2018A N N U A L R E P O R T
A R M A D A H O F F L E R P R O P E R T I E S
Forty years
Armada Hoffler Properties, Inc. (NYSE: AHH) is a vertically-
integrated, self-managed real estate investment trust (“REIT”)
with four decades of experience developing, building, acquir-
ing, and managing high-quality, institutional-grade office,
retail, and multifamily properties located primarily in the
Mid-Atlantic and Southeastern United States. In addition to
developing and building properties for its own account, the
Company also provides development and general contracting
construction services to third-party clients. Founded in 1979
by Daniel A. Hoffler, the Company has elected to be taxed as
a REIT for U.S. federal income tax purposes.
In the late 1970’s, Daniel A. Hoffler recognized both the lack of supply and the increasing demand
for flex office and warehouse space in Chesapeake, VA. In October 1979, Mr. Hoffler presented his
real estate development plan to a Texas-based oil company, Armada Petroleum. He left that meeting
with a $2.5 million check that became the seed money for his newly formed company, Armada
Hoffler. With his vision, Mr. Hoffler created a business culture that quickly vaulted the Company into
one of the premier commercial real estate firms on the East Coast. Today, he continues to serve as
Executive Chairman of the Board of Directors. While Armada Petroleum no longer holds an ownership
stake in what is now Armada Hoffler Properties, its initial investment and role in the Company’s
1979
Daniel A. Hoffler Launches
founding are still recognized today in the Company’s name.
Armada Hoffler
Company Established
Armada Hoffler Construction
19821982
When Armada Hoffler broke ground on the 23-story hotel and
convention center in May of 1990, some said it couldn’t be done.
Mr. Hoffler soon recognized that cost overruns and schedule delays posed significant
risks in real estate development. In order to mitigate those risks, Mr. Hoffler founded
Armada Hoffler Construction Company to serve as the general contractor for the
Company’s projects. Built on a foundation of trust and a reputation for integrity and
quality, Armada Hoffler Construction Company has since grown into one of the largest
general contractors in the country. Primarily through repeat business with long-term
clients, Armada Hoffler Construction Company has developed and built more than 25
million square feet of commercial real estate with a market value in excess of $3 billion.
That the spectacular, $62 million project could not be completed
by November 1991. Not only did Armada Hoffler complete the
project, but they did it ahead of schedule and the hotel opened
1991
Norfolk Waterside Marriott
for business as planned on November 17, 1991.
Hotel and Convention Center
Built in Record Time
A R M A D A H O F F L E R P R O P E R T I E S | 2 0 1 8 A N N U A L R E P O R T
A H H P E R F O R M A N C E S I N C E I P O
TOTAL SHAREHOLDER RETURN
VS. MSCI US REIT INDEX
CORE OPERATING
PORTFOLIO OCCUPANCY(1)
70%
vs.
28%
100%
90%
80%
70%
60%
50%
2 0 1 3
2 0 1 4
2 0 1 5
2 0 1 6
2 0 1 7
2 0 1 8
2 0 1 9
(1) Actual as of 12/31; projected as of 12/31/19
NET ASSET VALUE
PER SHARE*
37%
GROWTH
NORMALIZED
FFO PER SHARE
26%
GROWTH
COMMON STOCK
DIVIDENDS PER SHARE
31%
GROWTH
($15.70 at 12/31/18)
($1.03 at 12/31/18)
($0.84 in 2019)
*Source: Sell-Side Research Analyst Estimates
Armada Hoffler Construction Company establishes a longstanding relationship with
clients looking to redevelop Baltimore’s Harbor East area, the last stretch of develop-
able land on the City’s waterfront. Over the next two decades, this business relation-
ship would result in more than $1.5 billion worth of construction business for Armada
Hoffler and continues today with the Harbor Point development.
1995
Construction at Harbor East Begins
100
95
90
85
80
75
70
65
60
55
50
Armada Hoffler Breaks Ground on Town Center
In the summer of 2000, the City of Virginia Beach
2013
2014
and Armada Hoffler embarks on a multi-decade,
2015
2016
2017
2018
2019
20002000
public-private partnership to create an urban core
for the largest city in the Commonwealth of Virginia.
To date, the ongoing mixed-use development provides
an open-air, pedestrian-friendly live-work-play
environment for citizens and visitors to enjoy. Town
Center now features 460,000 SF of retail space,
800,000 SF of office space, 5,000 free parking
spaces, 759 apartment units, 410 hotel rooms,
30,000 SF of conference space, a 1,200 seat
performing arts theater, a 300 seat performing arts
theater, 110+ commercial tenants and 25+
restaurants and cafés.
0 1
N Y S E | A H H
Town Center
Virginia Beach, VA
2000
2019
Company Headquarters Moves to Virginia Beach
Upon completion of the first phase of development in the Town Center
2003
of Virginia Beach, the Company moves its corporate headquarters to
The Armada Hoffler Tower, which was at the time, the third tallest building
in the Commonwealth of Virginia. To this day, the Company maintains its
corporate headquarters in heart of the City’s Central Business District.
In partnership with the Kingdom of Sweden, Armada Hoffler completes the
House of Sweden in Washington, DC. Home to the Embassy of Sweden, this
120,000 SF building is a stunning example of contemporary architecture with
distinctive Scandinavian style. House of Sweden sits along the Potomac River
in the heart of Georgetown and offers panoramic views of the river, Kennedy
2008
House of Sweden (Swedish Embassy),
Center, Air Force Memorial, and the Watergate Complex.
Washington, DC
Williams Mullen Center, Richmond, VA
2010
2010
In the midst of the financial crisis, Armada Hoffler completes the new
Williams Mullen Center in downtown Richmond. Located at the corner of
10th and Canal Streets, this 15-story office tower offers 200,000 SF of
Class A office space and 5,500 SF of first-floor retail space. Williams
Mullen, a prominent law firm in the Mid-Atlantic region, agrees to lease
the majority of the office space in the building.
0 2
A R M A D A H O F F L E R P R O P E R T I E S | 2 0 1 8 A N N U A L R E P O R T
M Y F E L L O W
Shareholders
ENTERPRISE VALUE
SINCE IPO
167%
GROWTH
ENTERPRISE VALUE SINCE IPO
We expected that 2018 would be another strong year in
all aspects of our business. I am proud to report that
Armada Hoffler Properties has delivered on that promise
and produced another impressive year of growth in 2018.
With increases in occupancy, same store NOI, per share
earnings, and dividends, 2018 was by each of these
measures, a success.
$1.6B
$0.6B
Our Company was founded in 1979 by Daniel A. Hoffler. As we celebrate our
40th birthday, we take a good deal of pride in achieving a milestone of longevity
not often seen in the commercial real estate business. Over the years, we’ve
earned a reputation for integrity, consistency, and professionalism, traits that
are the foundation of our success. So, before looking ahead to 2019, let’s
6 / 3 0 / 1 3
1 2 / 3 1 / 1 8
reflect on this past year, the latest in these nearly 40 years of success.
2013
2000
Armada Hoffler Properties Goes Public
New York Stock Exchange under the ticker symbol “AHH.”
2013
2013On May 8, 2013, shares of Armada Hoffler Properties, Inc. begin trading on the
On November 30, 2016, Armada Hoffler Properties
2018
2013
2018
1000
1500
500
0
0
0
0
was added to the MSCI US REIT Index. The
MSCI US REIT Index is a free float-adjusted
market capitalization weighted index that is
0
0
2016
comprised of equity Real Estate Investment
Added to the MSCI US
Trusts (REITs).
REIT Index
0 3
N Y S E | A H H
DELIVERING RESULTS
Specifically, in 2018 we:
• increased occupancy in our core operating property portfolio to
nearly 96%,
• increased same store NOI on both a GAAP and cash basis,
• increased Normalized FFO per share over 4%,
• increased our dividend over 5%, and
• outperformed the MSCI US REIT Index.
Armada Hoffler Properties has provided outstanding absolute and
relative shareholder returns since our IPO in 2013. As of December
31, 2018, total shareholder return since our IPO was over 70%
compared to the MSCI US REIT Index total return of less than 28%.
STRATEGY
Our goal is simple—to create long-term shareholder value through
consistent growth in Normalized FFO per share and therefore, our
dividend, all while conservatively managing the balance sheet.
Our strategy to achieve these goals remains the same as it has
for these past four decades:
• Develop and invest in the highest quality real estate in high
barrier-to-entry locations in order to maintain high occupancy
and achieve premium rental rates through varying economic cycles.
• Maintain full-service capabilities across the real estate spec-
trum—development, construction, and asset management—
in order to execute on all types of opportunities throughout the
investment cycle.
• Capitalize on public-private partnership, joint venture, acquisi-
tion, and disposition opportunities.
• Create value and maximize the wholesale-to-retail spread in
our projects by controlling both costs and schedule with our
development and construction expertise.
• Maintain a strong balance sheet in order to provide both con-
sistent access to cost-effective capital and the flexibility to
make opportunistic investments.
On June 19, 2017, Armada Hoffler Properties was added to the S&P
SmallCap 600 Index. The S&P SmallCap 600 measures the small-cap
segment of the U.S. equity market. It consists of 600 domestic stocks
selected by Standard & Poor’s Index Committee based on specific eligibility
2017
criteria such as market capitalization, liquidity, and financial viability.
Added to the S&P SmallCap 600 Index
$1 Billion Equity Market Capitalization
Armada Hoffler Properties reaches
$1 billion in equity market cap.
2018
2019
2019—Celebrating 40 Years of Success
0 4
2019
A R M A D A H O F F L E R P R O P E R T I E S | 2 0 1 8 A N N U A L R E P O R T
DEVELOPMENT
LOOKING AHEAD TO 2019
On the development front, we delivered Premier, the latest phase
We anticipated that our activities over the course of 2018 would
of the Town Center of Virginia Beach and the most recent chapter
build a solid foundation for significantly higher earnings in 2019
in our ongoing public-private partnership with the City of Virginia
and beyond. With projected per share earnings growth of over
Beach. We delivered the initial apartment units at Greenside in
10% in 2019, we intend to deliver on that assertion. We expect
Charlotte and will have completed construction by the time you
portfolio NOI to climb by over 50% from 2018 levels when the
read this letter. We also delivered the office and retail compo-
current development projects are fully stabilized. Furthermore,
nents of One City Center in downtown Durham and expect to be
our other ancillary lines of business—third-party construction
fully stabilized by the middle of 2019.
profits, build-to-suit asset sales, and mezzanine interest income
This past year saw a number of construction starts: Wills Wharf
in the Harbor Point area of Baltimore’s Inner Harbor, the office
building at Brooks Crossing in Newport News, VA anchored by
—will continue to augment earnings and decrease the need for
external capital. We look forward to building on our past success
and continuing to create value for you, our shareholders.
Huntington Ingalls Industries, and Market at Mill Creek in Mount
GRATITUDE
Pleasant, SC anchored by a new Lowes Foods grocery store.
We ended the year by announcing several significant new invest-
ments: Nexton Square in Summerville, SC as well as Interlock
and Solis Interlock in West Midtown Atlanta. With over half a
billion dollars of investment in various stages of development
and over $165 million in third-party construction backlog,
we believe that our Company is poised for continued growth into
next year and over the next few years.
BALANCE SHEET
This past year, we increased the capacity under our credit facility to
$330 million and raised over $65 million through our at-the-market
equity offering program, taking advantage of favorable market con-
ditions. Core Debt to Core EBITDA was a healthy 6.5x at the end of
the year. Our conservative and prudent approach to managing our
balance sheet provides us the ability to not only withstand market
Of course, our past and future success is only possible because
of the talent and loyalty of the people on our team. Your executive
management team averages nearly 25 years of service to the
Company and the average employee tenure across the organiza-
tion is almost 10 years. That kind of institutional knowledge and
commitment to culture is irreplaceable. To each of our employees,
thank you for your hard work, loyalty, and dedication.
Thanks to each of our partners for placing your trust in us and
contributing to our collective success. Thanks to our Board of
Directors for your counsel, oversight, and guidance. Finally, thanks
to you, our shareholders, for your continued trust and support.
Sincerely,
uncertainty, but also the capability to grow.
Louis S. Haddad
President and Chief Executive Officer
Company Pride
9.5 yrs
Average Employee
Tenure
16%
of the Company Is
Owned by Management
75%
of Employees are
Shareholders
0 5
2018N Y S E | A H H
ASSET MANAGEMENT
H I G H L I G H T S
High Occupancy
Consistent Cash Flow
96%
CORE PORTFOLIO
OCCUPANCY
as of December 31, 2018
Greenside
Charlotte, NC
Town Center
Virginia Beach, VA
One City Center
Durham, NC
DEVELOPMENT
Growth Pipeline
Wholesale Equity Creation
$545 MILLION
UNDER
DEVELOPMENT
as of December 31, 2018
0 6
CONSTRUCTION
Fee Income
Reduced Development Risk
$6.1 MILLION*
SEGMENT
GROSS PROFIT
*Includes gain on non-operating
real estate of $3.4 million.
2018F O R M 1 0 - K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________________________________________
FORM 10-K
_________________________________________________________________
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from to
Commission file number 001-35908
_________________________________________________________________
ARMADA HOFFLER PROPERTIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
_________________________________________________________________
Maryland
(State or Other Jurisdiction of
Incorporation or Organization)
222 Central Park Avenue, Suite 2100
Virginia Beach, Virginia
(Address of Principal Executive Offices)
46-1214914
(IRS Employer
Identification No.)
23462
(Zip Code)
Registrant’s Telephone Number, Including Area Code (757) 366-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.01 par value per share
Name Of Each Exchange On Which Registered
New York Stock Exchange
_________________________________________________________________
Securities registered pursuant to Section 12(g) of the Act:
None
_________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes No
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K.
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 the 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
Non-accelerated filer
Emerging growth company
Accelerated filer
Smaller reporting 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 Act). Yes
No
As of June 29, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s
common stock held by non-affiliates of the registrant was approximately $716.0 million, based on the closing sales price of $14.90 per share as reported on the
New York Stock Exchange. (For purposes of this calculation all of the registrant’s directors and executive officers are deemed affiliates of the registrant.)
As of February 26, 2019, the registrant had 50,335,242 shares of common stock outstanding. In addition, as of February 26, 2019, Armada Hoffler, L.P., the
registrant's operating partnership subsidiary (the "Operating Partnership"), had 16,991,933 units of limited partnership interest ("OP Units") outstanding (other
than OP Units held by the registrant). Based on the 50,335,242 shares of common stock and 16,991,933 OP Units held by limited partners other than the
registrant, the registrant had a total equity market capitalization of $1,038,185,039 as of February 26, 2019 (based on the closing sales price of $15.42 on the
New York Stock Exchange on such date).
Portions of the registrant’s Definitive Proxy Statement relating to its 2019 Annual Meeting of Stockholders are incorporated by reference into Part III of this
report. The registrant expects to file its Definitive Proxy Statement with the Securities and Exchange Commission within 120 days after December 31, 2018.
Documents Incorporated by Reference
Armada Hoffler Properties, Inc.
Form 10-K
For the Fiscal Year Ended December 31, 2018
Table of Contents
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Business.
Risk Factors.
Unresolved Staff Comments.
Properties.
Legal Proceedings.
Mine Safety Disclosures.
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Selected Financial Data.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Financial Statements and Supplementary Data.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
Controls and Procedures.
Other Information.
Directors, Executive Officers and Corporate Governance.
Executive Compensation.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Certain Relationships and Related Transactions, and Director Independence.
Principal Accountant Fees and Services.
Exhibits and Financial Statement Schedules.
Item 16.
Form 10-K Summary.
Index to Exhibits
Signatures
1
16
44
44
44
44
45
47
49
68
68
69
69
69
70
70
70
70
70
71
71
72
74
i
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The following discussion should be read in conjunction with the financial statements and notes thereto appearing
elsewhere in this report. This report contains forward-looking statements within the meaning of the federal securities laws. We
caution investors that any forward-looking statements presented in this report, or which management may make orally or in
writing from time to time, are based on beliefs and assumptions made by, and information currently available to, management.
When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,”
“will,” “result” and similar expressions, which do not relate solely to historical matters, are intended to identify forward-
looking statements. Such statements are subject to risks, uncertainties, and assumptions and are not guarantees of future
performance, which may be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our
control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual
results may vary materially from those anticipated, estimated, or projected. We caution you that while forward-looking
statements reflect our good faith beliefs when we make them, they are not guarantees of future performance and are impacted
by actual events when they occur after we make such statements. We expressly disclaim any responsibility to update forward-
looking statements, whether as a result of new information, future events, or otherwise, except as required by law. Accordingly,
investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time
they are made, to anticipate future results or trends.
Forward-looking statements involve numerous risks and uncertainties, and you should not rely on them as predictions
of future events. Forward-looking statements depend on assumptions, data, or methods which may be incorrect or imprecise,
and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as
described (or that they will happen at all). The following factors, among others, could cause actual results and future events to
differ materially from those set forth or contemplated in the forward-looking statements:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
adverse economic or real estate developments, either nationally or in the markets in which our properties are
located;
our failure to develop the properties in our development pipeline successfully, on the anticipated timelines, or at
the anticipated costs;
our failure to generate sufficient cash flows to service our outstanding indebtedness;
defaults on, early terminations of, or non-renewal of leases by tenants, including significant tenants;
bankruptcy or insolvency of a significant tenant or a substantial number of smaller tenants;
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;
fluctuations in interest rates and increased operating costs;
our failure to obtain necessary outside financing on favorable terms or at all;
our inability to extend the maturity of or refinance existing debt or comply with the financial covenants in the
agreements that govern our existing debt;
financial market fluctuations;
risks that affect the general retail environment or the market for office properties or multifamily units;
the competitive environment in which we operate;
decreased rental rates or increased vacancy rates;
ii
•
•
•
•
•
•
•
•
conflicts of interests with our officers and directors;
lack or insufficient amounts of insurance;
environmental uncertainties and risks related to adverse weather conditions and natural disasters;
other factors affecting the real estate industry generally;
our failure to maintain our qualification as a real estate investment trust (“REIT”) for U.S. federal income tax
purposes;
limitations imposed on our business and our ability to satisfy complex rules in order for us to maintain our
qualification as a REIT for U.S. federal income tax purposes;
changes in governmental regulations or interpretations thereof, such as real estate and zoning laws and
increases in real property tax rates and taxation of REITs; and
potential negative impacts from the recent changes to the U.S. tax laws.
While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We
disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying
assumptions or factors, of new information, data or methods, future events, or other changes after the date of this Annual
Report on Form 10-K, except as required by applicable law. We caution investors not to place undue reliance on these forward-
looking statements. For a further discussion of these and other factors that could impact our future results, performance, or
transactions, see the risk factors described in Item 1A herein and in other documents that we file from time to time with the
Securities and Exchange Commission (the “SEC”).
iii
Item 1.
Business.
Our Company
PART I
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.
We are a full-service real estate company with extensive experience developing, building, owning, and managing
high-quality, institutional-grade office, retail, and multifamily properties in attractive markets primarily throughout the Mid-
Atlantic and Southeastern United States. In addition to the ownership of our operating property portfolio, we develop and build
properties for our own account and through joint ventures between us and unaffiliated partners and also invest in development
projects through mezzanine lending arrangements. We also provide general contracting services to third parties. Our
construction and development experience includes mid- and high-rise office buildings, retail strip malls and retail power
centers, multifamily apartment communities, hotels and conference centers, single- and multi-tenant industrial, distribution, and
manufacturing facilities, educational, medical and special purpose facilities, government projects, parking garages, and mixed-
use town centers. Our third-party construction contracts have included signature properties across the Mid-Atlantic region, such
as the Inner Harbor East development in Baltimore, Maryland, including the Four Seasons Hotel and Legg Mason office tower,
the Mandarin Oriental Hotel in Washington, D.C., and a $50.0 million proton therapy institute for Hampton University in
Hampton, Virginia. Our construction company historically has been ranked among the “Top 400 General Contractors”
nationwide by Engineering News Record and has been ranked among the “Top 50 Retail Contractors” by Shopping Center
World.
We were formed on October 12, 2012 under the laws of the State of Maryland and are headquartered in Virginia
Beach, Virginia. We elected to be taxed as a REIT for U.S. federal income tax purposes commencing with the taxable year
ended December 31, 2013. Substantially all of our assets are held by, and all of our operations are conducted through, our
Operating Partnership. As of December 31, 2018, we owned, through a combination of direct and indirect interests, 74.5% of
the units of limited partnership interest in our Operating Partnership (“OP Units”).
2018 Highlights
The following highlights our results of operations and significant transactions for the year ended December 31, 2018:
•
•
•
•
Net income of $23.5 million, or $0.36 per diluted share, compared to $29.9 million, or $0.50 per diluted share,
for the year ended December 31, 2017.
Funds from operations (“FFO”) of $64.3 million, or $0.99 per diluted share, compared to $59.7 million, or
$0.99 per diluted share, for the year ended December 31, 2017.
Normalized FFO of $66.5 million, or $1.03 per diluted share, compared to $59.3 million, or $0.99 per diluted
share, for the year ended December 31, 2017.
Property segment net operating income (“NOI”) of $78.4 million compared to $72.8 million for the year ended
December 31, 2017:
•
•
Office NOI of $12.8 million compared to $11.9 million
Retail NOI of $50.3 million compared to $46.7 million
• Multifamily NOI of $15.3 million compared to $14.2 million
•
Same store NOI of $59.0 million compared to $58.5 million for the year ended December 31, 2017:
•
•
Office same store NOI of $8.6 million compared to $8.4 million
Retail same store NOI of $43.5 million compared to $43.5 million
• Multifamily same store NOI of $6.9 million compared to $6.6 million
1
•
Stabilized portfolio occupancy by segment, as of December 31, 2018 compared to December 31, 2017:
Office occupancy at 93.3% compared to 89.9%
•
•
Retail occupancy at 96.2% compared to 96.5%
• Multifamily occupancy at 97.3% compared to 92.9%
•
•
•
•
•
•
•
Completed the sale of the new build-to-suit distribution facility in Richmond, Virginia for $25.9 million,
resulting in a gain of $3.4 million.
