
88

Equity method investments
 
10,360

 
1,411

Other assets
 
62,022

 
43,450

Total Assets
 
$
931,845

 
$
689,547

LIABILITIES AND EQUITY
 
 
 
 
Indebtedness, net
 
$
513,993

 
$
377,593

Accounts payable and accrued liabilities
 
10,604

 
6,472

Construction payables, including retentions
 
51,203

 
52,067

Billings in excess of construction contract costs and estimated earnings
 
6,560

 
2,224

Other liabilities
 
39,517

 
25,471

Total Liabilities
 
$
621,877

 
$
463,827

Stockholders’ equity:
 
 
 
 
Preferred stock, $0.01 par value, 100,000,000 shares authorized, none issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
 
—

 
—

Common stock, $0.01 par value, 500,000,000 shares authorized, 34,255,874 and 30,076,359 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively
 
342

 
300

Additional paid-in capital
 
153,571

 
102,906

Distributions in excess of earnings
 
(46,066
)
 
(53,010
)
Accumulated other comprehensive loss
 
—

 
(648
)
Total stockholders’ equity
 
107,847

 
49,548

Noncontrolling interests
 
202,121

 
176,172

Total Equity
 
309,968

 
225,720

Total Liabilities and Equity
 
$
931,845

 
$
689,547

See Notes to Condensed Consolidated Financial Statements.

1

Table of Contents

ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statements of Comprehensive Income 

(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
 
Rental revenues
 
$
25,305

 
$
21,303

 
$
72,839

 
$
59,401

General contracting and real estate services revenues
 
38,552

 
53,822

 
108,555

 
129,959

Total revenues
 
63,857

 
75,125

 
181,394

 
189,360

 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
Rental expenses
 
5,834

 
4,865

 
16,234

 
14,256

Real estate taxes
 
2,356

 
2,056

 
7,087

 
5,672

General contracting and real estate services expenses
 
37,274

 
51,716

 
104,336

 
125,141

Depreciation and amortization
 
8,885

 
6,317

 
25,636

 
16,991

General and administrative expenses
 
2,156

 
1,873

 
6,864

 
6,297

Acquisition, development and other pursuit costs
 
345

 
288

 
1,486

 
1,050

Impairment charges
 
149

 
—

 
184

 
23

Total expenses
 
56,999

 
67,115

 
161,827

 
169,430

Operating income
 
6,858

 
8,010

 
19,567

 
19,930

Interest income
 
1,024

 
—

 
1,928

 
—

Interest expense
 
(4,124
)
 
(3,518
)
 
(11,893
)
 
(9,922
)
Loss on extinguishment of debt
 
(82
)
 
(3
)
 
(82
)
 
(410
)
Gain on real estate dispositions
 
3,753

 
—

 
30,440

 
13,407

Change in fair value of interest rate derivatives
 
498

 
(51
)
 
(2,264
)
 
(238
)
Other income
 
35

 
17

 
154

 
56

Income before taxes
 
7,962

 
4,455

 
37,850

 
22,823

Income tax provision
 
(16
)
 
(118
)
 
(240
)
 
(83
)
Net income
 
7,946

 
4,337

 
37,610

 
22,740

Net income attributable to noncontrolling interests
 
(2,734
)
 
(1,649
)
 
(12,994
)
 
(8,426
)
Net income attributable to stockholders
 
$
5,212

 
$
2,688

 
$
24,616

 
$
14,314

Net income per share and unit:
 
 
 
 
 
 
 
 
Basic and diluted
 
$
0.15

 
$
0.10

 
$
0.77

 
$
0.56

Weighted-average outstanding:
 
 
 
 
 
 
 
 
Common shares
 
33,792

 
25,958

 
31,913

 
25,532

Common units
 
17,720

 
15,919

 
16,956

 
15,159

Basic and diluted
 
51,512

 
41,877

 
48,869

 
40,691

Dividends and distributions declared per common share and unit
 
$
0.18

 
$
0.17

 
$
0.54

 
$
0.51

Comprehensive income:
 
 

 
 

 
 

 
 

Net income
 
$
7,946

 
$
4,337

 
$
37,610

 
$
22,740

Unrealized cash flow hedge losses
 
—

 
(1,026
)
 
—

 
(1,574
)
Realized cash flow hedge losses reclassified to net income
 
—

 
13

 
—

 
13

Comprehensive income
 
7,946

 
3,324

 
37,610

 
21,179

Comprehensive income attributable to noncontrolling interests
 
(2,734
)
 
(1,264
)
 
(12,994
)
 
(7,837
)
Comprehensive income attributable to stockholders
 
$
5,212

 
$
2,060

 
$
24,616

 
$
13,342


See Notes to Condensed Consolidated Financial Statements.

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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
 
Accumulated other comprehensive loss
 
Total stockholders' equity
 
Noncontrolling interests
 
Total Equity
Balance, January 1, 2016
 
30,076,359

 
$
300

 
$
102,906

 
$
(53,010
)
 
$
(648
)
 
$
49,548

 
$
176,172

 
$
225,720

Net income
 
—

 
—

 
—

 
24,616

 
—

 
24,616

 
12,994

 
37,610

Dedesignation of cash flow hedge
 
—

 
—

 
—

 
—

 
648

 
648

 
400

 
1,048

Net proceeds from sales of common stock
 
4,079,482

 
40

 
49,865

 
—

 
—

 
49,905

 
—

 
49,905

Restricted stock awards
 
119,985

 
2

 
1,118

 
—

 
—

 
1,120

 
—

 
1,120

Restricted stock award forfeitures
 
(19,952
)
 
—

 
(216
)
 
—

 
—

 
(216
)
 
—

 
(216
)
Acquisitions of real estate investments in exchange for operating partnership units
 
—

 
—

 
(100
)
 
—

 
—

 
(100
)
 
21,178

 
21,078

Redemption of operating partnership units
 
—

 
—

 
(2
)
 
—

 
—

 
(2
)
 
(56
)
 
(58
)
Dividends and distributions declared
 
—

 
—

 
—

 
(17,672
)
 
—

 
(17,672
)
 
(8,567
)
 
(26,239
)
Balance, September 30, 2016
 
34,255,874

 
$
342

 
$
153,571

 
$
(46,066
)
 
$
—

 
$
107,847

 
$
202,121

 
$
309,968

 
See Notes to Condensed Consolidated Financial Statements.

3

Table of Contents

ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
OPERATING ACTIVITIES
 
 
 
 
Net income
 
$
37,610

 
$
22,740

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation of buildings and tenant improvements
 
17,055

 
13,998

Amortization of leasing costs and in-place lease intangibles
 
8,581

 
2,993

Accrued straight-line rental revenue
 
(765
)
 
(1,724
)
Amortization of leasing incentives and above or below-market rents
 
(61
)
 
564

Accrued straight-line ground rent expense
 
291

 
224

Bad debt expense
 
178

 
123

Noncash stock compensation
 
864

 
755

Impairment charges
 
184

 
23

Noncash interest expense
 
687

 
791

Noncash loss on extinguishment of debt
 
82

 
410

Gain on real estate dispositions
 
(30,440
)
 
(13,407
)
Change in the fair value of derivatives
 
2,264

 
238

Changes in operating assets and liabilities:
 
 
 
 
Property assets
 
(4,938
)
 
(2,524
)
Property liabilities
 
3,856

 
2,369

Construction assets
 
(5,863
)
 
(29,027
)
Construction liabilities
 
9,197

 
19,078

Net cash provided by operating activities
 
38,782

 
17,624

INVESTING ACTIVITIES
 
 
 
 
Development of real estate investments
 
(48,671
)
 
(40,293
)
Tenant and building improvements
 
(4,399
)
 
(3,794
)
Acquisitions of real estate investments, net of cash received
 
(177,865
)
 
(64,945
)
Dispositions of real estate investments
 
96,312

 
50,613

Government development grants
 
—

 
300

Notes receivable issuances
 
(42,110
)
 
—

(Decrease) increase in restricted cash
 
(210
)
 
742

Leasing costs
 
(1,601
)
 
(1,715
)
Leasing incentives
 
(188
)
 
(1,563
)
Contributions to equity method investments
 
(8,949
)
 
—

Net cash used for investing activities
 
(187,681
)
 
(60,655
)
FINANCING ACTIVITIES
 
 
 
 
Proceeds from sales of common stock
 
51,088

 
7,687

Offering costs
 
(1,183
)
 
(321
)
Debt issuances, credit facility and construction loan borrowings
 
290,105

 
200,267

Debt and credit facility repayments, including principal amortization
 
(167,659
)
 
(153,321
)
Debt issuance costs
 
(1,791
)
 
(1,844
)
Redemption of operating partnership units
 
(58
)
 
(79
)
Dividends and distributions
 
(24,702
)
 
(20,050
)
Net cash provided by financing activities
 
145,800

 
32,339

Net decrease in cash and cash equivalents
 
(3,099
)
 
(10,692
)
Cash and cash equivalents, beginning of period
 
26,989

 
25,883

Cash and cash equivalents, end of period
 
$
23,890

 
$
15,191

 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 throughout the Mid-Atlantic United States. The Company is the sole general partner of Armada Hoffler, L.P. (the “Operating Partnership”). The operations of the Company are carried on primarily through the Operating Partnership and the wholly owned subsidiaries of the Operating Partnership. Both the Company and the Operating Partnership were formed on October 12, 2012 and commenced operations upon completion of the underwritten initial public offering of shares of the Company’s common stock and certain related formation transactions on May 13, 2013.

As of September 30, 2016, the Company owned 100% of the interests in, and consolidated for financial reporting purposes, each of the following properties in its operating property portfolio:
Property
    
Segment
    
Location
4525 Main Street
 
Office
 
Virginia Beach, Virginia*
Armada Hoffler Tower
 
Office
 
Virginia Beach, Virginia*
Commonwealth of Virginia - Chesapeake
 
Office
 
Chesapeake, Virginia
Commonwealth of Virginia - Virginia Beach
 
Office
 
Virginia Beach, Virginia
One Columbus
 
Office
 
Virginia Beach, Virginia*
Two Columbus
 
Office
 
Virginia Beach, Virginia*
249 Central Park Retail
 
Retail
 
Virginia Beach, Virginia*
Alexander Pointe
 
Retail
 
Salisbury, North Carolina
Bermuda Crossroads
 
Retail
 
Chester, Virginia
Broad Creek Shopping Center
 
Retail
 
Norfolk, Virginia
Broadmoor Plaza
 
Retail
 
South Bend, Indiana
Columbus Village
 
Retail
 
Virginia Beach, Virginia*
Commerce Street Retail
 
Retail
 
Virginia Beach, Virginia*
Courthouse 7-Eleven
 
Retail
 
Virginia Beach, Virginia
Dick's at Town Center
 
Retail
 
Virginia Beach, Virginia*
Dimmock Square
 
Retail
 
Colonial Heights, Virginia
Fountain Plaza Retail
 
Retail
 
Virginia Beach, Virginia*
Gainsborough Square
 
Retail
 
Chesapeake, Virginia
Greentree Shopping Center
 
Retail
 
Chesapeake, Virginia
Hanbury Village
 
Retail
 
Chesapeake, Virginia
Harper Hill Commons
 
Retail
 
Winston-Salem, North Carolina
Harrisonburg Regal
 
Retail
 
Harrisonburg, Virginia
North Hampton Market
 
Retail
 
Taylors, South Carolina
North Point Center
 
Retail
 
Durham, North Carolina
Oakland Marketplace
 
Retail
 
Oakland, Tennessee
Parkway Marketplace
 
Retail
 
Virginia Beach, Virginia
Patterson Place
 
Retail
 
Durham, North Carolina
Perry Hall Marketplace
 
Retail
 
Perry Hall, Maryland
Providence Plaza
 
Retail
 
Charlotte, North Carolina
Sandbridge Commons
 
Retail
 
Virginia Beach, Virginia
Socastee Commons
 
Retail
 
Myrtle Beach, South Carolina
Southgate Square
 
Retail
 
Colonial Heights, Virginia

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Property
    
Segment
    
Location
Southshore Shops
 
Retail
 
Chesterfield, Virginia
South Retail
 
Retail
 
Virginia Beach, Virginia*
South Square
 
Retail
 
Durham, North Carolina
Stone House Square
 
Retail
 
Hagerstown, Maryland
Studio 56 Retail
 
Retail
 
Virginia Beach, Virginia*
Tyre Neck Harris Teeter
 
Retail
 
Portsmouth, Virginia
Waynesboro Commons
 
Retail
 
Waynesboro, Virginia
Wendover Village
 
Retail
 
Greensboro, North Carolina
Encore Apartments
 
Multifamily
 
Virginia Beach, Virginia*
Liberty Apartments
 
Multifamily
 
Newport News, Virginia
Smith's Landing
 
Multifamily
 
Blacksburg, Virginia
The Cosmopolitan
 
Multifamily
 
Virginia Beach, Virginia*
*Located in the Town Center of Virginia Beach
 
As of September 30, 2016, the following properties that the Company consolidates for financial statement purposes were under development or construction: 
Property
    
