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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM
10-Q
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended June 30, 2022  
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 or other jurisdiction of incorporation or organization) (I.R.S. 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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.01 par value per share AHH New York Stock Exchange
6.75% Series A Cumulative Redeemable Perpetual Preferred Stock, $0.01 par value per share AHHPrA New York Stock Exchange
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).      Yes       No 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. 
Large Accelerated Filer
Accelerated Filer
Non-Accelerated Filer Smaller Reporting Company
Emerging Growth Company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ¨
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 August 4, 2022, the registrant had 67,729,650 shares of common stock, $0.01 par value per share, outstanding. In addition, as of August 4, 2022, Armada Hoffler, L.P., the registrant's operating partnership subsidiary, had 20,611,190 units of limited partnership interest ("OP Units") outstanding (other than OP Units held by the registrant).


ARMADA HOFFLER PROPERTIES, INC.
 
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2022
 
Table of Contents
 
  Page
 
1
 
1
1
2
3
5
7
 
 
 
 
 
 
 
 
 
 
 





PART I. Financial Information
 
Item 1.    Financial Statements
 
ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Balance Sheets
(In thousands, except par value and share data)
  June 30,
2022
December 31,
2021
  (Unaudited)  
ASSETS    
Real estate investments:    
Income producing property $ 1,791,302  $ 1,658,609 
Held for development 6,294  6,294 
Construction in progress 71,676  72,535 
  1,869,272  1,737,438 
Accumulated depreciation (303,032) (285,814)
Net real estate investments 1,566,240  1,451,624 
Real estate investments held for sale 115,680  80,751 
Cash and cash equivalents 69,731  35,247 
Restricted cash 6,681  5,196 
Accounts receivable, net 32,250  29,576 
Notes receivable, net 139,383  126,429 
Construction receivables, including retentions, net 29,107  17,865 
Construction contract costs and estimated earnings in excess of billings 493  243 
Equity method investments 53,260  12,685 
Operating lease right-of-use assets 23,387  23,493 
Finance lease right-of-use assets 46,433  46,989 
Acquired lease intangible assets 107,147  62,038 
Other assets 75,743  45,927 
Total Assets $ 2,265,535  $ 1,938,063 
LIABILITIES AND EQUITY    
Indebtedness, net $ 1,080,664  $ 917,556 
Liabilities related to assets held for sale 84,049  41,364 
Accounts payable and accrued liabilities 22,886  29,589 
Construction payables, including retentions 47,429  31,166 
Billings in excess of construction contract costs and estimated earnings 15,075  4,881 
Operating lease liabilities 31,645  31,648 
Finance lease liabilities 46,325  46,160 
Other liabilities 51,126  55,876 
Total Liabilities 1,379,199  1,158,240 
Stockholders’ equity:    
Preferred stock, $0.01 par value, 100,000,000 shares authorized:
6.75% Series A Cumulative Redeemable Perpetual Preferred Stock, 9,980,000 shares authorized; 6,843,418 shares issued and outstanding as of June 30, 2022 and December 31, 2021
171,085  171,085 
Common stock, $0.01 par value, 500,000,000 shares authorized; 67,729,650 and 63,011,700 shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively
677  630 
Additional paid-in capital 588,012  525,030 
Distributions in excess of earnings (135,942) (141,360)
Accumulated other comprehensive gain (loss) 10,091  (33)
Total stockholders’ equity 633,923  555,352 
Noncontrolling interests in investment entities 23,952  629 
Noncontrolling interests in Operating Partnership 228,461  223,842 
Total Equity 886,336  779,823 
Total Liabilities and Equity $ 2,265,535  $ 1,938,063 

See Notes to Condensed Consolidated Financial Statements.
1


ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statements of Comprehensive Income 
(In thousands, except per share data)
(Unaudited)
  Three Months Ended 
June 30,
Six Months Ended 
June 30,
  2022 2021 2022 2021
Revenues        
Rental revenues $ 55,224  $ 47,378  $ 109,859  $ 93,119 
General contracting and real estate services revenues 45,273  18,408  69,923  53,971 
Total revenues 100,497  65,786  179,782  147,090 
Expenses        
Rental expenses 12,685  11,292  25,354  22,124 
Real estate taxes 5,837  5,465  11,241  10,771 
General contracting and real estate services expenses 43,418  18,131  67,239  52,406 
Depreciation and amortization 18,781  17,285  37,338  35,351 
Amortization of right-of-use assets - finance leases 277  278  555  467 
General and administrative expenses 3,617  3,487  8,325  7,508 
Acquisition, development and other pursuit costs 26  32  37  103 
Impairment charges 286  83  333  3,122 
Total expenses 84,927  56,053  150,422  131,852 
Gain on real estate dispositions, net 19,493  —  19,493  3,717 
Operating income 35,063  9,733  48,853  18,955 
Interest income 3,352  6,746  6,920  10,862 
Interest expense (9,371) (8,418) (18,402) (16,393)
Loss on extinguishment of debt (618) —  (776) — 
Change in fair value of derivatives and other 2,548  314  6,730  707 
Unrealized credit loss provision (295) (388) (900) (333)
Other income (expense), net 68  297  186 
Income before taxes 30,747  7,994  42,722  13,984 
Income tax benefit 20  461  321  480 
Net income 30,767  8,455  43,043  14,464 
Net income attributable to noncontrolling interests:
Investment entities (128) —  (228) — 
Operating Partnership (6,479) (1,429) (8,662) (2,240)
Net income attributable to Armada Hoffler Properties, Inc. 24,160  7,026  34,153  12,224 
Preferred stock dividends (2,887) (2,887) (5,774) (5,774)
Net income attributable to common stockholders $ 21,273  $ 4,139  $ 28,379  $ 6,450 
Net income attributable to common stockholders per share (basic and diluted) $ 0.31  $ 0.07  $ 0.42  $ 0.11 
Weighted-average common shares outstanding (basic and diluted) 67,710  60,409  67,420  59,918 
Comprehensive income:        
Net income $ 30,767  $ 8,455  $ 43,043  $ 14,464 
Unrealized cash flow hedge gains (losses) 3,950  (469) 11,672  1,807 
Realized cash flow hedge losses reclassified to net income 866  1,103  1,653  2,181 
Comprehensive income 35,583  9,089  56,368  18,452 
Comprehensive income attributable to noncontrolling interests:
Investment entities (228) —  (328) — 
Operating Partnership (7,579) (1,592) (11,762) (3,274)
Comprehensive income attributable to Armada Hoffler Properties, Inc. $ 27,776  $ 7,497  $ 44,278  $ 15,178 