Sold our at-cost purchase option to the developer of The Residences at Annapolis Junction for $5.0 million and
received $11.1 million as partial repayment on the Company’s outstanding mezzanine loan.
Added $192.9 million in new contracts to third-party construction backlog.
Raised $66.5 million of gross proceeds through our at-the-market equity offering program at an average price of
$14.39 per share.
Began a new development project at Wills Wharf, a site in the Harbor Point area of Baltimore, Maryland. We
plan to develop a 325,000 square foot mixed-use building with an estimated development cost of $119 million.
Closed on our initial investment in the office, retail, and apartment components of The Interlock, a new mixed-
use development in West Midtown Atlanta. The Company has agreed to invest up to $65 million of principal
through a mezzanine loan on the commercial office and retail portions of the project as well as another $23
million of principal through a mezzanine loan on the multifamily apartment component of the project. In
addition to providing development services, the Company will also serve as the general contractor for the
majority of the project.
Closed on our investment in Nexton Square, a new open-air lifestyle center under construction in Summerville,
South Carolina. The Company has agreed to invest approximately $15 million of principal through a mezzanine
loan as well as provide construction management and development services to the project. The Company also
holds an option to purchase the project upon completion.
•
Completed the acquisitions of:
•
•
•
Indian Lakes Crossing, a Harris Teeter-anchored center in Virginia Beach, Virginia
Parkway Centre, a Publix-anchored center in Moultrie, Georgia
Lexington Square, a new Lowes Foods-anchored retail center near Columbia, South Carolina.
•
•
Completed the disposition of the Wawa parcel at Indian Lakes Crossing.
Declared cash dividends of $0.80 per share compared to $0.76 per share for the year ended December 31, 2017.
For definitions and discussion of FFO, Normalized FFO, NOI, and same store NOI, see the sections below entitled
“Item 6. Selected Financial Data” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
Our Competitive Strengths
We believe that we distinguish ourselves from other REITs through the following competitive strengths:
•
•
High-Quality, Diversified Portfolio. Our portfolio consists of institutional-grade, premier office, retail, and
multifamily properties located primarily in Virginia, Maryland, North Carolina, South Carolina, and Georgia.
Our properties are generally in the top tier of commercial properties in their markets and offer Class-A
amenities and finishes.
Seasoned, Committed and Aligned Senior Management Team with a Proven Track Record. Our senior
management team has extensive experience developing, constructing, owning, operating, renovating, and
financing institutional-grade office, retail, multifamily, and hotel properties in the Mid-Atlantic and
Southeastern regions. As of December 31, 2018, our named executive officers and directors collectively
2
•
•
•
owned approximately 15% of our company on a fully diluted basis, which we believe aligns their interests
with those of our stockholders.
Strategic Focus on Attractive Mid-Atlantic and Southeastern Markets. We focus our activities in our target
markets in the Mid-Atlantic and Southeastern regions of the United States that demonstrate attractive
fundamentals driven by favorable supply and demand characteristics and limited competition from other
large, well-capitalized operators. We believe that our longstanding presence in our target markets provides us
with significant advantages in sourcing and executing development opportunities, identifying and mitigating
potential risks, and negotiating attractive pricing.
Extensive Experience with Construction and Development. Our platform consists of development,
construction, and asset management capabilities, which comprise an integrated delivery system for every
project that we build for our own account or for third-party clients. This integrated approach provides a single
source of accountability for design and construction, simplifies coordination and communication among the
relevant stakeholders in each project and provides us valuable insight from an operational perspective. We
believe that being regularly engaged in construction and development projects provides us significant and
distinct advantages, including enhanced market intelligence, greater insight into best practices, enhanced
operating leverage, and “first look” access to development and ownership opportunities in our target
markets. We also use mezzanine lending arrangements, which may enable us to acquire completed
development projects at prices that are below market or at cost and may enable us to realize greater profit in
the development process.
Longstanding Public and Private Relationships. We have extensive experience with public/private real estate
development projects dating back to 1984, having worked with the Commonwealth of Virginia, the State of
Georgia, and the Kingdom of Sweden, as well as various municipalities. Through our experience and
longstanding relationships with governmental entities such as these, we have learned to successfully navigate
the often complex and time-consuming government approval process, which has given us the ability to
capture opportunities that we believe many of our competitors are unable to pursue.
Our Business and Growth Strategies
Our primary business objectives are to: (i) continue to develop, build and own institutional-grade office, retail, and
multifamily properties in our target markets, (ii) finance and operate our portfolio in a manner that increases cash flow and
property values, (iii) execute new third-party construction work with consistent operating margins, and (iv) pursue selective
acquisition opportunities, particularly when the acquisition involves a significant redevelopment aspect. We will seek to
achieve our objectives through the following strategies:
•
•
•
•
Pursue a Disciplined, Opportunistic Development and Acquisition Strategy Focused on Office, Retail, and
Multifamily Properties. We intend to continue to grow our asset base through continued strategic
development of office, retail, and multifamily properties, and the selective acquisition of high-quality
properties that are well-located in their submarkets. Furthermore, we believe our construction and
development expertise provides a high level of quality control while ensuring that the projects we construct
and develop are completed more quickly and at a lower cost than if we engaged a third-party general
contractor.
Pursue New, and Expand Existing, Public/Private Relationships. We intend to continue to leverage our
extensive experience in completing large, complex, mixed-use, public/private projects to establish
relationships with new public partners while expanding our relationships with existing public partners.
Leverage our Construction and Development Platform to Attract Additional Third-Party Clients. We believe
that we have a unique advantage over many of our competitors due to our integrated construction and
development business that provides expertise, oversight, and a broad array of client-focused services. We
intend to continue to conduct and grow our construction business and other third-party services by pursuing
new clients and expanding our relationships with existing clients. We also intend to continue to use our
mezzanine lending program to leverage our development and construction expertise in serving clients.
Engage in Disciplined Capital Recycling. We intend to opportunistically divest properties when we believe
returns have been maximized and to redeploy the capital into new development, acquisition, repositioning, or
redevelopment projects that are expected to generate higher potential risk-adjusted returns.
3
Our Properties
The following table sets forth certain information regarding our stabilized portfolio as of December 31, 2018. We
generally consider a property to be stabilized when it reaches 80% occupancy or thirteen quarters after the property receives its
certificate of occupancy:
Property
Retail Properties
Location
Year Built
Interest
Square Feet(1) Occupancy(2)
ABR(3)
Leased SF(3)
Ownership
Net Rentable
ABR per
249 Central Park Retail(4)
Virginia Beach, VA
Alexander Pointe
Bermuda Crossroads(6)
Broad Creek Shopping
Center(6)(11)
Broadmoor Plaza
Columbus Village(6)
Columbus Village II
Salisbury, NC
Chester, VA
Norfolk, VA
South Bend, IN
Virginia Beach, VA
Virginia Beach, VA
Commerce Street Retail(5)
Virginia Beach, VA
Courthouse 7-Eleven
Dick’s at Town Center
Virginia Beach, VA
Virginia Beach, VA
Dimmock Square
Colonial Heights, VA
Fountain Plaza Retail
Virginia Beach, VA
Gainsborough Square
Chesapeake, VA
Greentree Shopping Center
Chesapeake, VA
2004
1997
2001
1997/2001
1980
1980/2013
1995/1996
2008
2011
2002
1998
2004
1999
2014
Hanbury Village(6)
Chesapeake, VA
2006/2009
Harper Hill Commons(6)
Winston-Salem, NC
Harrisonburg Regal
Harrisonburg, VA
Indian Lakes Crossing
Virginia Beach, VA
Lexington Square
Lexington, SC
Lightfoot Marketplace(6)(7)
Williamsburg, VA
North Hampton Market
North Point Center(6)
Oakland Marketplace(6)
Parkway Centre
Taylors, SC
Durham, NC
Oakland, TN
Moultrie, GA
Parkway Marketplace
Virginia Beach, VA
Patterson Place
Durham, NC
Perry Hall Marketplace
Perry Hall, MD
Providence Plaza
Renaissance Square
Charlotte, NC
Davidson, NC
Sandbridge Commons(6)
Virginia Beach, VA
2004
1999
2008
2017
2016
2004
1998/2009
2004
2017
1998
2004
2001
2007/2008
2008
2015
Socastee Commons
Myrtle Beach, SC
2000/2014
Southgate Square
Southshore Shops
South Retail
South Square(6)
Colonial Heights, VA
1991/2016
Midlothian, VA
Virginia Beach, VA
2006
2002
Durham, NC
1977/2005
Stone House Square(6)
Hagerstown, MD
Studio 56 Retail
Virginia Beach, VA
Tyre Neck Harris Teeter(6)(11)
Portsmouth, VA
Wendover Village
Greensboro, NC
Total / Weighted Average
2008
2007
2011
2004
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
70%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
92,710
57,710
122,566
121,504
115,059
62,362
92,061
19,173
3,177
103,335
106,166
35,961
88,862
15,719
116,635
96,914
49,000
64,973
85,531
124,735
114,935
494,746
64,538
61,200
37,804
160,942
74,256
103,118
80,467
69,417
57,273
220,131
40,333
38,515
109,590
112,274
11,594
48,859
97.9 % $
2,597,881
$
95.1 %
98.4 %
95.5 %
96.5 %
636,019
1,713,928
2,046,360
1,356,291
100.0 %
1,422,244
96.7 %
1,595,334
100.0 %
100.0 %
100.0 %
863,799
139,311
1,251,255
97.2 %
1,768,353
100.0 %
1,019,584
92.5 %
83.7 %
98.6 %
85.4 %
100.0 %
95.0 %
93.3 %
85.6 %
100.0 %
100.0 %
100.0 %
98.0 %
100.0 %
1,261,426
266,752
2,486,153
942,167
683,550
839,174
1,698,782
1,819,389
1,473,083
3,812,818
475,387
809,016
770,911
94.6 %
2,384,886
100.0 %
1,261,436
97.5 %
88.0 %
100.0 %
96.7 %
89.7 %
93.2 %
100.0 %
95.3 %
93.1 %
84.8 %
100.0 %
2,699,780
1,220,638
915,773
630,451
2,699,553
768,665
967,788
1,790,877
1,787,198
419,296
533,052
171,653
3,645,798
99.1 %
3,154,273
96.2% $ 54,982,633
$
28.63
11.58
14.22
17.63
12.21
22.81
17.92
45.05
43.85
12.11
17.14
28.35
15.35
20.28
21.61
11.38
13.95
13.60
21.29
17.03
12.82
7.71
7.37
13.48
20.39
15.67
16.99
26.86
17.23
13.74
11.39
13.68
20.44
25.13
17.14
17.10
42.65
10.91
18.54
15.68
4
Location
Year Built
Interest
Square Feet(1)
Occupancy
(2)
ABR(3)
Leased SF(3)
Ownership
Net Rentable
ABR per
Office Properties
4525 Main Street
Virginia Beach, VA
Armada Hoffler Tower(4)(5)
Virginia Beach, VA
One Columbus(5)
Two Columbus
Total / Weighted Average
Virginia Beach, VA
Virginia Beach, VA
2014
2002
1984
2009
100%
100%
100%
100%
234,938
324,247
128,876
108,448
796,509
96.0 % $ 6,434,782
$
91.4 %
92.2 %
94.2 %
8,606,013
2,934,268
2,672,688
93.3% $ 20,647,751
$
28.53
29.05
24.68
26.17
27.80
Location
Year Built
Interest
Units
Occupancy
(2)
ABR(8)
Ownership
Monthly Rent
per
Occupied Unit/
Bed(9)
Multifamily Properties
Encore Apartments
Virginia Beach, VA
Johns Hopkins Village(10)(11)
Baltimore, MD
Liberty Apartments(10)
Newport News, VA
Smith’s Landing(11)
Blacksburg, VA
The Cosmopolitan(10)(12)
Virginia Beach, VA
Total / Weighted Average
2014
2016
2013
2009
2006
100%
100%
100%
100%
100%
286
157
197
284
306
94.4 % $ 4,221,756
$
1,303.01
99.8 %
96.2 %
99.6 %
92.5 %
7,665,480
2,388,808
4,056,060
5,520,375
1,126.61
1,050.41
1,194.36
1,625.55
1,230
97.3% $ 23,852,479
$
1,290.34
________________________________________
(1) The net rentable square footage for each of our office and retail properties is the sum of (a) the square footage of existing
leases, plus (b) for available space, management’s estimate of net rentable square footage based, in part, on past leases. The
net rentable square footage included in office leases is generally consistent with the Building Owners and Managers
Association 1996 measurement guidelines.
(2) Occupancy for each of our office and retail properties is calculated as (a) square footage under executed leases as of
December 31, 2018 divided by (b) net rentable square feet, expressed as a percentage. Occupancy for our multifamily
properties is calculated as (a) total units occupied as of December 31, 2018 divided by (b) total units available, expressed
as a percentage.
(3) For the properties in our office and retail portfolios, annualized base rent ("ABR") is calculated by multiplying (a) monthly
base rent (defined as cash base rent, before contractual tenant concessions and abatements, and excluding tenant
reimbursements for expenses paid by us) as of December 31, 2018 for in-place leases as of such date by (b) 12, and does
not give effect to periodic contractual rent increases or contingent rental revenue (e.g., percentage rent based on tenant
sales thresholds). ABR per leased square foot is calculated by dividing (a) ABR by (b) square footage under in-place leases
as of December 31, 2018. In the case of triple net or modified gross leases, our calculation of ABR does not include tenant
reimbursements for real estate taxes, insurance, common area or other operating expenses.
(4) As of December 31, 2018, we occupied 41,103 square feet at these two properties at an ABR of $1.3 million, or $31.21 per
leased square foot, which amounts are reflected in this table. The rent paid by us is eliminated in accordance with U.S.
generally accepted accounting principles ("GAAP").
(5) Includes ABR pursuant to a rooftop lease.
5
(6) Net rentable square feet at certain of our retail properties includes pad sites leased pursuant to the ground leases in the table
below:
Properties Subject to Ground Lease
Bermuda Crossroads
Broad Creek Shopping Center
Columbus Village
Hanbury Village
Harper Hill Commons
Indian Lakes Crossing
Lightfoot Marketplace
North Point Center
Oakland Marketplace
Sandbridge Commons
South Square
Stone House Square
Tyre Neck Harris Teeter
Number of
Ground Leases
Square Footage
Leased Pursuant to
Ground Leases
ABR
2
6
1
2
1
1
3
4
1
1
1
1
1
11,000
$
179,685
23,825
3,403
639,988
200,000
55,586
1,082,118
41,520
50,311
60,442
373,680
592,385
660,375
280,556
1,139,610
45,000
53,288
1,778
3,650
186,300
583,000
60,000
181,500
48,859
533,052
Total / Weighted Average
25
679,218
$
6,411,693
(7) We are entitled to a preferred return of 8% and 9% on our investment in Brooks Crossing and Lightfoot Marketplace,
respectively.
(8) For the properties in our multifamily portfolio, ABR is calculated by multiplying (a) base rental payments for the month
ended December 31, 2018 by (b) 12.
(9) Monthly rent per occupied unit/bed is calculated by dividing total base rental payments for the month ended December 31,
2018 by the number of occupied units (or, in the case of Johns Hopkins Village, occupied beds of the 568 total beds) as of
December 31, 2018.
(10) The ABR for Liberty, Cosmopolitan, and John Hopkins Village excludes $0.3 million, $0.7 million, and $1.2 million from
ground floor retail leases, respectively.
(11) We lease the land underlying this property pursuant to a ground lease.
(12) Excludes 36 units offline for redevelopment.
6
Lease Expirations
The following tables summarize the scheduled expirations of leases in our office and retail operating property
portfolios as of December 31, 2018. The information in the following tables does not assume the exercise of any renewal
options.
Office Lease Expirations
Square
% of Office
Number of
Footage of
% Portfolio
Portfolio
Annualized Base
Leases
Leases
Net Rentable
Annualized
Annualized
Rent per Leased
Year of Lease Expiration
Expiring
Expiring
Square Feet
Base Rent
Base Rent
Square Foot
Available
Month-to-Month
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
Thereafter
Total / Weighted Average
Retail Lease Expirations
—
3
16
7
8
9
11
7
7
3
3
4
2
2
82
53,704
633
75,516
26,537
46,798
73,394
63,441
6.7 % $
0.1 %
9.5 %
3.3 %
5.9 %
9.2 %
8.0 %
—
20,400
1,942,629
765,538
1,339,418
2,083,571
1,816,072
102,931
12.9 %
2,796,210
8.8 %
1.9 %
6.2 %
7.1 %
1,931,218
331,665
1,416,099
1,512,745
70,062
15,140
49,081
56,844
86,759
75,669
796,509
— % $
0.1 %
9.4 %
3.7 %
6.5 %
10.1 %
8.8 %
13.5 %
9.4 %
1.6 %
6.9 %
7.3 %
10.9 %
2,646,518
12.8 %
9.5 %
2,045,668
100.0% $ 20,647,751
9.9 %
100.0% $
—
32.23
25.72
28.85
28.62
28.39
28.63
27.17
27.56
21.91
28.85
26.61
30.50
27.03
27.80
Square
% of Retail
Number of
Footage of
% Portfolio
Portfolio
Annualized Base
Leases
Leases
Net Rentable
Annualized
Annualized
Rent per Leased
Year of Lease Expiration
Expiring
Expiring
Square Feet
Base Rent
Base Rent
Square Foot
Available
Month-to-Month
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
—
2
64
77
67
59
59
39
21
20
18
25
9
159,923
2,600
287,943
589,349
301,451
422,280
432,951
305,397
236,602
169,355
118,786
270,005
48,665
4.3 % $
0.1 %
7.8 %
15.9 %
8.1 %
11.4 %
11.7 %
8.2 %
6.4 %
4.6 %
3.2 %
7.3 %
1.3 %
—
48,470
4,922,077
8,321,449
5,439,595
7,003,826
6,632,066
4,862,548
2,666,200
2,934,654
2,544,828
3,973,549
1,042,083
— % $
0.1 %
8.8 %
14.9 %
9.8 %
12.6 %
11.9 %
8.7 %
4.8 %
5.3 %
4.6 %
7.1 %
1.9 %
Thereafter
Total / Weighted Average
17
477
357,426
3,702,733
9.7 %
5,289,383
100.0% $ 55,680,728
9.5 %
100.0% $
7
—
18.64
17.09
14.12
18.04
16.59
15.32
15.92
11.27
17.33
21.42
14.72
21.41
14.80
15.72
Tenant Diversification
The following tables list the 10 largest tenants in each of our office and retail operating property portfolios, based on
annualized base rent as of December 31, 2018 ($ in thousands):
Office Tenant
Clark Nexsen
Mythics
Hampton University
Pender & Coward
Kimley-Horn
Troutman Sanders
The Art Institute
City of Virginia Beach Development Authority
Cherry Bekaert
Williams Mullen
Top 10 Total
Retail Tenant
Kroger/Harris Teeter
Regal Cinemas
Bed, Bath, & Beyond
PetSmart
Food Lion
Lowes Foods
Dick's Sporting Goods
Weis Markets
Ross Dress for Less
Petco
Top 10 Total
% of
Office
Portfolio
Annualized
Base Rent
% of
Total
Portfolio
Annualized
Base Rent
Annualized
Base Rent
2,588
1,164
1,063
882
876
855
852
744
718
655
10,397
12.5 %
5.6 %
5.1 %
4.3 %
4.2 %
4.1 %
4.1 %
3.6 %
3.5 %
3.2 %
50.2%
2.5 %
1.1 %
1.0 %
0.9 %
0.8 %
0.8 %
0.8 %
0.7 %
0.7 %
0.6 %
9.9%
% of
Retail
Portfolio
Annualized
Base Rent
% of
Total
Portfolio
Annualized
Base Rent
Annualized
Base Rent
6,188
1,679
1,677
1,438
1,291
930
840
802
762
743
16,350
11.1 %
3.0 %
3.0 %
2.6 %
2.3 %
1.7 %
1.5 %
1.4 %
1.4 %
1.3 %
29.3%
6.0 %
1.6 %
1.6 %
1.4 %
1.3 %
0.9 %
0.8 %
0.8 %
0.7 %
0.7 %
15.8%
$
$
$
$
8
Development Pipeline
In addition to the properties in our operating property portfolio as of December 31, 2018, we had the following
properties in various stages of development and stabilization. We generally consider a property to be stabilized when it reaches
80% occupancy or thirteen quarters after the property receives its certificate of occupancy.
