Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Business of Organization
Armada Hoffler Properties, Inc. (the "Company") is a full service real estate company with extensive experience developing, building, owning, and managing high-quality, institutional-grade office, retail, and multifamily properties in attractive markets primarily throughout the Mid-Atlantic and Southeastern United States.
The Company is a real estate investment trust ("REIT"), the sole general partner of Armada Hoffler, L.P. (the "Operating Partnership") and, as of September 30, 2019, owned 72.2% of the economic interest in the Operating Partnership, of which 0.1% is held as general partnership units. The operations of the Company are carried on primarily through the Operating Partnership and the wholly owned subsidiaries of the Operating Partnership.
As of September 30, 2019, the Company's property portfolio consisted of 56 operating properties and five properties either under development or not yet stabilized.
Refer to Note 5 for information related to the Company's recent acquisitions and dispositions of operating properties.
2. Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles ("GAAP").
The condensed consolidated financial statements include the financial position and results of operations of the Company and its consolidated subsidiaries, including the Operating Partnership, its wholly-owned subsidiaries, and any interests in variable interest entities ("VIEs") where the Company has been determined to be the primary beneficiary. All significant intercompany transactions and balances have been eliminated in consolidation.
In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for the fair presentation of the financial condition and results of operations for the interim periods presented.
The accompanying condensed consolidated financial statements were prepared in accordance with the requirements for interim financial information. Accordingly, these interim financial statements have not been audited and exclude certain disclosures required for annual financial statements. Also, the operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These interim financial statements should be read in conjunction with the audited consolidated financial statements of the Company included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed. Such estimates are based on management’s historical experience and best judgment after considering past, current, and expected events and economic conditions. Actual results could differ significantly from management’s estimates.
Reclassifications
Certain items have been reclassified from their prior year classifications to conform to the current year presentation. These reclassifications had no effect on net income or stockholders' equity as previously reported.
Recent Accounting Pronouncements
Leases
On February 25, 2016, the Financial Accounting Standards Board ("FASB") issued an Accounting Standards Update ("ASU") that requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets (ASU 2016-02—Leases (Topic 842)). The new standard also makes targeted changes to lessor accounting. The Company adopted the new standard on January 1, 2019, using the modified retrospective approach for all leases existing at, or entered into after, the beginning of the earliest comparative period presented as permitted in Accounting Standards Codification ("ASC") Topic 842.
In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company to not reassess whether any expired or existing contracts are or contain leases, not reassess the lease classification for any expired or existing leases, and not reassess initial direct costs for existing leases. As of January 1, 2019, the Company did not have any leases classified as finance leases. The Company also elected a practical expedient that allowed it to not separate non-lease components from lease components and instead to account for each lease and non-lease component as a single lease component. The adoption of the new standard as of January 1, 2019 did not impact the Company's consolidated results of operations and had no impact on cash flows.
As a lessee, the Company had six ground leases on five properties as of January 1, 2019 with initial terms that range from 20 to 65 years and options to extend up to an additional 70 years in certain cases. The exercise of lease renewal options is at the Company's sole discretion. The depreciable life of assets and leasehold improvements are limited by the expected lease term. The Company recognizes lease expense for operating leases on a straight-line basis over the lease term. The Company's lease agreements do not contain any residual value guarantees or material restrictive covenants.
The long-term ground leases represent a majority of the Company's current operating lease payments. The Company recorded right-of-use assets totaling $32.2 million and lease liabilities totaling $41.4 million upon adopting this standard on January 1, 2019. The Company utilized a weighted average discount rate of 5.4% to measure its lease liabilities upon adoption.
As a lessor, the Company leases its properties under operating leases and recognizes base rents on a straight-line basis over the lease term. The Company also recognizes revenue from tenant recoveries, through which tenants reimburse the Company on an accrual basis for certain expenses such as utilities, janitorial services, repairs and maintenance, security and alarms, parking lot and ground maintenance, administrative services, management fees, insurance, and real estate taxes. Rental revenues are reduced by the amount of any leasing incentives amortized on a straight-line basis over the term of the applicable lease. In addition, the Company recognizes contingent rental revenue (e.g., percentage rents based on tenant sales thresholds) when the sales thresholds are met. Many tenant leases include one or more options to renew, with renewal terms that can extend the lease term from one to 15 years or more. The exercise of lease renewal options is at the tenant's sole discretion. The Company includes a renewal period in the lease term only if it appears at lease inception that the renewal is reasonably assured.
The new standard includes new considerations regarding the recognition of rental revenue when collection is not probable. The Company changed its presentation and measurement of charges for uncollectable lease revenue associated with its office, retail, and residential leasing activity, reflecting those amounts as a component of rental income on the accompanying Condensed Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2019. However, in accordance with its prospective adoption of the standard, the Company did not adjust the prior year period presentation of charges for uncollectable lease revenue associated with its office, retail, and residential leasing activity as a component of operating expenses, excluding property taxes, on the accompanying Condensed Consolidated Statement of Comprehensive Income for the three and nine months ended September 30, 2018. Instead, the Company recorded a combined adjustment of $0.2 million to the opening balances for distributions in excess of earnings and noncontrolling interest relating to receivables where collection of substantially all operating lease payments was not probable as of January 1, 2019.
Lease-related receivables, which include contractual amounts accrued and unpaid from tenants and accrued straight-line rents receivable, are reduced for credit losses. Such amounts are recognized as a reduction to real estate rental revenues. The Company evaluates the collectability of lease receivables using several factors, including a lessee’s creditworthiness. The Company recognizes a credit loss on lease-related receivables when, in the opinion of management, collection of substantially all lease payments is not probable. When collectability is determined not probable, any lease income
subsequent to recognizing the credit loss is limited to the lesser of the lease income reflected on a straight-line basis or cash collected.
Credit losses
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments (Topic 326). ASU 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance will replace the "incurred loss" approach under existing guidance with an "expected loss" model for instruments measured at amortized cost, such as our notes receivable. The guidance is effective for fiscal years beginning after December 15, 2019 and is to be adopted through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. While the Company is currently evaluating the impact ASU 2016-13 will have on the consolidated financial statements, the Company expects that the adoption could result in earlier recognition of a provision for loan losses on its notes receivable as a result of new forward-looking estimation requirements. The Company may estimate and record a reserve for its notes receivable upon adoption of the standard.
Other Accounting Policies
See the Company's Annual Report on Form 10-K for the year ended December 31, 2018 for a description of other accounting principles upon which basis the accompanying consolidated financial statements were prepared.