See Notes to Condensed Consolidated Financial Statements.
2


ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statements of Equity
(In thousands, except share data)
(Unaudited)
  Preferred stock Common stock Additional paid-in capital Distributions in excess of earnings Accumulated other comprehensive loss Total stockholders' equity Noncontrolling interests in investment entities Noncontrolling interests in Operating Partnership Total equity
Balance, December 31, 2021 $ 171,085  $ 630  $ 525,030  $ (141,360) $ (33) $ 555,352  $ 629  $ 223,842  $ 779,823 
Net income —  —  —  9,993  —  9,993  100  2,183  12,276 
Unrealized cash flow hedge gains —  —  —  —  5,907  5,907  —  1,815  7,722 
Realized cash flow hedge losses reclassified to net income —  —  —  —  602  602  —  185  787 
Net proceeds from issuance of common stock —  45  65,149  —  —  65,194  —  —  65,194 
Noncontrolling interest in acquired real estate entity —  —  —  —  —  —  23,065  —  23,065 
Restricted stock awards, net —  —  1,064  —  —  1,064  —  —  1,064 
Acquisitions of noncontrolling interests —  —  (3,901) —  —  (3,901) —  —  (3,901)
Redemption of operating partnership units —  —  132  —  —  132  —  (132) — 
Dividends declared on preferred stock —  —  —  (2,887) —  (2,887) —  —  (2,887)
Dividends and distributions declared on common shares and units ($0.17 per share and unit)
—  —  —  (11,433) —  (11,433) —  (3,506) (14,939)
Balance, March 31, 2022 171,085  675  587,474  (145,687) 6,476  620,023  23,794  224,387  868,204 
Net income —  —  —  24,160  —  24,160  128  6,479  30,767 
Unrealized cash flow hedge losses —  —  —  —  2,986  2,986  55  909  3,950 
Realized cash flow hedge losses reclassified to net income —  —  —  629  630  45  191  866 
Net proceeds from issuance of common stock —  —  (35) —  —  (35) —  —  (35)
Restricted stock awards, net —  573  —  —  575  —  —  575 
Distributions to noncontrolling interests —  —  —  —  —  —  (84) —  (84)
Contributions from noncontrolling interests —  —  —  —  —  —  14  —  14 
Dividends declared on preferred stock —  —  —  (2,887) —  (2,887) —  —  (2,887)
Dividends and distributions declared on common shares and units ($0.17 per share and unit)
—  —  —  (11,529) —  (11,529) —  (3,505) (15,034)
Balance, June 30, 2022 $ 171,085  $ 677  $ 588,012  $ (135,942) $ 10,091  $ 633,923  $ 23,952  $ 228,461  $ 886,336 
3


  Preferred stock Common stock Additional paid-in capital Distributions in excess of earnings Accumulated other comprehensive loss Total stockholders' equity Noncontrolling interests in investment entities Noncontrolling interests in Operating Partnership Total equity
Balance, December 31, 2020 $ 171,085  $ 591  $ 472,747  $ (112,356) $ (8,868) $ 523,199  $ 488  $ 233,115  $ 756,802 
Net income —  —  —  5,198  —  5,198  —  811  6,009 
Unrealized cash flow hedge gains —  —  —  —  1,685  1,685  —  591  2,276 
Realized cash flow hedge losses reclassified to net income —  —  —  —  798  798  —  280  1,078 
Net proceeds from issuance of common stock —  8,974  —  —  8,981  —  —  8,981 
Restricted stock awards, net —  631  —  —  632  —  —  632 
Redemption of operating partnership units —  —  131  —  —  131  —  (134) (3)
Dividends declared on preferred stock —  —  —  (2,887) —  (2,887) —  —  (2,887)
Dividends and distributions declared on common shares and units ($0.15 per share and unit)
—  —  —  (9,008) —  (9,008) —  (3,128) (12,136)
Balance, March 31, 2021 171,085  599  482,483  (119,053) (6,385) 528,729  488  231,535  760,752 
Net income —  —  —  7,026  —  7,026  —  1,429  8,455 
Unrealized cash flow hedge losses —  —  —  —  (349) (349) —  (120) (469)
Realized cash flow hedge losses reclassified to net income —  —  —  —  820  820  —  283  1,103 
Net proceeds from issuance of common stock —  11  14,105  —  —  14,116  —  —  14,116 
Restricted stock awards, net —  —  473  —  —  473  —  —  473 
Acquisition of noncontrolling interest in real estate entity —  —  (950) —  —  (950) 146  —  (804)
Dividends declared on preferred stock —  —  —  (2,887) —  (2,887) —  —  (2,887)
Dividends and distributions declared on common shares and units ($0.16 per share and unit)
—  —  —  (9,783) —  (9,783) —  (3,337) (13,120)
Balance, June 30, 2021 $ 171,085  $ 610  $ 496,111  $ (124,697) $ (5,914) $ 537,195  $ 634  $ 229,790  $ 767,619 


See Notes to Condensed Consolidated Financial Statements.
4


ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)(Unaudited)
  Six Months Ended 
June 30,
  2022 2021
OPERATING ACTIVITIES    
Net income $ 43,043  $ 14,464 
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation of buildings and tenant improvements 27,613  25,209 
Amortization of leasing costs, in-place lease intangibles and below market ground rents - operating leases 9,725  10,142 
Accrued straight-line rental revenue (3,036) (3,327)
Amortization of leasing incentives and above or below-market rents (520) (508)
Amortization of right-of-use assets - finance leases 555  467 
Accrued straight-line ground rent expense 76  81 
Unrealized credit loss provision 900  333 
Adjustment for uncollectable lease accounts 405  562 
Noncash stock compensation 2,115  1,440 
Impairment charges 333  3,122 
Noncash interest expense 2,143  1,329 
Noncash loss on extinguishment of debt 776  — 
Gain on real estate dispositions, net (19,493) (3,717)
Change in fair value of derivatives and other (6,730) (707)
Changes in operating assets and liabilities:    
Property assets (8,243) (1,469)
Property liabilities (2,429) (2,968)
Construction assets (18,005) 26,865 
Construction liabilities 25,205  (34,645)
Interest receivable (4,026) 3,967 
Net cash provided by operating activities 50,407  40,640 
INVESTING ACTIVITIES    
Development of real estate investments (35,478) (19,476)
Tenant and building improvements (8,467) (4,817)
Acquisitions of real estate investments, net of cash received (93,313) (28,173)
Dispositions of real estate investments, net of selling costs 101,812  9,156 
Notes receivable issuances (20,829) (19,796)
Notes receivable paydowns 11,545  38,490 
Leasing costs (1,836) (1,068)
Leasing incentives (51) — 
Contributions to equity method investments (40,333) (5,921)
Net cash used for investing activities (86,950) (31,605)
FINANCING ACTIVITIES    
Proceeds from issuance of common stock, net 65,159  23,097 
Common shares tendered for tax withholding (774) (553)
Debt issuances, credit facility and construction loan borrowings 324,096  19,119 
Debt and credit facility repayments, including principal amortization (273,698) (18,379)
Debt issuance costs (3,303) (2,024)
Acquisition of NCI in consolidated RE investments (3,901) (804)
Distributions to noncontrolling interests (84) — 
Contributions from noncontrolling interests 14  — 
Dividends and distributions (34,997) (26,679)
Net cash provided by (used for) financing activities 72,512  (6,223)
Net increase in cash, cash equivalents, and restricted cash 35,969  2,812 
Cash, cash equivalents, and restricted cash, beginning of period 40,443  50,430 
Cash, cash equivalents, and restricted cash, end of period (1)
$ 76,412  $ 53,242 

