Business Overview and History
Armada Hoffler Properties, Inc. (AHH) is a vertically-integrated, self-managed real estate investment trust (REIT) with over four decades of experience in managing, building, acquiring, and developing high-quality retail, office, and multifamily properties primarily located in the Mid-Atlantic and Southeastern United States. The company’s diverse portfolio, strategic development pipeline, and prudent capital allocation have positioned it as a resilient player in the ever-changing real estate market.
Armada Hoffler was founded in the 1980s, leveraging its expertise to establish itself as a leading player in the real estate industry, particularly in the Mid-Atlantic and Southeastern regions. The company has built a strong reputation for developing and acquiring high-quality properties that attract a diverse tenant base. In 2013, Armada Hoffler made a significant transition by going public through an initial public offering (IPO), which provided the necessary capital to fund its growth and expansion plans.
Throughout its history, Armada Hoffler has demonstrated resilience in the face of industry challenges. During the 2008 financial crisis, which had a significant impact on the real estate sector, the company was able to navigate the difficulties and emerge stronger, thanks to its diversified portfolio and prudent management approach. More recently, Armada Hoffler has been addressing the ongoing shift in consumer preferences towards e-commerce, which has affected the retail sector. The company has responded by further diversifying its portfolio and focusing on developing and acquiring properties that cater to the changing needs of tenants and consumers.
Today, the company’s operations are organized into five reportable segments: retail real estate, office real estate, multifamily real estate, general contracting and real estate services, and real estate financing. Armada Hoffler’s portfolio consists of 55 stabilized properties, totaling approximately 8.2 million square feet, with a focus on premier assets in high-growth markets. The company’s retail segment includes 26 properties, the office segment comprises 15 properties, and the multifamily segment features 13 communities. In addition, Armada Hoffler has a robust development pipeline, with several mixed-use projects in various stages of completion.
Financial Performance and Outlook
For the fiscal year ended December 31, 2023, Armada Hoffler reported total revenue of $667.16 million, a 41.6% increase from the previous year’s $471.13 million. Net income for the year came in at $8.29 million, compared to $74.75 million in 2022. The company’s funds from operations (FFO), a key metric for REITs, stood at $79.59 million, or $0.90 per diluted share, in 2023, compared to $115.58 million, or $1.30 per diluted share, in the prior year.
In the most recent quarter (Q3 2024), Armada Hoffler reported total revenues of $187.65 million, representing a 13.3% year-over-year growth. However, the company experienced a net loss of $5.04 million, primarily due to an unrealized loss on interest rate derivatives of $10.31 million and an unrealized credit loss provision of $198,000. Despite these challenges, the company generated operating cash flow of $28.32 million and free cash flow of $39.75 million for the quarter.
Despite the challenging macroeconomic environment, Armada Hoffler has maintained a strong financial position, with a debt-to-total-capitalization ratio of 52.4% as of September 30, 2024. The company has also strategically diversified its funding sources, with a mix of secured and unsecured debt, as well as access to its $550 million credit facility.
Looking ahead, Armada Hoffler has provided guidance for 2024, narrowing its normalized FFO range to $1.25 to $1.27 per diluted share, compared to the previous range of $1.22 to $1.28 per diluted share. This guidance reflects the company’s continued focus on operational excellence, disciplined capital allocation, and the expected contributions from its development pipeline. The company reported normalized FFO of $0.35 per diluted share for Q3 2024, which was in line with their expectations. For the full year 2024, Armada Hoffler is maintaining their estimate that they will achieve the top-end of their guidance range.
The company expects interest expense through the end of 2024 to be lower than planned due to continued capitalization, resulting in higher-than-expected bottom line earnings for Q4 2024. However, the delivery of their development projects, particularly Allied, being pushed to early 2025 will create additional headwinds for earnings growth in 2025 as the 18-24 month lease-up period will begin during the most challenging time of the year for apartment leasing.
Financials
Armada Hoffler’s financial performance demonstrates its ability to navigate challenging market conditions while maintaining a focus on growth and profitability. The company’s revenue growth of 41.6% in 2023 is a testament to its successful execution of its strategic initiatives and the strength of its diversified portfolio.
While net income decreased from $74.75 million in 2022 to $8.29 million in 2023, it’s important to note that REITs often focus on FFO as a more relevant measure of performance. The company’s FFO of $79.59 million in 2023, although lower than the previous year, still represents a solid performance given the macroeconomic headwinds faced by the real estate industry.