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, 2019 and 2018 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Office real estate
|
|
|
|
|
|
|
|
|
Rental revenues
|
|
$
|
10,283
|
|
|
$
|
5,149
|
|
|
$
|
23,220
|
|
|
$
|
15,537
|
|
Rental expenses
|
|
2,753
|
|
|
1,551
|
|
|
6,097
|
|
|
4,435
|
|
Real estate taxes
|
|
1,141
|
|
|
515
|
|
|
2,319
|
|
|
1,519
|
|
Segment net operating income
|
|
6,389
|
|
|
3,083
|
|
|
14,804
|
|
|
9,583
|
|
Retail real estate
|
|
|
|
|
|
|
|
|
Rental revenues
|
|
20,780
|
|
|
16,932
|
|
|
57,273
|
|
|
50,251
|
|
Rental expenses
|
|
3,116
|
|
|
2,761
|
|
|
8,583
|
|
|
7,974
|
|
Real estate taxes
|
|
2,219
|
|
|
1,703
|
|
|
5,923
|
|
|
5,041
|
|
Segment net operating income
|
|
15,445
|
|
|
12,468
|
|
|
42,767
|
|
|
37,236
|
|
Multifamily residential real estate
|
|
|
|
|
|
|
|
|
Rental revenues
|
|
11,157
|
|
|
6,849
|
|
|
29,014
|
|
|
20,439
|
|
Rental expenses
|
|
4,055
|
|
|
2,791
|
|
|
9,935
|
|
|
7,640
|
|
Real estate taxes
|
|
820
|
|
|
622
|
|
|
2,517
|
|
|
1,828
|
|
Segment net operating income
|
|
6,282
|
|
|
3,436
|
|
|
16,562
|
|
|
10,971
|
|
General contracting and real estate services
|
|
|
|
|
|
|
|
|
Segment revenues
|
|
27,638
|
|
|
19,950
|
|
|
66,118
|
|
|
63,654
|
|
Segment expenses
|
|
26,446
|
|
|
18,973
|
|
|
62,855
|
|
|
61,474
|
|
Segment gross profit
|
|
1,192
|
|
|
977
|
|
|
3,263
|
|
|
2,180
|
|
Net operating income
|
|
$
|
29,308
|
|
|
$
|
19,964
|
|
|
$
|
77,396
|
|
|
$
|
59,970
|
|
Rental expenses represent costs directly associated with the operation and management of the Company’s real estate properties. Rental expenses include asset management expenses, property management fees, repairs and maintenance, insurance, and utilities.
General contracting and real estate services revenues for the three months ended September 30, 2019 and 2018 exclude revenue related to intercompany construction contracts of $22.4 million and $38.5 million, respectively. General contracting and real estate services revenues for the nine months ended September 30, 2019 and 2018 exclude revenue related to intercompany construction contracts of $82.6 million and $98.6 million, respectively.
General contracting and real estate services expenses for the three months ended September 30, 2019 and 2018 exclude expenses related to intercompany construction contracts of $22.2 million and $38.2 million, respectively. General contracting and real estate services expenses for the nine months ended September 30, 2019 and 2018 exclude expenses related to intercompany construction contracts of $81.8 million and $97.7 million, respectively.
The following table reconciles net operating income to net income, the most directly comparable GAAP measure, for the three and nine months ended September 30, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net operating income
|
|
$
|
29,308
|
|
|
$
|
19,964
|
|
|
$
|
77,396
|
|
|
$
|
59,970
|
|
Depreciation and amortization
|
|
(15,452
|
)
|
|
(10,196
|
)
|
|
(38,834
|
)
|
|
(28,653
|
)
|
Amortization of right-of-use assets - finance leases
|
|
(107
|
)
|
|
—
|
|
|
(168
|
)
|
|
—
|
|
General and administrative expenses
|
|
(2,977
|
)
|
|
(2,367
|
)
|
|
(9,329
|
)
|
|
(8,092
|
)
|
Acquisition, development and other pursuit costs
|
|
(93
|
)
|
|
(69
|
)
|
|
(550
|
)
|
|
(162
|
)
|
Impairment charges
|
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
(101
|
)
|
Gain on real estate dispositions
|
|
4,699
|
|
|
—
|
|
|
4,699
|
|
|
—
|
|
Interest income
|
|
5,710
|
|
|
2,545
|
|
|
16,622
|
|
|
7,152
|
|
Interest expense on indebtedness
|
|
(8,828
|
)
|
|
(4,677
|
)
|
|
(22,205
|
)
|
|
(13,547
|
)
|
Interest expense on finance leases
|
|
(228
|
)
|
|
—
|
|
|
(340
|
)
|
|
—
|
|
Equity in income of unconsolidated real estate entities
|
|
—
|
|
|
—
|
|
|
273
|
|
|
—
|
|
Loss on extinguishment of debt
|
|
—
|
|
|
(11
|
)
|
|
—
|
|
|
(11
|
)
|
Change in fair value of interest rate derivatives
|
|
(530
|
)
|
|
298
|
|
|
(3,926
|
)
|
|
1,256
|
|
Other income
|
|
362
|
|
|
65
|
|
|
426
|
|
|
233
|
|
Income tax benefit
|
|
199
|
|
|
120
|
|
|
339
|
|
|
552
|
|
Net income
|
|
$
|
12,063
|
|
|
$
|
5,669
|
|
|
$
|
24,403
|
|
|
$
|
18,597
|
|
General and administrative expenses represent costs not directly associated with the operation and management of the Company’s real estate properties and general contracting and real estate services businesses, including corporate office personnel salaries and benefits, bank fees, accounting fees, legal fees, and other corporate office expenses.
4. Leases
Lessee Disclosures
The components of lease cost for the three and nine months ended September 30, 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
Nine Months Ended
September 30, 2019
|
Operating lease cost
|
|
$
|
655
|
|
|
$
|
2,050
|
|
Finance lease cost:
|
|
|
|
|
Amortization of right-of-use assets (a)
|
|
146
|
|
|
223
|
|
Interest on lease liabilities
|
|
228
|
|
|
340
|
|
(a) Includes amortization of below-market ground lease intangible assets
The table below presents supplemental cash flow information related to leases during the three and nine months ended September 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
Nine Months Ended
September 30, 2019
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
477
|
|
|
$
|
1,501
|
|
Operating cash flows from finance leases
|
|
206
|
|
|
317
|
|
Financing cash flows from finance leases
|
|
—
|
|
|
—
|
|
Additional information related to leases as of September 30, 2019 were as follows (in thousands):
|
|
|
|
|
|
|
September 30, 2019
|
Weighted Average Remaining Lease Term (years)
|
|
|
Operating leases
|
|
45.7
|
|
Finance leases
|
|
41.5
|
|
|
|
|
Weighted Average Discount Rate
|
|
|
Operating leases
|
|
5.4
|
%
|
Finance leases
|
|
5.2
|
%
|
Maturities of lease liabilities as of September 30, 2019 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ending December 31,
|
|
Operating Leases
|
|
Finance Leases
|
2019 (excluding nine months ended September 30, 2019)
|
|
$
|
478
|
|
|
$
|
216
|
|
2020
|
|
2,080
|
|
|
864
|
|
2021
|
|
2,137
|
|
|
864
|
|
2022
|
|
2,361
|
|
|
868
|
|
2023
|
|
2,400
|
|
|
873
|
|
Thereafter
|
|
105,961
|
|
|
43,903
|
|
Total lease liabilities
|
|
115,417
|
|
|
47,588
|
|
Less imputed interest
|
|
(74,030
|
)
|
|
(29,697
|
)
|
Present value of lease liabilities
|
|
$
|
41,387
|
|
|
$
|
17,891
|
|
Lessor Disclosures
Rental revenue for the three and nine months ended September 30, 2019 comprised the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
Nine Months Ended
September 30, 2019
|
Base rent and tenant charges
|
|
$
|
41,236
|
|
|
$
|
106,227
|
|
Accrued straight-line rental adjustment
|
|
745
|
|
|
2,893
|
|
Lease incentive amortization
|
|
(187
|
)
|
|
(555
|
)
|
Above/below market lease amortization
|
|
426
|
|
|
942
|
|
Total rental revenue
|
|
$
|
42,220
|
|
|
$
|
109,507
|
|
The Company's commercial tenant leases provide for minimum rental payments during each of the next five years and thereafter as follows (in thousands):
|
|
|
|
|
|
Year Ending December 31,
|
|
Operating Leases
|
2019 (excluding nine months ended September 30, 2019)
|
|
$
|
24,083
|
|
2020
|
|
94,370
|
|
2021
|
|
87,474
|
|
2022
|
|
80,172
|
|
2023
|
|
69,962
|
|
Thereafter
|
|
317,305
|
|
Total
|
|
$
|
673,366
|
|
5. Real Estate Investment
Property Acquisitions
On February 6, 2019, the Company acquired an additional outparcel phase of Wendover Village in Greensboro, North Carolina for a contract price of $2.7 million plus capitalized acquisition costs of $0.1 million. This phase is leased by a single tenant.