Segment
    
Location
Ownership Interest
 
Brooks Crossing
 
Office/Retail
 
Newport News, Virginia
65
%
 
Johns Hopkins Village
 
Multifamily
 
Baltimore, Maryland
80
%
(1) 
Lightfoot Marketplace
 
Retail
 
Williamsburg, Virginia
70
%
 
Town Center Phase VI
 
Multifamily
 
Virginia Beach, Virginia*
80
%
 
Harding Place
 
Multifamily
 
Charlotte, North Carolina
80
%
 
 
 
 
 
 
 
 
 

(1)
The noncontrolling interest holder of Johns Hopkins Village has the right to exchange its 20% ownership interest for Class A units of limited partnership interest in the Operating Partnership (“Class A Units”) upon and for a period of one year after the project’s completion.  The Company is entitled to a preferred return of 9% on its investment in Johns Hopkins Village.
*Located in the Town Center of Virginia Beach
 
Please see Note 4 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.
 
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, the Operating Partnership and its wholly owned 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

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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, 2015.
 
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 from management’s estimates.
 
Significant Accounting Policies
 
The accompanying condensed consolidated financial statements were prepared on the basis of the accounting principles described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, among others.
 
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. The new standard could change the way the Company recognizes revenue from construction and development contracts with third party customers. The new standard will be effective for the Company on January 1, 2018. Management is currently evaluating the potential impact of the new revenue recognition standard on the Company’s consolidated financial statements.
 
On February 18, 2015, the FASB issued new consolidation guidance that changes: (i) the identification of variable interests, (ii) the variable interest entity (“VIE”) characteristics for a limited partnership or similar entity and (iii) primary beneficiary determination. The amended guidance also eliminates the presumption that a general partner controls a limited partnership. The Company adopted the guidance on January 1, 2016 with no material impact on the Company’s consolidated financial statements.
 
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 date of initial application with an option to use certain transition relief. Management is currently evaluating the potential impact of the new lease standard on the Company’s consolidated financial statements.
 
On March 10, 2016, the FASB issued new guidance clarifying that the novation of a derivative contract in a hedge accounting relationship does not, in and of itself, require dedesignation of that hedge accounting relationship.  Hedge accounting relationships could continue as long as all of the other hedge accounting criteria are met, including the expectation that the hedge will be highly effective when the creditworthiness of the new counterparty
to the derivative contract is considered. The new guidance will be effective for the Company on January 1, 2017, and may be applied prospectively, or the Company may use a modified retrospective approach. Management does not expect the adoption of the new guidance to have a material effect on the Company’s financial position or results of operations.
 
On March 17, 2016, the FASB issued new guidance eliminating the requirement that an investor retrospectively apply equity method accounting when an investment that it had accounted for by another method initially qualifies for the equity method. The new guidance is effective for the Company on January 1, 2017.  Management is currently evaluating the potential impact of the new guidance on the Company’s consolidated financial statements.
 
On March 30, 2016, the FASB issued new guidance that will change the accounting for certain aspects of share-based payments to employees.  Entities will be required to recognize the income tax effects of awards in the income statement when the awards vest or are settled, and allows the Company to account for forfeitures as they occur.  The new guidance is effective for the Company on January 1, 2017.  Management is currently evaluating the potential impact of the new guidance on the Company’s consolidated financial statements. 

On June 16, 2016, the FASB issued new guidance that modifies the accounting for recognizing credit losses on financial instruments. This new guidance replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of information to inform credit loss estimates. The

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new guidance is effective for the Company on January 1, 2020. Management is currently evaluating the potential impact of the new guidance on the Company’s consolidated financial statements. 

On August 26, 2016, the FASB issued new guidance that addresses eight classification issues related to the statement of cash flows. Early adoption is permitted, including adoption in an interim period. This guidance should be applied retrospectively to each period presented. This new guidance is effective for the Company on January 1, 2018. Management is currently evaluating the potential impact of the new guidance on the Company’s consolidated financial statements.
 
3. Segments
 
Net operating income (segment revenues minus segment expenses) is the measure used by the Company’s chief operating decision-maker to assess segment performance. Net operating income is not a measure of operating income or cash flows from operating activities as measured by GAAP and is not indicative of cash available to fund cash needs. As a result, net operating income should not be considered an alternative to cash flows as a measure of liquidity. Not all companies calculate net operating income in the same manner. The Company considers net operating income to be an appropriate supplemental measure to net income because it assists both investors and management in understanding the core operations of the Company’s real estate and construction businesses.

Net operating income of the Company’s reportable segments for the three and nine months ended September 30, 2016 and 2015 was as follows (in thousands): 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(Unaudited)
Office real estate
 
 
 
 
 
 
 
 
Rental revenues
 
$
5,277

 
$
8,092

 
$
16,097

 
$
23,847

Rental expenses
 
1,553

 
1,758

 
4,307

 
5,216

Real estate taxes
 
485

 
734

 
1,550

 
2,228

Segment net operating income
 
3,239

 
5,600

 
10,240

 
16,403

Retail real estate
 
 
 
 
 
 
 
 
Rental revenues
 
14,340

 
8,523

 
41,485

 
22,715

Rental expenses
 
2,264

 
1,478

 
6,820

 
4,223

Real estate taxes
 
1,339

 
810

 
3,953

 
2,080

Segment net operating income
 
10,737

 
6,235

 
30,712

 
16,412

Multifamily residential real estate
 
 
 
 
 
 
 
 
Rental revenues
 
5,688

 
4,688

 
15,257

 
12,839

Rental expenses
 
2,017

 
1,629

 
5,107

 
4,817

Real estate taxes
 
532

 
512

 
1,584

 
1,364

Segment net operating income
 
3,139

 
2,547

 
8,566

 
6,658

General contracting and real estate services
 
 
 
 
 
 
 
 
Segment revenues
 
38,552

 
53,822

 
108,555

 
129,959

Segment expenses
 
37,274

 
51,716

 
104,336

 
125,141

Segment gross profit
 
1,278

 
2,106

 
4,219

 
4,818

Net operating income
 
$
18,393

 
$
16,488

 
$
53,737

 
$
44,291

 
General contracting and real estate services revenues for the three and nine months ended September 30, 2016 exclude revenue related to intercompany construction contracts of $7.8 million and $40.7 million, respectively. General contracting and real estate services expenses for the three and nine months ended September 30, 2016 exclude expenses related to intercompany construction contracts of $7.6 million and $40.2 million, respectively. General contracting and real estate services expenses for the three and nine months ended September 30, 2016 include noncash stock compensation expense of less than $0.1 million and $0.4 million, respectively.
 

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General contracting and real estate services revenues for the three and nine months ended September 30, 2015 exclude revenue from intercompany construction contracts of $11.4 million and $27.9 million, respectively. General contracting and real estate services expenses for the three and nine months ended September 30, 2015 exclude expenses for intercompany construction contracts of $11.3 million and $27.7 million, respectively. General contracting and real estate services expenses for the three and nine months ended September 30, 2015 include noncash stock compensation expense of less than $0.1 million and $0.2 million, respectively.

The following table reconciles net operating income to net income for the three and nine months ended September 30, 2016 and 2015 (in thousands): 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(Unaudited)
Net operating income
 
$
18,393

 
$
16,488

 
$
53,737

 
$
44,291

Depreciation and amortization
 
(8,885
)
 
(6,317
)
 
(25,636
)
 
(16,991
)
General and administrative expenses
 
(2,156
)
 
(1,873
)
 
(6,864
)
 
(6,297
)
Acquisition, development and other pursuit costs
 
(345
)
 
(288
)
 
(1,486
)
 
(1,050
)
Impairment charges
 
(149
)
 
—

 
(184
)
 
(23
)
Interest income
 
1,024

 
—

 
1,928

 
—

Interest expense
 
(4,124
)
 
(3,518
)
 
(11,893
)
 
(9,922
)
Loss on extinguishment of debt
 
(82
)
 
(3
)
 
(82
)
 
(410
)
Gain on real estate dispositions
 
3,753

 
—

 
30,440

 
13,407

Change in fair value of interest rate derivatives
 
498

 
(51
)
 
(2,264
)
 
(238
)
Other income
 
35

 
17

 
154

 
56

Income tax provision
 
(16
)
 
(118
)
 
(240
)
 
(83
)
Net income
 
$
7,946

 
$
4,337

 
$
37,610

 
$
22,740

 
General and administrative expenses for the three and nine months ended September 30, 2016 include noncash stock compensation expense of $0.1 million and $0.6 million, respectively. General and administrative expenses for the three and nine months ended September 30, 2015 include noncash stock compensation expense of $0.2 million and $0.6 million, respectively.
 
4. Real Estate Investments
 
Operating Property Acquisitions
 
In connection with operating property acquisitions, the Company identifies and recognizes all assets acquired and liabilities assumed at their estimated fair values as of the acquisition date. The purchase price allocations to tangible assets, such as land, site improvements, and buildings and improvements, are presented within income producing property in the condensed consolidated balance sheet and depreciated over their estimated useful lives. Acquired lease intangibles are presented within other assets and liabilities in the condensed consolidated balance sheet and amortized over their respective lease terms. The Company expenses all costs incurred related to operating property acquisitions. The Company values land based on a market approach, looking to recent sales of similar properties, adjusting for differences due to location and the state of entitlement as well as the shape and size of the parcel. Improvements to land are valued using a replacement cost approach, which applies industry standard replacement costs adjusted for geographic specific considerations and reduced by estimated depreciation. The value of buildings acquired is estimated using the replacement cost approach, assuming the buildings were vacant at acquisition. The replacement cost approach considers the composition of the structures acquired, adjusted for an estimate of depreciation. The estimate of depreciation is made considering industry standard information and depreciation curves for the identified asset classes. The value of acquired lease intangibles considers the estimated cost of leasing the properties as if the acquired buildings were vacant, as well as the value of the current leases relative to market-rate leases. The in-place lease value is determined using an estimated total lease-up time and lost rental revenues during such time. The value of current leases relative to market-rate leases is based on market rents obtained for comparable assets in the applicable markets. Given the significance of unobservable inputs used in the valuation of acquired real estate assets, the Company classifies them as Level 3 inputs in the fair value hierarchy.
 