See Notes to Condensed Consolidated Financial Statements.
5


ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statements of Cash Flows (Continued)
(In thousands)(Unaudited)
Six Months Ended 
June 30,
2022 2021
Supplemental Disclosures (noncash transactions):
Increase in dividends and distributions payable $ 750  $ 4,351 
Increase (decrease) in accrued capital improvements and development costs (2,626) 2,058 
Operating Partnership units redeemed for common shares 132  131 
Debt assumed at fair value in conjunction with real estate purchases 156,071  — 
Noncontrolling interest in acquired real estate entity 23,065  — 
Recognition of finance lease right-of-use assets —  24,466 
Recognition of finance lease liabilities —  27,940 

(1) The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the Condensed Consolidated Statements of Cash Flows (in thousands):
  June 30, 2022 June 30, 2021
Cash and cash equivalents $ 69,731  $ 43,493 
Restricted cash (a)
6,681  9,749 
Cash, cash equivalents, and restricted cash $ 76,412  $ 53,242 
(a) Restricted cash represents amounts held by lenders for real estate taxes, insurance, and reserves for capital improvements.




See Notes to Condensed Consolidated Financial Statements.

6


ARMADA HOFFLER PROPERTIES, INC.
Notes to Condensed Consolidated Financial Statements
 (Unaudited)
 
1. Business of Organization
 
Armada Hoffler Properties, Inc. (the "Company") is a full-service real estate company with extensive experience developing, building, owning, and managing high-quality, institutional-grade office, retail, and multifamily properties in attractive markets primarily throughout the Mid-Atlantic and Southeastern United States.

The Company is a real estate investment trust ("REIT"), the sole general partner of Armada Hoffler, L.P. (the "Operating Partnership") and, as of June 30, 2022, owned 76.7% 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 thereof.
 
As of June 30, 2022, the Company's property portfolio consisted of 55 stabilized operating properties and four properties either under development or not yet stabilized.

Refer to Note 5 for information related to the Company's recent acquisitions and dispositions of 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, 2021.
 
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.

7


Recent Accounting Pronouncements

Accounting Standards Adopted in 2022

Reference Rate Reform

In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-04 Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848), which became effective on March 12, 2020 and generally can be applied through December 31, 2022. ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. This Accounting Standards Update ("ASU") also provides optional expedients to enable companies to continue to apply hedge accounting to certain hedging relationships impacted by reference rate reform. Application of the guidance is optional and only available in certain situations. In January 2021, FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848). The amendments in this standard are elective and principally apply to entities that have derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. Similar to ASU No. 2020-04, provisions of this ASU are effective upon issuance and generally can be applied through December 31, 2022. During the six months ended June 30, 2022, the Company elected to apply the practical expedients to modifications of qualifying contracts as continuations of the existing contracts rather than as new contracts. The adoption of the new guidance did not have a material impact on the consolidated financial statements. Management will continue to evaluate the impacts of reference rate reform.

Earnings Per Share

In August 2020, FASB issued ASU 2020-06 an update to ASC Topic 470 and ASC Topic 815, which became effective January 1, 2022. ASU 2020-06 simplifies the accounting for convertible instruments and removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception. This ASU also simplifies diluted earnings per share calculation in certain areas and provides updated disclosure requirements. The Company adopted ASU 2020-06 effective January 1, 2022 and the adoption did not have a material impact on the consolidated financial statements.

Other Accounting Policies

See the Company's Annual Report on Form 10-K for the year ended December 31, 2021 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.

8


Net operating income of the Company’s reportable segments for the three and six months ended June 30, 2022 and 2021 was as follows (in thousands): 
  Three Months Ended June 30, Six Months Ended June 30,
  2022 2021 2022 2021
Office real estate    
Rental revenues $ 18,314  $ 11,756  $ 35,337  $ 23,391 
Rental expenses 4,600  2,938  8,740  5,813 
Real estate taxes 2,035  1,413  3,539  2,771 
Segment net operating income 11,679  7,405  23,058  14,807 
Retail real estate    
Rental revenues 21,544  19,204  42,974  37,459 
Rental expenses 3,333  3,013  6,834  5,849 
Real estate taxes 2,271  2,180  4,509  4,207 
Segment net operating income 15,940  14,011  31,631  27,403 
Multifamily residential real estate    
Rental revenues 15,366  16,418  31,548  32,269 
Rental expenses 4,752  5,341  9,780  10,462 
Real estate taxes 1,531  1,872  3,193  3,793 
Segment net operating income 9,083  9,205  18,575  18,014 
General contracting and real estate services    
Segment revenues 45,273  18,408  69,923  53,971 
Segment expenses 43,418  18,131  67,239  52,406 
Segment gross profit 1,855  277  2,684  1,565 
Net operating income $ 38,557  $ 30,898  $ 75,948  $ 61,789 
 
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 June 30, 2022 and 2021 exclude revenue related to intercompany construction contracts of $14.2 million and $5.4 million, respectively, as it is eliminated in consolidation. General contracting and real estate services revenues for the six months ended June 30, 2022 and 2021 exclude revenue related to intercompany construction contracts of $22.8 million and $7.4 million, respectively, as it is eliminated in consolidation.

General contracting and real estate services expenses for the three months ended June 30, 2022 and 2021 exclude expenses related to intercompany construction contracts of $14.0 million and $5.4 million, respectively. General contracting and real estate services expenses for the six months ended June 30, 2022 and 2021 exclude expenses related to intercompany construction contracts of $22.5 million and $7.4 million, respectively, as it is eliminated in consolidation.


9


The following table reconciles net operating income to net income, the most directly comparable GAAP measure, for the three and six months ended June 30, 2022 and 2021 (in thousands): 
  Three Months Ended June 30, Six Months Ended June 30,
  2022 2021 2022 2021
Net operating income $ 38,557  $ 30,898  $ 75,948  $ 61,789 
Depreciation and amortization (18,781) (17,285) (37,338) (35,351)
Amortization of right-of-use assets - finance leases (277) (278) (555) (467)
General and administrative expenses (3,617) (3,487) (8,325) (7,508)
Acquisition, development and other pursuit costs (26) (32) (37) (103)
Impairment charges (286) (83) (333) (3,122)
Gain on real estate dispositions, net 19,493  —  19,493  3,717 
Interest income 3,352  6,746  6,920  10,862 
Interest expense (9,371) (8,418) (18,402) (16,393)
Loss on extinguishment of debt (618) —  (776) — 
Change in fair value of derivatives and other 2,548  314  6,730  707 
Unrealized credit loss provision (295) (388) (900) (333)
Other income (expense), net 68  297  186 
Income tax benefit 20  461  321  480 
Net income $ 30,767  $ 8,455  $ 43,043  $ 14,464 
 
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. These costs include corporate office personnel compensation and benefits, bank fees, accounting fees, legal fees, and other corporate office expenses.