On March 14, 2019, the Company acquired the office and retail portions of the One City Center project in exchange for a redemption of its 37% equity ownership in the joint venture with Austin Lawrence Partners, which totaled $23.0 million as of the acquisition date, and a cash payment of $23.2 million. The Company also incurred capitalized acquisition costs of $0.1 million.
On April 24, 2019, the Company exercised its option to purchase 79% of the interests in the partnership that owns 1405 Point in exchange for extinguishing the Company's $31.3 million note receivable on the project, making a cash payment of $0.3 million, and assuming a loan payable of $64.9 million, which was recorded at its fair value of $65.8 million. The Company also incurred capitalized acquisition costs of $0.1 million.
On May 23, 2019, the Company acquired Red Mill Commons and Marketplace at Hilltop from Venture Realty Group for consideration comprised of 4.1 million Class A Units (as defined in Note 11), the assumption of $35.7 million of mortgage debt principal, and $4.5 million in cash. The negotiated price was $105.0 million, which contemplated the price of the Company's common stock of $15.55 per share when the purchase and sale agreement was executed. The aggregate acquisition cost was $109.3 million, which consisted of 4.1 million Class A Units valued at $68.1 million (using the price of the Company's common stock of $16.50 on the date of the acquisition), mortgage debt valued at $35.6 million, cash consideration of $4.5 million, and capitalized acquisition costs of $1.1 million. In connection with the acquisition, the Company and the Operating Partnership entered into a tax protection agreement with the contributors pursuant to which the Company and the Operating Partnership agreed, subject to certain exceptions, to indemnify the contributors for up to 10 years against certain tax liabilities incurred by them, if such liabilities result from a transaction involving a direct or indirect taxable disposition of either or both of these properties or if the Operating Partnership fails to maintain and allocate to the contributors for taxation purposes minimum levels of Operating Partnership liabilities.
On June 26, 2019, the Company acquired Thames Street Wharf, a class A office building located in the Harbor Point development of Baltimore, Maryland, for $101.0 million in cash and $0.3 million of capitalized acquisition costs.
The following table summarizes the purchase price allocation (including acquisition costs) based on relative fair value of the assets acquired and intangible liabilities assumed for the six operating properties purchased during the nine months ended September 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wendover Village additional outparcel
|
|
One City Center
|
|
1405 Point
|
|
Red Mill Commons
|
|
Marketplace at Hilltop
|
|
Thames Street Wharf
|
Land
|
|
$
|
1,633
|
|
|
$
|
2,678
|
|
|
$
|
—
|
|
(a)
|
$
|
44,252
|
|
|
$
|
2,023
|
|
(b)
|
$
|
15,861
|
|
Site improvements
|
|
50
|
|
|
163
|
|
|
298
|
|
|
2,558
|
|
|
691
|
|
|
150
|
|
Building and improvements
|
|
888
|
|
|
28,039
|
|
|
92,866
|
|
|
27,790
|
|
|
19,195
|
|
|
64,539
|
|
Furniture and fixtures
|
|
—
|
|
|
—
|
|
|
2,302
|
|
|
—
|
|
|
—
|
|
|
—
|
|
In-place leases
|
|
101
|
|
|
15,140
|
|
|
3,371
|
|
|
9,973
|
|
|
4,565
|
|
|
24,385
|
|
Above-market leases
|
|
111
|
|
|
—
|
|
|
—
|
|
|
1,463
|
|
|
599
|
|
|
—
|
|
Below-market leases
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,221
|
)
|
|
(1,136
|
)
|
|
(3,636
|
)
|
Finance lease liabilities
|
|
—
|
|
|
—
|
|
|
(8,671
|
)
|
|
—
|
|
|
(9,200
|
)
|
|
—
|
|
Finance lease right-of-use assets
|
|
—
|
|
|
—
|
|
|
11,730
|
|
(a)
|
—
|
|
|
12,770
|
|
(b)
|
—
|
|
Net assets acquired
|
|
$
|
2,783
|
|
|
$
|
46,020
|
|
|
$
|
101,896
|
|
|
$
|
79,815
|
|
|
$
|
29,507
|
|
|
$
|
101,299
|
|
________________________________________
(a) Land is subject to a ground lease.
(b) Portion of land is subject to a ground lease.
Property Disposition
On April 1, 2019, the Company sold Waynesboro Commons for a sale price of $1.1 million. There was no gain or loss recognized on the disposition.
On August 15, 2019, the Company sold Lightfoot Marketplace for a sale price of $30.3 million. The gain on disposition was $4.5 million. In conjunction with this sale, the Company paid off the $17.9 million note payable secured by this property.
Subsequent to September 30, 2019
On October 25, 2019, the Company purchased land in Roswell, Georgia for a purchase price of $5.0 million for the development of a mixed-use property.
6. Equity Method Investment
One City Center
On February 25, 2016, the Company acquired a 37% interest in One City Center, a joint venture with Austin Lawrence Partners, for purposes of developing a 22-story mixed use tower in Durham, North Carolina. During the nine months ended September 30, 2019, the Company invested an additional $0.5 million in One City Center.
For the period from January 1, 2019 to March 13, 2019, One City Center had operating income of $0.3 million allocated to the Company. For the three and nine months ended September 30, 2018, One City Center had no operating activity, and therefore the Company received no allocated income.
On March 14, 2019, the Company acquired the office and retail portions of the One City Center project in exchange for its 37% equity ownership in the joint venture and a cash payment of $23.2 million. See Note 5 for additional discussion.