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On January 14, 2016, the Company completed the acquisition of an 11 asset retail portfolio totaling 1.1 million square feet for a gross purchase price of $170.5 million, less normal closing adjustments.

On April 29, 2016, the Company completed the acquisition of Southgate Square located in Colonial Heights, Virginia, for aggregate consideration of $39.5 million, comprised of the assumption of $21.1 million in debt (which approximates fair value as of the closing date) and 1,575,185 Class A Units.

As part of the Southgate Square purchase agreement, the Company acquired an option to purchase an adjacent undeveloped land parcel from the seller. The option for the land parcel is valid for an initial period of two years, and its value would be determined by applying a mutually agreed upon capitalization rate to the base rent of tenants provided by the seller and approved by the Company. If, at the end of the two-year period, no suitable tenants have been found, the Company has the option of either paying $3.0 million to the seller for the land parcel or extending the period for an additional year. If, at the end of the additional year, no suitable tenants have been found, the Company can either pay $1.25 million to the seller for the land parcel or let the option expire. Management has evaluated the option and determined that its value is immaterial to the consolidated financial statements.

On August 4, 2016, the Company completed the acquisition of Southshore Shops located in Chesterfield, Virginia, for aggregate consideration of $9.3 million, comprised of $6.7 million in cash and 189,160 Class A Units.

The following table summarizes the acquisition date fair values of the assets acquired and liabilities assumed during the nine months ended September 30, 2016 (in thousands): 
 
Retail
Portfolio
 
Southgate Square
 
Southshore Shops
 
Total
Land
$
66,260

 
$
8,890

 
$
1,770

 
$
76,920

Site improvements
3,870

 
2,140

 
490

 
6,500

Building and improvements
88,820

 
23,810

 
6,019

 
118,649

In-place leases
20,630

 
5,990

 
1,140

 
27,760

Above-market leases
1,960

 
100

 
120

 
2,180

Below-market leases
(11,040
)
 
(1,400
)
 
(190
)
 
(12,630
)
Net assets acquired
$
170,500

 
$
39,530

 
$
9,349

 
$
219,379

 
The following table summarizes the consolidated results of operations of the Company on a pro forma basis, as if the 11 asset retail portfolio acquisition had occurred on January 1, 2015 (in thousands): 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(Unaudited)
Rental revenues
 
$
25,305

 
$
25,918

 
$
73,370

 
$
73,247

Net income
 
7,946

 
5,493

 
11,639

 
11,814

 
The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place on January 1, 2015. The pro forma financial information includes adjustments to rental revenues for above and below-market leases and adjustments to depreciation and amortization expense for acquired property and in-place lease assets.
 
For the three months ended September 30, 2016, rental revenues and net income from the acquired properties for the period from the respective acquisition dates to September 30, 2016 included in the consolidated statement of comprehensive income was $4.8 million and $0.7 million, respectively. For the nine months ended September 30, 2016, rental revenues and net income from the acquired properties for the period from the respective acquisition dates to September 30, 2016 included in the consolidated statement of comprehensive income was $13.3 million and $2.1 million, respectively.
 

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Subsequent to September 30, 2016

On October 13, 2016, the Company completed the acquisition of a stabilized retail asset for aggregate consideration of 2,000,000 shares of the Company's common stock, which based on the closing stock price on the date of the acquisition, leads to an acquisition price of $26.2 million.

Investment in Unconsolidated Entities
 
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.  As of September 30, 2016, the Company has invested $10.3 million in City Center. 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 September 30, 2016, the construction loan has not been drawn against.
 
As of September 30, 2016, the difference between the carrying value of the Company’s initial investment in City Center and the amount of underlying equity was immaterial. For the three and nine months ended September 30, 2016, City Center did not have any operating activity, and therefore the Company did not receive any dividends or allocated income. 
 
Based on the terms of City Center’s operating agreement, the Company has concluded that City Center is a variable interest entity, 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.

Point Street Apartments

The Company holds a note receivable for the Point Street Apartments project, which was entered into in October 2015.  The Company has agreed to fund up to $23.0 million for this project. The balance of the note receivable was $19.3 million and $7.8 million as of September 30, 2016 and December 31, 2015, respectively. During the three and nine months ended September 30, 2016, the Company recognized $0.4 million and $0.8 million of interest income on the note, respectively.  No portion of the note receivable balance is past due and the Company has not recorded an impairment balance on the note. 

Annapolis Junction

On April 21, 2016, the Company entered into a note receivable with a maximum principal balance of $42.0 million in the Annapolis Junction residential component of the Annapolis Junction Town Center project in Maryland (“Annapolis Junction”). Annapolis Junction is an estimated $102.0 million mixed-use development project with plans for 416 residential units, 17,000 square feet of retail space and a 150-room hotel. Annapolis Junction Apartments Owner, LLC (“AJAO”) is the developer of the residential component and has engaged the Company to serve as construction general contractor for the residential component. Annapolis Junction is scheduled to open in 2018; however, management can provide no assurances that Annapolis Junction will open on the anticipated timeline or at the anticipated cost.
 
AJAO is responsible for securing a senior construction loan of up to $60.0 million to fund the development and construction of Annapolis Junction's residential component. 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 upon completion of the project as follows: (i) an option to purchase an 80% indirect interest in Annapolis Junction's residential component for the lesser of the seller’s budgeted or actual cost, exercisable within one year from the project’s completion (the “First Option”) and (ii) provided that the Company has exercised the First Option, an option to purchase an additional 8% indirect interest in Annapolis Junction for the lesser of the seller’s actual or budgeted cost, exercisable within 27 months from the project’s completion (the “Second Option”).
 
The Company’s investment in the Annapolis Junction project is in the form of a loan under which AJAO may borrow up to $48.0 million, including a $6.0 million interest reserve (the “AJAO loan”). Interest on the AJAO loan accrues at 10.0% per annum and matures on the earlier of: (i) December 21, 2020, which may be extended by AJAO under two one-year extension options, (ii) the maturity date or earlier termination of the senior construction loan or (iii) the date the Company exercises the Second Option as described further below. In the event that the Company exercises the First Option, AJAO is required to simultaneously pay down both the senior construction loan and the AJAO loan by 80%, at which time the

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interest rate on the AJAO loan will automatically be reduced to the interest rate on the senior construction loan. In the event the Company exercises the Second Option, AJAO is required to simultaneously repay any remaining amounts outstanding under the AJAO loan, with any excess proceeds received from the exercise of the Second Option applied against the remaining balance of the senior construction loan. In the event that the Company does not exercise either the First Option or the Second Option, the interest rate on the AJAO loan will automatically be reduced to the interest rate on the senior construction loan for the remaining term of the AJAO loan. During the three and nine months ended September 30, 2016, the Company recognized $0.6 million and $1.1 million, respectively, in interest income on the note. No portion of the note receivable balance is past due and the Company has not recorded an impairment balance on the note.

The balance on the Annapolis Junction note was $30.6 million as of September 30, 2016.

Harding Place

On March 16, 2016, the Company entered into a note receivable with a maximum balance of $0.5 million with Southern Apartment Group-Harding, LLC ("SAGH") for funding of pre-development expenses on an apartment development project in Charlotte, North Carolina ("SAGH Note"). Interest on the note accrues at 10.0% per annum and matures on the earlier of: (i) the funding of a mezzanine loan to cover the development costs of the project or (ii) 120 days from the date that the Company advises SAGH that it will not fund the mezzanine loan or (iii) within three years of the date of the loan. On July 28, 2016, the Company advised SAGH that it would not fund the mezzanine loan, making the maturity date November 25, 2016.

On August 30, 2016, the Company entered into an operating agreement with SAGH to jointly develop the aforementioned apartment project, and the $0.3 million balance on the SAGH Note was converted into equity in the joint venture entity. During the three months ended September 30, 2016, the Company purchased $6.2 million of land in conjunction with the project.

Real Estate Dispositions
 
On November 2, 2015, the Company entered into an agreement to sell the Richmond Tower office building for $78.0 million. The Company completed the disposition on January 8, 2016.  Net proceeds after transaction costs were $77.0 million. The gain on the disposition of Richmond Tower was $26.2 million.
 
On January 7, 2016, the Company completed the sale of a building constructed for the Economic Development Authority of Newport News, Virginia.  Net proceeds after transaction costs were $6.6 million.  The gain on the disposition was $0.4 million.

On June 20, 2016, the Company completed the sale of the Willowbrook Commons property located in Nashville, Tennessee for $9.2 million.  The gain on the sale of the Willowbrook Commons property was less than $0.1 million.
 
On July 29, 2016, the Company completed the sale of the Kroger Junction property located in Pasadena, Texas for $3.7 million. The loss on the sale of the Kroger Junction property was less than $0.1 million.

On September 15, 2016, the Company completed the sale of the Oyster Point office property for $6.4 million. Net proceeds after transaction costs and settlement of liabilities were not significant. The gain on the disposition of Oyster Point was $3.8 million.

5. Indebtedness
 
Credit Facility
 
On February 20, 2015, the Operating Partnership, as borrower, and the Company, as parent guarantor, entered into a new $200.0 million senior unsecured credit facility that includes a $150.0 million senior unsecured revolving credit facility and a $50.0 million senior unsecured term loan facility. The new credit facility replaced the prior $155.0 million senior secured revolving credit facility that was scheduled to mature on May 13, 2016. During the first quarter of 2016, the total capacity was increased to $250.0 million pursuant to the accordion feature of the credit facility.
 
Depending on the Operating Partnership’s total leverage, the revolving credit facility bears interest at LIBOR plus 1.40% to 2.00% and the term loan facility bears interest at LIBOR plus 1.35% to 1.95%. As of September 30, 2016, the effective

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interest rates on the revolving credit facility and the term loan facility were 2.07% and 2.02%, respectively. The revolving credit facility has a scheduled maturity date of February 20, 2019, with a one-year extension option, subject to certain conditions, and the term loan facility has a scheduled maturity date of February 20, 2020. The Operating Partnership may, at any time, voluntarily prepay any loan under the new credit facility in whole or in part without premium or penalty.
 
On February 25, 2016, the Company amended the credit facility to, among other things, allow the maximum leverage ratio of the Company to be increased to 65% for the two consecutive quarters following any acquisition that is equal to or greater than 10% of the Company’s total asset value (as defined in the credit agreement), but only up to two times during the term of the credit facility.
 
During the first quarter of 2016, the Company increased the borrowings under the senior unsecured term loan facility to $100.0 million.
 
As of September 30, 2016, the outstanding balances on the revolving credit facility and the term loan facility were $102.0 million and $100.0 million, respectively.

Other Financing Activity
 
On August 8, 2016, the Company repaid the existing $15.1 million mortgage loan secured by 249 Central Park Retail, the $6.7 million mortgage loan on South Retail and the $7.6 million mortgage loan on Fountain Plaza and refinanced them with a $35.0 million five-year term mortgage loan that bears interest at LIBOR plus 1.95% and matures on August 8, 2021. The new mortgage loan is collateralized by all three properties. The loss on extinguishment of debt recognized on the refinancing was less than $0.1 million.

On August 30, 2016, the Company repaid the existing $31.6 million construction loan secured by 4525 Main Street and the $25.2 million construction loan on Encore Apartments and refinanced them with a $57.0 million five-year term mortgage loan that bears interest at 3.25% and matures on September 10, 2021. The new mortgage is collateralized by both properties. The loss on extinguishment of debt recognized on the refinancing was less than $0.1 million for the three and nine months ended September 30, 2016.