4. Leases

Lessee Disclosures

As a lessee, the Company has eight ground leases on seven properties. These ground leases have maximum lease terms (including renewal options) that expire between 2074 and 2117. 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. Five of these leases have been classified as operating leases and three of these leases have been classified as finance leases. The Company's lease agreements do not contain any residual value guarantees or material restrictive covenants.

Lessor Disclosures

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 25 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.

10


Rental revenue for the three and six months ended June 30, 2022 and 2021 comprised the following (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
  2022 2021 2022 2021
Base rent and tenant charges $ 53,424  $ 45,686  $ 106,303  $ 89,284 
Accrued straight-line rental adjustment 1,544  1,436  3,036  3,327 
Lease incentive amortization (173) (159) (346) (318)
Above/below market lease amortization 429  415  866  826 
Total rental revenue $ 55,224  $ 47,378  $ 109,859  $ 93,119 

5. Real Estate Investment
 
Property Acquisitions

Exelon

On January 14, 2022, the Company acquired a 79% membership interest and an additional 11% economic interest in the partnership that owns the Exelon Building for a purchase price of approximately $92.2 million in cash and a loan to the seller of $12.8 million. The Exelon Building is a mixed-use structure located in Baltimore's Harbor Point and is comprised of an office building, the Exelon Office, that serves as the headquarters for Constellation Energy Corp., which was spun-off from Exelon, a Fortune 100 energy company, in February 2022, as well as a multifamily component, 1305 Dock Street. The Exelon Office includes a parking garage and retail space. The Exelon Building was subject to a $156.1 million loan, which the Company immediately refinanced following the acquisition with a new $175.0 million loan. The new loan bears interest at a rate of the Bloomberg Short-Term Bank Yield Index ("BSBY") plus a spread of 1.50% and will mature on November 1, 2026. This loan is hedged by an interest rate cap corridor of 1.00% and 3.00% as well as an interest rate cap of 4.00%. See Note 9 for further details.

The following table summarizes the purchase price allocation (including acquisition costs) based on the relative fair value of the assets acquired for the two operating properties purchased during the six months ended June 30, 2022 (in thousands):
Exelon Building
Land $ 23,317 
Site improvements 141 
Building 194,916 
In-place leases 53,705 
Above-market leases 306 
Net assets acquired $ 272,385 

Ten Tryon

On January 14, 2022, the Company acquired the remaining 20% ownership interest in the entity that is developing the Ten Tryon project in Charlotte, North Carolina for a cash payment of $3.9 million. The Company recorded the amount as an adjustment to additional paid-in-capital.

The Residences at Annapolis Junction

On April 11, 2022, the Company exercised its option to acquire an additional 16% of the partnership that owns The Residences at Annapolis Junction, increasing its ownership to 95%. In exchange for this increased partnership interest, the terms of the partnership waterfall calculation in the event of a capital event have been modified.

Property Dispositions

On April 1, 2022, the Company completed the sale of Hoffler Place for a sale price of $43.1 million. The loss recognized upon sale was $0.8 million.

On April 25, 2022, the Company completed the sale of Summit Place for a sale price of $37.8 million. The loss recognized upon sale was $0.5 million.
11



In addition to the losses recognized on the sales of the Hoffler Place and Summit Place student-housing properties during the three months ended June 30, 2022 described above, the Company recognized impairment of real estate of $18.3 million to record these properties at their fair values during the three months ended December 31, 2021.

On June 29, 2022, the Company completed the sale of the Home Depot and Costco outparcels at North Pointe for a sale price of $23.9 million. The gain on disposition was $20.9 million.

Real Estate Held for Sale

As of June 30, 2022, the Company had classified The Residences at Annapolis Junction and the AutoZone and Valvoline outparcels at Sandbridge Commons in real estate investments held for sale. Subsequent to June 30, 2022, the Company sold these properties. See Note 15 for more information.

Equity Method Investments

Harbor Point Parcel 3

The Company owns a 50% interest in Harbor Point Parcel 3, a joint venture with Beatty Development Group, for purposes of developing T. Rowe Price's new global headquarters office building in Baltimore, Maryland. The Company is a noncontrolling partner in the joint venture and will serve as the project's general contractor. During the six months ended June 30, 2022, the Company invested $21.1 million in Harbor Point Parcel 3. The Company has an estimated equity commitment of up to $39.0 million relating to this project. As of June 30, 2022 and December 31, 2021, the carrying value of the Company's investment in Harbor Point Parcel 3 was $33.8 million and $12.7 million, respectively. For the six months ended June 30, 2022, Harbor Point Parcel 3 had no operating activity, and therefore the Company received no allocated income.

Based on the terms of the operating agreement, the Company has concluded that Harbor Point Parcel 3 is a VIE and that the Company holds a variable interest. The Company has significant influence over the project due to its 50% ownership; however, the Company does not have the power to direct the activities of the project that most significantly impact its performance. This includes activity as the managing member of the entity, which is a power that is retained by the Company's joint venture partner. Accordingly, the Company is not the project's primary beneficiary and, therefore, does not consolidate Harbor Point Parcel 3 in its consolidated financial statements. The Company's investment in the project is recorded as an equity method investment in the consolidated balance sheets.

Harbor Point Parcel 4

On April 1, 2022, the Company acquired a 78% interest in Harbor Point Parcel 4, a real estate venture with Beatty Development Group, for purposes of developing a mixed-use project, which is planned to include multifamily units, retail space, and a parking garage. The Company holds an option to increase its ownership to 90%. The Company is a noncontrolling partner in the real estate venture and will serve as the project's general contractor. During the six months ended June 30, 2022, the Company invested $19.7 million in Harbor Point Parcel 4. The Company has an estimated equity commitment of up to $100.0 million relating to this project. As of June 30, 2022, the carrying value of the Company's investment in Harbor Point Parcel 4 was $19.7 million. For the six months ended June 30, 2022, Harbor Point Parcel 4 had no operating activity, and therefore the Company received no allocated income.

Based on the terms of the operating agreement, the Company has concluded that Harbor Point Parcel 4 is a VIE and that the Company holds a variable interest. The Company has significant influence over the project due to its 78% ownership; however, the Company does not have the power to direct the activities of the project that most significantly impact its performance. This includes activity as the managing member of the entity, which is a power that is retained by the Company's partner. Accordingly, the Company is not the project's primary beneficiary and, therefore, does not consolidate Harbor Point Parcel 4 in its consolidated financial statements. The Company's investment in the project is recorded as an equity method investment in the consolidated balance sheets.