Development, Not Delivered
($ in '000s)
Schedule(1)
Stabilized
Estimated
Estimated
Incurred
Initial
Operation
AHH
Property
Location
Size(1)
Cost(1)
Cost
Start
Occupancy
(2)
Ownership % Property Type
Summit Place (Meeting Street)
Charleston, SC
114 units
$
53,000
$ 35,000
Hoffler Place (King Street)
Charleston, SC
74 units
Market at Mill Creek
Mt. Pleasant, SC
73,000 sf
Brooks Crossing - Office
Newport News, VA
100,000 sf
48,000
23,000
20,000
Wills Wharf
Baltimore, MD
325,000 sf
119,000
34,500
19,500
15,000
20,000
3Q17
3Q17
1Q18
1Q18
3Q18
3Q19
3Q19
1Q19
2Q19
1Q20
3Q19
3Q19
2Q19
3Q19
3Q20
90 % Multifamily
93 % Multifamily
70% (3)
Retail
65% (3) Office
100% Office
Total Development, Pending Delivery
$
263,000
$ 124,000
Development, Delivered Not Stabilized
($ in '000s)
Schedule
Stabilized
Property
Location
Size(1)
Cost(1)
Cost
Start
Occupancy
(1)(2)
Ownership % Property Type
Estimated
Estimated
Incurred
Initial
Operation
AHH
Brooks Crossing - Retail
Newport News, VA
18,000 sf
$
3,000
$
3,000
Greenside (Harding Place)
Charlotte, NC
225 units
50,000
50,000
3Q15
3Q16
Premier Apartments (Town
Center Phase VI)
Premier Retail (Town Center
Phase VI)
Virginia Beach, VA
131 units
30,000
29,000
4Q16
Lightfoot Outparcel
Williamsburg, VA
NA
Virginia Beach, VA
39,000 sf
15,000
4,000
12,000
4,000
4Q16
1Q18
3Q16
3Q18
3Q18
3Q18
3Q18
4Q19
4Q19
3Q19
1Q20
1Q19
65% (3)
Retail
80% (3) Multifamily
100% Multifamily
100% Retail
70% (3)
Retail
Total Development, Delivered Not Stabilized
102,000
98,000
Total
$
365,000
$ 222,000
________________________________________
(1) Represents estimates that may change as the development/stabilization process proceeds.
(2) Estimated first full quarter of stabilized operations. Estimates are inherently uncertain, and we can provide no assurance
that our assumptions regarding the timing of stabilization will prove accurate.
(3) We are entitled to a preferred return on our equity prior to any distributions to minority partners.
Our execution on all of the projects identified in the preceding tables are subject to, among other factors, regulatory
approvals, financing availability, and suitable market conditions.
Lightfoot outparcel is the outparcel phase of our Harris Teeter-anchored shopping center in Williamsburg, Virginia.
This phase includes four outparcels. As of December 31, 2018, this phase of the project was 100% leased.
Summit Place (also known as Meeting Street) is a $53.0 million student housing property being developed in
Charleston, South Carolina with expected delivery in 2019.
Hoffler Place (also known as King Street) is a $48.0 million student housing property being developed in Charleston,
South Carolina with expected delivery in 2019.
Market at Mill Creek is a $23.0 million Lowes-Foods-anchored shopping center being developed in Mount Pleasant,
South Carolina with expected delivery in 2019.
Brooks Crossing is our public-private partnership with the City of Newport News, Virginia designed to revitalize the
east end of the city. The project includes 18,000 square feet of retail space and is leased by various small retailers. As of
December 31, 2018, the retail component was approximately 66% leased. The project also includes an office component, which
is a 100,000 square foot office building anchored by Newport News Shipbuilding, a division of Huntington Ingalls Industries
(NYSE:HII). As of December 31, 2018, the office building was 100% leased.
9
Wills Wharf is a mixed-use development project in the Harbor Point area of Baltimore, Maryland. The project will
consist primarily of office space anchored by WeWork and will also include a lease to the operator of a Canopy by Hilton hotel
with expected delivery in 2020.
Greenside (also known as Harding Place) is a $50.0 million Class A multifamily property in Midtown Charlotte,
North Carolina. As of December 31, 2018, the property was approximately 39% leased.
Premier (Town Center Phase VI) is the next phase of development in the Town Center of Virginia Beach, our ongoing
public-private partnership with the City of Virginia Beach. Premier is a $45.0 million mixed-use project that includes 39,000
square feet of retail space, which is 75% leased as of December 31, 2018, and 131 luxury apartments, which are 65% leased as
of December 31, 2018.
Other Investments
1405 Point
On October 15, 2015, we entered into a note receivable with a maximum principal balance of $28.2 million for the
1405 Point project in the Harbor Point area of Baltimore, Maryland (also known as Point Street Apartments). On November 11,
2018, this loan was modified to increase the maximum principal amount of the loan to $31.0 million. Interest on this loan
accrues at a rate of 8.0% per annum. 1405 Point is a development project for a 17-story building comprised of 289 residential
units and 18,000 square feet of street-level retail space. Beatty Development Group (“BDG”) is the developer of the project and
has engaged us to serve as construction general contractor. 1405 Point opened during the first quarter of 2018 and is subject to a
ground lease from an affiliate of BDG.
BDG secured a senior construction loan of up to $67.0 million to fund the development and construction of 1405 Point
on November 10, 2016. We have agreed to guarantee $25.0 million of the senior construction loan. We have options to
purchase up to a 100% interest in 1405 Point upon completion of the project as follows: (i) an option to purchase a 79%
indirect interest in Point Street Apartments for $27.6 million, exercisable within one year from the project’s completion (the
“First Option”) and (ii) provided that we have exercised the First Option, an option to purchase an additional 21% interest in
Point Street Apartments prior to July 31, 2020 (the “Second Option”) in exchange for increased payments under the ground
lease. The BDG mezzanine loan matures on the earliest of (i) November 1, 2019, which may be extended by BDG under a one-
year extension option, (ii) the maturity date or earlier termination of the senior construction loan, or (iii) the date we exercise
the Second Option.
We plan to exercise the First Option during the first quarter of 2019. We currently have a $2.1 million letter of credit
for the guarantee of the senior construction loan.
As of December 31, 2018, the balance of the BDG loan was $30.2 million, and for the year ended December 31, 2018,
we recognized $2.1 million of interest income on the BDG loan. See Note 6 to the accompanying consolidated financial
statements.
One City Center
On February 25, 2016, we announced our joint venture with Austin Lawrence Partners to develop and construct One
City Center in Durham, North Carolina. One City Center is a 22-story mixed-use project that includes 130,000 square feet of
office space, anchored by a 55,000 square foot lease with Duke University and a 62,000 square foot lease with WeWork, along
with 22,000 square feet of street-level retail space and 139 residential units. We are a minority partner in the joint venture and
serve as the project's general contractor, with rights to the operating cash flow of the office and retail portions of the project.
The project at One City Center is an unconsolidated joint venture. We have agreed to guarantee the commercial component of
the construction loan for City Center; however, the loan is collateralized by 100% of the assets of City Center. Our equity
investment in the joint venture as of December 31, 2018 is approximately $21.3 million. The project is substantially complete
and is in lease-up. During the first quarter of 2019, we plan to acquire the office and retail portions of the project in exchange
for our minority partnership interest in the joint venture.
10
The Residences at Annapolis Junction
On April 21, 2016, we entered into a note receivable with a maximum principal balance of $48.1 million in the
residential component of the Annapolis Junction Town Center project in Maryland (“Annapolis Junction”). Annapolis Junction
is an apartment development project with 416 residential units. It is part of a mixed-use development project that is also
planned to have 17,000 square feet of retail space and a 150-room hotel. Annapolis Junction Apartments Owner, LLC
(“AJAO”) is the developer of the residential component and engaged us to serve as construction general contractor for the
residential component. Annapolis Junction opened during 2017 and 2018 and is currently in lease-up.
Interest on the AJAO loan accrues at 10.0% per annum. On November 16, 2018, AJAO refinanced the senior
construction loan with a one year senior loan of $83.0 million, which matures on November 16, 2019. 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.
We have agreed to guarantee $8.3 million of the senior loan, and the AJAO loan will mature concurrent with the new senior
loan. In conjunction with this refinancing, we sold the First Option and Second Option to AJAO for a price of $5.0 million,
which is being recognized as interest income over the remaining term of the loan. Additionally, AJAO repaid $11.1 million of
the outstanding mezzanine loan balance as part of this refinancing.
The balance on the Annapolis Junction note was $36.4 million as of December 31, 2018. During the year ended
December 31, 2018, we recognized $4.9 million of interest income on the note, which includes amortization of the option sale.
See Note 6 to the accompanying consolidated financial statements.
North Decatur Square
On May 15, 2017, we invested in the development of an estimated $34.0 million Whole Foods-anchored center
located in Decatur, Georgia. The Company's investment is in the form of a mezzanine loan of up to $21.8 million to the
developer, North Decatur Square Holdings, LLC ("NDSH"). Interest on the loan bears interest at a rate of 15.0% per annum.
The note matures on the earliest of (i) May 15, 2022, (ii) the maturity of the senior construction loan, (iii) the sale of NDSH, or
(iv) the sale of the center. During 2018, this loan was modified to increase the maximum amount of the loan to $29.7 million
due to an increase in the scope of the project.
The balance on the North Decatur Square note was $18.5 million as of December 31, 2018. During the year ended
December 31, 2018, we recognized $2.2 million of interest income on the note. See Note 6 to the accompanying consolidated
financial statements.
Delray Plaza
On October 27, 2017, we invested in the development of an estimated $20.0 million Whole Foods-anchored center
located in Delray Beach, Florida. The Company's investment is in the form of a mezzanine loan of up to $13.1 million to the
developer, Delray Plaza Holdings, LLC. On January 8, 2019, this loan was modified to increase the maximum amount of the
loan to $15.0 million. The mezzanine loan bears interest at a rate 15.0% per annum. The note matures on the earliest of (i)
October 27, 2020, (ii) the date of any sale or refinance of the development project, or (iii) the disposition or change in control
of the development project. The balance on the Delray Plaza note was $7.0 million as of December 31, 2018. During the year
ended December 31, 2018, we recognized $0.9 million of interest income on the note. See Note 6 to the accompanying
consolidated financial statements.
Nexton Square
On December 4, 2018, we entered into a mezzanine loan agreement with the developer of Nexton Square, a shopping
center development project located in Summerville, South Carolina, which has a maximum capacity of $21.0 million. This loan
bears interest at a rate of 15.0% per annum (which will decrease to 10.0% upon completion of certain portions of the project)
and matures on the earliest of (i) December 4, 2020, (ii) the maturity date of the senior construction loan, including any
extension options available and exercised under that loan, or (iii) the date of any sale, transfer, or refinancing of the project.
We agreed to guarantee 50% of the senior construction loan in exchange for the option to purchase the property upon
completion according to a predetermined formula primarily dependent upon the developer's leasing activities and the extent to
which the developer elects to complete all or a portion of the total planned space, if applicable, in response to leasing activities.
11
The balance on the Nexton Square loan was $14.9 million as of December 31, 2018. During the year ended December
31, 2018, we recognized $0.2 million of interest income on the loan. See Note 6 to the accompanying consolidated financial
statements.
On February 8, 2019, the developer closed on a senior construction loan with a maximum borrowing capacity of $25.2
million and paid down $2.1 million of the mezzanine loan.
Interlock Commercial
On December 21, 2018, we entered into a mezzanine loan agreement with the developer of the office and retail
components of The Interlock, a new mixed-use public-private partnership with Georgia Tech in West Midtown Atlanta. The
loan has a maximum principal amount of $67.0 million and a total maximum commitment, including accrued interest reserves,
of $95.0 million. The mezzanine loan bears interest at a rate of 15.0% per annum and matures on the earlier of (i) 24 months
after the original maturity date or earlier termination date of the senior construction loan or (ii) any sale, transfer, or refinancing
of the project. In the event that the maturity date is established as being 24 months after the original maturity date or earlier
termination date of the senior construction loan, the developer will have the right to extend the maturity date for 5 years.
We have agreed to guarantee payment of 35% of the senior construction loan. The borrower has not obtained a
construction loan as of December 31, 2018.
The balance on the Interlock Commercial note was $18.3 million as of December 31, 2018. During the year ended
December 31, 2018, we recognized $0.2 million of interest income on the note. See Note 6 to the accompanying consolidated
financial statements.
Solis Apartments at Interlock
On December 21, 2018, we entered into a mezzanine loan agreement with the developer of Solis Apartments at
Interlock, which is the apartment component of The Interlock in West Midtown Atlanta. The mezzanine loan has a a maximum
principal commitment of $25.2 million and a total maximum commitment, including accrued interest reserves, of $41.1 million.
The mezzanine loan bears interest at a rate of 13.0% per annum and matures on the earlier of (a) the later of (i) December 21,
2021 or (ii) the maturity date or earlier termination date of the senior construction loan, including any extensions of the senior
construction loan, or (b) the date of any sale of the project or refinance of the loan.
The balance on the Solis Apartments at Interlock note was $13.8 million as of December 31, 2018. During the year
ended December 31, 2018, we recognized $0.1 million of interest income on the note. See Note 6 to the accompanying
consolidated financial statements.
Acquisitions and Dispositions
On November 30, 2017, we entered into a lease agreement with Bottling Group, LLC for a new distribution facility
that we developed and constructed. On January 29, 2018, we acquired undeveloped land in Chesterfield, Virginia, a portion of
which serves as the site for this facility, for a contract price of $2.4 million plus capitalized acquisition costs of $0.1 million. On
December 20, 2018, we sold the completed facility for $25.9 million, resulting in a gain of $3.4 million.
On January 9, 2018, we acquired Indian Lakes Crossing, a Harris Teeter-anchored shopping center in Virginia Beach,
Virginia, for a contract price of $14.7 million plus capitalized acquisition costs of $0.2 million.
On January 18, 2018, we entered into an operating agreement with a partner to develop a Lowes Foods-anchored
shopping center in Mount Pleasant, South Carolina. We have a 70% ownership interest in the partnership. The partnership,
Market at Mill Creek Partners, LLC, acquired undeveloped land on February 16, 2018 for a contract price of $2.9 million plus
capitalized acquisition costs of $0.1 million. As of December 31, 2018, the book value of our investment in the project totaled
$21.1 million.
On January 29, 2018, we acquired Parkway Centre, a newly developed Publix-anchored shopping center in Moultrie,
Georgia, for total consideration of $11.3 million (comprising $9.6 million in cash and $1.7 million in the form of Class A units
of limited partnership interest in the Operating Partnership ("Class A Units") plus capitalized acquisition costs of $0.3 million.
On April 2, 2018, we acquired undeveloped land in Newport News, Virginia for less than $0.1 million. This land
parcel is being used in the development of the Brooks Crossing Office property.
12
On May 24, 2018, we completed the sale of the Wawa outparcel at Indian Lakes Crossing for a contract price of $4.4
million. There was no gain or loss on the disposition.
On July 2, 2018, we executed a ground lease for the site of a new mixed-use development project at Wills Wharf, a
site in the Harbor Point area of Baltimore, Maryland. The lease has an initial term of five years and includes ten extension
options of seven years each.
On August 28, 2018, we acquired Lexington Square, a newly developed Lowes Foods-anchored shopping center in
Lexington, South Carolina, for a purchase price of $26.8 million, consisting of cash consideration of $24.2 million and $2.6
million of additional consideration in the form of Class A Units issuable in increments to the seller upon the fulfillment of
certain occupancy thresholds within the first 18 months of our ownership. No Class A Units have been issued as of
December 31, 2018 for this acquisition. As part of this transaction, we also capitalized acquisition costs of $0.4 million.
On December 31, 2018, we sold the leasehold interest in the building previously leased by Home Depot at Broad
Creek Shopping Center for $2.4 million, resulting in a gain on sale of $0.8 million.
Subsequent to December 31, 2018
On February 6, 2019, we acquired an additional outparcel phase of Wendover Village in Greensboro, North Carolina
for a contract price of $2.7 million.
Tax Status
We have elected and qualified to be taxed as a REIT for U.S. federal income tax purposes commencing with our
taxable year ended December 31, 2013. Our continued qualification as a REIT will depend upon our ability to meet, on a
continuing basis, through actual investment and operating results, various complex requirements under the Internal Revenue
Code of 1986, as amended (the “Code”), relating to, among other things, the sources of our gross income, the composition and
values of our assets, our distribution levels, and the diversity of ownership of our capital stock. We believe that we are
organized in conformity with the requirements for qualification as a REIT under the Code and that our manner of operation will
enable us to maintain the requirements for qualification and taxation as a REIT for U.S. federal income tax purposes. In
addition, we have elected to treat AHP Holding, Inc., which, through its wholly-owned subsidiaries, operate our construction,
development, and third-party asset management businesses, as a taxable REIT subsidiary (“TRS”).
As a REIT, we generally will not be subject to U.S. federal income tax on our net taxable income that we distribute
currently to our stockholders. Under the Code, REITs are subject to numerous organizational and operational requirements,
including a requirement that they distribute each year at least 90% of their REIT taxable income, determined without regard to
the deduction for dividends paid and excluding any net capital gains. If we fail to qualify for taxation as a REIT in any taxable
year and do not qualify for certain statutory relief provisions, our income for that year will be taxed at regular corporate rates,
and we would be disqualified from taxation as a REIT for the four taxable years following the year during which we ceased to
qualify as a REIT. Even if we qualify as a REIT for U.S. federal income tax purposes, we may still be subject to state and local
taxes on our income and assets and to federal income and excise taxes on our undistributed income. Additionally, any income
earned by our services company, and any other TRS we form in the future, will be fully subject to federal, state and local
corporate income tax.
Insurance
We carry comprehensive liability, fire, extended coverage, business interruption, and rental loss insurance covering all
of the properties in our portfolio under a blanket insurance policy in addition to other coverage that may be appropriate for
certain of our properties. We believe the policy specifications and insured limits are appropriate and adequate for our properties
given the relative risk of loss, the cost of the coverage, and industry practice; however, our insurance coverage may not be
sufficient to fully cover our losses. We do not carry insurance for certain losses, including, but not limited to, losses caused by
riots or war. Some of our policies, such as those covering losses due to terrorism and earthquakes, are insured subject to
limitations involving large deductibles or co-payments and policy limits that may not be sufficient to cover losses for such
events. In addition, all but two of the properties in our portfolio as of December 31, 2018 were located in Virginia, Maryland,
North Carolina, South Carolina, and Georgia, which are areas subject to an increased risk of hurricanes. While we will carry
hurricane insurance on certain of our properties, the amount of our hurricane insurance coverage may not be sufficient to fully
cover losses from hurricanes. We may reduce or discontinue hurricane, terrorism, or other insurance on some or all of our
properties in the future if the cost of premiums for any of these policies exceeds, in our judgment, the value of the coverage
13
discounted for the risk of loss. Also, if destroyed, we may not be able to rebuild certain of our properties due to current zoning
and land use regulations. As a result, we may incur significant costs in the event of adverse weather conditions and natural
disasters. In addition, our title insurance policies may not insure for the current aggregate market value of our portfolio, and we
do not intend to increase our title insurance coverage as the market value of our portfolio increases. If we or one or more of our
tenants experiences a loss that is uninsured or that exceeds policy limits, we could lose the capital invested in the damaged
properties as well as the anticipated future cash flows from those properties. In addition, if the damaged properties are subject
to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were irreparably
damaged. Furthermore, we may not be able to obtain adequate insurance coverage at reasonable costs in the future as the costs
associated with property and casualty renewals may be higher than anticipated.
Regulation
General
Our properties are subject to various covenants, laws, ordinances, and regulations, including regulations relating to
common areas and fire and safety requirements. We believe that each of the properties in our portfolio has the necessary
permits and approvals to operate its business.
Americans With Disabilities Act
Our properties must comply with Title III of the Americans with Disabilities Act of 1990 (the “ADA”), to the extent
that such properties are “public accommodations” as defined by the ADA. Under the ADA, all public accommodations must
meet federal requirements related to access and use by disabled persons. The ADA may require removal of structural barriers to
access by persons with disabilities in certain public areas of our properties where such removal is readily achievable. Although
we believe that the properties in our portfolio in the aggregate substantially comply with present requirements of the ADA, we
have not conducted a comprehensive audit or investigation of all of our properties to determine our compliance, and we are
aware that some particular properties may currently be in non-compliance with the ADA. Noncompliance with the ADA could
result in the incurrence of additional costs to attain compliance, the imposition of fines, an award of damages to private
litigants, and a limitation on our ability to refinance outstanding indebtedness. The obligation to make readily achievable
accommodations is an ongoing one, and we will continue to assess our properties and to make alterations as appropriate in this
respect.
Environmental Matters
Under various federal, state, and local laws and regulations relating to the environment, as a current or former owner
or operator of real property, we may be liable for costs and damages resulting from the presence or discharge of hazardous or
toxic substances, waste, or petroleum products at, on, in, under, or migrating from such property, including costs to investigate
and clean up such contamination and liability for harm to natural resources. Such laws often impose liability without regard to
whether the owner or operator knew of, or was responsible for, the presence of such contamination, and the liability may be
joint and several. These liabilities could be substantial, and the cost of any required remediation, removal, fines, or other costs
could exceed the value of the property and our aggregate assets. In addition, the presence of contamination or the failure to
remediate contamination at our properties may expose us to third-party liability for costs of remediation and personal or
property damage or materially adversely affect our ability to sell, lease, or develop our properties or to borrow using the
properties as collateral. In addition, environmental laws may create liens on contaminated sites in favor of the government for
damages and costs it incurs to address such contamination. Moreover, if contamination is discovered on our properties,
environmental laws may impose restrictions on the manner in which property may be used or businesses may be operated, and
these restrictions may require substantial expenditures.
Some of our properties contain, have contained, or are adjacent to or near other properties that have contained or
currently contain storage tanks for the storage of petroleum products, propane, or other hazardous or toxic substances.
Similarly, some of our properties were used in the past for commercial or industrial purposes, or are currently used for
commercial purposes, that involve or involved the use of petroleum products or other hazardous or toxic substances, or are
adjacent to or near properties that have been or are used for similar commercial or industrial purposes. As a result, some of our
properties have been or may be impacted by contamination arising from the releases of such hazardous substances or petroleum
products. Where we have deemed appropriate, we have taken steps to address identified contamination or mitigate risks
associated with such contamination; however, we are unable to ensure that further actions will not be necessary. As a result of
the foregoing, we could potentially incur material liability.
14
Environmental laws also govern the presence, maintenance, and removal of asbestos-containing building materials, or
ACBM, and may impose fines and penalties for failure to comply with these requirements or expose us to third-party liability.