7. Notes Receivable
The Company had the following notes receivable outstanding as of September 30, 2019 and December 31, 2018 ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding loan amount
|
|
Maximum loan commitment
|
|
Interest rate
|
|
Interest compounding
|
Development Project
|
|
September 30,
2019
|
|
December 31, 2018
|
|
1405 Point
|
|
$
|
—
|
|
|
$
|
30,238
|
|
|
$
|
31,032
|
|
|
8.0
|
%
|
|
Monthly
|
The Residences at Annapolis Junction
|
|
38,571
|
|
|
36,361
|
|
|
48,105
|
|
|
10.0
|
%
|
|
Monthly
|
North Decatur Square
|
|
—
|
|
|
18,521
|
|
|
29,673
|
|
|
15.0
|
%
|
|
Annually
|
Delray Plaza
|
|
12,526
|
|
|
7,032
|
|
|
15,000
|
|
|
15.0
|
%
|
|
Annually
|
Nexton Square
|
|
14,718
|
|
|
14,855
|
|
|
17,000
|
|
|
15.0
|
%
|
|
Monthly
|
Interlock Commercial
|
|
54,112
|
|
|
18,269
|
|
|
95,000
|
|
|
15.0
|
%
|
|
None
|
Solis Apartments at Interlock
|
|
22,544
|
|
|
13,821
|
|
|
41,100
|
|
|
13.0
|
%
|
|
Annually
|
Total mezzanine
|
|
142,471
|
|
|
139,097
|
|
|
$
|
276,910
|
|
|
|
|
|
Other notes receivable
|
|
1,333
|
|
|
1,275
|
|
|
|
|
|
|
|
Notes receivable guarantee premium
|
|
5,702
|
|
|
2,800
|
|
|
|
|
|
|
|
Notes receivable discount, net (a)
|
|
(762
|
)
|
|
(4,489
|
)
|
|
|
|
|
|
|
Total notes receivable
|
|
$
|
148,744
|
|
|
$
|
138,683
|
|
|
|
|
|
|
|
Interest on the mezzanine loans is accrued and funded utilizing the interest reserves for each loan, which are components of the respective maximum loan commitments, and such accrued interest is added to the loan receivable balances. The Company recognized interest income for the three and nine months ended September 30, 2019 and 2018 as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
Development Project
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
1405 Point
|
|
$
|
—
|
|
|
$
|
547
|
|
|
$
|
783
|
|
|
$
|
1,483
|
|
The Residences at Annapolis Junction
|
|
2,340
|
|
(a)
|
1,166
|
|
|
6,536
|
|
(a)
|
3,374
|
|
North Decatur Square
|
|
178
|
|
|
569
|
|
|
1,509
|
|
|
1,561
|
|
Delray Plaza
|
|
429
|
|
|
228
|
|
|
1,153
|
|
|
676
|
|
Nexton Square
|
|
550
|
|
|
19
|
|
|
1,584
|
|
|
19
|
|
Interlock Commercial
|
|
1,595
|
|
|
—
|
|
|
3,425
|
|
|
—
|
|
Solis Apartments at Interlock
|
|
596
|
|
|
—
|
|
|
1,567
|
|
|
—
|
|
Total mezzanine
|
|
5,688
|
|
|
2,529
|
|
|
16,557
|
|
|
7,113
|
|
Other interest income
|
|
22
|
|
|
16
|
|
|
65
|
|
|
39
|
|
Total interest income
|
|
$
|
5,710
|
|
|
$
|
2,545
|
|
|
$
|
16,622
|
|
|
$
|
7,152
|
|
________________________________________
(a) Includes amortization of the $5.0 million loan modification fee paid by the borrower in November 2018.
As of September 30, 2019 and December 31, 2018, there was no allowance for loan losses. During the three and nine months ended September 30, 2019 and 2018, there was no provision for loan losses recorded for any of the Company's notes receivable. The Company's management performs a quarterly analysis of the loan portfolio to determine if an impairment has occurred based on the progress of development activities including leasing activities, projected development costs, and current and projected mezzanine and senior construction loan balances.
Delray Plaza
On January 8, 2019, the Delray Plaza loan was modified to increase the maximum amount of the loan to $15.0 million and increase the payment guarantee amount to $5.2 million.
Nexton Square
On February 8, 2019, the developer of Nexton Square closed on a senior construction loan with a maximum borrowing capacity of $25.2 million. The developer used proceeds from its original draw in part to repay $2.1 million of the mezzanine loan. Upon the closing of this senior construction loan, the Company entered into a payment guarantee for $12.6 million of the senior loan.
Interlock Commercial
On April 19, 2019, the borrower executed its senior construction loan, and the Company's payment guarantee of up to $30.7 million became effective. See Note 15 for additional information.
1405 Point
On April 24, 2019, the Company exercised its option to purchase 79% of the interests in the partnership that owns 1405 Point in exchange for extinguishing its note receivable on the project and a cash payment of $0.3 million. The project is subject to a loan payable of $64.9 million.
The Residences at Annapolis Junction
The Residences at Annapolis Junction loan was originated inclusive of options for the Company to purchase up to 88% of the related development project from the developer, Annapolis Junction Apartments Owner, LLC (“AJAO”). On November 16, 2018, AJAO refinanced the senior construction loan with a one year senior loan of $83.0 million. This senior loan may be extended for one additional year if certain minimum debt yields and minimum debt service coverage ratios are met by AJAO. Concurrent with the refinancing of the senior construction loan, the Company agreed to modify the mezzanine loan receivable with AJAO as follows:
•The Company agreed to guarantee $8.3 million of the new senior loan;
•The Company agreed to extend the maturity of the mezzanine loan, which will mature concurrently with the
new senior loan;
•The Company terminated its rights under the purchase options;
•AJAO paid a fee of $5.0 million; and
•AJAO paid down $11.1 million of the outstanding mezzanine loan balance, which was comprised of a $9.9 million payment of accrued interest and a $1.2 million payment of principal.
The fee of $5.0 million paid by AJAO is being accounted for as a loan discount that is being recognized as interest income over the remaining term of the loan using the effective interest method.
North Decatur Square
On July 22, 2019, the borrower paid off the North Decatur Square note receivable in full. The Company received the outstanding principal and interest in the amount of $20.0 million.
8. Construction Contracts
Construction contract costs and estimated earnings in excess of billings represent reimbursable costs and amounts earned under contracts in progress as of the balance sheet date. Such amounts become billable according to contract terms, which usually consider the passage of time, achievement of certain milestones, or completion of the project. The Company expects to bill and collect substantially all construction contract costs and estimated earnings in excess of billings as of September 30, 2019 during the next twelve months.
Billings in excess of construction contract costs and estimated earnings represent billings or collections on contracts made in advance of revenue recognized.
The following table summarizes the changes to the balances in the Company’s construction contract costs and estimated earnings in excess of billings account and the billings in excess of construction contract costs and estimated earnings account for the nine months ended September 30, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2019
|
|
Nine Months Ended
September 30, 2018
|
|
|
Construction contract costs and estimated earnings in excess of billings
|
|
Billings in excess of construction contract costs and estimated earnings
|
|
Construction contract costs and estimated earnings in excess of billings
|
|
Billings in excess of construction contract costs and estimated earnings
|
Beginning balance
|
|
$
|
1,358
|
|
|
$
|
3,037
|
|
|
$
|
245
|
|
|
$
|
3,591
|
|
Revenue recognized that was included in the balance at the beginning of the period
|
|
—
|
|
|
(3,037
|
)
|
|
—
|
|
|
(3,591
|
)
|
Increases due to new billings, excluding amounts recognized as revenue during the period
|
|
—
|
|
|
4,256
|
|
|
—
|
|
|
2,400
|
|
Transferred to receivables
|
|
(2,015
|
)
|
|
—
|
|
|
(245
|
)
|
|
—
|
|
Construction contract costs and estimated earnings not billed during the period
|
|
624
|
|
|
—
|
|
|
576
|
|
|
—
|
|
Changes due to cumulative catch-up adjustment arising from changes in the estimate of the stage of completion
|
|
657
|
|
|
(923
|
)
|
|
151
|
|
|
(633
|
)
|
Ending balance
|
|
$
|
624
|
|
|
$
|
3,333
|
|
|
$
|
727
|
|
|
$
|
1,767
|
|
The Company defers pre-contract costs when such costs are directly associated with specific anticipated contracts and their recovery is probable. Pre-contract costs of $1.0 million and $1.4 million were deferred as of September 30, 2019 and December 31, 2018, respectively. Amortization of pre-contract costs for the nine months ended September 30, 2019 and 2018 was $0.1 million and zero, respectively.