12


6. Notes Receivable and Current Expected Credit Losses

Notes Receivable

The Company had the following notes receivable outstanding as of June 30, 2022 and December 31, 2021 ($ in thousands):
Outstanding loan amount (a)
Interest compounding
Development Project June 30,
2022
December 31,
2021
Maximum loan commitment Interest rate
City Park 2 $ 8,014  $ —  $ 20,594  13.0  % Annually
Interlock Commercial 86,334  95,379  107,000 
(b)
15.0  % None
Nexton Multifamily 24,853  23,567  22,315  11.0  % Annually
Total mezzanine & preferred equity 119,201  118,946  $ 149,909 
Exelon note receivable 12,834  — 
Other notes receivable 7,455  7,234 
Notes receivable guarantee premium 1,345  1,243 
Allowance for credit losses (1,452)
(c)
(994)
Total notes receivable $ 139,383  $ 126,429 
________________________________________
(a) Outstanding loan amounts include any accrued and unpaid interest, as applicable.
(b) This amount includes interest reserves.
(c) The amount excludes $0.5 million of Current Expected Credit Losses ("CECL") allowance that relates to the unfunded commitments, which was recorded as a liability under Other liabilities in the consolidated balance sheet.

Interest on the notes receivable 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 generally added to the loan receivable balances. The Company recognized interest income for the three and six months ended June 30, 2022 and 2021 as follows (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
Development Project 2022 2021 2022 2021
City Park 2 $ 206 
(a)
$ —  $ 224 
(a)
$ — 
Interlock Commercial 2,361 
(a)
3,310 
(a)
5,187 
(a)
6,384 
(a)
Nexton Multifamily 672  261  1,286  261 
Solis Apartments at Interlock —  3,068 
(b)
—  4,005 
(b)
Total mezzanine 3,239  6,639  6,697  10,650 
Other interest income 113  107  223  212 
Total interest income $ 3,352  $ 6,746  $ 6,920  $ 10,862 
________________________________________
(a) Includes recognition of interest income related to fee amortization.
(b) Includes prepayment premium of $2.4 million from early payoff of the loan.

City Park 2

On March 23, 2022, the Company entered into a $20.6 million preferred equity investment for the development of a multifamily property located in Charlotte, North Carolina. The investment has economic terms consistent with a note receivable, including a mandatory redemption or maturity on April 28, 2026, and it is accounted for as a note receivable. The Company's investment bears interest at a rate of 13%, compounded annually.

Management has concluded that this entity is a VIE. Because the other investor in the project, TP City Park 2 LLC, is the developer of City Park 2 Multifamily, 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 does not consolidate the project in its consolidated financial statements.
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Interlock Commercial

During February 2022, the Company received $13.5 million as a partial repayment of the Interlock Commercial mezzanine loan, which consisted of $11.1 million of principal and $2.4 million of interest.

Allowance for Loan Losses

The Company is exposed to credit losses primarily through its mezzanine lending activities and preferred equity investments. As of June 30, 2022, the Company had three mezzanine loans (including the Nexton Multifamily and City Park 2 preferred equity investments that are accounted for as notes receivable), each of which are financing development projects in various stages of completion or lease-up. Each of these projects is subject to a loan that is senior to the Company’s mezzanine loan. Interest on these loans is paid in kind and is generally not expected to be paid until a sale of the project after completion of the development.

The Company's management performs a quarterly analysis of the loan portfolio to determine the risk of credit loss based on the progress of development activities, including leasing activities, projected development costs, and current and projected mezzanine and senior construction loan balances. The Company estimates future losses on its notes receivable using risk ratings that correspond to probabilities of default and loss given default. The Company's risk ratings are as follows:

Pass: loans in this category are adequately collateralized by a development project with conditions materially consistent with the Company's underwriting assumptions.
Special Mention: loans in this category show signs that the economic performance of the project may suffer as a result of slower-than-expected leasing activity or an extended development or marketing timeline. Loans in this category warrant increased monitoring by management.
Substandard: loans in this category may not be fully collected by the Company unless remediation actions are taken. Remediation actions may include obtaining additional collateral or assisting the borrower with asset management activities to prepare the project for sale. The Company will also consider placing the loan on nonaccrual status if it does not believe that additional interest accruals will ultimately be collected.

On a quarterly basis, the Company compares the risk inherent in its loans to industry loan loss data experienced during past business cycles. The Company updated the risk ratings for each of its notes receivable as of June 30, 2022 and obtained industry loan loss data relative to these risk ratings. Each of the outstanding loans as of June 30, 2022 was "Pass" rated.

At December 31, 2021, the Company reported $126.4 million of notes receivable, net of allowances of $1.0 million. At June 30, 2022, the Company reported $139.4 million of notes receivable, net of allowances of $1.5 million. Changes in the allowance for the three and six months ended June 30, 2022 and 2021 were as follows (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
  2022 2021 2022 2021
Beginning balance $ 1,599  $ 1,741  $ 994  $ 2,584 
Unrealized credit loss provision (release) 295  388  900  333
Extinguishment due to acquisition —  —  —  (788)
Ending balance (a)
$ 1,894  $ 2,129  $ 1,894  $ 2,129 
________________________________________
(a) The amount as of June 30, 2022 includes $0.5 million of allowance related to the unfunded commitments, which was recorded as Other liabilities on the consolidated balance sheet.

The Company places loans on non-accrual status when the loan balance, together with the balance of any senior loan, approximately equals the estimated realizable value of the underlying development project. As of June 30, 2022, the Company had the Exelon note, which bears interest at 3% per annum, on non-accrual status. The principal balance of the note receivable is adequately secured by the seller's partnership interest. As of June 30, 2022 and December 31, 2021, there were no other loans on non-accrual status.

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7. Construction Contracts

Construction contract costs and estimated earnings in excess of billings represent reimbursable costs and amounts earned under contracts in progress as of the balance sheet date. Such amounts become billable according to contract terms, which usually consider the passage of time, achievement of certain milestones, or completion of the project. The Company expects to bill and collect substantially all construction contract costs and estimated earnings in excess of billings as of June 30, 2022 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 six months ended June 30, 2022 and 2021 (in thousands):
Six Months Ended 
June 30, 2022
Six Months Ended 
June 30, 2021
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 $ 243  $ 4,881  $ 138  $ 6,088 
Revenue recognized that was included in the balance at the beginning of the period —  (4,881) —  (6,088)
Increases due to new billings, excluding amounts recognized as revenue during the period —  15,442  —  4,191 
Transferred to receivables (361) —  (464) — 
Construction contract costs and estimated earnings not billed during the period 493  —  85  — 
Changes due to cumulative catch-up adjustment arising from changes in the estimate of the stage of completion 118  (367) 326  (54)
Ending balance $ 493  $ 15,075  $ 85  $ 4,137 

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 $2.2 million were deferred as of June 30, 2022 and December 31, 2021, respectively. Amortization of pre-contract costs for the six months ended June 30, 2022 and 2021 was $0.5 million and $0.2 million, respectively.
 
Construction receivables and payables include retentions, which are amounts that are generally withheld until the completion of the contract or the satisfaction of certain restrictive conditions such as fulfillment guarantees. As of June 30, 2022 and December 31, 2021, construction receivables included retentions of $9.4 million and $3.1 million, respectively. The Company expects to collect substantially all construction receivables outstanding as of June 30, 2022 during the next twelve months. As of June 30, 2022 and December 31, 2021, construction payables included retentions of $10.3 million and $4.2 million, respectively. The Company expects to pay substantially all construction payables outstanding as of June 30, 2022 during the next twelve months.