Such laws require that owners or operators of buildings containing ACBM (and employers in such buildings) properly manage
and maintain the asbestos, adequately notify or train those who may come into contact with asbestos, and undertake special
precautions, including removal or other abatement, if asbestos would be disturbed during renovation or demolition of a
building. In addition, the presence of ACBM in our properties may expose us to third-party liability (e.g. liability for personal
injury associated with exposure to asbestos). We are not presently aware of any material adverse issues at our properties
including ACBM.
Similarly, environmental laws govern the presence, maintenance, and removal of lead-based paint in residential
buildings, and may impose fines and penalties for failure to comply with these requirements. Such laws require, among other
things, that owners or operators of residential facilities that contain or potentially contain lead-based paint notify residents of
the presence or potential presence of lead-based paint prior to occupancy and prior to renovations and manage lead-based paint
waste appropriately. In addition, the presence of lead-based paint in our buildings may expose us to third-party liability (e.g.,
liability for personal injury associated with exposure to lead-based paint). We are not presently aware of any material adverse
issues at our properties involving lead-based paint.
In addition, the properties in our portfolio also are subject to various federal, state, and local environmental and health
and safety requirements, such as state and local fire requirements. Moreover, some of our tenants may handle and use
hazardous or regulated substances and wastes as part of their operations at our properties, which are subject to regulation. Such
environmental and health and safety laws and regulations could subject us or our tenants to liability resulting from these
activities. Environmental liabilities could affect a tenant’s ability to make rental payments to us. In addition, changes in laws
could increase the potential liability for noncompliance. Our leases sometimes require our tenants to comply with
environmental and health and safety laws and regulations and to indemnify us for any related liabilities. However, in the event
of the bankruptcy or inability of any of our tenants to satisfy such obligations, we may be required to satisfy such obligations.
In addition, we may be held directly liable for any such damages or claims regardless of whether we knew of, or were
responsible for, the presence or disposal of hazardous or toxic substances or waste and irrespective of tenant lease provisions.
The costs associated with such liability could be substantial and could have a material adverse effect on us.
When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if
the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins
or irritants. Indoor air quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor
sources, and other biological contaminants such as pollen, viruses, and bacteria. Indoor exposure to airborne toxins or irritants
above certain levels can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other
reactions. As a result, the presence of significant mold or other airborne contaminants at any of our properties could require us
to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the affected
property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could
expose us to liability from our tenants, employees of our tenants, or others if property damage or personal injury occurs. We are
not presently aware of any material adverse indoor air quality issues at our properties.
Competition
We compete with a number of developers, owners, and operators of office, retail, and multifamily real estate, many of
which own properties similar to ours in the same markets in which our properties are located and some of which have greater
financial resources than we do. In operating and managing our portfolio, we compete for tenants based on a number of factors,
including location, rental rates, security, flexibility, and expertise to design space to meet prospective tenants’ needs and the
manner in which the property is operated, maintained, and marketed. As leases at our properties expire, we may encounter
significant competition to renew or re-lease space in light of the large number of competing properties within the markets in
which we operate. As a result, we may be required to provide rent concessions or abatements, incur charges for tenant
improvements and other inducements, including early termination rights or below-market renewal options, or we may not be
able to timely lease vacant space.
We also face competition when pursuing development, acquisition, and lending opportunities. Our competitors may be
able to pay higher property acquisition prices, may have private access to opportunities not available to us, may have more
financial resources than we do, and may otherwise be in a better position to acquire or develop a property. Competition may
also have the effect of reducing the number of suitable development and acquisition opportunities available to us or increasing
the price required to consummate a development or acquisition opportunity.
15
In addition, we face competition in our construction business from other construction companies in the markets in
which we operate, including small local companies and large regional and national companies. In our construction business, we
compete for construction projects based on several factors, including cost, reputation for quality and timeliness, access to
machinery and equipment, access to and relationships with high-quality subcontractors, financial strength, knowledge of local
markets, and project management abilities. We believe that we compete favorably on the basis of the foregoing factors and that
our construction business is well-positioned to compete effectively in the markets in which we operate. However, some of the
construction companies with which we compete have different cost structures and greater financial and other resources than we
do, which may put them at an advantage when competing with us for construction projects. Competition from other
construction companies may reduce the number of construction projects that we are hired to complete and increase pricing
pressure, either of which could reduce the profitability of our construction business.
Employees
As of December 31, 2018, we had 156 employees. None of our employees are represented by a collective bargaining
unit. We believe that our relationship with our employees is good.
Corporate Information
Our principal executive office is located at 222 Central Park Avenue, Suite 2100, Virginia Beach, Virginia 23462 in the
Armada Hoffler Tower at the Town Center of Virginia Beach. In addition, we have construction offices located at 249 Central
Park Avenue, Suite 300, Virginia Beach, Virginia 23462 and 1300 Thames Street, Suite 30, Baltimore, Maryland 21231. The
telephone number for our principal executive office is (757) 366-4000. We maintain a website located at
www.armadahoffler.com. The information on, or accessible through, our website is not incorporated into and does not
constitute a part of this Annual Report on Form 10-K or any other report or document we file with or furnish to the SEC.
Available Information
We file our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all
amendments to those reports with the SEC. You may obtain copies of these documents by accessing the SEC’s website at
www.sec.gov. In addition, as soon as reasonably practicable after such materials are furnished to the SEC, we make copies of
these documents available to the public free of charge through our website or by contacting our Corporate Secretary at the
address set forth above under “—Corporate Information.”
Our Corporate Governance Guidelines, Code of Business Conduct and Ethics, and the charters of our audit committee,
compensation committee and nominating and corporate governance committee are all available in the Corporate Governance
section of the Investor Relations section of our website.
Financial Information
For required financial information related to our operations, please refer to our consolidated financial statements,
including the notes thereto, included with this Annual Report on Form 10-K.
Item 1A.
Risk Factors
Set forth below are the risks that we believe are material to our stockholders. You should carefully consider the
following risks in evaluating our Company and our business. The occurrence of any of the following risks could materially and
adversely impact our financial condition, results of operations, cash flow, the market price of shares of our common stock, and
our ability to, among other things, satisfy our debt service obligations and to make distributions to our stockholders, which in
turn could cause our stockholders to lose all or a part of their investment. Some statements in this Annual Report on Form 10-
K, including statements in the following risk factors constitute forward-looking statements. Please refer to the section entitled
“Special Note Regarding Forward-Looking Statements” at the beginning of this Annual Report on Form 10-K.
Risks Related to Our Business
The geographic concentration of our portfolio could cause us to be more susceptible to adverse economic or regulatory
developments in the markets in which our properties are located than if we owned a more geographically diverse portfolio.
The majority of the properties in our portfolio are located in Virginia and North Carolina, which expose us to greater
economic risks than if we owned a more geographically diverse portfolio. As of December 31, 2018, our properties in the
16
Virginia and North Carolina markets represented approximately 65% and 17%, respectively, of the total annualized base rent of
the properties in our portfolio. Furthermore, many of our properties are located in the Town Center of Virginia Beach, and
rental revenues from our Town Center properties represented 41% of our total rental revenues for the year ended December 31,
2018. As a result of this geographic concentration, we are particularly susceptible to adverse economic, regulatory or other
conditions in the Virginia and North Carolina markets (such as periods of economic slowdown or recession, business layoffs or
downsizing, industry slowdowns, relocations of businesses, increases in real estate and other taxes, and the cost of complying
with governmental regulations or increased regulation), as well as to natural disasters that occur in these markets (such as
hurricanes and other events). For example, the markets in Virginia and North Carolina in which many of the properties in our
portfolio are located contain high concentrations of military personnel and operations. A reduction of the military presence or
cuts in defense spending in these markets could have a material adverse effect on us. If there is a downturn in the economy in
Virginia or North Carolina, our operations, revenue, and cash available for distribution, including cash available to pay
distributions to our stockholders, could be materially and adversely affected. We cannot assure you that these markets will grow
or that underlying real estate fundamentals will be favorable to owners and operators of office, retail, or multifamily properties.
Our operations may also be adversely affected if competing properties are built in these markets. Moreover, submarkets within
any of our target markets may be dependent upon a limited number of industries. Any adverse economic or real estate
developments in our markets, or any decrease in demand for office, retail or multifamily space resulting from the regulatory
environment, business climate or energy or fiscal problems, could materially and adversely affect our financial condition,
results of operations, cash flow, cash available for distribution, and ability to satisfy our debt service obligations.
We have a substantial amount of indebtedness outstanding, which may expose us to the risk of default under our debt
obligations and may include covenants that restrict our ability to pay distributions to our stockholders.
As of December 31, 2018, we had total debt of approximately $694 million, including amounts drawn under our credit
facility, a substantial portion of which is guaranteed by our Operating Partnership, and we may incur significant additional debt
to finance future acquisition and development activities. Excluding unamortized fair value adjustments and debt issuance costs,
the aggregate outstanding principal balance of our debt was $701 million as of December 31, 2018. Payments of principal and
interest on borrowings may leave us with insufficient cash resources to operate our properties or to pay the dividends currently
contemplated or necessary to maintain our REIT qualification. Our level of debt and the limitations imposed on us by our debt
agreements could have significant adverse consequences, including the following:
•
•
•
•
•
•
•
our cash flow may be insufficient to meet our required principal and interest payments;
we may be unable to borrow additional funds as needed or on favorable terms, which could, among other
things, adversely affect our ability to meet operational needs;
we may be unable to refinance our indebtedness at maturity or the refinancing terms may be less favorable than
the terms of our original indebtedness;
we may be forced to dispose of one or more of our properties, possibly on unfavorable terms or in violation of
certain covenants to which we may be subject;
we may default on our obligations, in which case the lenders or mortgagees may have the right to foreclose on
any properties that secure the loans or collect rents and other income from our properties;
we may violate restrictive covenants in our loan documents, which would entitle the lenders to accelerate our
debt obligations or reduce our ability to pay, or prohibit us from paying, distributions to our stockholders; and
our default under any loan with cross-default provisions could result in a default on other indebtedness.
If any one of these events were to occur, our financial condition, results of operations, cash flow, cash available for
distribution, and ability to service our debt obligations could be materially and adversely affected. Furthermore, foreclosures
could create taxable income without accompanying cash proceeds, which could hinder our ability to meet the REIT distribution
requirements imposed by the Code. See “Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources.”
17
The loss of, or a store closure by, one of the anchor stores or major tenants in our retail shopping center properties could
result in a material decrease in our rental income, which would have a material adverse effect on us, including our
financial condition, results of operations, cash flow, cash available for distribution, and ability to service our debt
obligations.
Our retail shopping center properties typically are anchored by large, nationally recognized tenants. As of
December 31, 2018, Kroger/Harris Teeter, Regal Cinemas, Bed Bath & Beyond, and PetSmart collectively represented
approximately 19.7%, and individually represented 11.1%, 3.0%, 3.0% and 2.6%, respectively, of the total annualized base rent
in our retail portfolio. In addition, several of our retail properties are single-tenant properties or are occupied primarily by a
single tenant. As of December 31, 2018, the Courthouse 7-Eleven, Tyre Neck Harris Teeter, and Harrisonburg Regal retail
properties in our portfolio were 100% occupied by 7-Eleven, Harris Teeter, and Regal Cinemas, respectively, and several
shopping centers are more than 50% occupied by an anchor tenant. At any time, our tenants may experience a downturn in their
businesses that may significantly weaken their financial condition. As a result, our tenants, including our anchor and other
major tenants, may fail to comply with their contractual obligations to us, seek concessions in order to continue operations or
declare bankruptcy, any of which could result in the termination of such tenants’ leases and the loss of rental income
attributable to the terminated leases. In addition, certain of our tenants may cease operations while continuing to pay rent,
which could decrease customer traffic, thereby decreasing sales for our other tenants at the applicable retail property.
Furthermore, mergers or consolidations among retail establishments could result in the closure of existing stores or duplicate or
geographically overlapping store locations, which could include stores at our retail properties.
Loss of, or a store closure by, an anchor or major tenant could significantly reduce our occupancy level or the rent we
receive from our retail properties, and we may not have the right, or otherwise may be unable, to re-lease the vacated space at
attractive rents or at all. Moreover, in the event of default by a major tenant or anchor store, we may experience delays and
costs in enforcing our rights as landlord to recover amounts due to us under the terms of our agreements with those parties. The
occurrence of any of the situations described above, particularly if it involves an anchor tenant with leases in multiple locations,
could seriously harm our performance and could adversely affect the value of the affected retail property.
In the event that any of the anchor stores, major tenants, or single-tenant property tenants in our retail properties do not
renew their leases with us when they expire, we may be unable to re-lease such premises at market rents or at all, which could
have a material adverse effect on our financial condition, results of operations, cash flow, cash available for distribution, and
ability to satisfy our debt service obligations.
We may be unable to renew leases, lease vacant space, or re-lease space on favorable terms or at all as leases expire, which
could materially and adversely affect our financial condition, results of operations, cash flow, cash available for
distribution, and ability to service our debt obligations.
As of December 31, 2018, approximately 4.4% of the square footage of the properties in our stabilized office and
retail portfolios was available. Additionally, 9.4% and 3.7% of the annualized base rent in our office portfolio was scheduled to
expire in 2019 and 2020, respectively, and 8.8% and 14.9% of the annualized base rent in our retail portfolio was scheduled to
expire in 2019 and 2020, respectively. We cannot assure you that new leases will be entered into, that leases will be renewed, or
that our properties will be re-leased at net effective rental rates equal to or above the current average net effective rental rates or
that substantial rent abatements, tenant improvements, early termination rights or below-market renewal options will not be
offered to attract new tenants or retain existing tenants. In addition, our ability to lease our multifamily properties at favorable
rates, or at all, may be adversely affected by the increase in supply of multifamily properties in our target markets. Our ability
to lease our properties depends upon the overall level of spending in the economy, which is adversely affected by, among other
things, job losses and unemployment levels, fears of a recession, personal debt levels, the housing market, stock market
volatility, and uncertainty about the future. If rental rates for our properties decrease, our existing tenants do not renew their
leases, or we do not re-lease a significant portion of our available space and space for which leases expire, our financial
condition, results of operations, cash flow, cash available for distribution, and ability to service our debt obligations could be
materially and adversely affected.
The short-term leases in our multifamily portfolio expose us to the effects of declining market rents, which could adversely
affect our results of operations, cash flow and cash available for distribution.
Substantially all of the leases in our multifamily portfolio are for terms of 12 months or less. As a result, even if we are
able to renew or re-lease apartment units as leases expire, our rental revenues will be impacted by declines in market rents more
quickly than if all of our leases had longer terms, which could adversely affect our results of operations, cash flow, and cash
available for distribution.
18
Competition for property acquisitions and development opportunities may reduce the number of opportunities available to
us and increase our costs, which could have a material adverse effect on our growth prospects.
The current market for property acquisitions and development opportunities continues to be extremely competitive.
This competition may increase the demand for the types of properties in which we typically invest and, therefore, reduce the
number of suitable investment opportunities available to us and increase the purchase prices for such properties in the event we
are able to acquire or develop such properties. We face significant competition for attractive investment opportunities from an
indeterminate number of investors, including publicly traded and privately held REITs, private equity investors, and
institutional investment funds, some of which have greater financial resources than we do, a greater ability to borrow funds to
make investments in properties, and the ability to accept more risk than we can prudently manage, including risks with respect
to the geographic proximity of investments and the payment of higher acquisition prices. This competition will increase if
investments in real estate become more attractive relative to other forms of investment. If the level of competition for
investment opportunities is significant in our target markets, it could have a material adverse effect on our growth prospects.
Increased competition and increased affordability of residential homes could limit our ability to retain our residents, lease
apartment units, or increase or maintain rents at our multifamily apartment communities.
Our multifamily apartment communities compete with numerous housing alternatives in attracting residents, including
other multifamily apartment communities and single-family rental units, as well as owner-occupied single-family and
multifamily units. Competitive housing in a particular area and an increase in affordability of owner-occupied single-family and
multifamily units due to, among other things, declining housing prices, oversupply, mortgage interest rates, and tax incentives
and government programs to promote home ownership, could adversely affect our ability to retain residents, lease apartment
units, and increase or maintain rents at our multifamily properties, which could adversely impact our results of operations, cash
flow, and cash available for distribution.
The failure of properties that we develop or acquire in the future to meet our financial expectations could have a material
adverse effect on us, including our financial condition, results of operations, cash flow, cash available for distribution,
ability to service our debt obligations, the per share trading price of our common stock, and growth prospects.
Our future acquisitions and development projects and our ability to successfully operate these properties may be
exposed to the following significant risks, among others:
•
•
•
•
we may acquire or develop properties that are not accretive to our results upon acquisition, and we may not
successfully manage and lease those properties to meet our expectations;
our cash flow may be insufficient to enable us to pay the required principal and interest payments on the debt
secured by the property;
we may spend more than budgeted amounts to make necessary improvements or renovations to acquired
properties or to develop new properties;
we may be unable to quickly and efficiently integrate new acquisitions or developed properties into our existing
operations;
• market conditions may result in higher than expected vacancy rates and lower than expected rental rates; and
•
we may acquire properties subject to liabilities without any recourse, or with only limited recourse, with respect
to unknown liabilities such as liabilities for clean-up of undisclosed environmental contamination, claims by
tenants, vendors, or other persons dealing with the former owners of the properties, liabilities incurred in the
ordinary course of business, and claims for indemnification by general partners, directors, officers, and others
indemnified by the former owners of the properties.
If we cannot operate acquired or developed properties to meet our financial expectations, our financial condition,
results of operations, cash flow, cash available for distribution, ability to service our debt obligations, the per share trading price
of our common stock, and growth prospects could be materially and adversely affected.
19
Failure to succeed in new markets may limit our growth.
We have acquired in the past, and we may acquire in the future if appropriate opportunities arise, properties that are
outside of our primary markets. Entering into new markets exposes us to a variety of risks, including difficulty evaluating local
market conditions and local economies, developing new business relationships in the area, competing with other companies
that already have an established presence in the area, hiring and retaining key personnel, evaluating quality tenants in the area,
and a lack of familiarity with local governmental and permitting procedures. Furthermore, expansion into new markets may
divert management time and other resources away from our current primary markets. As a result, we may not be successful in
expanding into new markets, which could adversely impact our financial condition, results of operations, cash flow, cash
available for distribution, and ability to service our debt obligations.
We depend on significant tenants in certain of our office properties, and an inability to pay rent by any of these tenants
could result in a material decrease in our rental income, which would have an adverse effect on our financial condition,
results of operations, cash flow, cash available for distribution, and ability to service our debt obligations.
As of December 31, 2018, the top ten largest tenants in our office portfolio collectively accounted for approximately
50.2% of the total annualized base rent in our office portfolio. Furthermore, Clark Nexsen, Mythics, and Hampton University
accounted for 12.5%, 5.6%, and 5.1%, respectively, of the total annualized base rent in our office portfolio as of December 31,
2018. The inability of these or other significant tenants to pay rent or renew their leases upon expiration could materially and
adversely affect the income produced by our office properties, which would have an adverse effect on our financial condition,
results of operations, cash flow, cash available for distribution, and ability to service our debt obligations.
A bankruptcy or insolvency of any of our significant tenants in our office or retail properties could have a material adverse
effect on our financial condition, results of operations, cash flow, cash available for distribution, and ability to service our
debt obligations.
If a significant tenant in our office or retail properties becomes bankrupt or insolvent, federal law may prohibit us from
evicting such tenant based solely upon such bankruptcy or insolvency. In addition, a bankrupt or insolvent tenant may be
authorized to reject and terminate its lease with us. Any claim against such tenant for unpaid, future rent would be subject to a
statutory cap that might be substantially less than the remaining rent owed under the lease. If any of these tenants were to
experience a downturn in its business or a weakening of its financial condition resulting in its failure to make timely rental
payments or causing it to default under its lease, we may experience delays in enforcing our rights as landlord and may incur
substantial costs in protecting our investment. In many cases, we may have made substantial initial investments in the
applicable leases through tenant improvement allowances and other concessions that we may not be able to recover. Any such
event could have a material adverse effect on our financial condition, results of operations, cash flow, cash available for
distribution, and ability to service our debt obligations.
Certain of the leases at our retail properties contain “co-tenancy” or “go-dark” provisions, which, if triggered, may allow
tenants to pay reduced rent, cease operations, or terminate their leases, any of which could materially and adversely affect
our performance or the value of the affected retail property.
Certain of the leases at our retail properties contain “co-tenancy” provisions that condition a tenant’s obligation to
remain open, the amount of rent payable by the tenant, or the tenant’s obligation to continue occupancy on certain conditions,
including: (i) the presence of a certain anchor tenant or tenants, (ii) the continued operation of an anchor tenant’s store, and
(iii) minimum occupancy levels at the retail property. If a co-tenancy provision is triggered by a failure of any of these or other
applicable conditions, a tenant could have the right to cease operations, to terminate its lease early, or to reduce its rent. In
periods of prolonged economic decline, there is a higher than normal risk that co-tenancy provisions will be triggered as there
is a higher risk of tenants closing stores or terminating leases during these periods. In addition to these co-tenancy provisions,
certain of the leases at our retail properties contain “go-dark” provisions that allow the tenant to cease operations while
continuing to pay rent. This could result in decreased customer traffic at the affected retail property, thereby decreasing sales
for our other tenants at that property, which may result in our other tenants being unable to pay their minimum rents or expense
recovery charges. These provisions also may result in lower rental revenue generated under the applicable leases. To the extent
co-tenancy or go-dark provisions in our retail leases result in lower revenue, tenant sales, tenants’ rights to terminate their
leases early, or a reduction of their rent, our revenues and the value of the affected retail property could be materially and
adversely affected.
20
Our dependence on smaller businesses, particularly in our retail portfolio, to rent our space could have a material adverse
effect on our financial condition, results of operations, cash flow, cash available for distribution, and ability to service our
debt obligations.