The company’s debt-to-equity ratio stands at 2.01, indicating a moderate level of leverage. Armada Hoffler maintains a healthy liquidity position with $43.85 million in cash and cash equivalents, as well as $102.60 million available under its $550 million revolving credit facility. The company’s current ratio and quick ratio both stand at 1.87, suggesting a strong ability to meet short-term obligations.
Liquidity
Armada Hoffler’s liquidity position remains strong, with a well-structured balance sheet and diversified funding sources. The company’s debt-to-total-capitalization ratio of 52.4% as of September 30, 2024, indicates a balanced approach to leverage, allowing for financial flexibility while maintaining a prudent level of debt.
The $550 million credit facility provides additional liquidity, enabling Armada Hoffler to pursue growth opportunities and manage its capital needs effectively. This financial flexibility is crucial in the current market environment, allowing the company to navigate potential challenges and capitalize on emerging opportunities.
Operational Highlights and Key Segments
Armada Hoffler’s diversified portfolio has demonstrated resilience, with the company reporting an overall occupancy rate of 95.4% as of September 30, 2024. The retail segment maintained a 96.2% occupancy rate, the office segment achieved 94.7% occupancy, and the multifamily segment reported 95.3% occupancy.
In the retail segment, Armada Hoffler executed 28 lease renewals and 9 new leases during the third quarter of 2024, covering a total of 273,210 square feet. The company achieved positive releasing spreads of 13.1% on a GAAP basis and 7.8% on a cash basis. For the three months ended September 30, 2024, the retail segment generated rental revenues of $26.16 million and segment net operating income (NOI) of $18.59 million. Retail same store NOI for the three months decreased 4.9% compared to the prior year period, primarily due to increased costs and decreased parking income.
The office segment also delivered strong performance, with same-store net operating income (NOI) increasing 6.1% on a GAAP basis compared to the third quarter of 2023. The company executed positive office lease renewals, with spreads of 18.5% on a GAAP basis and 0.8% on a cash basis. For the three months ended September 30, 2024, the office segment generated rental revenues of $27.78 million and segment NOI of $19.12 million, an increase of 38% compared to the prior year period. This increase was primarily due to a termination fee received from a tenant at the Wills Wharf property and the addition of new tenants at that property.
Armada Hoffler’s multifamily segment reported a combined trade-out spread of 1.8% for the third quarter of 2024, with renewal spreads remaining strong at 4.9%. However, the company did experience some pressure on new lease trade-outs, primarily due to competitive dynamics in the Gainesville, Georgia market. For the three months ended September 30, 2024, the multifamily segment generated rental revenues of $14.65 million and segment NOI of $8.05 million, a decrease of 5.8% compared to the prior year period. The decrease was primarily due to the commencement of operations at the Chandler Residences property and increased utilities and maintenance costs at the Chronicle Mill Apartments.
The general contracting and real estate services segment provides construction and development services to third-party clients. For the three months ended September 30, 2024, this segment generated revenues of $114.35 million and gross profit of $3.37 million, an increase of 1.6% compared to the prior year period. The increase was primarily due to an increase in work performed and the recognition of savings from unused contingencies on certain contracts. The segment’s third-party construction backlog as of September 30, 2024 was $193.12 million.
The real estate financing segment generates interest income from the Company’s mezzanine preferred equity investments. For the three months ended September 30, 2024, this segment generated interest income of $4.07 million and gross profit of $2.35 million, a decrease of 15.2% compared to the prior year period. The decrease was primarily due to increased funded balances and higher allocated interest costs, partially offset by increased recognized interest income.
Risks and Challenges
While Armada Hoffler has demonstrated resilience, the company is not immune to the broader challenges facing the real estate industry. The ongoing economic uncertainty, rising interest rates, and potential shifts in consumer and tenant preferences pose risks to the company’s performance.
Additionally, Armada Hoffler’s reliance on development projects, particularly the mixed-use properties in its pipeline, exposes the company to construction and lease-up risks. The company’s ability to successfully navigate these challenges and execute its strategic initiatives will be crucial to its long-term success.
Conclusion
Armada Hoffler Properties has established itself as a diversified REIT with a well-rounded portfolio and a proven track record of navigating market cycles. The company’s strategic focus on high-quality assets, prudent capital management, and disciplined development approach have positioned it to capitalize on emerging opportunities in the evolving real estate landscape. As Armada Hoffler continues to execute its growth strategies and adapt to the changing market dynamics, it remains a compelling investment proposition for investors seeking exposure to the dynamic real estate sector.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.