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The Company’s net position on uncompleted construction contracts comprised the following as of June 30, 2022 and December 31, 2021 (in thousands):
  June 30, 2022 December 31, 2021
Costs incurred on uncompleted construction contracts $ 411,547  $ 379,993 
Estimated earnings 16,423  15,115 
Billings (442,552) (399,746)
Net position $ (14,582) $ (4,638)
Construction contract costs and estimated earnings in excess of billings $ 493  $ 243 
Billings in excess of construction contract costs and estimated earnings (15,075) (4,881)
Net position $ (14,582) $ (4,638)
The above table reflects the net effect of projects closed as of June 30, 2022 and December 31, 2021, respectively.

The Company’s balances and changes in construction contract price allocated to unsatisfied performance obligations (backlog) as of June 30, 2022 and 2021 were as follows (in thousands):
  Three Months Ended June 30, Six Months Ended June 30,
  2022 2021 2022 2021
Beginning backlog $ 419,439  $ 38,838  $ 215,518  $ 71,258 
New contracts/change orders 167,143  50,278  395,746  53,402 
Work performed (45,368) (18,897) (70,050) (54,441)
Ending backlog $ 541,214  $ 70,219  $ 541,214  $ 70,219 

The Company expects to complete a majority of the uncompleted contracts in place as of June 30, 2022 during the next 12 to 24 months.

8. Indebtedness
 
Credit Facility

The Company has a senior credit facility that was amended and restated on October 3, 2019, which provides for a $355.0 million credit facility comprised of a $150.0 million senior unsecured revolving credit facility (the "revolving credit facility") and a $205.0 million senior unsecured term loan facility (the "term loan facility" and, together with the revolving credit facility, the "credit facility"), with a syndicate of banks.
 
The credit facility includes an accordion feature that allows the total commitments to be further increased to $700.0 million, subject to certain conditions, including obtaining commitments from any one or more lenders. The revolving credit facility has a scheduled maturity date of January 24, 2024, with two six-month extension options, subject to certain conditions, including payment of a 0.075% extension fee at each extension. The term loan facility has a scheduled maturity date of January 24, 2025.
The revolving credit facility bears interest at the London Inter-Bank Offered Rate ("LIBOR") plus a margin ranging from 1.30% to 1.85% and the term loan facility bears interest at LIBOR plus a margin ranging from 1.25% to 1.80%, in each case depending on the Company's total leverage. The Company is also obligated to pay an unused commitment fee of 0.15% or 0.25% on the unused portions of the commitments under the revolving credit facility, depending on the amount of borrowings under the credit facility.

As of June 30, 2022 and December 31, 2021, the outstanding balance on the revolving credit facility was $82.0 million and $5.0 million, respectively. The outstanding balance on the term loan facility was $205.0 million as of both dates. As of June 30, 2022, the effective interest rates on the revolving credit facility and the term loan facility were 3.29% and 3.24%, 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, and its obligations under the credit facility are guaranteed by the Company and
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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 2022 Financing Activity

On January 5, 2022, the Company contributed $2.6 million to the Harbor Point Parcel 3 joint venture in order to meet the lender's equity funding requirement since a $15.0 million standby letter of credit, which was available for draw down on the revolving credit facility in the event the Company did not meet its equity requirement, expired on January 4, 2022.

On January 14, 2022, the Company acquired a 79% membership interest and an additional 11% economic interest in the partnership that owns the mixed-use property known as the Exelon Building. The property was subject to a $156.1 million loan, which the Company immediately refinanced following the acquisition with a new $175.0 million loan. The new loan bears interest at a rate of BSBY plus a spread of 1.50% and will mature on November 1, 2026.

On January 19, 2022, the Company paid off the $14.1 million balance of the loan secured by the Delray Beach Plaza shopping center.

On March 3, 2022, the Company paid off the $10.3 million balance of the loan secured by the Red Mill West Commons shopping center.

On April 25, 2022, Harbor Point Parcel 3, a joint venture to which the Company is party, entered into a construction loan agreement for $161.5 million.

On April 25, 2022, Harbor Point Parcel 4, a real estate venture to which the Company is party, entered into a construction loan agreement for $109.7 million.

On June 29, 2022, the Company paid off the $1.9 million loan balance associated with North Pointe Phase II in conjunction with the sale of the property leased and occupied by Costco.

On June 30, 2022, the Company refinanced the $20.1 million loan secured by Nexton Square. The new $22.5 million loan bears interest at a rate of Secured Overnight Financing Rate ("SOFR") plus a spread of 1.95% (SOFR has a 0.30% floor) and will mature on June 30, 2027.

During the six months ended June 30, 2022, the Company borrowed $26.9 million under its existing construction loans to fund new development and construction.

9. Derivative Financial Instruments
 
The Company enters 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.
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As of June 30, 2022, the Company had the following LIBOR, SOFR, and BSBY interest rate caps ($ in thousands):
Effective Date Maturity Date Notional Amount Strike Rate Premium Paid
7/1/2020 7/1/2023 $ 100,000 
(a)
0.50% (LIBOR)
$ 232 
11/1/2020 11/1/2023 84,375 
(a)
1.84% (SOFR)
91 
2/2/2021 2/1/2023 100,000 
0.50% (LIBOR)
45 
3/4/2021 4/1/2023 14,479 
2.50% (LIBOR)
5/5/2021 5/1/2023 50,000 
0.50% (LIBOR)
75 
5/5/2021 5/1/2023 35,100 
0.50% (LIBOR)
55 
6/16/2021 7/1/2023 100,000 
0.50% (LIBOR)
120 
1/11/2022 2/1/2024 175,000 
4.00% (BSBY)
154 
4/7/2022 2/1/2024 175,000 
(a)
1.00%-3.00% (BSBY)
(b)
3,595 
9/1/2022 9/1/2024 73,562 
(a)
1.00%-3.00% (SOFR)
(b)(c)
1,370 
Total $ 907,516  $ 5,741 
________________________________________
(a) Designated as a cash flow hedge.
(b) The Company purchased interest rate caps at 1.00% and sold interest rate caps at 3.00%, resulting in interest rate cap corridors of 1.00% and 3.00%. The intended goal of these corridors is to provide a level of protection from the effect of rising interest rates and reduce the all-in cost of the derivative instrument.
(c) The Company purchased this interest rate cap corridor during the three months ended June 30, 2022 with an effective date of September 1, 2022. The notional amount represents the maximum notional amount that will eventually be in effect. The notional amount is scheduled to increase over the term of the corridor in accordance with projected borrowings on the associated loan.