Construction receivables and payables include retentions, amounts that are generally withheld until the completion of the contract or the satisfaction of certain restrictive conditions such as fulfillment guarantees. As of September 30, 2019 and December 31, 2018, construction receivables included retentions of $5.4 million and $8.5 million, respectively. The Company expects to collect substantially all construction receivables outstanding as of September 30, 2019 during the next twelve months. As of September 30, 2019 and December 31, 2018, construction payables included retentions of $15.8
million and $21.6 million, respectively. The Company expects to pay substantially all construction payables outstanding as of September 30, 2019 during the next twelve months.
The Company’s net position on uncompleted construction contracts comprised the following as of September 30, 2019 and December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
Costs incurred on uncompleted construction contracts
|
$
|
656,874
|
|
|
$
|
594,006
|
|
Estimated earnings
|
23,527
|
|
|
20,375
|
|
Billings
|
(683,110
|
)
|
|
(616,060
|
)
|
Net position
|
$
|
(2,709
|
)
|
|
$
|
(1,679
|
)
|
|
|
|
|
Construction contract costs and estimated earnings in excess of billings
|
$
|
624
|
|
|
$
|
1,358
|
|
Billings in excess of construction contract costs and estimated earnings
|
(3,333
|
)
|
|
(3,037
|
)
|
Net position
|
$
|
(2,709
|
)
|
|
$
|
(1,679
|
)
|
The Company’s balances and changes in construction contract price allocated to unsatisfied performance obligations (backlog) as of September 30, 2019 and 2018 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Beginning backlog
|
|
$
|
178,632
|
|
|
$
|
37,921
|
|
|
$
|
165,863
|
|
|
$
|
49,167
|
|
New contracts/change orders
|
|
22,054
|
|
|
7,138
|
|
|
73,250
|
|
|
39,514
|
|
Work performed
|
|
(27,594
|
)
|
|
(19,879
|
)
|
|
(66,021
|
)
|
|
(63,501
|
)
|
Ending backlog
|
|
$
|
173,092
|
|
|
$
|
25,180
|
|
|
$
|
173,092
|
|
|
$
|
25,180
|
|
The Company expects to complete a majority of the uncompleted contracts in place as of September 30, 2019 during the next 12 to 18 months.
9. Indebtedness
Credit Facility
The Company has a senior credit facility that was modified on January 31, 2019 using the accordion feature to increase the maximum total commitments to $355.0 million, comprised of a $150.0 million senior unsecured revolving credit facility (the "revolving credit facility") and a $205.0 million senior unsecured term loan facility (the "term loan facility" and, together with the revolving credit facility, the "credit facility"), with a syndicate of banks.
The credit facility includes an accordion feature that allows the total commitments to be further increased to $450.0 million, subject to certain conditions, including obtaining commitments from any one or more lenders. The revolving credit facility has a scheduled maturity date of October 26, 2021, with two six-month extension options, subject to certain conditions, including payment of a 0.075% extension fee at each extension. The term loan facility has a scheduled maturity date of October 26, 2022.
The revolving credit facility bears interest at LIBOR (the London Inter-Bank Offered Rate) plus a margin ranging from 1.40% to 2.00% and the term loan facility bears interest at LIBOR plus a margin ranging from 1.35% to 1.95%, in each case depending on the Company's total leverage. The Company is also obligated to pay an unused commitment fee of 15 or 25 basis points on the unused portions of the commitments under the revolving credit facility, depending on the amount of borrowings under the credit facility.
As of September 30, 2019 and December 31, 2018, the outstanding balance on the revolving credit facility was $110.0 million and $126.0 million, respectively, and the outstanding balance on the term loan facility was $205.0 million and $180.0 million, respectively. As of September 30, 2019, the effective interest rates on the revolving credit facility and the term loan facility were 3.57% and 3.52%, respectively. The Company may, at any time, voluntarily prepay any loan under the credit facility in whole or in part without premium or penalty.
The Operating Partnership is the borrower under the credit facility, and its obligations under the credit facility are guaranteed by the Company and certain of its subsidiaries that are not otherwise prohibited from providing such guaranty. The credit agreement contains customary representations and warranties and financial and other affirmative and negative covenants. The Company's ability to borrow under the credit facility is subject to ongoing compliance with a number of financial covenants, affirmative covenants, and other restrictions. The credit agreement includes customary events of default, in certain cases subject to customary cure periods. The occurrence of an event of default, if not cured within the applicable cure period, would permit the lenders to, among other things, declare the unpaid principal, accrued and unpaid interest, and all other amounts payable under the credit facility to be immediately due and payable.
The Company is currently in compliance with all covenants governing the credit facility.
Other 2019 Financing Activity
On January 31, 2019, the Company paid off North Point Center Note 1.
On March 11, 2019, the Company received $7.4 million of additional funding on the loan secured by Lightfoot Marketplace. On August 15, 2019, the Company sold the property and paid off the outstanding balance of $17.9 million.
On March 14, 2019, the Company obtained a loan secured by One City Center in the amount of $25.6 million in conjunction with the acquisition of this property. This loan may be increased to $27.6 million subject to certain conditions.
The loan bears interest at a rate of LIBOR plus a spread of 1.85% and will mature on April 1, 2024.
On April 24, 2019, the Company exercised its option to purchase 79% of the partnership that owns 1405 Point in exchange for extinguishing its note receivable on the project and a cash payment of $0.3 million. The project was acquired subject to a loan payable of $64.9 million, which was recorded at its fair value of $65.8 million. The loan matures on May 1, 2020 and bears interest at a rate of LIBOR plus a spread of 2.75%; this spread will decrease to 2.50% upon stabilization (as defined in the loan agreement).
On May 23, 2019, the Company assumed notes payable in connection with the acquisition of Red Mill Commons and Marketplace at Hilltop with outstanding principal balances of $24.9 million and $10.8 million, respectively. The following table summarizes the note balance at assumption, fair value at assumption, maturity date, and interest rate for each loan ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan name
|
|
Note balance at assumption
|
|
Fair value of loan at assumption
|
|
Loan maturity date
|
|
Loan interest rate
|
Red Mill North
|
|
$
|
4,451
|
|
|
$
|
4,520
|
|
|
12/31/2028
|
|
4.73
|
%
|
Red Mill South
|
|
6,310
|
|
|
6,090
|
|
|
5/1/2025
|
|
3.57
|
%
|
Red Mill Central
|
|
2,640
|
|
|
2,690
|
|
|
6/17/2024
|
|
4.80
|
%
|
Red Mill West
|
|
11,548
|
|
|
11,540
|
|
|
6/1/2022
|
|
4.23
|
%
|
Marketplace at Hilltop
|
|
10,740
|
|
|
10,790
|
|
|
10/1/2022
|
|
4.42
|
%
|
|
|
$
|
35,689
|
|
|
$
|
35,630
|
|
|
|
|
|
On June 26, 2019, the Company obtained a loan secured by Thames Street Wharf in the amount of $70.0 million in conjunction with the acquisition of this property. The loan bears interest at a rate of LIBOR plus a spread of 1.30% and will mature on June 26, 2022.
On June 26, 2019, the Company entered into a $76.0 million syndicated construction loan facility for the Wills Wharf development project in Baltimore, Maryland. The facility bears interest at a rate of LIBOR plus a spread of 2.25% during construction activities and will mature on June 26, 2023. The facility will have an unused commitment fee of 25 basis points until the Company has borrowed at least $19.0 million under the facility.
During the nine months ended September 30, 2019, the Company borrowed $77.8 million under its existing construction loans to fund new development and construction.