During the nine months ended September 30, 2016, the Company borrowed $41.2 million under its construction loans to fund new development and construction.

Subsequent to September 30, 2016

On October 4, 2016, the Company increased its borrowings under the revolving credit facility by $6.0 million.
 
6. 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 comprehensive income. For derivatives that qualify as cash flow hedges, the effective portion of the gain or loss is reported as a component of other comprehensive loss and reclassified into earnings in the periods during which the hedged forecasted transaction affects earnings.
 
On February 25, 2016, the Operating Partnership entered into a LIBOR interest rate cap agreement on a notional amount of $75.0 million at a strike rate of 1.50% for a premium of less than $0.1 million.  The interest rate cap agreement expires on March 1, 2018.

On June 17, 2016, the Operating Partnership entered into a LIBOR interest rate cap agreement on a notional amount of $70.0 million at a strike rate of 1.00% for a premium of less than $0.1 million. The interest rate cap agreement expires on June 17, 2018.
 

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The Company’s derivatives were comprised of the following as of September 30, 2016 and December 31, 2015 (in thousands): 
 
 
September 30, 2016
 
December 31, 2015
 
 
(Unaudited)
 
 
 
 
 
 
 
 
Notional
Amount
 
Fair Value
 
Notional
Amount
 
Fair Value
 
 
 
 
Asset
 
Liability
 
 
 
Asset
 
Liability
Interest rate swaps
 
$
56,950

 
$
—

 
$
(2,007
)
 
$
57,093

 
$
—

 
$
(1,082
)
Interest rate caps
 
270,000

 
111

 
—

 
246,546

 
164

 
—

Total
 
$
326,950

 
$
111

 
$
(2,007
)
 
$
303,639

 
$
164

 
$
(1,082
)
 
The changes in the fair value of the Company’s derivatives during the three and nine months ended September 30, 2016 and 2015 were comprised of the following (in thousands): 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(Unaudited)
Interest rate swaps
 
$
481

 
$
(1,026
)
 
$
(2,007
)
 
$
(1,574
)
Interest rate caps
 
17

 
(51
)
 
(257
)
 
(238
)
Total
 
$
498

 
$
(1,077
)
 
$
(2,264
)
 
$
(1,812
)
Comprehensive income statement presentation:
 
 

 
 

 
 
 
 
Change in fair value of interest rate derivatives
 
$
498

 
$
(51
)
 
$
(2,264
)
 
$
(238
)
Unrealized gain (loss) on cash flow hedge
 
—

 
(1,026
)
 
—

 
(1,574
)
Total
 
$
498

 
$
(1,077
)
 
$
(2,264
)
 
$
(1,812
)

Effective March 31, 2016, the Company determined that the short-cut method of hedge accounting was not appropriate for two of its interest-rate swaps and, for accounting purposes, the hedge relationship was terminated. The swaps were entered into in February and July 2015. Accordingly, changes in fair value of the swap should have been recorded in income rather than other comprehensive income. The Company determined that the errors were immaterial to all previously issued financial statements. The Company recognized $0.7 million of accumulated other comprehensive income and $0.4 million, which was previously allocated to noncontrolling interest as of December 31, 2015, in earnings during the first quarter of 2016. Subsequent changes in the value of the interest rate swap for the period from January 1, 2016 to September 30, 2016 were also recognized in earnings during the first, second and third quarters of 2016. Net income for the three and nine months ended September 30, 2015 was overstated by $0.6 million and $1.0 million, respectively. In reaching its conclusions, management considered the nature of the error, the effect of the error on operating results for 2015, and the effects of the error on important financial statement measures, including related trends.   
 
7. Equity
 
Stockholders’ Equity
 
On May 4, 2016, the Company commenced a new at-the-market continuous equity offering program (the “New 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 $75.0 million. Upon commencing the New ATM Program, the Company simultaneously terminated its prior $50.0 million at-the-market continuous equity offering program (the "Prior ATM Program"), which the Company entered into in May 2015. During the nine months ended September 30, 2016, the Company issued and sold an aggregate of 1,152,919 shares of common stock at a weighted average price of $10.87 per share under the Prior ATM Program prior to its termination on May 4, 2016, receiving net proceeds after offering costs and commissions of $12.2 million. From the inception date of the New ATM Program through September 30, 2016, the Company issued and sold an aggregate of 2,926,563 shares of common stock at a weighted average price of $13.17 per share under the New ATM Program, receiving net proceeds after offering costs and commissions of $37.7 million.
 
As of September 30, 2016 and December 31, 2015, the Company’s authorized capital was 500 million shares of common stock and 100 million shares of preferred stock. The Company had 34,255,874 and 30,076,359 shares of common stock

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issued and outstanding as of September 30, 2016 and December 31, 2015, respectively. No shares of preferred stock were issued and outstanding as of September 30, 2016 or December 31, 2015.
 
Noncontrolling Interests
 
As of September 30, 2016 and December 31, 2015, the Company held a 66.2% and 65.6% interest in the Operating Partnership, respectively. 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 66.2% 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 not held by the Company.
 
As of September 30, 2016, there were 16,518,474 Class A Units not held by the Company. The noncontrolling interest for the consolidated entities under development or construction (see Note 1) was zero as of September 30, 2016 and December 31, 2015.
 
As partial consideration for Columbus Village, the Operating Partnership issued 1,000,000 Class B Units on July 10, 2015 and agreed to issue 275,000 Class C Units on January 10, 2017. Subject to the occurrence of certain events, the Class B Units and Class C Units will not earn or accrue distributions until July 10, 2017 and January 10, 2018, respectively, at which time each automatically will convert to Class A Units.
 
Common Stock Dividends and Class A Unit Distributions
 
On January 7, 2016, the Company paid cash dividends of $5.1 million to common stockholders and the Operating Partnership paid cash distributions of $2.5 million to holders of Class A Units.
 
On April 7, 2016, the Company paid cash dividends of $5.6 million to common stockholders and the Operating Partnership paid cash distributions of $2.7 million to holders of Class A Units.

On July 7, 2016, the Company paid cash dividends of $5.9 million to common stockholders and the Operating Partnership paid cash distributions of $2.9 million to holders of Class A Units.

On August 4, 2016, the Board of Directors declared a cash dividend of $0.18 per share payable on October 6, 2016 to stockholders of record on September 28, 2016.

Subsequent to September 30, 2016

On October 6, 2016, the Company paid cash dividends of $6.2 million to common stockholders and the Operating Partnership paid cash distributions of $3.0 million to holders of Class A Units.

From October 1, 2016 to October 14, 2016, the Company issued and sold an aggregate of 169,548 shares of common stock under the New ATM Program at a weighted average price of $13.11 per share. Net proceeds to the Company after offering costs and commissions were $2.2 million.

On October 13, 2016, the Company completed the acquisition of a stabilized retail asset for aggregate consideration of 2,000,000 shares of common stock, which based on the closing stock price on the date of the acquisition, leads to an acquisition price of $26.2 million. On October 19, 2016, the Company filed a registration statement covering resales of the shares pursuant to a registration rights agreement with the sellers.
 
8. Stock-Based Compensation
 
During the nine months ended September 30, 2016, the Company granted an aggregate of 119,985 shares of restricted stock to employees and non-employee directors with a weighted average grant date fair value of $11.19 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.
 

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On January 1, 2016, the Company established its Long Term Incentive Plan (“LTIP”) and entered into agreements with certain of its employees to issue performance-based awards in the form of restricted stock units.  The performance period for these agreements is three years, with a required two-year service period immediately following the performance period. The compensation expense and the effect on the Company’s weighted average diluted shares calculation were immaterial.

During the three and nine months ended September 30, 2016, the Company recognized $0.3 million and $1.2 million of stock-based compensation expense, respectively. During the three and nine months ended September 30, 2015, the Company recognized $0.2 million and $1.0 million of stock-based compensation expense, respectively. As of September 30, 2016, there were 105,152 nonvested restricted shares outstanding; the total unrecognized compensation expense related to nonvested restricted shares was $0.3 million, which the Company expects to recognize over the next 18 months.
 
9. Fair Value of Financial Instruments
 
Fair value measurements are based on assumptions that market participants would use in pricing an asset or a liability. The hierarchy for inputs used in measuring fair value is as follows: 
Level 1—quoted prices in active markets for identical assets or liabilities 
Level 2—observable inputs other than quoted prices in active markets for identical assets and liabilities 
Level 3—unobservable inputs 
Except as disclosed below, the carrying amounts of the Company’s financial instruments approximate their fair value. Financial assets and liabilities whose fair values are measured on a recurring basis using Level 2 inputs consist of interest rate swaps and caps. The Company measures the fair values of these assets and liabilities based on prices provided by independent market participants that are based on observable inputs using market-based valuation techniques.
 
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. For disclosure purposes, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
 
The fair value of the Company’s long term debt is sensitive to fluctuations in interest rates. Discounted cash flow analysis based on Level 2 inputs is generally used to estimate the fair value of the Company’s long term debt. Considerable judgment is used to estimate the fair value of financial instruments. The estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments.
 
The carrying amounts and fair values of the Company’s financial instruments, all of which are based on Level 2 inputs, as of September 30, 2016 and December 31, 2015, were as follows (in thousands): 
 
 
September 30, 2016
 
December 31, 2015
 
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
 
(Unaudited)
 
 

 
 

Indebtedness
 
$
519,209

 
$
519,878

 
$
377,593

 
$
384,691

Interest rate swap liabilities
 
2,007

 
2,007

 
1,082

 
1,082

Interest rate cap assets
 
111

 
111

 
164

 
164

 

16

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10. Related Party Transactions
 
The Company provides general contracting and real estate services to certain related party entities that are not included in these condensed consolidated financial statements. Revenue from construction contracts with related party entities of the Company were $0.2 million and $15.1 million for the three and nine months ended September 30, 2016, respectively. Gross profit from such contracts was $0.2 million and $0.8 million for the three and nine months ended September 30, 2016, respectively. Revenue from construction contracts with related party entities of the Company was $1.5 million and $5.5 million for the three and nine months ended September 30, 2015, respectively. Gross profit from such contracts was less than $0.1 million and $0.2 million for the three and nine months ended September 30, 2015. Real estate services fees from affiliated entities of the Company were not significant for either the three and nine months ended September 30, 2016 or 2015. 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 either the three and nine months ended September 30, 2016 or 2015. 
 
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 federal income tax purposes. Pursuant to these tax protection agreements, certain of the Company’s executive officers have guaranteed $0.3 million of the Operating Partnership’s outstanding debt as of September 30, 2016.

In addition, the loan for the City Center joint venture is underwritten by a syndicate which includes Park Sterling Bank.  The Chief Executive Officer of Park Sterling Bank is the Chairman of the Company’s Audit Committee.
 
11. 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, none of which management expects will have a material adverse effect on the Company’s financial position, results of operations or liquidity. Management accrues a liability for litigation if an unfavorable outcome is determined to be probable and the amount of loss can be reasonably estimated. If an unfavorable outcome is determined to be probable and a range of loss can be reasonably estimated, management accrues the best estimate within the range; however, if no amount within the range is a better estimate than any other, the minimum amount within the range is accrued. Legal fees related to litigation are expensed as incurred. Management does not believe 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 $184.0 million and $183.0 million as of September 30, 2016 and December 31, 2015, respectively.
 