As of June 30, 2022, 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 
(a)
1-month LIBOR 2.26  % 3.71  % 4/1/2019 10/26/2022
Senior unsecured term loan 50,000  1-month LIBOR 2.78  % 4.23  % 5/1/2018 5/1/2023
249 Central Park Retail, South Retail, and Fountain Plaza Retail 33,115 
(a)
1-month LIBOR 2.25  % 3.85  % 4/1/2019 8/10/2023
Senior unsecured term loan 10,500 
(a)
1-month LIBOR 3.02  % 4.47  % 10/12/2018 10/12/2023
Senior unsecured term loan 25,000 
(a)
1-month LIBOR 0.50  % 1.95  % 4/1/2020 4/1/2024
Senior unsecured term loan 25,000 
(a)
1-month LIBOR 0.50  % 1.95  % 4/1/2020 4/1/2024
Senior unsecured term loan 25,000 
(a)
1-month LIBOR 0.55  % 2.00  % 4/1/2020 4/1/2024
Thames Street Wharf 70,044 
(a)
1-month BSBY 1.05  % 2.35  % 9/30/2021 9/30/2026
Total $ 288,659 
________________________________________
(a) Designated as a cash flow hedge.

For the interest rate swaps and caps 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 recognizing approximately $7.3 million of net hedging gains as reductions to interest expense. These amounts will be reclassified from accumulated other comprehensive gain into earnings to offset the variability of the hedged items during this period.

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The Company’s derivatives were comprised of the following as of June 30, 2022 and December 31, 2021 (in thousands): 
  June 30, 2022 December 31, 2021
  Notional
Amount
Fair Value Notional
Amount
Fair Value
  Asset Liability   Asset Liability
Derivatives not designated as accounting hedges
Interest rate swaps $ 50,000  $ 90  $ —  $ 50,000  $ —  $ (1,454)
Interest rate caps 474,579  6,519  —  399,579  1,019  — 
Total derivatives not designated as accounting hedges 524,579  6,609  —  449,579  1,019  (1,454)
Derivatives designated as accounting hedges
Interest rate swaps 238,659  8,453  —  239,633  1,317  (2,013)
Interest rate caps 360,472  9,208  —  384,375  590  — 
Total derivatives $ 1,123,710  $ 24,270  $ —  $ 1,073,587  $ 2,926  $ (3,467)

The changes in the fair value of the Company’s derivatives during the three and six months ended June 30, 2022 and 2021 were comprised of the following (in thousands): 
  Three Months Ended June 30, Six Months Ended June 30,
  2022 2021 2022 2021
Interest rate swaps $ 2,807  $ (86) $ 9,564  $ 2,375 
Interest rate caps 3,817  (35) 8,999  207 
Total change in fair value of interest rate derivatives $ 6,624  $ (121) $ 18,563  $ 2,582 
Comprehensive income statement presentation:
Change in fair value of derivatives and other $ 2,674  $ 348  $ 6,891  $ 775 
Unrealized cash flow hedge gains (losses) 3,950  (469) 11,672  1,807 
Total change in fair value of interest rate derivatives $ 6,624  $ (121) $ 18,563  $ 2,582 

10. Equity
 
Stockholders’ Equity

On March 10, 2020, 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 and shares of its 6.75% Series A Cumulative Redeemable Perpetual Preferred Stock (the "Series A Preferred Stock") having an aggregate offering price of up to $300.0 million, to or through its sales agents and, with respect to shares of its common stock, may enter into separate forward sales agreements to or through the forward purchaser.

During the six months ended June 30, 2022, the Company issued and sold 475,074 shares of common stock at a weighted average price of $15.21 per share under the ATM Program, receiving net proceeds, after offering costs and commissions, of $7.1 million. During the six months ended June 30, 2022, the Company did not issue any shares of Series A Preferred Stock under the ATM Program. Shares having an aggregate offering price of $205.0 million remained unsold under the ATM Program as of August 4, 2022.

On January 11, 2022, the Company completed an underwritten public offering of 4,025,000 shares of common stock, which were pre-purchased from the Company by the underwriter at a purchase price of $14.45 per share of common stock including fees, resulting in net proceeds after offering costs of $58.0 million.

Noncontrolling Interests
 
As of June 30, 2022 and December 31, 2021, the Company held a 76.7% and 75.3% common interest in the Operating Partnership, respectively. As of June 30, 2022, the Company also held a preferred interest in the Operating Partnership in the form of preferred units with a liquidation preference of $171.1 million. The Company is the primary beneficiary of the
19


Operating Partnership as it has the power to direct the activities of the Operating Partnership and the rights to absorb 76.7% 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 June 30, 2022, there were 20,621,336 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 $24.0 million relates to the minority partners' interest in certain joint venture entities as of June 30, 2022, including $23.3 million for minority partners’ interest in the Exelon Building. The noncontrolling interest for consolidated real estate entities was $0.6 million as of December 31, 2021.

On January 1, 2022, due to holders of Class A Units tendering an aggregate of 12,149 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.

Dividends and Distributions

During the six months ended June 30, 2022, the following dividends/distributions were declared or paid:
Equity type Declaration Date Record Date Payment Date Dividends per Share/Unit Aggregate Dividends/Distributions on Stock and Units (in thousands)
Common Stock/Class A Units 10/25/2021 12/29/2021 01/06/2022 $ 0.17  $ 14,209 
Common Stock/Class A Units 02/23/2022 03/30/2022 04/07/2022 0.17  15,014 
Common Stock/Class A Units 05/12/2022 06/29/2022 07/07/2022 0.17  15,020 
Series A Preferred Stock 10/25/2021 01/03/2022 01/14/2022 0.421875  2,887 
Series A Preferred Stock 02/23/2022 04/01/2022 04/15/2022 0.421875  2,887 
Series A Preferred Stock 05/12/2022 07/01/2022 07/15/2022 0.421875  2,887 

11. 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 June 30, 2022, there were 398,307 shares available for issuance under the Equity Plan.

During the six months ended June 30, 2022, the Company granted an aggregate of 286,086 shares of restricted stock to employees and non-employee directors with a weighted average grant date fair value of $14.62 per share. Of those shares, 52,088 were surrendered by the employees for income tax withholdings. 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. Beginning with grants made in 2021, executive officers' restricted shares generally vest over a period of three years: two-fifths immediately on the grant date and the remaining three-fifths in equal amounts on the first three 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 three months ended June 30, 2022 and 2021, the Company recognized $0.6 million and $0.5 million, respectively, of stock-based compensation cost. During the six months ended June 30, 2022 and 2021, the Company recognized $2.4 million and $1.7 million, respectively, of stock-based compensation cost. As of June 30, 2022, there were 221,693 nonvested restricted shares outstanding; the total unrecognized compensation expense related to nonvested restricted shares was $2.3 million, which the Company expects to recognize over the next 33 months.

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12. Fair Value of Financial Instruments
 
Fair value measurements are based on assumptions that market participants would use in pricing an asset or a liability. The hierarchy for inputs used in measuring fair value is as follows: 
Level 1 — quoted prices in active markets for identical assets or liabilities 
Level 2 — observable inputs other than quoted prices in active markets for identical assets and liabilities 
Level 3 — unobservable inputs 
Except as disclosed below, the carrying amounts of the Company’s financial instruments approximate their fair values. Financial assets and liabilities whose fair values are measured on a recurring basis using Level 2 inputs consist of interest rate swaps and caps. The Company measures the fair values of these assets and liabilities based on prices provided by independent market participants that are based on observable inputs using market-based valuation techniques.