Subsequent to September 30, 2019
On October 3, 2019, the Company amended and restated the credit facility to, among other things, extend the initial maturity date of the revolving credit facility to January 24, 2024 and the maturity date of the term loan facility to January 24, 2025. In addition, the interest rate for the revolving credit facility was lowered to LIBOR plus a margin ranging from 1.30% to 1.85% and the interest rate for the term loan facility was lowered to LIBOR plus a margin ranging from 1.25% to 1.80%, in each case depending on the Company's total leverage. The amended and restated credit facility includes an increased accordion feature that allows the total commitments to be increased to $700.0 million, subject to certain conditions, including obtaining commitments from any one or more lenders.
On October 29, 2019, the Company extended and modified the Premier loan. The Company increased the balance on the loan to $25.0 million by receiving additional proceeds of $2.7 million. The loan bears interest at a rate of LIBOR plus a spread of 1.55% and will mature on October 31, 2024.
In October 2019, the Company increased its borrowings under the revolving credit facility by $12.0 million.
In October 2019, the Company borrowed $9.5 million on its construction loans to fund development activities.
10. Derivative Financial Instruments
The Company may enter into interest rate derivative contracts to manage exposure to interest rate risks. The Company does not use derivative financial instruments for trading or speculative purposes. Derivative financial instruments are recognized at fair value and presented within other assets and other liabilities in the condensed consolidated balance sheets. Gains and losses resulting from changes in the fair value of derivatives that are neither designated nor qualify as hedging instruments are recognized within the change in fair value of interest rate derivatives in the condensed consolidated statements of comprehensive income. For derivatives that qualify as cash flow hedges, the gain or loss is reported as a component of other comprehensive income (loss) and reclassified into earnings in the periods during which the hedged forecasted transaction affects earnings.
As of September 30, 2019, the Company had the following LIBOR interest rate caps ($ in thousands), which are not designated as cash flow hedges for accounting purposes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Origination Date
|
|
Expiration Date
|
|
Notional Amount
|
|
Strike Rate
|
|
Premium Paid
|
9/18/2017
|
|
10/1/2019
|
|
$
|
50,000
|
|
|
1.50
|
%
|
|
$
|
199
|
|
11/28/2017
|
|
12/1/2019
|
|
50,000
|
|
|
1.50
|
%
|
|
359
|
|
3/7/2018
|
|
4/1/2020
|
|
50,000
|
|
|
2.25
|
%
|
|
310
|
|
7/16/2018
|
|
8/1/2020
|
|
50,000
|
|
|
2.50
|
%
|
|
319
|
|
12/11/2018
|
|
1/1/2021
|
|
50,000
|
|
|
2.75
|
%
|
|
210
|
|
5/15/2019
|
|
6/1/2022
|
|
100,000
|
|
|
2.50
|
%
|
|
288
|
|
Total
|
|
|
|
$
|
350,000
|
|
|
|
|
$
|
1,685
|
|
As of September 30, 2019, the Company held the following floating-to-fixed interest rate swaps ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related Debt
|
|
Notional Amount
|
|
|
Index
|
|
Swap Fixed Rate
|
|
Debt effective rate
|
|
Effective Date
|
|
Expiration Date
|
Senior unsecured term loan
|
|
$
|
50,000
|
|
|
|
1-month LIBOR
|
|
2.00
|
%
|
|
3.50
|
%
|
|
3/1/2016
|
|
2/20/2020
|
Senior unsecured term loan
|
|
50,000
|
|
|
|
1-month LIBOR
|
|
2.78
|
%
|
|
4.28
|
%
|
|
5/1/2018
|
|
5/1/2023
|
John Hopkins Village
|
|
52,032
|
|
(a)
|
|
1-month LIBOR
|
|
2.94
|
%
|
|
4.19
|
%
|
|
8/7/2018
|
|
8/7/2025
|
Senior unsecured term loan
|
|
10,500
|
|
(a)(b)
|
|
1-month LIBOR
|
|
3.02
|
%
|
|
4.52
|
%
|
|
10/12/2018
|
|
10/12/2023
|
249 Central Park Retail, South Retail, and Fountain Plaza Retail
|
|
34,456
|
|
(a)
|
|
1-month LIBOR
|
|
2.25
|
%
|
|
3.85
|
%
|
|
4/1/2019
|
|
8/10/2023
|
Senior unsecured term loan
|
|
50,000
|
|
(a)
|
|
1-month LIBOR
|
|
2.26
|
%
|
|
3.76
|
%
|
|
4/1/2019
|
|
10/22/2022
|
Total
|
|
$
|
246,988
|
|
|
|
|
|
|
|
|
|
|
|
|
________________________________________
(a) Designated as a cash flow hedge.
(b) Prior to August 15, 2019, this swap was used as a hedge for the cash flows for the loan secured by Lightfoot Marketplace.
This loan was paid off on August 15, 2019. This swap is now being used as a hedge for the cash flows for a portion of the
Company's unsecured term loan facility.
For the interest rate swaps designated as cash flow hedges, realized losses are reclassified out of accumulated other comprehensive loss to interest expense in the Condensed Consolidated Statements of Comprehensive Income due to payments made to the swap counterparty. During the next 12 months, the Company anticipates reclassifying approximately $1.3 million of net hedging losses from accumulated other comprehensive loss into earnings to offset the variability of the hedged items during this period.
The Company’s derivatives were comprised of the following as of September 30, 2019 and December 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Notional
Amount
|
|
Fair Value
|
|
Notional
Amount
|
|
Fair Value
|
|
|
|
|
Asset
|
|
Liability
|
|
|
|
Asset
|
|
Liability
|
Derivatives not designated as accounting hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
100,000
|
|
|
$
|
—
|
|
|
$
|
(2,416
|
)
|
|
$
|
100,000
|
|
|
$
|
303
|
|
|
$
|
(749
|
)
|
Interest rate caps
|
|
350,000
|
|
|
122
|
|
|
—
|
|
|
350,000
|
|
|
1,790
|
|
|
—
|
|
Total derivatives not designated as accounting hedges
|
|
450,000
|
|
|
122
|
|
|
(2,416
|
)
|
|
450,000
|
|
|
2,093
|
|
|
(749
|
)
|
Derivatives designated as accounting hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
146,988
|
|
|
—
|
|
|
(7,204
|
)
|
|
63,208
|
|
|
—
|
|
|
(1,725
|
)
|
Total derivatives
|
|
$
|
596,988
|
|
|
$
|
122
|
|
|
$
|
(9,620
|
)
|
|
$
|
513,208
|
|
|
$
|
2,093
|
|
|
$
|
(2,474
|
)
|
The changes in the fair value of the Company’s derivatives during the three and nine months ended September 30, 2019 and 2018 were comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Interest rate swaps
|
|
$
|
(1,477
|
)
|
|
$
|
319
|
|
|
$
|
(7,679
|
)
|
|
$
|
673
|
|
Interest rate caps
|
|
(299
|
)
|
|
(151
|
)
|
|
(1,956
|
)
|
|
453
|
|
Total change in fair value of interest rate derivatives
|
|
$
|
(1,776
|
)
|
|
$
|
168
|
|
|
$
|
(9,635
|
)
|
|
$
|
1,126
|
|
Comprehensive income statement presentation:
|
|
|
|
|
|
|
|
|
Change in fair value of interest rate derivatives
|
|
$
|
(529
|
)
|
|
$
|
298
|
|
|
$
|
(3,926
|
)
|
|
$
|
1,256
|
|
Unrealized cash flow hedge gains losses
|
|
(1,247
|
)
|
|
(130
|
)
|
|
(5,709
|
)
|
|
(130
|
)
|
Total change in fair value of interest rate derivatives
|
|
$
|
(1,776
|
)
|
|
$
|
168
|
|
|
$
|
(9,635
|
)
|
|
$
|
1,126
|
|
11. Equity
Stockholders’ Equity
On February 26, 2018, the Company commenced an at-the-market continuous equity offering program (the "ATM Program") through which the Company may, from time to time, issue and sell shares of its common stock. On August 6, 2019, the Company entered into amendments (the "Amendments") to the separate sales agreements related to the ATM Program, which, among other things, increased the aggregate offering price of shares of the Company’s common stock under the ATM Program from $125.0 million to $180.7 million. Prior to the date of the Amendments, the Company had sold shares having an aggregate offering price of $105.7 million, resulting in shares having an aggregate offering price of $75.0 million remaining available for sale under the ATM Program as of August 6, 2019. During the nine months ended September 30, 2019, the Company issued and sold 4,476,565 shares of common stock at a weighted average price of $16.28 per share under the ATM Program, receiving net proceeds after offering costs and commissions of $71.9 million.