The Operating Partnership has entered into standby letters of credit using the available capacity under the credit facility. The letters of credit relate to the guarantee of future performance on certain of the Company’s construction contracts. Letters of credit generally are available for draw down in the event the Company does not perform. As of September 30, 2016 and December 31, 2015, the Operating Partnership had total outstanding letters of credit of $2.0 million and $8.0 million, respectively.

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Review Report of Independent Registered Public Accounting Firm
 
Board of Directors and Stockholders of
Armada Hoffler Properties, Inc.
 
We have reviewed the condensed consolidated balance sheet of Armada Hoffler Properties, Inc. as of September 30, 2016, and the related condensed consolidated statements of comprehensive income for the three and nine-month periods ended September 30, 2016 and 2015, the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2016 and 2015 and the condensed consolidated statement of equity for the nine-month period ended September 30, 2016. These financial statements are the responsibility of the Company’s management.
 
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
 
Based on our review, we are not aware of any material modifications that should be made to the condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.
 
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Armada Hoffler Properties, Inc. as of December 31, 2015, and the related consolidated statements of comprehensive income, equity, and cash flows for the year then ended (not presented herein) and we expressed an unqualified audit opinion on those consolidated financial statements in our report dated March 2, 2016. In our opinion, the accompanying condensed consolidated balance sheet as of December 31, 2015, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
 
/s/ Ernst & Young LLP
 
McLean, Virginia
November 2, 2016

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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; and 
•
changes in governmental regulations or interpretations thereof, such as real estate and zoning laws and increases in real property tax rates and taxation of REITs.
 
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 throughout the Mid-Atlantic United States. As of September 30, 2016, we owned 100% of the interests in, and consolidate for financial reporting purposes, each of the following properties in our operating property portfolio:
 
Property
    
Segment
    
Location
4525 Main Street
 
Office
 
Virginia Beach, Virginia*
Armada Hoffler Tower
 
Office
 
Virginia Beach, Virginia*
Commonwealth of Virginia - Chesapeake
 
Office
 
Chesapeake, Virginia
Commonwealth of Virginia - Virginia Beach
 
Office
 
Virginia Beach, Virginia
One Columbus
 
Office
 
Virginia Beach, Virginia*
Two Columbus
 
Office
 
Virginia Beach, Virginia*
249 Central Park Retail
 
Retail
 
Virginia Beach, Virginia*
Alexander Pointe
 
Retail
 
Salisbury, North Carolina
Bermuda Crossroads
 
Retail
 
Chester, Virginia
Broad Creek Shopping Center
 
Retail
 
Norfolk, Virginia
Broadmoor Plaza
 
Retail
 
South Bend, Indiana
Columbus Village
 
Retail
 
Virginia Beach, Virginia*
Commerce Street Retail
 
Retail
 
Virginia Beach, Virginia*
Courthouse 7-Eleven
 
Retail
 
Virginia Beach, Virginia
Dick's at Town Center
 
Retail
 
Virginia Beach, Virginia*
Dimmock Square
 
Retail
 
Colonial Heights, Virginia
Fountain Plaza Retail
 
Retail
 
Virginia Beach, Virginia*
Gainsborough Square
 
Retail
 
Chesapeake, Virginia
Greentree Shopping Center
 
Retail
 
Chesapeake, Virginia
Hanbury Village
 
Retail
 
Chesapeake, Virginia
Harper Hill Commons
 
Retail
 
Winston-Salem, North Carolina
Harrisonburg Regal
 
Retail
 
Harrisonburg, Virginia

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Property
    
Segment
    
Location
North Hampton Market
 
Retail
 
Taylors, South Carolina
North Point Center
 
Retail
 
Durham, North Carolina
Oakland Marketplace
 
Retail
 
Oakland, Tennessee
Parkway Marketplace
 
Retail
 
Virginia Beach, Virginia
Patterson Place
 
Retail
 
Durham, North Carolina
Perry Hall Marketplace
 
Retail
 
Perry Hall, Maryland
Providence Plaza
 
Retail
 
Charlotte, North Carolina
Sandbridge Commons
 
Retail
 
Virginia Beach, Virginia
Socastee Commons
 
Retail
 
Myrtle Beach, South Carolina
Southgate Square
 
Retail
 
Colonial Heights, Virginia
Southshore Shops
 
Retail
 
Chesterfield, Virginia
South Retail
 
Retail
 
Virginia Beach, Virginia*
South Square
 
Retail
 
Durham, North Carolina
Stone House Square
 
Retail
 
Hagerstown, Maryland
Studio 56 Retail
 
Retail
 
Virginia Beach, Virginia*
Tyre Neck Harris Teeter
 
Retail
 
Portsmouth, Virginia
Waynesboro Commons
 
Retail
 
Waynesboro, Virginia
Wendover Village
 
Retail
 
Greensboro, North Carolina
Encore Apartments
 
Multifamily
 
Virginia Beach, Virginia*
Liberty Apartments
 
Multifamily
 
Newport News, Virginia
Smith's Landing
 
Multifamily
 
Blacksburg, Virginia
The Cosmopolitan
 
Multifamily
 
Virginia Beach, Virginia*
*Located in the Town Center of Virginia Beach

As of September 30, 2016, the following properties that we consolidate for financial reporting purposes were either under development or construction: 
Property
    
Segment
    
Location
Ownership Interest
 
Brooks Crossing
 
Office/Retail
 
Newport News, Virginia
65
%
 
Johns Hopkins Village
 
Multifamily
 
Baltimore, Maryland
80
%
(1) 
Lightfoot Marketplace
 
Retail
 
Williamsburg, Virginia
70
%
 
Town Center Phase VI
 
Multifamily
 
Virginia Beach, Virginia*
80
%
 
Harding Place
 
Multifamily
 
Charlotte, North Carolina
80
%
 
 
 
 
 
 
 
 
 

(1)
The noncontrolling interest holder of Johns Hopkins Village has the right to exchange its 20% ownership interest for Class A units of limited partnership interest in the Operating Partnership (“Class A Units”) upon and for a period of one year after the project’s completion.  We are entitled to a preferred return of 9% on our investment in Johns Hopkins Village.
*Located in the Town Center of Virginia Beach
 
Please see Note 4 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.
 

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Acquisitions and Dispositions
 
On April 29, 2016, we completed the acquisition of Southgate Square, located in Colonial Heights, Virginia, for aggregate consideration of $39.5 million, comprised of the assumption of $21.1 million in debt and 1,575,185 Class A Units.

On June 20, 2016, we completed the sale of the Willowbrook Commons property located in Nashville, Tennessee for $9.2 million.  

On July 29, 2016, we completed the sale of the Kroger Junction property located in Pasadena, Texas for $3.7 million.

On August 4, 2016, we completed the acquisition of Southshore Shops, located in Chesterfield, Virginia, for aggregate consideration of $9.3 million, comprised of $6.7 million in cash and 189,160 Class A Units.

On September 15, 2016, the Company completed the sale of the Oyster Point office property for $6.4 million.

On October 13, 2016, the Company completed the acquisition of a stabilized retail asset for aggregate consideration of 2,000,000 shares of common stock, which based on the closing stock price on the date of the acquisition, leads to an acquisition price of $26.2 million.

Third Quarter 2016 Highlights
 
The following highlights our results of operations and significant transactions for the three months ended September 30, 2016:
 
•Net income of $7.9 million, or $0.15 per diluted share, compared to $4.3 million, or $0.10 per diluted share, for the three months ended September 30, 2015. 
•Funds from operations ("FFO") of $13.1 million, or $0.25 per diluted share, compared to $10.7 million, or $0.25 per diluted share, for the three months ended September 30, 2015. See “Non-GAAP Financial Measures.” 
•Normalized funds from operations (“Normalized FFO”) of $13.2 million, or $0.26 per diluted share, compared to $11.0 million, or $0.26 per diluted share, for the three months ended September 30, 2015. See “Non-GAAP Financial Measures.”
•Property segment net operating income (“NOI”) of $17.1 million compared to $14.4 million for the three months ended September 30, 2015: 
•
Office NOI of $3.2 million compared to $5.6 million 
•
Retail NOI of $10.7 million compared to $6.2 million 
•
Multifamily NOI of $3.1 million compared to $2.5 million 
•Same store NOI of $10.0 million compared to $9.9 million for the three months ended September 30, 2015: 
•
Office same store NOI of $2.4 million compared to $2.4 million
•
Retail same store NOI of $5.9 million compared to $5.7 million 
•
Multifamily same store NOI of $1.7 million compared to $1.8 million 
•General contracting and real estate services segment gross profit of $1.3 million compared to $2.1 million for the three months ended September 30, 2015. 
•Third party construction backlog of $246.4 million as of September 30, 2016. 
•Raised $19.9 million of gross proceeds at a weighted average price of $13.93 per share under our New ATM Program (as defined below). Net proceeds totaled $19.5 million. 
•Declared cash dividends of $0.18 per share.

 

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Segment Results of Operations
 
As of September 30, 2016, we operated our business in four segments: (i) office real estate, (ii) retail real estate, (iii) multifamily residential real estate and (iv) general contracting and real estate services, which are conducted through our taxable REIT subsidiaries (“TRS”). Net operating income (segment revenues minus segment expenses), or “NOI”, is the measure used by management to assess segment performance and allocate our resources among our segments. NOI is not a measure of operating income or cash flows from operating activities as measured by accounting principles generally accepted in the United States (“GAAP”) and is not indicative of cash available to fund cash needs. As a result, NOI should not be considered an alternative to cash flows as a measure of liquidity. Not all companies calculate NOI in the same manner. We consider NOI to be an appropriate supplemental measure to net income because it assists both investors and management in understanding the core operations of our real estate and construction businesses. See Note 3 to our condensed consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q for a reconciliation of NOI to net income.
 
We define same store properties as those properties that we owned and operated and that were stabilized for the entirety of both periods presented. Same store properties exclude those that were in lease-up during either of the periods presented. We generally consider a property to be in lease-up until 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.
 
Office Segment Data 
 
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
 
 
(unaudited, $ in thousands)
Rental revenues
 
$
5,277

 
$
8,092

 
$
(2,815
)
 
$
16,097

 
$
23,847

 
$
(7,750
)
Property expenses
 
2,038

 
2,492

 
(454
)
 
5,857

 
7,444

 
(1,587
)
Segment NOI
 
$
3,239

 
$
5,600

 
$
(2,361
)
 
$
10,240

 
$
16,403

 
$
(6,163
)
 
Office segment NOI for the three and nine months ended September 30, 2016 decreased $2.4 million and $6.2 million, respectively, compared to the corresponding periods in 2015. This decrease is due to the sales of the Sentara Williamsburg, Richmond Tower and Oceaneering office buildings, which contributed $2.2 million and $6.3 million, respectively, in office segment NOI for the three and nine months ended September 30, 2015. We completed the sale of the Sentara Williamsburg in the first quarter of 2015, the sale of the Oceaneering office building in the fourth quarter of 2015, and the sale of the Richmond Tower office building in the first quarter of 2016.

Office Same Store Results
 
Office same store results for the three and nine months ended September 30, 2016 exclude new real estate development – 4525 Main Street – as well as the Sentara Williamsburg, Richmond Tower and Oyster Point office buildings, which we sold in the first quarter of 2015, the first quarter of 2016 and the third quarter of 2016, respectively.
 