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 June 30, 2022 and December 31, 2021 were as follows (in thousands): 
  June 30, 2022 December 31, 2021
  Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
Indebtedness, net (a)
$ 1,164,713  $ 1,158,485  $ 958,910  $ 976,520 
Notes receivable, net 139,383  139,383  126,429  126,429 
Interest rate swap liabilities —  —  3,467  3,467 
Interest rate swap and cap assets 24,270  24,270  2,926  2,926 
_______________________________________
(a) The values as of June 30, 2022 and December 31, 2021 include loans reclassified to liabilities related to assets held for sale.

13. Related Party Transactions
 
The Company provides general contracting services to certain related party entities that are included in these condensed consolidated financial statements. Revenue and gross profit from construction contracts with these entities for the three months ended June 30, 2021 were $6.3 million and $0.2 million, respectively. Revenue and gross profit from construction contracts with these entities for the six months ended June 30, 2021 were $18.7 million and $0.7 million, respectively. Revenue and gross profit from construction contracts with these entities for the three and six months ended June 30, 2022 were immaterial. There were no outstanding construction receivables due from related parties as of June 30, 2022 compared to $4.1 million outstanding at December 31, 2021.

The general contracting services described above include contracts with an aggregate price of $81.6 million with the developer of a mixed-use project, including an apartment building, retail space, and a parking garage located in Virginia Beach, Virginia. The developer is owned in part by certain executives of the Company, not including the Chief Executive Officer and Chief Financial Officer. These contracts were executed in 2019 and were substantially complete as of September 10, 2021. Aggregate gross profit was projected at $3.9 million to the Company, representing a gross profit margin of 5.1% as of June 30, 2022. As part of these contracts and per the requirements of the lender for this project, the Company issued a letter of credit for $9.5 million to secure certain performances of the Company's subsidiary construction company under the contracts, of which $1.9 million remains outstanding as of June 30, 2022.
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The Company provides general contracting services to the Harbor Point Parcel 3 and Harbor Point Parcel 4 partnerships. See Note 5 for more information. During the three and six months ended June 30, 2022, the Company recognized gross profit of $0.1 million and $0.2 million, respectively, relating to these construction contracts.

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 prior to May 13, 2023.

14. Commitments and Contingencies
 
Legal Proceedings
 
The Company is from time to time involved in various disputes, lawsuits, warranty claims, environmental and other matters arising in the ordinary course of business. Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters.
 
The Company currently is a party to various legal proceedings, 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 certain of the Company's mezzanine lending activities and equity method investments, 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 outstanding guarantees made by the Company as of June 30, 2022 (in thousands):
Development project Payment guarantee amount Guarantee liability
Interlock Commercial $ 37,450  $ 1,346 
Harbor Point Parcel 4 (a)
32,910  242 
Total $ 70,360  $ 1,588 
_______________________________________
(a) As of June 30, 2022, no amounts have been funded on this senior loan.

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 $2.7 million and $2.1 million as of June 30, 2022 and December 31, 2021, respectively. In addition, as of June 30, 2022, the Company has an outstanding letter of credit for $1.9 million to secure certain performances of the Company's subsidiary construction company under a related party project.

Unfunded Loan Commitments

The Company has certain commitments related to its notes receivable investments that it may be required to fund in the future. The Company is generally obligated to fund these commitments at the request of the borrower or upon the occurrence of events outside of the Company's direct control. As of June 30, 2022, the Company had three notes receivable
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with a total of $19.3 million of unfunded commitments. If commitments are funded in the future, interest will be charged at rates consistent with the existing investments. As of June 30, 2022, the Company has recorded a $0.5 million CECL allowance that relates to the unfunded commitments, which was recorded as a liability in Other liabilities in the consolidated balance sheet. See Note 6 for more information.

15. Subsequent Events
 
The Company has evaluated subsequent events through the date on which this Quarterly Report on Form 10-Q was filed, the date on which these financial statements were issued, and identified the items below for discussion.

Real Estate

On July 22, 2022, the Company sold The Residences at Annapolis Junction for a sale price of $150.0 million. This property was classified as held for sale as of June 30, 2022.

On July 26, 2022, the Company sold the AutoZone and Valvoline outparcels at Sandbridge Commons for a sale price of $3.5 million. The property was classified as held for sale as of June 30, 2022.

Indebtedness

On July 22, 2022, the Company paid off the $84.4 million loan secured by The Residences at Annapolis Junction in conjunction with the disposition mentioned above.

In July 2022, the Company had net paydowns of $31.0 million on the revolving credit facility.

Derivative Financial Instruments

On July 1, 2022, the Company modified and extended two interest rate caps with total notional amounts of $200.0 million and LIBOR strike rates of 0.50%, which were scheduled to expire on July 1, 2023. The modified agreements establish a SOFR corridor bought at 1.00% and sold at 3.00% on a $200.0 million notional amount, with the expiration date extended to March 1, 2024. The Company did not pay a premium for this modification.

On July 5, 2022, the Company modified and extended an interest rate cap with a notional amount of $50.0 million and a LIBOR strike rate of 0.50%, which was scheduled to expire on May 1, 2023. The modified agreement establishes a SOFR corridor bought at 1.00% and sold at 3.00% on a $50.0 million notional amount, with the expiration date extended to January 1, 2024. The Company paid a de minimis premium for this modification.

On July 5, 2022, the Company modified and extended the interest rate cap associated with the Chronicle Mill project with a notional amount of $35.1 million and a LIBOR strike rate of 0.50%, which was scheduled to expire on May 1, 2023. The modified agreement establishes a SOFR corridor bought at 1.00% and sold at 3.00% on a $35.1 million notional amount, with the expiration date extended to January 1, 2024. The Company paid a de minimis premium for this modification.

Equity

On July 1, 2022, due to a holder of Class A Units tendering 10,146 Class A Units for redemption by the Operating Partnership, the Company elected to satisfy the redemption request with a cash payment of $0.1 million.

On July 28, 2022, the Company announced that its board of directors declared a cash dividend of $0.19 per common share for the third quarter of 2022. The third quarter dividend will be payable in cash on October 6, 2022 to stockholders of record on September 28, 2022.

On July 28, 2022, the Company announced that its board of directors declared a cash dividend of $0.421875 per share of Series A Preferred Stock for the third quarter of 2022. The dividend will be payable in cash on October 14, 2022 to stockholders of record on October 3, 2022.
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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, including as a result of the COVID-19 pandemic;
our ability to commence or continue construction and development projects on the timeframes and terms currently anticipated;
our failure to generate sufficient cash flows to service our outstanding indebtedness; 
defaults on, early terminations of, or non-renewal of leases by tenants, including significant tenants; 
bankruptcy or insolvency of a significant tenant or a substantial number of smaller tenants; 
the inability of one or more mezzanine loan borrowers to repay mezzanine loans in accordance with their contractual terms;
difficulties in identifying or completing development, acquisition, or disposition opportunities; 
our failure to successfully operate developed and acquired properties; 
our failure to generate income in our general contracting and real estate services segment in amounts that we anticipate;