On June 18, 2019, the Company issued 2,530,000 shares of its 6.75% Series A Cumulative Redeemable Perpetual Preferred Stock, $0.01 par value per share ("Series A Preferred Stock"), with a liquidation preference of $25.00 per share, which included 330,000 shares issued upon the underwriters’ full exercise of their option to purchase additional shares. Net proceeds from the offering, after the underwriting discount but before offering expenses payable by the Company, were approximately $61.3 million. The Company used the net proceeds to fund a portion of the purchase price of Thames Street Wharf, a 263,426 square foot office building located in the Harbor Point neighborhood of Baltimore, Maryland. The balance of the net proceeds was used to repay a portion of the outstanding borrowings under the Company’s unsecured revolving credit facility and for general corporate purposes.
In connection with the issuance of the Series A Preferred Stock, on June 18, 2019, the Operating Partnership issued to the Company 2,530,000 6.75% Series A Cumulative Redeemable Perpetual Preferred Units (the "Series A Preferred Units"), which have economic terms that are identical to the Company’s Series A Preferred Stock. The Series A Preferred Units were issued in exchange for the Company’s contribution of the net proceeds from the offering of the Series A Preferred Stock to the Operating Partnership.
Dividends on the Series A Preferred Stock will be payable quarterly in arrears on or about the 15th day of each January, April, July and October. The first dividend on the Series A Preferred Stock was paid on October 15, 2019. The Series A Preferred Stock does not have a stated maturity date and is not subject to any sinking fund or mandatory redemption provisions. Upon liquidation, dissolution or winding up, the Series A Preferred Stock will rank senior to the Company's common stock with respect to the payment of distributions and other amounts. Except in instances relating to preservation of the Company's qualification as a REIT or pursuant to the Company’s special optional redemption right, the Series A Preferred Stock is not redeemable prior to June 18, 2024. On and after June 18, 2024, the Company may, at its option, redeem the Series A Preferred Stock, in whole, at any time, or in part, from time to time, for cash at a redemption price of $25.00 per share, plus any accrued and unpaid dividends (whether or not declared) to, but excluding, the redemption date.
Upon the occurrence of a change of control (as defined in the articles supplementary designating the terms of the Series A Preferred Stock), the Company has a special optional redemption right that enables it to redeem the Series A Preferred Stock, in whole or in part and within 120 days after the first date on which a change of control has occurred resulting in neither the Company nor the surviving entity having a class of common stock listed on the NYSE, NYSE American, or NASDAQ or the acquisition of beneficial ownership of its stock entitling a person to exercise more than 50% of the total voting power of all our stock entitled to vote generally in election of directors. The special optional redemption price is $25.00 per share, plus any accrued and unpaid dividends (whether or not declared) to, but excluding, the date of redemption.
Upon the occurrence of a change of control, holders will have the right (unless the Company has elected to exercise its
special optional redemption right to redeem their Series A Preferred Stock) to convert some or all of such holder’s Series A
Preferred Stock into a number of shares of the Company's common stock equal to the lesser of:
|
|
•
|
the quotient obtained by dividing (i) the sum of the $25.00 liquidation preference plus the amount of any accrued and unpaid distributions to, but not including, the change of control conversion date (unless the change of control conversion date is after a record date for a Series A Preferred Stock distribution payment and prior to the corresponding Series A Preferred Stock distribution payment date, in which case no additional amount for such accrued and unpaid distribution will be included in this sum) by (ii) the Common Stock Price (as defined in the articles supplementary designating the terms of the Series A Preferred Stock); and
|
|
|
•
|
2.97796 (i.e., the Share Cap), subject to certain adjustments;
|
subject, in each case, to certain adjustments and provisions for the receipt of alternative consideration of equivalent value as described in the articles supplementary designating the terms of the Series A Preferred Stock.
Noncontrolling Interests
As of September 30, 2019 and December 31, 2018, the Company held a 72.2% and 74.5% common interest, respectively, in the Operating Partnership. As of September 30, 2019, the Company also held a preferred interest in the Operating Partnership in the form of preferred units with a liquidation preference of $63.3 million. The Company is the primary beneficiary of the Operating Partnership as it has the power to direct the activities of the Operating Partnership and the rights to absorb 72.2% of the net income of the Operating Partnership. As the primary beneficiary, the Company consolidates the financial position and results of operations of the Operating Partnership. Noncontrolling interests in the Operating Partnership represent units of limited partnership interest in the Operating Partnership not held by the Company.
As of September 30, 2019, there were 21,167,104 Class A units of limited partnership interest in the Operating Partnership ("Class A Units") not held by the Company. The Company's financial position and results of operations are the same as those of the Operating Partnership.
Additionally, the Operating Partnership owns a majority interest in certain non-wholly-owned operating and development properties. The noncontrolling interest for investment entities of $5.5 million relates to the minority partners' interest in certain joint venture entities as of September 30, 2019, including 1405 Point, Hoffler Place, and Lightfoot Marketplace, which was sold during the three months ended September 30, 2019 but for which proceeds have not yet been distributed to the partners. The noncontrolling interest for consolidated real estate entities was zero as of December 31, 2018.
On January 2, 2019, due to the holders of Class A Units tendering an aggregate of 118,471 Class A Units for redemption by the Operating Partnership, the Company elected to satisfy the redemption requests through the issuance of an equal number of shares of common stock.
On May 23, 2019, the Operating Partnership issued 4,125,759 Class A Units valued at $68.1 million in connection with the acquisition of Red Mill Commons and Marketplace at Hilltop.
On May 30, 2019, the Operating Partnership issued 60,000 Class A Units valued at $1.0 million in exchange for the remaining 35% ownership interest in Brooks Crossing Office, which was previously owned by Tidewater Partners.
On July 1, 2019, due to the holders of Class A Units tendering an aggregate of 125,118 Class A Units for redemption by the Operating Partnership, the Company elected to satisfy the redemption requests through the issuance of an equal number of shares of common stock.
On August 20, 2019, the Operating Partnership issued 40,864 Class A Units valued at $0.7 million due to the satisfaction of certain leasing requirements associated with the 2018 acquisition of Lexington Square.
On September 20, 2019, the Operating Partnership issued 73,666 Class A Units valued at $1.3 million upon the satisfaction of certain leasing and development requirements associated with the 2016 acquisition of Southgate Square.