Office same store rental revenues, property expenses and NOI for the three and nine months ended September 30, 2016 and 2015 were as follows: 
 
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
 
 
(unaudited, $ in thousands)
Rental revenues
 
$
3,883

 
$
3,838

 
$
45

 
$
11,671

 
$
11,669

 
$
2

Property expenses
 
1,443

 
1,413

 
30

 
4,103

 
4,292

 
(189
)
Same Store NOI
 
$
2,440

 
$
2,425

 
$
15

 
$
7,568

 
$
7,377

 
$
191

Non-Same Store NOI
 
799

 
3,175

 
(2,376
)
 
2,672

 
9,026

 
(6,354
)
Segment NOI
 
$
3,239

 
$
5,600

 
$
(2,361
)
 
$
10,240

 
$
16,403

 
$
(6,163
)
 
Office same store NOI for the three and nine months ended September 30, 2016 increased 1% and 3%, respectively, compared to the corresponding periods in 2015 as a result of contractual rent increases.  These increases were partially offset by

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higher utility costs in the three months ended September 30, 2016. For the nine months ended September 30, 2016, these increases were also a result of lower utility costs driven by the milder winter of 2016 compared to 2015.
 

Retail Segment Data

 
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
 
 
(unaudited, $ in thousands)
Rental revenues
 
$
14,340

 
$
8,523

 
$
5,817

 
$
41,485

 
$
22,715

 
$
18,770

Property expenses
 
3,603

 
2,288

 
1,315

 
10,773

 
6,303

 
4,470

Segment NOI
 
$
10,737

 
$
6,235

 
$
4,502

 
$
30,712

 
$
16,412

 
$
14,300

 
Retail segment NOI for the three and nine months ended September 30, 2016 increased $4.5 million and $14.3 million, respectively, compared to the corresponding periods in 2015. 2016 acquisitions and new real estate development contributed $3.9 million and $10.5 million, respectively, of NOI during the three and nine months ended September 30, 2016. Same store NOI growth coupled with 2015 acquisitions not included in same store NOI accounted for the balance of the increase.
 
During the second quarter of 2015, we acquired Stone House Square in Hagerstown, Maryland and Perry Hall Marketplace in Perry Hall, Maryland. During the third quarter of 2015, we acquired Socastee Commons in Myrtle Beach, South Carolina, Columbus Village in Virginia Beach, Virginia and Providence Plaza in Charlotte, North Carolina. During the first quarter of 2016, we acquired the 11 property retail portfolio. During the second quarter of 2016, we acquired Southgate Square in Colonial Heights, Virginia. During the third quarter of 2016, we acquired Southshore Shops in Chesterfield, Virginia.
 
Retail Same Store Results
 
Retail same store results for the three months ended September 30, 2016 exclude Columbus Village, Providence Plaza, the eleven property retail portfolio, Southgate Square and Southshore Shops. Retail same store results for the nine months ended September 30, 2016 exclude Sandbridge Commons, Stone House Square, Perry Hall Marketplace, Socastee Commons, Columbus Village, Providence Plaza, Greentree Shopping Center, the eleven property retail portfolio, Southgate Square and Southshore Shops.

Retail same store rental revenues, property expenses and NOI for the three and nine months ended September 30, 2016 and 2015 were as follows:
 
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
 
 
(unaudited, $ in thousands)
Rental revenues
 
$
8,211

 
$
7,907

 
$
304

 
$
19,688

 
$
19,352

 
$
336

Property expenses
 
2,295

 
2,194

 
101

 
5,684

 
5,581

 
103

Same Store NOI
 
$
5,916

 
$
5,713

 
$
203

 
$
14,004

 
$
13,771

 
$
233

Non-Same Store NOI
 
4,821

 
522

 
4,299

 
16,708

 
2,641

 
14,067

Segment NOI
 
$
10,737

 
$
6,235

 
$
4,502

 
$
30,712

 
$
16,412

 
$
14,300

 
Retail same store NOI increased 4% and 2% for the three and nine months ended September 30, 2016, respectively, compared to the corresponding periods in 2015. The increases were the result of higher occupancy, specifically at Two Columbus.


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Multifamily Segment Data
 
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
 
 
(unaudited, $ in thousands)
Rental revenues
 
$
5,688

 
$
4,688

 
$
1,000

 
$
15,257

 
$
12,839

 
$
2,418

Property expenses
 
2,549

 
2,141

 
408

 
6,691

 
6,181

 
510

Segment NOI
 
$
3,139

 
$
2,547

 
$
592

 
$
8,566

 
$
6,658

 
$
1,908

 
Multifamily segment NOI for the three and nine months ended September 30, 2016 increased $0.6 million and $1.9 million, respectively, compared to the corresponding periods in 2015, primarily as a result of the stabilization of Encore Apartments and Liberty Apartments. Liberty Apartments stabilized in the third quarter of 2015.
 
Multifamily Same Store Results
 
Multifamily same store results exclude new real estate development – Encore Apartments and Whetstone Apartments – as well as Liberty Apartments, which was acquired during the first quarter of 2014 and stabilized in the third quarter of 2015.
 
Multifamily same store rental revenues, property expenses and NOI for the three and nine months ended September 30, 2016 and 2015 were as follows: 
 
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
 
 
(unaudited, $ in thousands)
Rental revenues
 
$
3,075

 
$
3,105

 
$
(30
)
 
$
9,145

 
$
9,069

 
$
76

Property expenses
 
1,396

 
1,342

 
54

 
4,016

 
3,913

 
103

Same Store NOI
 
$
1,679

 
$
1,763

 
$
(84
)
 
$
5,129

 
$
5,156

 
$
(27
)
Non-Same Store NOI
 
1,460

 
784

 
676

 
3,436

 
1,502

 
1,934

Segment NOI
 
$
3,139

 
$
2,547

 
$
592

 
$
8,565

 
$
6,658

 
$
1,907

 
Multifamily same store NOI for the three and nine months ended September 30, 2016 decreased 5% and 1%, respectively, compared to the corresponding periods in 2015. The decreases were primarily due to timing of expenses at The Cosmopolitan in the Town Center of Virginia Beach and Smith’s Landing.

General Contracting and Real Estate Services Segment Data
 
 
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
 
 
(unaudited, $ in thousands)
Segment revenues
 
$
38,552

 
$
53,822

 
$
(15,270
)
 
$
108,555

 
$
129,959

 
$
(21,404
)
Segment expenses
 
37,274

 
51,716

 
(14,442
)
 
104,336

 
125,141

 
(20,805
)
Segment gross profit
 
$
1,278

 
$
2,106

 
$
(828
)
 
$
4,219

 
$
4,818

 
$
(599
)
Operating margin
 
3.3
%
 
3.9
%
 
(0.7
)%
 
3.9
%
 
3.7
%
 
0.2
%
 
Segment profit for the three and nine months ended September 30, 2016 decreased $0.8 million and $0.6 million, respectively, compared to the corresponding periods in 2015, because of timing of volume on our construction contracts. The overall operating margin on our construction contracts for the three and nine months ended September 30, 2016 fluctuated compared to the overall operating margin for the corresponding periods in 2015 due to the closeout of certain projects and timing of work completed.
 

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Table of Contents

The changes in third party construction backlog for the three and nine months ended September 30, 2016 and 2015 were as follows: 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(unaudited, $ in thousands)
Beginning backlog
 
$
252,318

 
$
195,512

 
$
83,433

 
$
159,139

New contracts/change orders
 
32,498

 
(23,552
)
 
271,288

 
88,854

Work performed
 
(38,384
)
 
(53,768
)
 
(108,289
)
 
(129,801
)
Ending backlog
 
$
246,432

 
$
118,192

 
$
246,432

 
$
118,192

 
During the nine months ended September 30, 2016, we added $68.1 million to backlog for the construction of the Point Street Apartments project, $62.0 million in backlog for the City Center project in Durham, North Carolina and $68.8 million in backlog on the Annapolis Junction project.   As of September 30, 2016, we had $55.8 million in backlog on the Point Street Apartments project, $52.4 million in backlog on the City Center project and $59.7 million in backlog on the Annapolis Junction project. 
  
As of September 30, 2016, we had $19.5 million in backlog related to the 27th Street Oceanfront hotel project, which we expect to substantially complete in 2017.
 
Consolidated Results of Operations
 
The following table summarizes the results of operations for the three and nine months ended September 30, 2016 and 2015: 
 
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
 
 
(unaudited, $ in thousands)
Revenues
 
 

 
 

 
 

 
 

 
 

 
 

Rental revenues
 
$
25,305

 
$
21,303

 
$
4,002

 
$
72,839

 
$
59,401

 
$
13,438

General contracting and real estate services revenues
 
38,552

 
53,822

 
(15,270
)
 
108,555

 
129,959

 
(21,404
)
Total revenues
 
63,857

 
75,125

 
(11,268
)
 
181,394

 
189,360

 
(7,966
)
Expenses
 
 

 
 

 
 

 
 

 
 

 
 

Rental expenses
 
5,834

 
4,865

 
969

 
16,234

 
14,256

 
1,978

Real estate taxes
 
2,356

 
2,056

 
300

 
7,087

 
5,672

 
1,415

General contracting and real estate services expenses
 
37,274

 
51,716

 
(14,442
)
 
104,336

 
125,141

 
(20,805
)
Depreciation and amortization
 
8,885

 
6,317

 
2,568

 
25,636

 
16,991

 
8,645

General and administrative expenses
 
2,156

 
1,873

 
283

 
6,864

 
6,297

 
567

Acquisition, development and other pursuit costs
 
345

 
288

 
57

 
1,486

 
1,050

 
436

Impairment charges
 
149

 
—

 
149

 
184

 
23

 
161

Total expenses
 
56,999

 
67,115

 
(10,116
)
 
161,827

 
169,430

 
(7,603
)
Operating income
 
6,858

 
8,010

 
(1,152
)
 
19,567

 
19,930

 
(363
)
Interest income
 
1,024

 
—

 
1,024

 
1,928

 
—

 
1,928

Interest expense
 
(4,124
)
 
(3,518
)
 
(606
)
 
(11,893
)
 
(9,922
)
 
(1,971
)
Loss on extinguishment of debt
 
(82
)
 
(3
)
 
(79
)
 
(82
)
 
(410
)
 
328

Gain on real estate dispositions
 
3,753

 
—

 
3,753

 
30,440

 
13,407

 
17,033

Change in fair value of interest rate derivatives
 
498

 
(51
)
 
549

 
(2,264
)
 
(238
)
 
(2,026
)
Other (expense) income
 
35

 
17

 
18

 
154

 
56

 
98

Income before taxes
 
7,962

 
4,455

 
3,507

 
37,850

 
22,823

 
15,027

Income tax benefit (provision)
 
(16
)
 
(118
)
 
102

 
(240
)
 
(83
)
 
(157
)
Net income
 
$
7,946

 
$
4,337

 
$
3,609

 
$
37,610

 
$
22,740

 
$
14,870

 

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Table of Contents

Rental revenues for the three and nine months ended September 30, 2016 increased $4.0 million and $13.4 million, respectively, compared to the corresponding periods in 2015, as follows: 
 
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
 
 
(unaudited, $ in thousands)
Office
 
$
5,277

 
$
8,092

 
$
(2,815
)
 
$
16,097

 
$
23,847

 
$
(7,750
)
Retail
 
14,340

 
8,523

 
5,817

 
41,485

 
22,715

 
18,770

Multifamily
 
5,688

 
4,688

 
1,000

 
15,257

 
12,839

 
2,418

 
 
$
25,305

 
$
21,303

 
$
4,002

 
$
72,839

 
$
59,401

 
$
13,438

 
Office rental revenues for the three and nine months ended September 30, 2016 decreased 35% and 32%, respectively, compared to the corresponding periods in 2015 as a result of the sales of the Sentara Williamsburg, Oceaneering and Richmond Tower office buildings, which contributed $2.8 million and $7.9 million in office rental revenues for the three and nine months ended September 30, 2015, respectively, compared to $0 and $0.2 million, respectively, for the three and nine months ended September 30, 2016, respectively.  Office same store rental revenues increased during the three and nine months ended September 30, 2016, driven by contractual rent increases.
 