Many of our tenants, particularly those that lease space in our retail properties are smaller businesses that generally do
not have the financial strength or resources of larger corporate tenants. In particular, 226 of our retail leases (representing
approximately 14% of our annualized base rent from retail properties as of December 31, 2018) lease 2,500 or less square feet
from us, and many of those tenants are smaller independent businesses, which generally experience a higher rate of failure than
larger businesses. As a result of our dependence on these smaller businesses, we could experience a higher rate of tenant
defaults, turnover, and bankruptcies, which could have a material adverse effect on our financial condition, results of
operations, cash flow, cash available for distribution, and ability to service our debt obligations.
Many of our operating costs and expenses are fixed and will not decline if our revenues decline.
Our results of operations depend, in large part, on our level of revenues, operating costs, and expenses. The expense of
owning and operating a property is not necessarily reduced when circumstances such as market factors and competition cause a
reduction in revenue from the property. As a result, if revenues decline, we may not be able to reduce our expenses to keep pace
with the corresponding reductions in revenues. Many of the costs associated with real estate investments, such as real estate
taxes, insurance, loan payments and maintenance, generally will not be reduced if a property is not fully occupied or other
circumstances cause our revenues to decrease, which could have a material adverse effect on our financial condition, results of
operations, cash flow, cash available for distribution, and ability to service our debt obligations.
Adverse conditions in the general retail environment could have a material adverse effect on our financial condition, results
of operations, cash flow, cash available for distribution, and ability to service our debt obligations.
Approximately 54% of our total annualized base rent as of December 31, 2018 is from retail properties. As a result, we
are subject to factors that affect the retail sector generally as well as the market for retail space. The retail environment and the
market for retail space have been, and in the future could be, adversely affected by weakness in the national, regional, and local
economies, the level of consumer spending and consumer confidence, the adverse financial condition of some large retail
companies, the ongoing consolidation in the retail sector, the excess amount of retail space in a number of markets, and
increasing competition from discount retailers, outlet malls, internet retailers, and other online businesses. Increases in
consumer spending via the internet may significantly affect our retail tenants’ ability to generate sales in their stores. New and
enhanced technologies, including new digital technologies and new web services technologies, may increase competition for
certain of our retail tenants.
Any of the foregoing factors could adversely affect the financial condition of our retail tenants and the willingness of
retailers to lease space in our retail properties. In turn, these conditions could negatively affect market rents for retail space and
could materially and adversely affect our financial condition, results of operations, cash flow, cash available for distribution,
and ability to service our debt obligations.
Increases in interest rates will increase our interest expense and may adversely affect our cash flow and ability to pay
distributions.
We have incurred, and may in the future incur, additional indebtedness that bears interest at a variable rate. An
increase in interest rates would increase our interest expense and increase the cost of refinancing existing debt and issuing new
debt, which would adversely affect our cash flow and ability to make distributions to our stockholders. In addition, if we need
to repay existing debt during periods of rising interest rates, we could be required to liquidate one or more of our investments at
times that may not permit realization of the maximum return on such investments. The effect of prolonged interest rate
increases could adversely impact our ability to make acquisitions and develop properties.
Mortgage debt obligations expose us to the possibility of foreclosure, which could result in the loss of our investment in a
property or group of properties subject to mortgage debt.
Mortgage and other secured debt obligations increase our risk of property losses because defaults on indebtedness
secured by properties may result in foreclosure actions initiated by lenders and ultimately our loss of the property securing any
loans for which we are in default. Any foreclosure on a mortgaged property or group of properties could adversely affect the
overall value of our portfolio of properties. For tax purposes, a foreclosure on any of our properties that is subject to a
nonrecourse mortgage loan would be treated as a sale of the property for a purchase price equal to the outstanding balance of
the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the
21
property, we would recognize taxable income on foreclosure, but would not receive any cash proceeds, which could hinder our
ability to meet the REIT distribution requirements imposed by the Code. Foreclosures could also trigger our tax
indemnification obligations under the terms of our tax protection agreements with respect to the sales of certain properties.
Most of our debt arrangements involve balloon payment obligations, which may materially and adversely affect our
financial condition, cash flow, cash available for distribution, and ability to service our debt obligations.
Most of our debt arrangements require us to make a lump-sum or “balloon” payment at maturity. Our ability to make a
balloon payment at maturity is uncertain and may depend upon our ability to obtain additional financing or our ability to sell
the property. At the time the balloon payment is due, we may or may not be able to refinance the existing financing on terms as
favorable as the original loan or sell the property at a price sufficient to make the balloon payment. In addition, balloon
payments and payments of principal and interest on our indebtedness may leave us with insufficient cash to pay the
distributions that we are required to pay to maintain our qualification as a REIT. Any of these factors may materially and
adversely affect our financial condition, cash flow, cash available for distribution, and ability to service our debt obligations.
Our credit facility restricts our ability to engage in certain business activities, including our ability to incur additional
indebtedness, make capital expenditures, and make certain investments.
Our credit facility contains customary negative covenants and other financial and operating covenants that, among
other things:
•
•
•
•
•
•
•
restrict our ability to incur additional indebtedness;
restrict our ability to incur additional liens;
restrict our ability to make certain investments (including certain capital expenditures);
restrict our ability to merge with another company;
restrict our ability to sell or dispose of assets;
restrict our ability to make distributions to our stockholders; and
require us to satisfy minimum financial coverage ratios, minimum tangible net worth requirements, and
maximum leverage ratios.
These limitations restrict our ability to engage in certain business activities, which could materially and adversely
affect our financial condition, results of operations, cash flow, cash available for distribution, and ability to service our debt
obligations. In addition, our credit facility may contain specific cross-default provisions with respect to specified other
indebtedness, giving the lenders the right, in certain circumstances, to declare a default if we are in default under other loans.
Adverse economic and geopolitical conditions and dislocations in the credit markets could have a material adverse effect on
our financial condition, results of operations, cash flow, cash available for distribution, and ability to service our debt
obligations.
Our business may be affected by market and economic challenges experienced by the U.S. economy or the real estate
industry as a whole. Such conditions may materially and adversely affect us as a result of the following potential consequences,
among others:
•
•
•
decreased demand for office, retail and multifamily space, which would cause market rental rates and property
values to be negatively impacted;
reduced values of our properties may limit our ability to dispose of assets at attractive prices or obtain debt
financing secured by our properties and may reduce the availability of unsecured loans;
our ability to obtain financing on terms and conditions that we find acceptable, or at all, may be limited, which
could reduce our ability to pursue acquisition and development opportunities and refinance existing debt,
reduce our returns from our acquisition and development activities, and increase our future debt service
expense; and
22
•
one or more lenders under our credit facility could refuse to fund their financing commitment to us or could
otherwise fail to do so, and we may not be able to replace the financing commitment of any such lenders on
favorable terms or at all.
If the U.S. economy experiences an economic downturn, we may see increases in bankruptcies and defaults by our
tenants, and we may experience higher vacancy rates and delays in re-leasing vacant space, which could negatively impact our
financial condition, results of operations, cash flow, cash available for distribution, and ability to service our debt obligations.
A cybersecurity incident or other technology disruptions could negatively impact our business, our relationships, and our
reputation.
We use computers and computer networks in most aspects of our business operations. We also use mobile devices to
communicate with our employees, suppliers, business partners, and tenants. These devices are used to transmit sensitive and
confidential information including financial and strategic information about us, information about employees, business
partners, tenants, and other individuals and organizations. Additionally, we utilize third-party service providers that host
personally identifiable information and other confidential information of our employees, business partners, tenants, and others.
We also maintain confidential financial and business information regarding us and persons and entities with which we do
business on our information technology systems. Information security risks have increased in recent years due to the rise in
new technologies and the increased sophistication of perpetrators of cyber attacks. The theft, destruction, loss, or release of
sensitive and confidential information or operational downtime of the systems used to store and transmit such information
could result in disruptions to our business, negative publicity, brand damage, violation of privacy laws, financial liability,
difficulty attracting and retaining tenants, loss of business partners, and loss of business opportunities, any of which may
adversely affect our financial condition, results of operations, cash flow, cash available for distribution, and ability to service
our debt obligations.
Failure to hedge effectively against interest rate changes may adversely affect our financial condition, results of operations,
cash flow, cash available for distribution, and ability to service our debt obligations.
Subject to maintaining our qualification as a REIT, we expect to continue to enter into hedging transactions to protect
us from the effects of interest rate fluctuations on floating rate debt. Our existing hedging transactions have included, and future
hedging transactions may include, entering into interest rate cap agreements or interest rate swap agreements. These agreements
involve risks, such as the risk that (i) such arrangements may not be effective in reducing our exposure to interest rate changes,
(ii) a court could rule that such agreements are not legally enforceable, (iii) hedging could actually increase our costs and
reduce the overall returns on our investments, as interest rate hedging can be expensive, particularly during periods of rising
and volatile interest rates, (iv) counterparties to such arrangements could not perform, (v) we could incur significant costs
associated with the settlement of the agreements, or (vi) the underlying transactions could fail to qualify as highly-effective
cash flow hedges under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic
815, Derivatives and Hedging. Our failure to hedge effectively against interest rate changes may adversely affect our financial
condition, results of operations, cash flow, cash available for distribution, and ability to service our debt obligations.
We will continue to incur costs as a result of being a public company.
As a public company, we expect to continue to incur significant legal, accounting, insurance, and other expenses that
we did not incur as a private company, including costs associated with public company reporting requirements. The expenses
incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect
compliance with these public reporting requirements and associated rules and regulations to increase expenses, particularly
now that we are no longer an emerging growth company, although we are currently unable to estimate these costs with any
degree of certainty.
We are required to have an independent auditor assess the effectiveness of our internal control over financial reporting.
As of December 31, 2018, we are no longer an emerging growth company under the Jumpstart Our Business Startups
Act ("JOBS Act"), and management is required to have an independent auditor assess the effectiveness of our internal control
over financial reporting, pursuant to Section 404 of the Sarbanes-Oxley Act. We cannot give any assurances that material
weaknesses will not be identified in the future in connection with our compliance with the provisions of Section 404 of the
Sarbanes-Oxley Act. The existence of any material weakness described above would preclude a conclusion by management and
our independent auditors that we maintained effective internal control over financial reporting. Our management may be
required to devote significant time and expense to remediate any material weaknesses that may be discovered and may not be
23
able to remediate such material weaknesses in a timely manner. The existence of any material weakness in our internal control
over financial reporting could also result in errors in our financial statements that could require us to restate our financial
statements, cause us to fail to meet our reporting obligations, and cause investors to lose confidence in our reported financial
information, any of which could lead to a decline in the per share trading price of our common stock.
We may be required to make rent or other concessions or significant capital expenditures to improve our properties in order
to retain and attract tenants, which may materially and adversely affect our financial condition, results of operations, cash
flow, cash available for distribution, and ability to service our debt obligations.
Upon expiration of our leases to our tenants, we may be required to make rent or other concessions, accommodate
requests for renovations, build-to-suit remodeling, and other improvements, or provide additional services to our tenants, any of
which would increase our costs. As a result, we may have to make significant capital or other expenditures in order to retain
tenants whose leases expire and to attract new tenants in sufficient numbers. Additionally, we may need to raise capital to make
such expenditures. If we are unable to do so or capital is otherwise unavailable, we may be unable to make the required
expenditures. This could result in non-renewals by tenants upon expiration of their leases. If any of the foregoing were to occur,
it could have a material adverse effect on our financial condition, results of operations, cash flow, cash available for
distribution, and ability to service our debt obligations.
Our use of units in our Operating Partnership as currency to acquire properties could result in stockholder dilution or limit
our ability to sell such properties, which could have a material adverse effect on us.
We have acquired, and in the future may acquire, properties or portfolios of properties through tax deferred
contribution transactions in exchange for OP Units. This acquisition structure may have the effect of, among other things,
reducing the amount of tax depreciation we could deduct over the tax life of the acquired properties, and may require that we
agree to protect the contributors’ ability to defer recognition of taxable gain through restrictions on our ability to dispose of the
acquired properties or the allocation of partnership debt to the contributors to maintain their tax bases. These restrictions also
could limit our ability to sell properties at a time, or on terms, that would be favorable absent such restrictions. In addition,
future issuances of OP Units would reduce our ownership percentage in our Operating Partnership and affect the amount of
distributions made to us by our Operating Partnership and, therefore, the amount of distributions we can make to our
stockholders. To the extent that our stockholders do not directly own OP Units, our stockholders will not have any voting rights
with respect to any such issuances or other partnership level activities of our Operating Partnership.
Significant competition in the leasing market could have a material adverse effect on us, including our financial condition,
results of operations, cash flow, cash available for distribution, and our ability to service our debt obligations.
We compete with numerous developers, owners, and operators of real estate, many of which own properties similar to
ours in the same submarkets in which our properties are located. If our competitors offer space at rental rates below current
market rates or below the rental rates we currently charge our tenants, we may lose existing or potential tenants and we may be
pressured to reduce our rental rates below those we currently charge or to offer more substantial rent abatements, tenant
improvements, early termination rights, or below-market renewal options in order to retain tenants when our tenants’ leases
expire. As a result, our financial condition, results of operations, cash flow, cash available for distribution, and ability to service
our debt obligations could be materially and adversely affected.
Our success depends on key personnel whose continued service is not guaranteed, and the loss of one or more of our key
personnel could adversely affect our ability to manage our business and to implement our growth strategies or could create
a negative perception of our company in the capital markets.
Our continued success and our ability to manage anticipated future growth depend, in large part, upon the efforts of
key personnel, particularly Messrs. Hoffler (our Executive Chairman), Kirk (our Vice Chairman), Haddad (our President and
Chief Executive Officer), Apperson (our President of Construction), and O’Hara (our Chief Financial Officer, Treasurer, and
Corporate Secretary) and Ms. Hampton (our President of Asset Management), who have extensive market knowledge and
relationships and exercise substantial influence over our operational, financing, development, and construction activity. Among
the reasons that these individuals are important to our success is that each has a national or regional industry reputation that
attracts business and investment opportunities and assists us in negotiations with lenders, existing and potential tenants, and
industry personnel. We have not currently entered into employment agreements with any of these individuals. If we lose their
services, our relationships with such industry personnel could diminish.
Many of our other senior executives also have extensive experience and strong reputations in the real estate industry,
which aid us in identifying opportunities, having opportunities brought to us, and negotiating with tenants and build-to-suit
24
prospects. The loss of services of one or more members of our senior management team, or our inability to attract and retain
highly qualified personnel, could adversely affect our business, diminish our investment opportunities, and weaken our
relationships with lenders, business partners, existing and prospective tenants, and industry participants, which could materially
and adversely affect our financial condition, results of operations, cash flow, and the per share trading price of our common
stock.
We may be subject to ongoing or future litigation, including existing claims relating to the entities that owned the properties
prior to our initial public offering and otherwise in the ordinary course of business, which could have a material adverse
effect on our financial condition, results of operations, cash flow, the per share trading price of our common stock, cash
available for distribution, and ability to service our debt obligations.
We may be subject to ongoing or future litigation, including existing claims relating to the entities that owned the
properties and operated the businesses prior to our initial public offering and otherwise in the ordinary course of business.
Some of these claims may result in significant defense costs and potentially significant judgments against us, some of which
are not, or cannot be, insured against. We generally intend to vigorously defend ourselves; however, we cannot be certain of the
ultimate outcomes of currently asserted claims or of those that may arise in the future. In addition, we may become subject to
litigation in connection with the formation transactions related to our initial public offering in the event that prior investors
dispute the valuation of their respective interests, the adequacy of the consideration received by them in the formation
transactions or the interpretation of the agreements implementing the formation transactions. Resolution of these types of
matters against us may result in our having to pay significant fines, judgments, or settlements, which, if uninsured, or if the
fines, judgments, and settlements exceed insured levels, could adversely impact our earnings and cash flow, thereby having an
adverse effect on our financial condition, results of operations, cash flow, the per share trading price of our common stock, cash
available for distribution, and ability to service our debt obligations. Certain litigation or the resolution of certain litigation may
affect the availability or cost of some of our insurance coverage, which could materially and adversely affect our results of
operations and cash flow, expose us to increased risks that would be uninsured, and adversely impact our ability to attract
officers and directors.
Potential losses from hurricanes in Virginia, Maryland, North Carolina, South Carolina, and Georgia may not be covered
by insurance.
All but two of the properties in our portfolio as of December 31, 2018 are located in Virginia, Maryland, North
Carolina, South Carolina, and Georgia, which are areas particularly susceptible to hurricanes. While we carry insurance on
certain of our properties, the amount of our insurance coverage may not be sufficient to fully cover losses from hurricanes and
will be subject to limitations involving large deductibles or co-payments. In addition, we may reduce or discontinue insurance
on some or all of our properties in the future if the cost of premiums for any such policies exceeds, in our judgment, the value
of the coverage discounted for the risk of loss. As a result, in the event of a hurricane, we may be required to incur significant
costs, and, to the extent that a loss exceeds policy limits, we could lose the capital invested in the damaged properties as well as
the anticipated future cash flows from those properties. In addition, if the damaged properties are subject to recourse
indebtedness, we would continue to be liable for the indebtedness, even if these properties were irreparably damaged.
We may not be able to rebuild our existing properties to their existing specifications if we experience a substantial or
comprehensive loss of such properties.
In the event that we experience a substantial or comprehensive loss of one of our properties, we may not be able to
rebuild such property to its existing specifications. Further, reconstruction or improvement of such a property would likely
require significant upgrades to meet zoning and building code requirements. Environmental and legal restrictions could also
restrict the rebuilding of our properties.
Joint venture investments could be materially and adversely affected by our lack of sole decision-making authority, our
reliance on co-venturers’ financial condition, and disputes between us and our co-venturers.
In the past, we have, and in the future, we expect to, co-invest with third parties through partnerships, joint ventures or
other entities, acquiring noncontrolling interests in or sharing responsibility for developing properties and managing the affairs
of a property, partnership, joint venture, or other entity. In particular, in connection with the formation transactions related to
our initial public offering, we provided certain of the prior investors with the right to co-develop certain projects with us in the
future and the right to acquire a minority equity interest in certain properties that we may develop in the future, in each case
under certain circumstances and subject to certain conditions set forth in the applicable agreement. Furthermore, as of
December 31, 2018, we were 70%, 65%, 80%, 93%, 90%, 70%, and 37% joint venture partners in our Lightfoot Marketplace,
Brooks Crossing, Greenside, Hoffler Place, Summit Place, Market at Mill Creek, and City Center development projects,
25
respectively. In the event that we co-develop a property together with a third party, we would be required to share a portion of
the development fee. With respect to any such arrangement or any similar arrangement that we may enter into in the future, we
may not be in a position to exercise sole decision-making authority regarding the development, property, partnership, joint
venture, or other entity. Investments in partnerships, joint ventures or other entities may, under certain circumstances, involve
risks not present where a third party is not involved, including the possibility that partners or co-venturers might become
bankrupt or fail to fund their share of required capital contributions. Partners or co-venturers may have economic or other
business interests or goals which are inconsistent with our business interests or goals and may be in a position to take actions
contrary to our policies or objectives, and they may have competing interests in our markets that could create conflicts of
interest. Such investments may also have the potential risk of impasses on decisions, such as a sale or financing, because
neither we nor the partner(s) or co-venturer(s) would have full control over the partnership or joint venture. In addition, a sale
or transfer by us to a third party of our interests in the joint venture may be subject to consent rights or rights of first refusal, in
favor of our joint venture partners, which would in each case restrict our ability to dispose of our interest in the joint venture.
Where we are a limited partner or non-managing member in any partnership or limited liability company, if such entity takes or
expects to take actions that could jeopardize our status as a REIT or require us to pay tax, we may be forced to dispose of our
interest in such entity. Disputes between us and partners or co-venturers may result in litigation or arbitration that would
increase our expenses and prevent our officers and directors from focusing their time and effort on our business. Consequently,
actions by or disputes with partners or co-venturers might result in subjecting properties owned by the partnership or joint
venture to additional risk. In addition, we may in certain circumstances be liable for the actions of our third-party partners or
co-venturers. Our joint ventures may be subject to debt and, during periods of volatile credit markets, the refinancing of such
debt may require equity capital calls.
Mezzanine loans and similar loan investments are subject to significant risks, and losses related to these investments could
have a material adverse effect on our financial condition and results of operations.
We have originated, and in the future expect to originate or acquire, mezzanine or similar loans, which take the form
of subordinated loans secured by second mortgages on the underlying property or loans secured by a pledge of the ownership
interests of either the entity owning the property or a pledge of the ownership interests of the entity that owns the interest in the
entity owning the property. As of December 31, 2018, we had approximately $139.1 million in outstanding mezzanine loans or
similar investments. These types of loans involve a higher degree of risk than long-term senior mortgage loans secured by
income-producing real property because the loan may become unsecured as a result of foreclosure by the senior lender. In
addition, these loans may have higher loan-to-value ratios than conventional mortgage loans, with little or no equity invested
by the borrower, increasing the risk of loss of principal. If a borrower defaults on our mezzanine loan or debt senior to our loan,
or in the event of a borrower bankruptcy, our mezzanine loan will be satisfied only after the senior debt is paid in full. In the
event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we may not have full recourse to
the assets of such entity, or the assets of the entity may not be sufficient to satisfy our mezzanine loan. As a result, we may not
recover some or all of our initial investment. Additionally, in conjunction with certain mezzanine loans, we issue partial
payment guarantees to the senior lender for the property, which may require us to make payments to the senior lender in the
event of a default on the senior note. Finally, in connection with our loan investments, we may have options to purchase all or a
portion of the underlying property upon maturity of the loan; however, if a developer’s costs for a project are higher than
anticipated, exercising such options may not be attractive or economically feasible, or we may not have sufficient funds to
exercise such options even if we desire to do so. Significant losses related to mezzanine or similar loan investments could have
a material adverse effect on our financial condition and results of operations.