Common Stock Dividends and Class A Unit Distributions
On January 3, 2019, the Company paid cash dividends of $10.0 million to common stockholders, and the Operating Partnership paid cash distributions of $3.4 million to holders of Class A Units.
On April 4, 2019, the Company paid cash dividends of $11.0 million to common stockholders, and the Operating Partnership paid cash distributions of $3.6 million to holders of Class A Units.
On July 3, 2019, the Company paid cash dividends of $11.1 million to common stockholders, and the Operating Partnership paid cash distributions of $4.4 million to holders of Class A Units.
On August 7, 2019, the Board of Directors declared a cash dividend and distribution of $0.21 per share and unit payable on October 3, 2019 to stockholders and unitholders of record on September 25, 2019.
On August 7, 2019, the Board of Directors declared a cash dividend and distribution of $0.54844 per share on its 6.75% Series A Cumulative Redeemable Perpetual Preferred Stock payable on October 15, 2019 to stockholders of record on October 1, 2019.
Subsequent to September 30, 2019
On October 1, 2019, due to a holder of Class A Units tendering an aggregate of 4,896 Class A Units for redemption by the Operating Partnership, the Company elected to satisfy the redemption request through the issuance of an equal number of shares of common stock.
On October 3, 2019, the Company paid cash dividends of $11.5 million to common stockholders, and the Operating Partnership paid cash distributions of $4.4 million to holders of Class A Units other than the Company.
On October 15, 2019, the Company paid cash dividends of $1.4 million to holders of shares of Series A Preferred Stock.
In October 2019, the Company sold an aggregate of 543,513 shares of common stock at a weighted average price of $18.14 per share under the ATM Program, receiving net proceeds, after offering costs and commissions, of $9.7 million.
12. Stock-Based Compensation
The Company’s Amended and Restated 2013 Equity Incentive Plan (the "Equity Plan") permits the grant of restricted stock awards, stock options, stock appreciation rights, performance units, and other equity-based awards up to an aggregate of 1,700,000 shares of common stock. As of September 30, 2019, there were 894,680 shares available for issuance under the Equity Plan.
During the nine months ended September 30, 2019, the Company granted an aggregate of 153,173 shares of restricted stock to employees and non-employee directors with a weighted average grant date fair value of $15.41 per share. Employee restricted stock awards generally vest over a period of two years: one-third immediately on the grant date and the remaining two-thirds in equal amounts on the first two anniversaries following the grant date, subject to continued service to the Company. Non-employee director restricted stock awards vest either immediately upon grant or over a period of one year, subject to continued service to the Company. Unvested restricted stock awards are entitled to receive dividends from their grant date.
During the nine months ended September 30, 2019, the Company issued performance-based awards in the form of restricted stock units to certain employees. The performance period for these awards is three years, with a required two-year service period immediately following the expiration of the performance period in order to fully vest. The compensation expense and the effect on the Company’s weighted average diluted shares calculation were immaterial. During the nine months ended September 30, 2019, 10,755 shares were issued with a grant date fair value of $15.42 per share due to the partial vesting of performance units awarded to certain employees in 2016.
During the three months ended September 30, 2019 and 2018, the Company recognized $0.5 million and $0.4 million, respectively, of stock-based compensation cost. During the nine months ended September 30, 2019 and 2018, the Company recognized $2.0 million and $1.6 million, respectively, of stock-based compensation cost. As of September 30, 2019, there were 144,122 nonvested restricted shares outstanding; the total unrecognized compensation expense related to nonvested restricted shares was $1.1 million, which the Company expects to recognize over the next 18 months.
13. Fair Value of Financial Instruments
Fair value measurements are based on assumptions that market participants would use in pricing an asset or a liability. The hierarchy for inputs used in measuring fair value is as follows:
Level 1 — quoted prices in active markets for identical assets or liabilities
Level 2 — observable inputs other than quoted prices in active markets for identical assets and liabilities
Level 3 — unobservable inputs
Except as disclosed below, the carrying amounts of the Company’s financial instruments approximate their fair values. Financial assets and liabilities whose fair values are measured on a recurring basis using Level 2 inputs consist of interest rate swaps and caps. The Company measures the fair values of these assets and liabilities based on prices provided by independent market participants that are based on observable inputs using market-based valuation techniques.
Financial assets and liabilities whose fair values are not measured at fair value but for which the fair value is disclosed include the Company's notes receivable and indebtedness. The fair value is estimated by discounting the future cash flows of each instrument at estimated market rates consistent with the maturity, credit characteristics, and other terms of the arrangements, which are Level 3 inputs under the fair value hierarchy.
In certain cases, the inputs used to estimate the fair value may fall into different levels of the fair value hierarchy. For disclosure purposes, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
Considerable judgment is used to estimate the fair value of financial instruments. The estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments.
The carrying amounts and fair values of the Company’s financial instruments as of September 30, 2019 and December 31, 2018 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
Indebtedness
|
|
$
|
943,371
|
|
|
$
|
949,106
|
|
|
$
|
694,239
|
|
|
$
|
688,437
|
|
Notes receivable
|
|
148,744
|
|
|
148,744
|
|
|
138,683
|
|
|
138,683
|
|
Interest rate swap liabilities
|
|
9,620
|
|
|
9,620
|
|
|
2,474
|
|
|
2,474
|
|
Interest rate swap and cap assets
|
|
122
|
|
|
122
|
|
|
2,093
|
|
|
2,093
|
|
14. Related Party Transactions
The Company provides general contracting and real estate services to certain related party entities that are included in these condensed consolidated financial statements. Revenue from construction contracts with these entities for the three months ended September 30, 2018 was less than $0.1 million, and gross profit from such contracts was less than $0.1 million. Revenue from construction contracts with related party entities for the nine months ended September 30, 2018 was $1.5 million, and gross profit from such contracts was $0.3 million. There was no such revenue or gross profit for the three and nine months ended September 30, 2019.
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.
Subsequent to September 30, 2019
In October 2019, the Company executed construction contracts with an aggregate price of $7.5 million with the developer of an apartment building and parking garage to be located in Virginia Beach, Virginia. The developer is owned in part by executives of the Company. The contracts are projected to result in aggregate gross profit of $0.3 million to the Company.
15. 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.
Guarantees
In connection with the Company's mezzanine lending activities, the Company has made guarantees to pay portions of certain senior loans of third parties associated with the development projects. The following table summarizes the guarantees made by the Company as of September 30, 2019 (in thousands):
|
|
|
|
|
|
Development project
|
|
Payment guarantee amount
|
The Residences at Annapolis Junction
|
|
$
|
8,300
|
|
Delray Plaza
|
|
5,180
|
|
Nexton Square
|
|
12,600
|
|
Interlock Commercial
|
|
30,654
|
|
Total
|
|
$
|
56,734
|
|
Commitments
The Company has a bonding line of credit for its general contracting construction business and is contingently liable under performance and payment bonds, bonds for cancellation of mechanics liens and defect bonds. Such bonds collectively totaled $29.2 million and $34.8 million as of September 30, 2019 and December 31, 2018, respectively.
The Company has entered into standby letters of credit using the available capacity under the credit facility. The letters of credit relate to the guarantee of future performance on certain of the Company’s construction contracts. Letters of credit generally are available for draw down in the event the Company does not perform. As of September 30, 2019 and December 31, 2018, the Operating Partnership had total outstanding letters of credit of $0.3 million and $2.1 million, respectively.
Subsequent to September 30, 2019
On October 3, 2019, the Company canceled the outstanding $0.3 million letter of credit.