Retail rental revenues for the three and nine months ended September 30, 2016 increased 68% and 83%, respectively, compared to the corresponding periods in 2015 as a result of property acquisitions, our delivery of Greentree Shopping Center and organic growth in the same store retail portfolio due to higher occupancy rates. The eleven property retail portfolio, Southgate Square and Southshore Shops contributed $4.8 million and $13.3 million in retail rental revenues for the three and nine months ended September 30, 2016, respectively.

Multifamily rental revenues for the three and nine months ended September 30, 2016 increased 21% and 19%, respectively, compared to the corresponding periods in 2015 as a result of the stabilization of Encore Apartments and Liberty Apartments as well as higher occupancy at The Cosmopolitan. Liberty Apartments stabilized in the third quarter of 2015.
 
General contracting and real estate services revenues for the three and nine months ended September 30, 2016 decreased 28% and 16%, respectively, compared to the corresponding periods in 2015 as a result of the timing and volume of work performed.
 
Rental expenses for the three and nine months ended September 30, 2016 increased $1.0 million and $2.0 million, respectively, compared to the corresponding periods in 2015, as follows: 
 
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
 
 
(unaudited, $ in thousands)
Office
 
$
1,553

 
$
1,758

 
$
(205
)
 
$
4,307

 
$
5,216

 
$
(909
)
Retail
 
2,264

 
1,478

 
786

 
6,820

 
4,223

 
2,597

Multifamily
 
2,017

 
1,629

 
388

 
5,107

 
4,817

 
290

 
 
$
5,834

 
$
4,865

 
$
969

 
$
16,234

 
$
14,256

 
$
1,978

 
Office rental expenses for the three and nine months ended September 30, 2016 decreased compared to the corresponding periods in 2015 due to the sales of the Sentara Williamsburg and Richmond Tower office buildings. Retail rental expenses for the three and nine months ended September 30, 2016 increased compared to the corresponding periods in 2015 as a result of property acquisitions. Multifamily rental expenses increased due to the timing of repairs and maintenance.
 

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Table of Contents

Real estate taxes for the three and nine months ended September 30, 2016 increased $0.3 million and $1.4 million, respectively, compared to the corresponding periods in 2015, as follows: 
 
 
Three Months Ended September 30,
 
 
 
Nine Months Ended September 30,
 
 
 
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
 
 
(unaudited, $ in thousands)
Office
 
$
485

 
$
734

 
$
(249
)
 
$
1,550

 
$
2,228

 
$
(678
)
Retail
 
1,339

 
810

 
529

 
3,953

 
2,080

 
1,873

Multifamily
 
532

 
512

 
20

 
1,584

 
1,364

 
220

 
 
$
2,356

 
$
2,056

 
$
300

 
$
7,087

 
$
5,672

 
$
1,415

 
Office real estate taxes for the three and nine months ended September 30, 2016 decreased compared to the corresponding periods in 2015 due to the sales of the Sentara Williamsburg and Richmond Tower office buildings. Retail and multifamily real estate taxes for the three and nine months ended September 30, 2016 increased compared to the corresponding periods in 2015 as a result of acquisitions and increases from new tax assessments.
 
General contracting and real estate services expenses for the three and nine months ended September 30, 2016 decreased 28% and 17%, respectively, compared to the corresponding periods in 2015 as a result of the timing and volume of work performed.
 
Depreciation and amortization for the three and nine months ended September 30, 2016 increased 41% and 51%, respectively, compared to the corresponding periods in 2015 as a result of property acquisitions.
 
General and administrative expenses for the three and nine months ended September 30, 2016 increased 15% and 9%, respectively, compared to the corresponding periods in 2015 as a result of higher regulatory and compliance costs as well as higher compensation and benefit costs from increased employee headcount.
 
Acquisition, development and other pursuit costs for the three and nine months ended September 30, 2016 increased compared to the corresponding periods in 2015. Approximately less than $0.1 million and $0.7 million of the acquisition costs incurred in the three and nine months ended September 30, 2016 were related to the 11 asset portfolio acquisition. Socastee Commons, Perry Hall Marketplace, Stone House Square, Columbus Village and Providence Plaza were acquired during the nine months ended September 30, 2015.
 
Impairment charges for the three and nine months ended September 30, 2016 were primarily due to lease terminations. These charges were not significant for three and nine months ended September 30, 2015.
 
Interest expense for the three and nine months ended September 30, 2016 increased 17% and 20%, respectively, compared to the corresponding periods in 2015, primarily as a result of increased borrowings. 
 
The change in fair value of interest rate derivatives for the three and nine months ended September 30, 2016 decreased $0.5 million and increased $2.0 million, respectively. The decrease for the three months ended September 30, 2016 was due to the increase in LIBOR, while the increase for the nine months ended was due to the $1.0 million adjustment made for interest rate derivatives. 
 
During the three and nine months ended September 30, 2016, we recognized losses on extinguishment of debt of $0.1 million and less than $0.1 million, respectively, compared to less than $0.1 million and $0.4 million, respectively, for the corresponding periods in 2015. These losses represent the unamortized debt issuance costs associated with repaid mortgages and also in connection with the closing of our credit facility.
 
During the three and nine months ended September 30, 2016, we recognized gains of $3.75 million and $30.4 million, respectively, on our sales of Willowbrook Commons, Kroger Junction, the Richmond Tower office building, the Oyster Point office building and the Newport News Economic Authority building. During the nine months ended September 30, 2015, we recognized gains of $13.4 million on our sales of the Sentara Williamsburg office building and Whetstone Apartments.
 
Income tax provisions that we recognized during the three and nine months ended September 30, 2016 and 2015 were attributable to the taxable profits and losses of our development and construction businesses that we operate through our TRS.
 

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Table of Contents

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 proceeds from the sale of common stock through our new at-the-market continuous equity offering program (“New 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 September 30, 2016, we had unrestricted cash and cash equivalents of $23.9 million available for both current liquidity needs as well as development activities. We also had restricted cash of $3.5 million available for property improvements and required maintenance. As of September 30, 2016, we had $48.0 million of available borrowings under our credit facility and $23.9 million available for future issuance under our New ATM Program to meet our short-term liquidity requirements.
 
ATM Equity Offering Programs
 
On May 4, 2016, we commenced a new at-the-market continuous equity offering program (the "New ATM Program") through which we may, from time to time, issue and sell shares of common stock having an aggregate offering price of up to $75.0 million. Upon commencing our New ATM Program, we simultaneously terminated our prior $50.0 million at-the-market continuous equity offering program (the "Prior ATM Program"), which we entered into in May 2015 and under which we sold an aggregate of 2,261,068 shares of common stock, resulting in aggregate net proceeds of $23.1 million. Our sale of shares under the New ATM Program will depend on a variety of factors, including among other things, market conditions, the trading price of our common stock, capital needs and our determination of appropriate sources of funding. We have no obligation to sell any shares and may at any time suspend or terminate the New ATM Program. Each of our sales agents are entitled to a commission of up to 1.5% of the gross offering proceeds of shares that they sell through the New ATM Program. We intend to use any net proceeds from the sale of shares through the New ATM Program to fund development or redevelopment activities, fund potential acquisition opportunities, repay indebtedness, including amounts outstanding under our credit facility, or for general corporate purposes. In the three months ended September 30, 2016, we raised $19.9 million of gross proceeds at a weighted average price of $13.93 per share under the New ATM Program, resulting in net proceeds after offering costs and commissions of $19.5 million.
 
Credit Facility
 
On February 20, 2015, we entered into a $200.0 million senior unsecured credit facility that includes a $150.0 million senior unsecured revolving credit facility and a $50.0 million senior unsecured term loan facility. The credit facility replaced the prior $155.0 million senior secured revolving credit facility that was scheduled to mature on May 13, 2016. We intend to use future borrowings under the credit facility for general corporate purposes, including funding acquisitions, development and redevelopment of properties in our portfolio and for working capital.
 
The credit facility includes an accordion feature that allows the total commitments to be increased to $350.0 million, subject to certain conditions. On January 5, 2016 and March 31, 2016, we increased the total borrowing capacity to $225.0 million and $250.0 million, respectively, using this feature. The amount permitted to be borrowed under the credit facility, together with all of our other unsecured indebtedness, is generally limited to the lesser of: (i) 60% of the value of our unencumbered borrowing base properties, (ii) the maximum amount of principal that would result in a debt service coverage ratio of 1.50 to 1.0, and (iii) the maximum aggregate loan commitment, which currently is $250.0 million.
 

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Table of Contents

The revolving credit facility has a scheduled maturity date of February 20, 2019, with a one-year extension option, subject to certain conditions. The term loan facility has a scheduled maturity date of February 20, 2020. We may, at any time, voluntarily prepay any loan under the credit facility in whole or in part without premium or penalty.
 
The revolving credit facility bears interest at LIBOR plus 1.40% to 2.00%, depending on our total leverage. The term loan facility bears interest at LIBOR plus 1.35% to 1.95%, 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 credit facility, depending on the amount of borrowings under the credit facility. If we attain investment grade credit ratings from S&P and Moody’s, we may elect to have borrowings become subject to interest rates based on our credit ratings.
 
On February 25, 2016, we entered into an amendment to the credit facility to, among other things, amend the maximum leverage ratio as set forth below.
 
The credit facility requires us to comply with various financial covenants, affirmative covenants and other restrictions, including the following:
•
Total leverage ratio of the Company of not more than 60% (or 65% for the two consecutive quarters following any acquisition that is equal to or greater than 10% of our total asset value (as defined in the credit agreement), but only up to two times during the term of the credit facility); 
•
Ratio of adjusted EBITDA to fixed charges of the Company of not less than 1.50 to 1.0; 
•
Tangible net worth of not less than the sum of $220.0 million and 75% of the net equity proceeds received after December 31, 2014; 
•
Ratio of variable rate indebtedness to total asset value of not more than 30%;
•
Ratio of secured indebtedness to total asset value of not more than 45%; and 
•
Ratio of secured recourse debt to total asset value of not more than 25%.
 
The credit facility limits our ability to pay cash dividends. However, so long as no default or event of default exists, the credit agreement allows us to pay cash dividends with respect to any 12-month period in an amount not to exceed the greater of: (i) 95% of adjusted funds from operations (as defined in the credit agreement) or (ii) the amount required for us (a) to maintain our status as a REIT and (b) to avoid income or excise tax under the Internal Revenue Code of 1986, as amended. 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.
 
We are currently in compliance with all covenants under the credit facility.