Our growth depends on external sources of capital that are outside of our control and may not be available to us on
commercially reasonable terms or at all, which could limit our ability to, among other things, meet our capital and
operating needs or make the cash distributions to our stockholders necessary to maintain our qualification as a REIT.
In order to maintain our qualification as a REIT, we are required under the Code to, among other things, distribute
annually at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding
any net capital gain. In addition, we will be subject to income tax at regular corporate rates to the extent that we distribute less
than 100% of our REIT taxable income, including any net capital gains. Because of these distribution requirements, we may not
be able to fund future capital needs, including any necessary capital expenditures, from operating cash flow. Consequently, we
intend to rely on third-party sources to fund our capital needs. We may not be able to obtain such financing on favorable terms
or at all and any additional debt we incur will increase our leverage and likelihood of default. Our access to third-party sources
of capital depends, in part, on:
•
•
general market conditions;
the market’s perception of our growth potential;
26
•
•
•
•
our current debt levels;
our current and expected future earnings;
our cash flow and cash distributions; and
the market price per share of our common stock.
If we cannot obtain capital from third-party sources, we may not be able to acquire or develop properties when
strategic opportunities exist, meet the capital and operating needs of our existing properties, satisfy our debt service obligations
or make the cash distributions to our stockholders necessary to maintain our qualification as a REIT.
We may not be able to sustain our growth rate level.
Since our inception, we have achieved significant growth in our portfolio and results of operations. We may not be
able to sustain this level of growth, and over time we may experience a decline in our growth rate as a result of various factors,
including our ability to successfully acquire and develop retail, office, and multifamily properties, changes in the economic and
other conditions in geographic markets in which we conduct business, changes in the real estate market generally, the
competitiveness of the real estate market, and the other risks discussed in this section, which could adversely affect the market
price of our common stock.
Risks Related to Our Third-Party Construction Business
Adverse economic and regulatory conditions, particularly in the Mid-Atlantic region, could adversely affect our
construction and development business, which could have a material adverse effect on our financial condition, results of
operations, cash flow, cash available for distribution, and ability to service our debt obligations.
Our third-party construction activities have been, and are expected to continue to be, primarily focused in the Mid-
Atlantic region, although we have also historically undertaken construction projects in various states in the Southeast,
Northeast, and Midwest regions of the United States. As a result of our concentration of construction projects in the Mid-
Atlantic region of the United States, we are particularly susceptible to adverse economic or other conditions in this market
(such as periods of economic slowdown or recession, business layoffs or downsizing, industry slowdowns, relocations of
businesses, labor disruptions, and the costs of complying with governmental regulations or increased regulation), as well as to
natural disasters that occur in this region. We cannot assure you that our target markets will support construction and
development projects of the type in which we typically engage. While we have the ability to provide a wide range of
development and construction services, any adverse economic or real estate developments in the Mid-Atlantic region could
materially and adversely affect our financial condition, results of operations, cash flow, cash available for distribution, and
ability to service our debt obligations.
There can be no assurance that all of the projects for which our construction business is engaged as general contractor will
be commenced or completed in their entirety in accordance with the anticipated cost, or that we will achieve the financial
results we expect from the construction of such properties, which could materially and adversely affect our results of
operations, cash flow, and growth prospects.
Our construction business earns profit for serving as general contractor equal to the difference between the total
construction fees that we charge and the costs that we incur to build a property. If the decision is made by a third-party client to
abandon a construction project for any reason, our anticipated fee revenue from such project could be significantly lower than
we expect. In addition, we defer pre-contract costs when such costs are directly associated with specific anticipated
construction contracts and their recovery is deemed probable. In the event that we determine that the execution of a
construction contract is no longer probable, we would be required to expense those pre-contract costs in the period in which
such determination is made, which could materially and adversely affect our results of operations in such period. Our ability to
complete the projects in our construction pipeline on time and on budget could be materially and adversely affected as a result
of the following factors, among others:
•
•
shortages of subcontractors, equipment, materials, or skilled labor;
unscheduled delays in the delivery of ordered materials and equipment;
27
•
•
•
•
•
•
unanticipated increases in the cost of equipment, labor, and raw materials;
unforeseen engineering, environmental, or geological problems;
weather interferences;
difficulties in obtaining necessary permits or in meeting permit conditions;
client acceptance delays; or
work stoppages and other labor disputes.
If we do not complete construction projects on time and on budget, it could have a material adverse effect on us,
including our results of operations, cash flow, and growth prospects.
Our dependence on third-party subcontractors and equipment and material providers could result in material shortages and
project delays and could reduce our profits or result in project losses, which could materially and adversely affect our
financial condition, results of operations, and cash flow.
Because our construction business provides general contracting services, we rely on third-party subcontractors and
equipment and material providers. For example, we procure equipment and construction materials as needed when engaged in
large construction projects. To the extent that we cannot engage subcontractors or acquire equipment and materials at
reasonable costs or if the amount we are required to pay for subcontractors or equipment exceeds our estimates, our ability to
complete a construction project in a timely fashion or at a profit may be impaired. In addition, if a subcontractor or a
manufacturer is unable to deliver its services, equipment, or materials according to the negotiated terms for any reason,
including the deterioration of its financial condition, we may be required to purchase the services, equipment, or materials from
another source at a higher price. Additionally, while our construction contracts generally provide that our obligation to pay
subcontractors is expressly made subject to the condition precedent that we shall have first received payment, we cannot assure
you that these so called “pay-if-paid” or “pay-when-paid” provisions will be recognized in all jurisdictions in which we do
business, or that a subcontractor or payment bond surety may not otherwise be entitled to payment or to record a lien on the
affected property. In such event, we may be required to pay a payment bond surety or the subcontractors we engage even
though we have yet to receive our fees as general contractor. This may reduce the profit to be realized or result in a loss on a
project for which the services, equipment, or materials are needed, which may materially and adversely affect our financial
condition, results of operations, and cash flow.
Our construction business recognizes certain revenue using the input method and upon the achievement of contractual
milestones, and any delay or cancellation of a construction project could materially and adversely affect our cash flow and
results of operations.
Our construction business recognizes certain revenue using the input method and, as a result, revenue from our
construction business is driven by the performance of our contractual obligations. The input method of accounting is inherently
subjective because it relies on estimates of total project cost as a basis for recognizing revenue and profit. Accordingly, revenue
and profit recognized under the input method is potentially subject to adjustments in subsequent periods based on refinements
in the estimated cost to complete a project, which could result in a reduction or reversal of previously recorded revenues and
profits. In addition, delays in, or the cancellation of, any particular construction project could adversely impact our ability to
recognize revenue in a particular period. Furthermore, changes in job performance, job conditions, and estimated profitability,
including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and
income in the period in which they are determined. If any of the foregoing were to occur, it could have a material adverse effect
on our cash flow and results of operations.
28
Construction project sites are inherently dangerous workplaces, and, as a result, our failure to maintain safe construction
project sites could result in deaths or injuries, reduced profitability, the loss of projects or clients, and possible exposure to
litigation, any of which could materially and adversely affect our financial condition, results of operations, cash flow, and
reputation.
Construction and maintenance sites often put our employees, employees of subcontractors, our tenants, and members
of the public in close proximity with mechanized equipment, moving vehicles, chemical and manufacturing processes, and
highly regulated materials. On many sites, we are responsible for safety and, accordingly, must implement appropriate safety
procedures. If we fail to implement these procedures or if the procedures we implement are ineffective, we may suffer the loss
of or injury to our employees or fines or expose our tenants and members of the public to potential injury, thereby creating
exposure to litigation. As a result, our failure to maintain adequate safety standards could result in reduced profitability or the
loss of projects, clients, and tenants, which may materially and adversely affect our financial condition, results of operations,
cash flow, and reputation.
Supply shortages and other risks associated with demand for skilled labor could increase construction costs and delay
performance of our obligations under construction contracts, which could materially and adversely affect the profitability of
our construction business, our cash flow, and our results of operations.
There is a high level of competition in the construction industry for skilled labor. Increased costs, labor shortages, or
other disruptions in the supply of skilled labor, such as carpenters, roofers, electricians, and plumbers, could cause increases in
construction costs and construction delays. We may not be able to pass on increases in construction costs because of market
conditions or negotiated contractual terms. Sustained increases in construction costs due to competition for skilled labor and
delays in performance under construction contracts may materially and adversely affect the profitability of our construction
business, our cash flow, and results of operations.
Our failure to successfully and profitably bid on construction contracts could materially and adversely affect our results of
operations and cash flow.
Many of the costs related to our construction business, such as personnel costs, are fixed and are incurred by us
irrespective of the level of activity of our construction business. The success of our construction business depends, in part, on
our ability to successfully and profitably bid on construction contracts for private and public sector clients. Contract proposals
and negotiations are complex and frequently involve a lengthy bidding and selection process, which can be impacted by a
number of factors, many of which are outside our control, including market conditions, financing arrangements, and required
governmental approvals. If we are unable to maintain a consistent backlog of third-party construction contracts, our results of
operations and cash flow could be materially and adversely affected.
If we fail to timely complete a construction project, miss a required performance standard, or otherwise fail to adequately
perform on a construction project, we may incur losses or financial penalties, which could materially and adversely affect
our financial condition, results of operations, cash flow, cash available for distribution, ability to service our debt
obligations, and reputation.
We may contractually commit to a construction client that we will complete a construction project by a scheduled date
at a fixed cost. We may also commit that a construction project, when completed, will achieve specified performance standards.
If the construction project is not completed by the scheduled date or fails to meet required performance standards, we may
either incur significant additional costs or be held responsible for the costs incurred by the client to rectify damages due to late
completion or failure to achieve the required performance standards. In addition, completion of projects can be adversely
affected by a number of factors beyond our control, including unavoidable delays from governmental inaction, public
opposition, inability to obtain financing, weather conditions, unavailability of vendor materials, availabilities of subcontractors,
changes in the project scope of services requested by our clients, industrial accidents, environmental hazards, labor disruptions,
and other factors. In some cases, if we fail to meet required performance standards or milestone requirements, we may also be
subject to agreed-upon financial damages in the form of liquidated damages, which are determined pursuant to the contract
governing the construction project. To the extent that these events occur, the total costs of the project could exceed our
estimates and our contracted cost and we could experience reduced profits or, in some cases, incur a loss on a project, which
may materially and adversely affect our financial condition, results of operations, cash flow, cash available for distribution, and
ability to service our debt obligations. Failure to meet performance standards or complete performance on a timely basis could
also adversely affect our reputation.
29
Unionization or work stoppages could have a material adverse effect on us.
From time to time, our construction business and the subcontractors we engage may use unionized construction
workers, which requires us to pay the prevailing wage in a jurisdiction to such workers. Due to the highly labor-intensive and
price-competitive nature of the construction business, the cost of unionization or prevailing wage requirements for new
developments could be substantial, which could adversely affect our profitability. In addition, the use of unionized construction
workers could cause us to become subject to organized work stoppages, which would materially and adversely affect our ability
to meet our construction timetables and could significantly increase the cost of completing a construction project.
Risks Related to Our Development Business and Property Acquisitions
Our failure to establish new development relationships with public partners and expand our development relationships with
existing public partners could have a material adverse effect on our results of operations, cash flow, and growth prospects.
Our growth strategy depends significantly on our ability to leverage our extensive experience in completing large,
complex, mixed-use public/private projects to establish new relationships with public partners and expand our relationships
with existing public partners. Future increases in our revenues may depend significantly on our ability to expand the scope of
the work we do with the state and local government agencies with which we currently have partnered and attract new state and
local government agencies to undertake public/private development projects with us. Our ability to obtain new work with state
and local governmental authorities on new public/private development and financing partnerships could be adversely affected
by several factors, including decreases in state and local budgets, changes in administrations, the departure of government
personnel with whom we have worked, and negative public perceptions about public/private partnerships. In addition, to the
extent that we engage in public/private partnerships in states or local communities in which we have not previously worked, we
could be subject to risks associated with entry into new markets, such as lack of market knowledge or understanding of the
local economy, lack of business relationships in the area, competition with other companies that already have an established
presence in the area, difficulties in hiring and retaining key personnel, difficulties in evaluating quality tenants in the area, and
unfamiliarity with local governmental and permitting procedures. If we fail to establish new relationships with public partners
and expand our relationships with existing public partners, it could have a material adverse effect on our results of operations,
cash flow, and growth prospects.
We may be unable to identify and complete development opportunities and acquisitions of properties that meet our
investment criteria, which may materially and adversely affect our results of operations, cash flow, and growth prospects.
Our business and growth strategy involves the development and selective acquisition of office, retail and multifamily
properties. We may expend significant management time and other resources, including out-of-pocket costs, in pursuing these
investment opportunities. Our ability to complete development projects or acquire properties on favorable terms, or at all, may
be exposed to the following significant risks:
•
•
•
we may incur significant costs and divert management attention in connection with evaluating and negotiating
potential development opportunities and acquisitions, including those that we are subsequently unable to
complete;
we have agreements for the development or acquisition of properties that are subject to conditions, which we
may be unable to satisfy; and
we may be unable to obtain financing on favorable terms or at all.
If we are unable to identify attractive investment opportunities and successfully develop new properties, our results of
operations, cash flow, and growth prospects could be materially and adversely affected.
The risks associated with land holdings and related activities could have a material adverse effect on our results of
operations.
We hold options to acquire undeveloped parcels of land for future development and may in the future acquire
additional land holdings for development. The risks inherent in purchasing, owning, and developing land increase as demand or
rental rates for office, retail or multifamily properties decreases. Real estate markets are highly uncertain and volatile and, as a
result, the value of undeveloped land has fluctuated significantly and may continue to fluctuate. In addition, carrying costs,
including interest and other pre-development costs, can be significant and can result in losses or reduced profitability. If there
are subsequent changes in the fair value of our undeveloped land holdings that cause us to determine that the fair value of our
30
undeveloped land holdings is less than their carrying basis reflected in our financial statements plus estimated costs to sell, we
may be required to take future impairment charges which would reduce our net income and could materially and adversely
affect our results of operations.
The success of our activities to design, construct and develop properties in which we will retain an ownership interest is
dependent, in part, on the availability of suitable undeveloped land at acceptable prices as well as our having sufficient
liquidity to fund investments in such undeveloped land and subsequent development.
Our success in designing, constructing, and developing projects for our own account depends, in part, upon the
continued availability of suitable undeveloped land at acceptable prices. The availability of undeveloped land for purchase at
favorable prices depends on a number of factors outside of our control, including the risk of competitive over-bidding on land
and governmental regulations that restrict the potential uses of land. If the availability of suitable land opportunities decreases,
the number of development projects we may be able to undertake could be reduced. In addition, our ability to make land
purchases will depend upon us having sufficient liquidity or access to external sources of capital to fund such purchases. Thus,
the lack of availability of suitable land opportunities and insufficient liquidity to fund the purchases of any such available land
opportunities could have a material adverse effect on our results of operations and growth prospects.
Our real estate development activities are subject to risks particular to development, such as unanticipated expenses, delays
and other contingencies, any of which could materially and adversely affect our financial condition, results of operations,
and cash flow.
We engage in development and redevelopment activities and will be subject to the following risks associated with
such activities:
•
•
•
•
unsuccessful development or redevelopment opportunities could result in direct expenses to us and cause us to
incur losses;
construction or redevelopment costs of a project may exceed original estimates, possibly making the project
less profitable than originally estimated, or unprofitable;
occupancy rates and rents of a completed project may not be sufficient to make the project profitable; and
the availability and pricing of financing to fund our development activities on favorable terms or at all.
These risks could result in substantial unanticipated delays or expenses and, under certain circumstances, could
prevent completion of development or redevelopment activities once undertaken, any of which could have a material adverse
effect on our financial condition, results of operations, and cash flow.
There can be no assurance that all of the properties in our development pipeline will be completed in their entirety in
accordance with the anticipated cost, or that we will achieve the results we expect from the development of such properties,
which could materially and adversely affect our financial condition, results of operations, and growth prospects.
The development of the projects in our development pipeline is subject to numerous risks, many of which are outside
of our control. The cost necessary to complete the development of our development pipeline could be materially higher than we
anticipate. Because we generally intend to commence the construction phase of an office or retail project for our own account
only where a substantial percentage of the commercial space is pre-leased, we could decide not to undertake construction on
one or more of the projects in our development pipeline if our pre-leasing efforts are unsuccessful. Furthermore, if we are
delayed in the completion of any development project, tenants may have the right to terminate pre-development leases, which
could materially and adversely affect the financial viability of the project. In addition, even if we decide to commence
construction on a project, we can provide no assurances that we will complete any of the projects in our development pipeline
on the anticipated schedule, or that, once completed, the properties in our development pipeline will achieve the results that we
expect. If the development of the projects in our development pipeline is not completed in accordance with our anticipated
timing or at the anticipated cost, or the properties fail to achieve the financial results we expect, it could have a material adverse
effect on our financial condition, results of operations, and growth prospects.
31
Risks Related to the Real Estate Industry
Our business is subject to risks associated with real estate assets and the real estate industry, which could materially and
adversely affect our financial condition, results of operations, cash flow, cash available for distribution, and ability to
service our debt obligations.
Our ability to pay expected dividends to our stockholders depends on our ability to generate revenues in excess of
expenses, scheduled principal payments on debt, and capital expenditure requirements. Events and conditions generally
applicable to owners and operators of real property that are beyond our control may decrease cash available for distribution and
the value of our properties. These events include many of the risks set forth above under “—Risks Related to Our Business ,” as
well as the following:
•
•
•
•
•
•
•
•
•
•
oversupply or reduction in demand for office, retail, or multifamily space in our markets;
adverse changes in financial conditions of buyers, sellers, and tenants of properties;
vacancies or our inability to rent space on favorable terms, including possible market pressures to offer tenants
rent abatements, tenant improvements, early termination rights, or below-market renewal options, and the need
to periodically repair, renovate, and re-lease space;
increased operating costs, including insurance premiums, utilities, real estate taxes, and state and local taxes;
a favorable interest rate environment that may result in a significant number of potential residents of our
multifamily apartment communities deciding to purchase homes instead of renting;
rent control or stabilization laws or other laws regulating rental housing, which could prevent us from raising
rents to offset increases in operating costs;
civil unrest, acts of war, terrorist attacks, and natural disasters, including hurricanes, which may result in
uninsured or underinsured losses;
decreases in the underlying value of our real estate;
changing submarket demographics; and
changing traffic patterns.
In addition, periods of economic downturn or recession, rising interest rates or declining demand for real estate, or the
public perception that any of these events may occur, could result in a general decline in rents or an increased incidence of
defaults under existing leases, which could materially and adversely affect our financial condition, results of operations, cash
flow, cash available for distribution, and ability to service our debt obligations.
Illiquidity of real estate investments could significantly impede our ability to respond to adverse changes in the performance
of our properties and harm our financial condition.
The real estate investments made, and to be made, by us are difficult to sell quickly. As a result, our ability to promptly
sell one or more properties in our portfolio in response to changing economic, financial, and investment conditions is limited.
Return of capital and realization of gains, if any, from an investment generally will occur upon disposition or refinancing of the
underlying property. We may be unable to realize our investment objectives by disposition or refinancing at attractive prices
within any given period of time or may otherwise be unable to complete any exit strategy. In particular, our ability to dispose of
one or more properties within a specific time period is subject to certain limitations imposed by our tax protection agreements,
as well as weakness in or even the lack of an established market for a property, changes in the financial condition or prospects
of prospective purchasers, changes in national or international economic conditions, and changes in laws, regulations or fiscal
policies of jurisdictions in which the property is located.
In addition, the Code imposes restrictions on a REIT’s ability to dispose of properties that are not applicable to other
types of real estate companies. In particular, the tax laws applicable to REITs effectively require that we hold our properties for
investment, rather than primarily for sale in the ordinary course of business, which may cause us to forego or defer sales of
32
properties that otherwise would be in our best interests. Therefore, we may not be able to vary our portfolio in response to
economic or other conditions promptly or on favorable terms.
Our property taxes could increase due to property tax rate changes or reassessment, which would adversely impact our cash
flows and cash available for distribution.
Even if we qualify as a REIT for federal income tax purposes, we will be required to pay some state and local taxes on
our properties. The real property taxes on our properties may increase as property tax rates change or as our properties are
assessed or reassessed by taxing authorities. Therefore, the amount of property taxes we pay in the future may increase
substantially from what we have paid in the past. If the property taxes we pay increase, our cash flow and cash available for
distribution would be adversely impacted.
As an owner of real estate, we could incur significant costs and liabilities related to environmental matters.
Under various federal, state, and local laws and regulations relating to the environment, as a current or former owner
or operator of real property, we may be liable for costs and damages resulting from the presence or discharge of hazardous or
toxic substances, waste, or petroleum products at, on, in, under or migrating from such property, including costs to investigate
and clean up such contamination and liability for harm to natural resources. Such laws often impose liability without regard to
whether the owner or operator knew of, or was responsible for, the presence of such contamination, and the liability may be
joint and several. These liabilities could be substantial and the cost of any required remediation, removal, fines, or other costs
could exceed the value of the property and our aggregate assets. In addition, the presence of contamination or the failure to
remediate contamination at our properties may expose us to third-party liability for costs of remediation and personal or
property damage or materially and adversely affect our ability to sell, lease, or develop our properties or to borrow using the
properties as collateral. In addition, environmental laws may create liens on contaminated sites in favor of the government for
damages and costs it incurs to address such contamination. Moreover, if contamination is discovered on our properties,
environmental laws may impose restrictions on the manner in which the properties may be used or businesses may be operated,
and these restrictions may require substantial expenditures. See “Part I—Business—Regulation.”
Some of our properties have been or may be impacted by contamination arising from current or prior uses of the
property, or adjacent properties, for commercial or industrial purposes. Such contamination may arise from spills of petroleum
or hazardous substances or releases from tanks used to store such materials. For example, some of the tenants of properties in
our retail portfolio operate gas stations or other businesses that utilize storage tanks to store petroleum products, propane, or
wastes typically associated with automobile service or other operations conducted at the properties, and spills or leaks of
hazardous materials from those storage tanks could expose us to liability. See “Part I—Business—Regulation—Environmental
Matters.” In addition to the foregoing, while we obtained Phase I Environmental Site Assessments for each of the properties in
our portfolio, the assessments are limited in scope and may have failed to identify all environmental conditions or concerns. For
example, they do not generally include soil sampling, subsurface investigations or hazardous materials surveys. Furthermore,
we do not have current Phase I Environmental Site Assessment reports for all of the properties in our portfolio and, as such,
may not be aware of all potential or existing environmental contamination liabilities at the properties in our portfolio. As a
result, we could potentially incur material liability for these issues.
As the owner of the buildings on our properties, we could face liability for the presence of hazardous materials, such
as asbestos or lead, or other adverse conditions, such as poor indoor air quality, in our buildings. Environmental laws govern
the presence, maintenance, and removal of hazardous materials in buildings, and if we do not comply with such laws, we could
face fines for such noncompliance. Also, we could be liable to third parties, such as occupants of the buildings, for damages
related to exposure to hazardous materials or adverse conditions in our buildings, and we could incur material expenses with
respect to abatement or remediation of hazardous materials or other adverse conditions in our buildings. In addition, some of
our tenants routinely may handle and use hazardous or regulated substances and wastes as part of their operations at our
properties, which are subject to regulation. Such environmental and health and safety laws and regulations could subject us or
our tenants to liability resulting from these activities. Environmental liabilities could affect a tenant’s ability to make rental
payments to us, and changes in laws could increase the potential liability for noncompliance. This may result in significant
unanticipated expenditures or may otherwise materially and adversely affect our operations, or those of our tenants, which
could in turn have an adverse effect on us. If we incur material environmental liabilities in the future, we may face significant
remediation costs, and we may find it difficult to sell any affected properties.
33
Our properties may contain or develop harmful mold or suffer from other air quality issues, which could lead to liability for
adverse health effects and costs of remediation.
When excessive moisture accumulates in buildings or on building materials, mold growth may occur, particularly if
the moisture problem remains undiscovered or is not addressed over a period of time. Some molds may produce airborne toxins
or irritants. Indoor air quality issues can also stem from inadequate ventilation, chemical contamination from indoor or outdoor
sources, and other biological contaminants such as pollen, viruses, and bacteria. Indoor exposure to airborne toxins or irritants
above certain levels can be alleged to cause a variety of adverse health effects and symptoms, including allergic or other
reactions. As a result, the presence of significant mold or other airborne contaminants at any of our properties could require us
to undertake a costly remediation program to contain or remove the mold or other airborne contaminants from the affected
property or increase indoor ventilation. In addition, the presence of significant mold or other airborne contaminants could
expose us to liability from our tenants, employees of our tenants, or others if property damage or personal injury is alleged to
have occurred.
We may incur significant costs complying with various federal, state and local laws, regulations, and covenants that are
applicable to our properties.
Properties are subject to various covenants and federal, state, and local laws and regulatory requirements, including
permitting and licensing requirements. Local regulations, including municipal or local ordinances, zoning restrictions, and
restrictive covenants imposed by community developers may restrict our use of our properties and may require us to obtain
approval from local officials or community standards organizations at any time with respect to our properties, including prior to
developing or acquiring a property or when undertaking renovations of any of our existing properties. Among other things,
these restrictions may relate to fire and safety, seismic, or hazardous material abatement requirements. There can be no
assurance that existing laws and regulatory policies will not adversely affect us or the timing or cost of any future development,
acquisitions, or renovations, or that additional regulations will not be adopted that increase such delays or result in additional
costs. Our growth strategy may be affected by our ability to obtain permits, licenses, and zoning relief.
In addition, federal and state laws and regulations, including laws such as the ADA and the Fair Housing Amendment
Act of 1988 (“FHAA”), impose further restrictions on our properties and operations. Under the ADA and the FHAA, all public
accommodations must meet federal requirements related to access and use by disabled persons. Some of our properties may
currently be in non-compliance with the ADA or the FHAA. If one or more of the properties in our portfolio is not in
compliance with the ADA, the FHAA, or any other regulatory requirements, we may incur additional costs to bring the
property into compliance, incur governmental fines or the award of damages to private litigants, or be unable to refinance such
properties. In addition, we do not know whether existing requirements will change or whether future requirements will require
us to make significant unanticipated expenditures that will adversely impact our financial condition, results of operations, cash
flow, cash available for distribution, and ability to service our debt obligations.
Risks Related to Our Organizational Structure
Daniel Hoffler and his affiliates own, directly or indirectly, a substantial beneficial interest in our company on a fully
diluted basis and have the ability to exercise significant influence on our company and our Operating Partnership,
including the approval of significant corporate transactions.
As of December 31, 2018, Daniel Hoffler, our Executive Chairman, owned approximately 9% and, collectively,
Messrs. Hoffler, Haddad, and Kirk owned approximately 15% of the combined outstanding shares of our common stock and
OP Units of our Operating Partnership (which OP Units may be redeemable for shares of our common stock). Consequently,
these individuals may be able to significantly influence the outcome of matters submitted for stockholder action, including the
approval of significant corporate transactions, including business combinations, consolidations, and mergers.
Conflicts of interest may exist or could arise in the future between the interests of our stockholders and the interests of
holders of units in our Operating Partnership, which may impede business decisions that could benefit our stockholders.
Conflicts of interest may exist or could arise in the future as a result of the relationships between us and our affiliates,
on the one hand, and our Operating Partnership or any partner thereof, on the other. Our directors and officers have duties to
our company under Maryland law in connection with their management of our company. At the same time, we, as the general
partner of our Operating Partnership, have fiduciary duties and obligations to our Operating Partnership and its limited partners
under Virginia law and the partnership agreement of our Operating Partnership in connection with the management of our
Operating Partnership. Our fiduciary duties and obligations as the general partner of our Operating Partnership may come into
conflict with the duties of our directors and officers to our company. Messrs. Hoffler, Haddad, and Kirk own a significant
34
interest in our Operating Partnership as limited partners and may have conflicts of interest in making decisions that affect both
our stockholders and the limited partners of our Operating Partnership.
Under Virginia law, a general partner of a Virginia limited partnership has fiduciary duties of loyalty and care to the
partnership and its partners and must discharge its duties and exercise its rights as general partner under the partnership
agreement or Virginia law consistently with the obligation of good faith and fair dealing. The partnership agreement provides
that, in the event of a conflict between the interests of our Operating Partnership or any partner, on the one hand, and the
separate interests of our company or our stockholders, on the other hand, we, in our capacity as the general partner of our
Operating Partnership, are under no obligation not to give priority to the separate interests of our company or our stockholders,
and that any action or failure to act on our part or on the part of our directors that gives priority to the separate interests of our
company or our stockholders that does not result in a violation of the contractual rights of the limited partners of the Operating
Partnership under its partnership agreement does not violate the duty of loyalty that we, in our capacity as the general partner of
our Operating Partnership, owe to the Operating Partnership and its partners.
Additionally, the partnership agreement provides that we will not be liable to the Operating Partnership or any partner
for monetary damages for losses sustained, liabilities incurred, or benefits not derived by the Operating Partnership or any
limited partner, except for liability for our intentional harm or gross negligence. Our Operating Partnership must indemnify us,
our directors and officers, and our designees from and against any and all claims that relate to the operations of our Operating
Partnership, unless: (i) an act or omission of the person was material to the matter giving rise to the action and either was
committed in bad faith or was the result of active and deliberate dishonesty, (ii) the person actually received an improper
personal benefit in violation or breach of the partnership agreement, or (iii) in the case of a criminal proceeding, the
indemnified person had reasonable cause to believe that the act or omission was unlawful. Our Operating Partnership must also
pay or reimburse the reasonable expenses of any such person upon its receipt of a written affirmation of the person’s good faith
belief that the standard of conduct necessary for indemnification has been met and a written undertaking to repay any amounts
paid or advanced if it is ultimately determined that the person did not meet the standard of conduct for indemnification. Our
Operating Partnership will not indemnify or advance funds to any person with respect to any action initiated by the person
seeking indemnification without our approval (except for any proceeding brought to enforce such person’s right to
indemnification under the partnership agreement) or if the person is found to be liable to our Operating Partnership on any
portion of any claim in the action.
We may be subject to unknown or contingent liabilities related to acquired properties and properties that we may acquire in
the future, which could have a material adverse effect on us.
Properties that we have acquired, and properties that we may acquire in the future, may be subject to unknown or
contingent liabilities for which we may have no recourse, or only limited recourse, against the sellers. In general, the
representations and warranties provided under the transaction agreements related to the purchase of properties that we acquire
may not survive the completion of the transactions. Furthermore, indemnification under such agreements may be limited and
subject to various materiality thresholds, a significant deductible, or an aggregate cap on losses. As a result, there is no
guarantee that we will recover any amounts with respect to losses due to breaches by the sellers of their representations and
warranties. In addition, the total amount of costs and expenses that may be incurred with respect to liabilities associated with
these properties may exceed our expectations, and we may experience other unanticipated adverse effects, all of which may
materially and adversely affect us.
Our charter contains certain provisions restricting the ownership and transfer of our stock that may delay, defer, or prevent
a change of control transaction that might involve a premium price for our common stock or that our stockholders
otherwise believe to be in their best interests.
Our charter contains certain ownership limits with respect to our stock. Our charter, among other restrictions, prohibits
the beneficial or constructive ownership by any person of more than 9.8% in value or number of shares, whichever is more
restrictive, of the outstanding shares of any class or series of our stock, excluding any shares that are not treated as outstanding
for federal income tax purposes. Our board of directors, in its sole and absolute discretion, may exempt a person, prospectively
or retroactively, from this ownership limit if certain conditions are satisfied. This ownership limit as well as other restrictions
on ownership and transfer of our stock in our charter may:
•
discourage a tender offer or other transactions or a change in management or of control that might involve a
premium price for our common stock or that our stockholders otherwise believe to be in their best interests; and
35
•
result in the transfer of shares acquired in excess of the restrictions to a trust for the benefit of a charitable
beneficiary and, as a result, the forfeiture by the acquirer of certain of the benefits of owning the additional
shares.
We could increase the number of authorized shares of stock, classify and reclassify unissued stock, and issue stock without
stockholder approval.
Our board of directors, without stockholder approval, has the power under our charter to amend our charter to increase
or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that we are
authorized to issue. In addition, under our charter, our board of directors, without stockholder approval, has the power to
authorize us to issue authorized but unissued shares of our common stock or preferred stock and to classify or reclassify any
unissued shares of our common stock or preferred stock into one or more classes or series of stock and set the preference,
conversion or other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, or
terms or conditions of redemption for such newly classified or reclassified shares. As a result, we may issue series or classes of
common stock or preferred stock with preferences, dividends, powers, and rights, voting or otherwise, that are senior to, or
otherwise conflict with, the rights of holders of our common stock. Although our board of directors has no such intention at the
present time, it could establish a class or series of preferred stock that could, depending on the terms of such series, delay, defer,
or prevent a transaction or a change of control that might involve a premium price for our common stock or that our
stockholders otherwise believe to be in their best interests.
Certain provisions of Maryland law could inhibit changes of control, which may discourage third parties from conducting a
tender offer or seeking other change of control transactions that could involve a premium price for our common stock or
that our stockholders otherwise believe to be in their best interests.
Certain provisions of the Maryland General Corporation Law (the “MGCL”) may have the effect of inhibiting a third
party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could
provide the holders of shares of our common stock with the opportunity to realize a premium over the then-prevailing market
price of such shares, including:
•
•
“business combination” provisions that, subject to limitations, prohibit certain business combinations between
us and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of the
voting power of our outstanding voting shares or an affiliate or associate of ours who was the beneficial owner,
directly or indirectly, of 10% or more of the voting power of our then outstanding stock at any time within the
two-year period immediately prior to the date in question) or an affiliate thereof for five years after the most
recent date on which the stockholder becomes an interested stockholder, and thereafter impose certain fair price
and supermajority stockholder voting requirements on these combinations; and
“control share” provisions that provide that holders of “control shares” of our company (defined as shares of
stock that, when aggregated with other shares of stock controlled by the stockholder, entitle the stockholder to
exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share
acquisition” (defined as the direct or indirect acquisition of ownership or control of issued and outstanding
“control shares”) have no voting rights with respect to their control shares, except to the extent approved by our
stockholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter,
excluding all interested shares.
By resolution of our board of directors, we have opted out of the business combination provisions of the MGCL and
provided that any business combination between us and any other person is exempt from the business combination provisions
of the MGCL, provided that the business combination is first approved by our board of directors (including a majority of
directors who are not affiliates or associates of such persons). In addition, pursuant to a provision in our bylaws, we have opted
out of the control share provisions of the MGCL. However, our board of directors may by resolution elect to opt in to the
business combination provisions of the MGCL and we may, by amendment to our bylaws, opt in to the control share provisions
of the MGCL in the future.
Certain provisions of the MGCL permit our board of directors, without stockholder approval and regardless of what is
currently provided in our charter or bylaws, to implement certain corporate governance provisions, some of which are not
currently applicable to us. If implemented, these provisions may have the effect of limiting or precluding a third party from
making an unsolicited acquisition proposal for us or of delaying, deferring, or preventing a change in control of us under
circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a
premium over the then current market price. Our charter contains a provision whereby we elect, at such time as we become
36
eligible to do so, to be subject to the provisions of Title 3, Subtitle 8 of the MGCL relating to the filling of vacancies on our
board of directors.
Certain provisions in the partnership agreement of our Operating Partnership may delay, make more difficult, or prevent
unsolicited acquisitions of us.
Provisions in the partnership agreement of our Operating Partnership may delay, make more difficult, or prevent
unsolicited acquisitions of us or changes of our control. These provisions could discourage third parties from making proposals
involving an unsolicited acquisition of us or change of our control, although some of our stockholders might consider such
proposals, if made, desirable. These provisions include, among others:
•
•
•
•
•
redemption rights;
a requirement that we may not be removed as the general partner of our Operating Partnership without our
consent;
transfer restrictions on OP Units;
our ability, as general partner, in some cases, to amend the partnership agreement and to cause the Operating
Partnership to issue units with terms that could delay, defer, or prevent a merger or other change of control of us
or our Operating Partnership without the consent of the limited partners; and
the right of the limited partners to consent to direct or indirect transfers of the general partnership interest,
including as a result of a merger or a sale of all or substantially all of our assets, in the event that such transfer
requires approval by our common stockholders.
The limited partners in our Operating Partnership (other than us) owned approximately 25.5% of the outstanding OP
Units of our Operating Partnership as of December 31, 2018.
Our tax protection agreements could limit our ability to sell or otherwise dispose of certain properties.
In connection with the formation transactions related to our initial public offering, our Operating Partnership entered
into tax protection agreements that provide that if we dispose of any interest in certain protected properties in a taxable
transaction prior to the seventh (or, in a limited number of cases, the tenth) anniversary of the completion of the formation
transactions, subject to certain exceptions, we will indemnify certain contributors, including Messrs. Hoffler, Haddad, Kirk, and
Apperson and their respective affiliates and certain of our other officers, for their tax liabilities attributable to the built-in gain
that existed with respect to such property interests as of the time of our initial public offering, and the tax liabilities incurred as
a result of such tax protection payment. In addition, in connection with certain acquisitions completed since our initial public
offering, we entered into tax protection agreements that require us to indemnify the contributors for their tax liabilities in the
event that we dispose of the properties subject to the tax protection agreements, and may enter into similar agreements in
connection with future property acquisitions. Therefore, although it may be in our stockholders’ best interests that we sell one
of these properties, it may be economically prohibitive or unattractive for us to do so because of these obligations. Moreover, as
a result of these potential tax liabilities, Messrs. Hoffler, Haddad, Kirk, and Apperson and certain of our other officers may
have a conflict of interest with respect to our determination as to certain of our properties.
Our board of directors may change our strategies, policies, and procedures without stockholder approval and we may
become more highly leveraged, which may increase our risk of default under our debt obligations.
Our investment, financing, leverage, and distribution policies, and our policies with respect to all other activities,
including growth, capitalization, and operations, will be determined exclusively by our board of directors and may be amended
or revised at any time by our board of directors without notice to or a vote of our stockholders. This could result in us
conducting operational matters, making investments, or pursuing different business or growth strategies than those
contemplated in this Annual Report on Form 10-K. Further, our charter and bylaws do not limit the amount or percentage of
indebtedness, funded or otherwise, that we may incur. Our board of directors may alter or eliminate our current policy on
borrowing at any time without stockholder approval. If this policy changed, we could become more highly leveraged, which
could result in an increase in our debt service costs. Higher leverage also increases the risk of default on our obligations. In
addition, a change in our investment policies, including the manner in which we allocate our resources across our portfolio or
the types of assets in which we seek to invest, may increase our exposure to interest rate risk, real estate market fluctuations
37
and liquidity risk. Changes to our policies with regards to the foregoing could materially and adversely affect our financial
condition, results of operations, cash flow, cash available for distribution, and ability to service our debt obligations.
Our rights and the rights of our stockholders to take action against our directors and officers are limited.
Under Maryland law, generally, a director will not be liable if he or she performs his or her duties in good faith, in a
manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent person in a like
position would use under similar circumstances. In addition, our charter limits the liability of our directors and officers to us
and our stockholders for money damages, except for liability resulting from:
•
•
actual receipt of an improper benefit or profit in money, property or services; or
active and deliberate dishonesty by the director or officer that was established by a final judgment as being
material to the cause of action adjudicated.
Our charter authorizes us to indemnify our directors and officers for actions taken by them in those capacities to the
maximum extent permitted by Maryland law. Our bylaws require us to indemnify each director and officer, to the maximum
extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or threatened to be made, a
party by reason of his or her service to us. In addition, we may be obligated to advance the defense costs incurred by our
directors and officers. We have entered into indemnification agreements with each of our executive officers and directors
whereby we agreed to indemnify our directors and executive officers to the fullest extent permitted by Maryland law against all
expenses and liabilities incurred in their capacity as an officer or director, subject to limited exceptions. As a result, we and our
stockholders may have more limited rights against our directors and officers than might otherwise exist absent the current
provisions in our charter and bylaws and the indemnification agreements or that might exist with other companies.
We are a holding company with no direct operations and, as such, we will rely on funds received from our Operating
Partnership to pay liabilities, and the interests of our stockholders will be structurally subordinated to all liabilities and
obligations of our Operating Partnership and its subsidiaries.
We are a holding company and conduct substantially all of our operations through our Operating Partnership. We do
not have, apart from an interest in our Operating Partnership, any independent operations. As a result, we rely on cash
distributions from our Operating Partnership to pay any dividends we might declare on shares of our common stock. We also
rely on distributions from our Operating Partnership to meet any of our obligations, including any tax liability on taxable
income allocated to us from our Operating Partnership. In addition, because we are a holding company, your claims as a
stockholder will be structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed
money) of our Operating Partnership and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation, or
reorganization, our assets and those of our Operating Partnership and its subsidiaries will be available to satisfy the claims of
our stockholders only after all of our and our Operating Partnership’s and its subsidiaries’ liabilities and obligations have been
paid in full.
Our Operating Partnership may issue additional OP Units to third parties without the consent of our stockholders, which
would reduce our ownership percentage in our Operating Partnership and could have a dilutive effect on the amount of
distributions made to us by our Operating Partnership and, therefore, the amount of distributions we can make to our
stockholders.
As of December 31, 2018, we owned 74.5% of the outstanding OP Units in our Operating Partnership. We regularly
have issued OP Units to third parties as consideration for acquisitions, and we may continue to do so in the future. Any such
future issuances would reduce our ownership percentage in our Operating Partnership and could affect the amount of
distributions made to us by our Operating Partnership and, therefore, the amount of distributions we can make to our
stockholders. Because stockholders do not directly own OP Units, you do not have any voting rights with respect to any such
issuances or other partnership level activities of our Operating Partnership.
38
Risks Related to Our Status as a REIT
Failure to qualify as a REIT, or failure to remain qualified as a REIT, would cause us to be taxed as a regular corporation,
which would substantially reduce funds available for distribution to our stockholders.
We have elected to be taxed and to operate in a manner that will allow us to qualify as a REIT for federal income tax
purposes commencing with our taxable year ended December 31, 2013. We have not requested and do not plan to request a
ruling from the Internal Revenue Service (the “IRS”) that we qualify as a REIT. Therefore, we cannot be assured that we will
qualify as a REIT, or that we will remain qualified as such in the future. If we fail to qualify as a REIT or otherwise lose our
REIT status in any taxable year, we will face serious tax consequences that would substantially reduce the funds available for
distribution to our stockholders for each of the years involved because:
•
•
•
we would not be allowed a deduction for dividends paid to stockholders in computing our taxable income and
would be subject to U.S. federal income tax at regular corporate rates;
we could be subject to increased state and local taxes; and
unless we are entitled to relief under certain U.S. federal income tax laws, we could not re-elect REIT status
until the fifth calendar year after the year in which we failed to qualify as a REIT.
In addition, if we fail to qualify as a REIT, we will no longer be required to make distributions. As a result of all these
factors, our failure to qualify as a REIT could impair our ability to expand our business and raise capital, and it would adversely
affect the value of our common stock.
Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flows.
Even if we qualify for taxation as a REIT, we may be subject to certain federal, state, and local taxes on our income
and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a
foreclosure, and state or local income, property, and transfer taxes. In addition, our TRS will be subject to regular corporate
federal, state, and local taxes. Any of these taxes would decrease cash available for distribution to our stockholders.