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Table of Contents

Consolidated Indebtedness
 
The following table sets forth our consolidated indebtedness as of September 30, 2016 ($ in thousands): 
 
 
Amount Outstanding
    
Interest Rate(a)
 
Effective Rate for Variable
Debt
    
Maturity Date
 
Balance at Maturity
Secured Debt
 
 
 
 
 
 
 
 
 
 
249 Central Park Retail
 
$
17,132

 
LIBOR+1.95

 
2.47
%
 
September 10, 2021
 
$
15,959

South Retail
 
7,517

 
LIBOR+1.95

 
2.47
%
 
September 10, 2021
 
7,002

Fountain Plaza Retail
 
10,314

 
LIBOR+1.95

 
2.47
%
 
September 10, 2021
 
9,608

4525 Main Street
 
32,034

 
0.0325

 


 
September 10, 2021
 
30,774

Encore Apartments
 
24,966

 
0.0325

 


 
September 10, 2021
 
24,006

North Point Note 5
 
649

 
LIBOR+2.00

 
3.57
%
(b)  
February 1, 2017
 
641

Harrisonburg Regal
 
3,309

 
6.06

 
 

 
June 8, 2017
 
3,165

Commonwealth of Virginia – Chesapeake
 
4,933

 
LIBOR+1.90

 
2.42
%
 
August 28, 2017
 
4,933

Hanbury Village
 
20,777

 
6.67

 
 

 
October 11, 2017
 
20,499

Lightfoot Marketplace
 
11,469

 
LIBOR+1.90

 
2.42
%
 
November 14, 2017
 
11,469

Sandbridge Commons
 
9,435

 
LIBOR+1.85

 
2.37
%
 
January 17, 2018
 
9,009

Southgate Square
 
21,150

 
LIBOR+2.00

 
2.52
%
 
April 29, 2021
 
20,665

Columbus Village Note 1
 
6,303

 
LIBOR+2.00

 
3.05
%
(b)  
April 5, 2018
 
5,891

Columbus Village Note 2
 
2,276

 
LIBOR+2.00

 
2.52
%
 
April 5, 2018
 
2,108

Johns Hopkins Village
 
40,818

 
LIBOR+1.90

 
2.42
%
 
July 30, 2018
 
40,818

North Point Note 1
 
9,825

 
6.45

 
 

 
February 5, 2019
 
9,333

Socastee Commons
 
4,890

(c)  
4.57

 
 

 
January 6, 2023
 
4,223

North Point Note 2
 
2,589

 
7.25

 
 

 
September 15, 2025
 
1,344

Smith's Landing
 
20,694

 
4.05

 
 

 
June 1, 2035
 
—

Liberty Apartments
 
20,084

(c)  
5.66

 
 

 
November 1, 2043
 
—

The Cosmopolitan
 
46,045

 
3.75

 
 

 
July 1, 2051
 
—

Total secured debt
 
$
317,209

 
 

 
 

 
 
 
$
221,447

Unsecured Debt
 
 

 
 

 
 

 
 
 
 

Revolving credit facility
 
102,000

 
LIBOR+1.40 to 2.00

 
2.07
%
 
February 20, 2019
 
107,000

Term loan
 
50,000

 
LIBOR+1.35 to 1.95

 
2.02
%
 
February 20, 2020
 
50,000

Term loan
 
50,000

 
LIBOR+1.35 to 1.95

 
3.70
%
(b)  
February 20, 2020
 
50,000

Total unsecured debt
 
$
202,000

 
 

 
 

 
 
 
$
207,000

Unamortized GAAP adjustments
 
(5,216
)
 
 

 
 

 
 
 
—

Indebtedness, net
 
$
513,993

 
 

 
 

 
 
 
$
428,447

(a)    LIBOR rate is determined by individual lenders.
(b)    Subject to an interest rate swap agreement.
(c)    Principal balance excluding fair value adjustments.
 
We are currently in compliance with all covenants on our outstanding indebtedness.


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Table of Contents

As of September 30, 2016, our principal payments during the following years are as follows ($ in thousands): 
Year(1)
 
Amount Due 
 
Percentage of Total 
2016
 
$
922

 
—
%
2017
 
44,464

 
9
%
2018
 
61,505

 
12
%
2019
 
114,818

 
22
%
2020
 
104,482

 
20
%
Thereafter
 
193,018

 
37
%
 
 
 
$
519,209

 
100
%
 
 
 
 
 
 

(1)    Does not reflect the effect of any maturity extension options.
 
Interest Rate Derivatives
 
We may use interest rate derivatives from time to time to manage our exposure to interest rate risks. Using an interest rate swap, we fixed our interest payments under North Point Center Note 5 at 3.57% through maturity on February 1, 2017.
 
On February 20, 2015, we entered into a $50.0 million floating-to-fixed interest rate swap attributable to one-month LIBOR indexed interest payments. The $50.0 million interest rate swap has a fixed rate of 2.00%, an effective date of March 1, 2016 and a maturity date of February 20, 2020. We entered into this interest rate swap agreement in connection with the $50.0 million senior unsecured term loan facility that bears interest at LIBOR plus 1.35% to 1.95%, depending on our total leverage.
 
On July 13, 2015, we entered into a $6.5 million floating-to-fixed interest rate swap attributable to one-month LIBOR indexed interest payments. The $6.5 million interest rate swap has a fixed rate of 3.05%, an effective date of July 13, 2015 and a maturity date of April 5, 2018.
 
As of September 30, 2016, we were party to the following LIBOR interest rate cap agreements ($ in thousands): 
Effective Date
 
Maturity Date
 
Strike Rate
 
Notional Amount
March 14, 2014
 
March 1, 2017
 
1.25
%
 
50,000

October 26, 2015
 
October 15, 2017
 
1.25
%
 
75,000

February 25, 2016
 
March 1, 2018
 
1.50
%
 
75,000

June 17, 2016
 
June 17, 2018
 
1.00
%
 
70,000

Total
 
 
 
 
 
$
270,000

 
As of September 30, 2016, the notional amounts of our LIBOR interest rate cap agreements with strike rates below and above 1.25% were as follows ($ in thousands): 
Strike Rate
 
Notional Amount 
≤ 1.25%
 
$
195,000

> 1.25%
 
75,000

Total
 
$
270,000

 
On February 25, 2016, we entered into a LIBOR interest rate cap agreement on a notional amount of $75.0 million at a strike rate of 1.50% for a premium of less than $0.1 million.  The interest rate cap agreement expires on March 1, 2018.

On June 17, 2016, we entered into a LIBOR interest rate cap agreement on a notional amount of $70.0 million at a strike rate of 1.00% for a premium of less than $0.1 million. The interest rate cap agreement expires on June 17, 2018.
 
Off-Balance Sheet Arrangements
 
We have entered into standby letters of credit relating to the guarantee of future performance on certain of our construction contracts. Letters of credit generally are available for draw down in the event we do not perform. As of September 30, 2016, we had aggregate outstanding standby letters of credit totaling $2.0 million that expire during 2016.

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Table of Contents

However, any of our standby letters of credit may be renewed for additional periods until completion of the underlying contractual obligation.
 
Cash Flows
 
 
 
Nine Months Ended September 30,
 
 
 
 
2016
 
2015
 
Change
 
 
($ in thousands)
Operating Activities
 
$
38,782

 
$
17,624

 
$
21,158

Investing Activities
 
(187,681
)
 
(60,655
)
 
(127,026
)
Financing Activities
 
145,800

 
32,339

 
113,461

Net Increase (Decrease)
 
$
(3,099
)
 
$
(10,692
)
 
$
7,593

Cash and Cash Equivalents, Beginning of Period
 
$
26,989

 
$
25,883

 
 
Cash and Cash Equivalents, End of Period
 
$
23,890

 
$
15,191

 
 
 
Net cash provided by operating activities during the nine months ended September 30, 2016 increased 120% compared to the nine months ended September 30, 2015, primarily as a result of increased net cash collected under our construction contracts and increased depreciation and amortization. This increase was offset by a $17.0 million increase in the gain on real estate dispositions in 2016 when compared to the dispositions which occurred in 2015.
 
During the nine months ended September 30, 2016, we invested 209% more cash compared to the nine months ended September 30, 2015, primarily as a result of our acquisitions of the 11 asset retail portfolio, Southgate Square and Southshore Shops, coupled with the mezzanine financing in Annapolis Junction.
 
Net cash provided by financing activities during the nine months ended September 30, 2016 increased 351% compared to the nine months ended September 30, 2015, primarily as a result of net proceeds from common stock sales and increased borrowing on the credit facility and refinancings.
 
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.
 
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 the Company’s operating property portfolio and affect the comparability of the Company’s year-over-year performance. Accordingly, management believes that Normalized FFO is a more useful performance

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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 nine months ended September 30, 2016 and 2015 to net income, the most directly comparable GAAP equivalent: 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(unaudited, $ in thousands)
Net income
 
$
7,946

 
$
4,337

 
$
37,610

 
$
22,740

Depreciation and amortization
 
8,885

 
6,317

 
25,636

 
16,991

Gain on real estate dispositions
 
(3,753
)
 
—

 
(30,010
)
 
(13,407
)
Funds from operations
 
$
13,078

 
$
10,654

 
$
33,236

 
$
26,324

Acquisition, development and other pursuit costs
 
345

 
288

 
1,486

 
1,050

Impairment charges
 
149

 
—

 
184

 
23

Loss on extinguishment of debt
 
82

 
3

 
82

 
410

Change in fair value of interest rate derivatives
 
$
(498
)
 
$
51

 
$
2,264

 
$
238

Normalized funds from operations
 
$
13,156

 
$
10,996

 
$
37,252

 
$
28,045

FFO per diluted share
 
$
0.25

 
$
0.25

 
$
0.68

 
$
0.65

Normalized FFO per diluted share
 
$
0.26

 
$
0.26

 
$
0.76

 
$
0.69

Weighted average common shares - diluted
 
51,512

 
41,877

 
48,869

 
40,691

 
The adjustment for gain on real estate dispositions excludes the gain on the Newport News Economic Authority building because this building was sold before being placed in service.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements that have been prepared in accordance with GAAP. The preparation of these financial statements requires us to exercise our best judgment in making estimates that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates on an ongoing basis, based upon then-currently available information. Actual results could differ from these estimates. We discuss the accounting policies and estimates that are most critical to understanding our reported financial results in our Annual Report on Form 10-K for the year ended December 31, 2015.
 
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 September 30, 2016, approximately $242.2 million, or 46.6%, of our debt had fixed interest rates and approximately $277.0 million, or 53.4%, had variable interest rates. Assuming no increase in the level of our variable rate debt, if interest rates increased by 1.0%, our cash flow would decrease by approximately $2.8 million per year. At September 30, 2016, LIBOR was approximately 52 basis points. Assuming no increase in the level of our variable rate debt, if LIBOR was reduced to 0 basis points, our cash flow would increase by approximately $1.5 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 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 U.S. Securities and Exchange Commission (“SEC”) and that such information is accumulated and communicated to management,

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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 September 30, 2016, 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 September 30, 2016, that our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in reports filed or submitted under the Exchange Act: (i) is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.
 
There have been no changes to our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information
 
Item  1.    Legal Proceedings
 
We are not currently a party, as plaintiff or defendant, to any legal proceedings that we believe to be material or which, individually or in the aggregate, would be expected to have a material effect on our business, financial condition or results of operations if determined adversely to us. We may be subject to on-going 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, 2015. 
 
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
 
Unregistered Sales of Equity Securities
 
None.

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

Item 5.    Other Information
 
None.
 
Item 6.    Exhibits
 
The exhibits listed in the accompanying Exhibit Index are filed, furnished or incorporated by reference (as applicable) as part of this Quarterly Report on Form 10-Q.


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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: November 2, 2016
/s/ LOUIS S. HADDAD
 
Louis S. Haddad
 
President and Chief Executive Officer
 
(Principal Executive Officer)
 
 
Date: November 2, 2016
/s/ MICHAEL P. O’HARA
 
Michael P. O’Hara
 
Chief Financial Officer and Treasurer
 
(Principal Accounting and Financial Officer)

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Exhibit Index
Exhibit No.
 
Description
15.1
 
Acknowledgment of Ernst & Young LLP, Independent Registered Public Accounting Firm
 
 
 
31.1
 
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
31.2
 
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
 
 
32.1
 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
32.2
 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 
 
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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