Failure to make required distributions would subject us to U.S. federal corporate income tax.
We intend to continue to operate in a manner so as to qualify as a REIT for U.S. federal income tax purposes. In order
to qualify as a REIT, we generally are required to distribute at least 90% of our REIT taxable income, determined without
regard to the dividends paid deduction and excluding any net capital gain, each year to our stockholders. To the extent that we
satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to U.S.
federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise
tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under
the Code.
Complying with REIT requirements may cause us to forego otherwise attractive opportunities or liquidate otherwise
attractive investments.
To qualify as a REIT for federal income tax purposes, we must continually satisfy tests concerning, among other
things, the sources of our income, the nature and diversification of our assets, the amounts we distribute to our stockholders,
and the ownership of our capital stock. In order to meet these tests, we may be required to forego investments we might
otherwise make. Thus, compliance with the REIT requirements may hinder our performance.
In particular, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of
cash, cash items, government securities, and qualified real estate assets. The remainder of our investment in securities (other
than government securities, securities of TRSs, and qualified real estate assets) generally cannot include more than 10% of the
outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one
issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities, securities of TRSs,
and qualified real estate assets) can consist of the securities of any one issuer, and no more than 20% of the value of our total
assets can be represented by the securities of one or more TRSs. If we fail to comply with these requirements at the end of any
calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory
relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be
39
required to liquidate otherwise attractive investments. These actions could have the effect of reducing our income and amounts
available for distribution to our stockholders.
The prohibited transactions tax may limit our ability to dispose of our properties.
A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are
sales or other dispositions of property other than foreclosure property, held primarily for sale to customers in the ordinary
course of business. We may be subject to the prohibited transaction tax equal to 100% of the net gain upon a disposition of real
property. Although a safe harbor to the characterization of the sale of real property by a REIT as a prohibited transaction is
available, we cannot assure you that we can comply with the safe harbor or that we will avoid owning property that may be
characterized as held primarily for sale to customers in the ordinary course of business. Consequently, we may choose not to
engage in certain sales of our properties or may conduct such sales through our TRS, which would be subject to federal and
state income taxation.
The ability of our board of directors to revoke our REIT qualification without stockholder approval may cause adverse
consequences to our stockholders.
Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the
approval of our stockholders, if it determines that it is no longer in our best interests to continue to qualify as a REIT. If we
cease to qualify as a REIT, we would become subject to U.S. federal income tax on our taxable income and would no longer be
required to distribute most of our taxable income to our stockholders, which may have adverse consequences on our total return
to our stockholders.
Our ownership of our TRS will be subject to limitations and our transactions with our TRS will cause us to be subject to a
100% penalty tax on certain income or deductions if those transactions are not conducted on arm’s-length terms.
Overall, no more than 20% of the value of a REIT’s assets may consist of stock or securities of one or more TRS. In
addition, the Code limits the deductibility of interest paid or accrued by a TRS to its parent REIT to assure that the TRS is
subject to an appropriate level of corporate taxation. The Code also imposes a 100% excise tax on certain transactions between
a TRS and its parent REIT that are not conducted on an arm’s-length basis. Furthermore, we will monitor the value of our
respective investments in our TRS for the purpose of ensuring compliance with TRS ownership limitations and will structure
our transactions with our TRS on terms that we believe are arm’s length to avoid incurring the 100% excise tax described
above. There can be no assurance, however, that we will be able to comply with the 20% REIT subsidiaries limitation or to
avoid application of the 100% excise tax.
You may be restricted from acquiring or transferring certain amounts of our common stock.
The restrictions on ownership and transfer in our charter may inhibit market activity in our capital stock and restrict
our business combination opportunities.
In order to qualify as a REIT for each taxable year after 2013, five or fewer individuals, as defined in the Code, may
not own, beneficially or constructively, more than 50% in value of our issued and outstanding stock at any time during the last
half of a taxable year. Attribution rules in the Code determine if any individual or entity beneficially or constructively owns our
capital stock under this requirement. Additionally, at least 100 persons must beneficially own our capital stock during at least
335 days of a taxable year for each taxable year after 2013. To help ensure that we meet these tests, our charter restricts the
acquisition and ownership of shares of our capital stock.
Our charter, with certain exceptions, authorizes our directors to take such actions as are necessary to preserve our
qualification as a REIT. Unless exempted by our board of directors, our charter prohibits any person from beneficially or
constructively owning more than 9.8% in value or number of shares, whichever is more restrictive, of the outstanding shares of
any class or series of our capital stock. Our board of directors may not grant an exemption from this restriction to any proposed
transferee whose ownership in excess of 9.8% of the value of our outstanding shares would result in our failing to qualify as a
REIT. This restriction, as well as other restrictions on transferability and ownership will not apply, however, if our board of
directors determines that it is no longer in our best interests to continue to qualify as a REIT.
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
The maximum tax rate applicable to “qualified dividend income” payable to U.S. stockholders that are taxed at
individual rates is 20%. Dividends payable by REITs, however, generally are not eligible for the reduced rates on qualified
40
dividend income. Instead, our ordinary dividends generally are taxed at the higher tax rates applicable to ordinary income, the
current maximum rate of which is 37%. However, for taxable years prior to 2026, individual stockholders are generally allowed
to deduct 20% of the aggregate amount of ordinary dividends distributed by us, subject to certain limitations, which would
reduce the maximum marginal effective tax rate for individuals on the receipt of such ordinary dividends to 29.6%.
Changes to the U.S. federal income tax laws, including the enactment of certain tax reform measures, could have an
adverse impact on our business and financial results.
The legislation commonly known as the Tax Cuts and Jobs Act (the "Tax Act") was enacted on December 22, 2017.
The Tax Act significantly changed the U.S. federal income taxation of U.S. businesses and their owners, including REITs and
their stockholders. The impact of the act on us and our shareholders is uncertain, and may not become evident for some period
of time. For example, the act contained provisions that may reduce the relative competitive advantage of operating as a REIT,
including the lowering of income tax rates on individuals and corporations, which eases the burden of double taxation on
corporate dividends and potentially causes the single level of taxation on REIT distributions to become relatively less attractive.
The act also contains provisions allowing the expensing of capital expenditures, which could result in the bunching of taxable
income and required distributions for REITs, and provisions extending the depreciable lives of certain real estate assets and
further limiting the deductibility of interest expense, which could negatively impact the real estate market. In addition, although
the Tax Act was recently passed, there can be no assurance that future changes to the U.S. federal income tax laws or regulatory
changes will not be proposed or enacted that could impact our business and financial results. The REIT rules are constantly
under review by persons involved in the legislative process and by the Internal Revenue Service and the U.S. Treasury
Department, which may result in revisions to regulations and interpretations in addition to statutory changes. If enacted, certain
of such changes could have an adverse impact on our business and financial results.
We cannot predict whether, when, or to what extent the Tax Act and any new U.S. federal tax laws, regulations,
interpretations, or rulings will impact the real estate investment industry or REITs. Prospective investors are urged to consult
their tax advisors regarding the effect of the Tax Act and potential future changes to the federal tax laws on an investment in our
shares.
If our Operating Partnership failed to qualify as a partnership for federal income tax purposes, we would cease to qualify as
a REIT and suffer other adverse consequences.
We believe that our Operating Partnership will be treated as a partnership for federal income tax purposes. As a
partnership, our Operating Partnership will not be subject to federal income tax on its income. Instead, each of its partners,
including us, will be allocated, and may be required to pay tax with respect to, its share of our Operating Partnership’s income.
We cannot assure you, however, that the IRS will not challenge the status of our Operating Partnership or any other subsidiary
partnership in which we own an interest as a partnership for federal income tax purposes, or that a court would not sustain such
a challenge. If the IRS were successful in treating our Operating Partnership or any such other subsidiary partnership as an
entity taxable as a corporation for federal income tax purposes, we would fail to meet the gross income tests and certain of the
asset tests applicable to REITs and, accordingly, we would likely cease to qualify as a REIT. Also, the failure of our Operating
Partnership or any subsidiary partnerships to qualify as a partnership could cause it to become subject to federal and state
corporate income tax, which would reduce significantly the amount of cash available for debt service and for distribution to its
partners, including us.
To maintain our REIT status, we may be forced to borrow funds during unfavorable market conditions, and the
unavailability of such capital on favorable terms at the desired times, or at all, may cause us to curtail our investment
activities or dispose of assets at inopportune times or on unfavorable terms, which could materially and adversely affect our
financial condition, results of operations, cash flow, cash available for distribution, and ability to service our debt
obligations.
To qualify as a REIT, we generally must distribute to our stockholders at least 90% of our REIT taxable income each
year, excluding net capital gains, and we will be subject to regular corporate income taxes to the extent that we distribute less
than 100% of our REIT taxable income each year. In addition, we will be subject to a 4% nondeductible excise tax on the
amount, if any, by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income,
95% of our capital gain net income and 100% of our undistributed income from prior years. In order to maintain our REIT
status and avoid the payment of income and excise taxes, we may need to borrow funds to meet the REIT distribution
requirements even if the then prevailing market conditions are not favorable for these borrowings. These borrowing needs
could result from, among other things, differences in timing between the actual receipt of cash and inclusion of income for
federal income tax purposes, or the effect of non-deductible capital expenditures, the creation of reserves or required principal
or amortization payments. These sources, however, may not be available on favorable terms or at all. Our access to third-party
41
sources of capital depends on a number of factors, including the market’s perception of our growth potential, our current debt
levels, the market price of our common stock, and our current and potential future earnings. We cannot assure you that we will
have access to such capital on favorable terms at the desired times, or at all, which may cause us to curtail our investment
activities or dispose of assets at inopportune times or on unfavorable terms, which could materially and adversely affect our
financial condition, results of operations, cash flow, cash available for distribution, and ability to service our debt obligations.
Risks Related to Our Common Stock
We may be unable to make distributions at expected levels, which could result in a decrease in the market price of our
common stock.
We intend to continue to pay regular quarterly distributions to our stockholders. All distributions will be made at the
discretion of our board of directors and will be based upon, among other factors, our historical and projected results of
operations, financial condition, cash flows and liquidity, maintenance of our REIT qualification and other tax considerations,
capital expenditure and other expense obligations, debt covenants, contractual prohibitions or other limitations, applicable law,
and such other matters as our board of directors may deem relevant from time to time. If sufficient cash is not available for
distribution from our operations, we may have to fund distributions from working capital, borrow to provide funds for such
distributions, or reduce the amount of such distributions. To the extent we borrow to fund distributions, our future interest costs
would increase, thereby reducing our earnings and cash available for distribution from what they otherwise would have been. If
cash available for distribution generated by our assets is less than our current estimate, or if such cash available for distribution
decreases in future periods from expected levels, our inability to make the expected distributions could result in a decrease in
the market price of our common stock.
Our ability to make distributions may also be limited by our credit facility. Under the terms of the credit facility, our
ability to make distributions during any twelve-month period is limited to the greater of (1) 95% of our adjusted funds from
operations (as defined in the credit agreement) or (2) the amount required for us to (a) maintain our REIT status and (b) avoid
the payment of federal or state income or excise tax. In addition, if a default or events of default exist or would result from a
distribution, we are precluded from making certain distributions other than those required to allow us to maintain our status as a
REIT.
As a result of the foregoing, we may not be able to make distributions in the future, and our inability to make
distributions, or to make distributions at expected levels, could result in a decrease in the market price of our common stock.
The market price and trading volume of our common stock may be volatile and could decline substantially in the future.
The market price of our common stock may be volatile in the future. In addition, the trading volume in our common
stock may fluctuate and cause significant price variations to occur. We cannot assure stockholders that the market price of our
common stock will not fluctuate or decline significantly in the future, including as a result of factors unrelated to our operating
performance or prospects in 2019 compared to 2018. In particular, the market price of our common stock could be subject to
wide fluctuations in response to a number of factors, including, among others, the following:
•
•
•
•
•
•
•
•
•
actual or anticipated variations in our quarterly operating results or dividends;
changes in our FFO, Normalized FFO, or earnings estimates;
publication of research reports about us or the real estate industry;
increases in market interest rates that lead purchasers of our shares to demand a higher yield;
changes in market valuations of similar companies;
adverse market reaction to any additional debt we incur in the future;
additions or departures of key management personnel;
actions by institutional stockholders;
speculation in the press or investment community;
42
•
•
•
•
•
•
•
•
•
•
•
•
•
•
the realization of any of the other risk factors presented in this Annual Report on Form 10-K;
the extent of investor interest in our securities;
the general reputation of REITs and the attractiveness of our equity securities in comparison to other equity
securities, including securities issued by other real estate-based companies;
changes in the federal government;
our underlying asset value;
investor confidence in the stock and bond markets generally;
further changes in tax laws;
future equity issuances;
failure to meet earnings estimates;
failure to meet and maintain REIT qualifications;
changes in our credit ratings;
general market and economic conditions;
our issuance of debt or preferred equity securities; and
our financial condition, results of operations, and prospects.
In the past, securities class action litigation has often been instituted against companies following periods of volatility
in the price of their common stock. This type of litigation could result in substantial costs and divert our management’s
attention and resources, which could have a material and adverse effect on our financial condition, results of operations, cash
flow, cash available for distribution, ability to service our debt obligations, and the per share trading price of our common
stock.
Increases in market interest rates may have an adverse effect on the trading prices of our common stock as prospective
purchasers of our common stock may expect a higher dividend yield and as an increased cost of borrowing may decrease
our funds available for distribution.
One of the factors that will influence the trading prices of our common stock will be the dividend yield on the
common stock (as a percentage of the price of our common stock) relative to market interest rates. An increase in market
interest rates, which are currently at low levels relative to historical rates, may lead prospective purchasers of our common
stock to expect a higher dividend yield (with a resulting decline in the trading prices of our common stock) and higher interest
rates would likely increase our borrowing costs and potentially decrease funds available for distribution. Thus, higher market
interest rates could cause the market price of our common stock to decrease.
The number of shares of our common stock available for future issuance or sale could materially and adversely affect the
per share trading price of our common stock and our ability to obtain additional capital.
We cannot predict whether future issuances or sales of shares of our common stock or the availability of shares for
resale in the open market will decrease the per share trading price of our common stock. The issuance of substantial numbers of
shares of our common stock in the public market, the redemption of OP Units for shares of our common stock, or the
perception that such issuances might occur could adversely affect the per share trading price of our common stock. As of
February 26, 2019, 50,335,242 shares of our common stock were outstanding. In addition, as of February 26, 2019, 16,991,933
OP Units in our Operating Partnership were outstanding (other than OP Units held by us), which were eligible to be tendered
for redemption for cash or, at our option, for shares of our common stock on a one-for-one basis. We have an effective resale
shelf registration statement pursuant to which we may issue freely tradeable shares of our common stock upon redemption of
such OP Units. Accordingly, a substantial number of shares of our common stock could be issued in the future pursuant to such
resale shelf registration statement. In addition, we have an effective shelf registration statement covering the possible resale,
43
from time to time, of up to 2,000,000 shares of our common stock that were issued in connection with our acquisition of a retail
property in October 2016. The sale of such shares, or the perception that such a sale may occur, could materially and adversely
affect the per share trading price of our common stock. In addition, as of February 26, 2019, 930,602 shares of our common
stock and other equity-based awards were available for future issuance under our 2013 Amended and Restated Equity Incentive
Plan (our "Equity Plan").
The issuance of substantial numbers of shares of equity securities, including OP Units, or the perception that such
issuances might occur, could materially and adversely affect us, including the per share trading price of shares of our
common stock.
The redemption of OP Units for common stock, the vesting of any restricted stock granted to certain directors,
executive officers, and other employees under our Equity Plan, the issuance of our common stock or OP Units in connection
with future property, portfolio, or business acquisitions, and other issuances of our common stock could have an adverse effect
on the per share trading price of our common stock, and the existence of units, options, or shares of our common stock issuable
under our Equity Plan or upon redemption of OP Units may adversely affect the terms upon which we may be able to obtain
additional capital through the sale of equity securities. In addition, future issuances of shares of our common stock or OP Units
may be dilutive to existing stockholders.
Future offerings of debt, which would be senior to our common stock upon liquidation, and preferred equity securities,
which may be senior to our common stock for purposes of dividend distributions or upon liquidation, may materially and
adversely affect us, including the per share trading price of our common stock.
In the future, we may attempt to increase our capital resources by making additional offerings of debt or equity
securities (or causing our Operating Partnership to issue debt securities), including medium-term notes, senior or subordinated
notes, and classes or series of preferred stock. Upon liquidation, holders of our debt securities and shares of preferred stock and
lenders with respect to other borrowings will be entitled to receive our available assets prior to distribution to the holders of our
common stock. Additionally, any convertible or exchangeable securities that we issue in the future may have rights,
preferences, and privileges more favorable than those of our common stock and may result in dilution to owners of our
common stock. Holders of our common stock are not entitled to preemptive rights or other protections against dilution. Our
preferred stock, if issued, could have a preference on liquidating distributions or a preference on dividend payments that could
limit our ability pay dividends to the holders of our common stock. Because our decision to issue securities in any future
offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount,
timing, or nature of our future offerings. Thus, our stockholders bear the risk that our future offerings could reduce the per
share trading price of our common stock and dilute their interest in us.
Item 1B.
Unresolved Staff Comments.
None.
Item 2.
Properties.
The information set forth under the captions “Our Properties” and “Development Pipeline” in Item 1 of this Annual
Report on Form 10-K is incorporated by reference herein.
Item 3.
Legal Proceedings.
The nature of our business exposes our properties, us and the Operating Partnership to the risk of claims and litigation
in the normal course of business. Other than routine litigation arising out of the ordinary course of business, we are not
presently subject to any material litigation nor, to our knowledge, is any material litigation threatened against us.
Item 4.
Mine Safety Disclosures.
Not Applicable.
44
Item 5.
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
PART II
Market Information
Our common stock trades on the NYSE under the symbol “AHH.”
Stock Performance Graph
The following graph sets forth the cumulative total stockholder return (assuming reinvestment of dividends) to our
stockholders during the period December 31, 2013 through December 31, 2018, as well as the corresponding returns on an
overall stock market index (S&P 500) and a peer group index (MSCI US REIT Index). The stock performance graph assumes
that $100 was invested on December 31, 2013. Historical total stockholder return is not necessarily indicative of future results.
The information in this paragraph and the following graph shall not be deemed to be “soliciting material” or to be “filed” with
the SEC or subject to Regulation 14A or 14C, other than as provided in Item 201 of Regulation S-K, or to the liabilities of
Section 18 of the Exchange Act, except to the extent we specifically request that such information be treated as soliciting
material or specifically incorporate it by reference into a filing under the Securities Act or the Exchange Act.
Index
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
Armada Hoffler Properties, Inc.
MSCI US REIT
S&P 500
100.00
100.00
100.00
109.27
130.38
113.69
128.84
133.67
115.26
189.34
145.16
129.05
213.05
152.52
157.22
204.06
145.55
150.33
Period Ending
45
Distribution Information
Since our initial quarter as a publicly-traded REIT, we have made regular quarterly distributions to our stockholders.
We intend to continue to declare quarterly distributions. However, we cannot provide any assurance as to the amount or timing
of future distributions.
Any future distributions will be at the sole discretion of our board of directors, and their form, timing, and amount, if
any, will depend upon a number of factors, including our actual and projected financial condition, liquidity, EBITDA, FFO,
Normalized FFO, results of operations, the revenue we actually receive from our properties, our operating expenses, our debt
service requirements, our capital expenditures, prohibitions and other limitations under our financing arrangements, as
described above, our REIT taxable income, the annual REIT distribution requirements, applicable law, and such other factors as
our board of directors deems relevant. To the extent that our cash available for distribution is less than 90% of our REIT taxable
income, we may consider various means to cover any such shortfall, including borrowing under our credit facility or other
loans, selling certain of our assets, or using a portion of the net proceeds we receive from offerings of equity, equity-related, or
debt securities, or declaring taxable share dividends.
To the extent that we make distributions in excess of our earnings and profits, as computed for federal income tax
purposes, these distributions will represent a return of capital, rather than a dividend, for federal income tax purposes.
Distributions that are treated as a return of capital for federal income tax purposes will reduce the stockholder’s basis in its
shares (but not below zero) and therefore can result in the stockholder having a higher gain upon a subsequent sale of such
shares. Return of capital distributions in excess of a stockholder’s basis generally will be treated as gain from the sale of such
shares for federal income tax purposes.
Stockholder Information
As of February 26, 2019, there were approximately 111 holders of record of our common stock. However, because
many shares of our common stock are held by brokers and other institutions on behalf of stockholders, we believe there are
substantially more beneficial holders of our common stock than record holders. As of February 26, 2019, there were 84 holders
(other than our company) of our OP units. Our OP units are redeemable for cash or, at our election, for shares of our common
stock.
Unregistered Sales of Equity Securities
Subject to the satisfaction of certain conditions, holders of Class A Units in the Operating Partnership may tender their
units for redemption by the Operating Partnership in exchange for cash equal to the market price of shares of the Company’s
common stock at the time of redemption or, at the Company’s option and sole discretion, for shares of common stock on a one-
for-one basis. During the three months ended December 31, 2018, the Company elected to satisfy certain redemption requests
by issuing a total of 17,200 shares of common stock in reliance upon an exemption from registration provided by Section 4(a)
(2) of the Securities Act of 1933, as amended.
46
Issuer Purchases of Equity Securities
During the three months ended December 31, 2018, certain of our employees surrendered shares of common stock
owned by them to satisfy their minimum statutory federal and state tax obligations associated with the vesting of restricted
shares of common stock issued under our Amended and Restated 2013 Equity Incentive Plan (the "Amended Plan"). The
following table summarizes all of these repurchases during the three months ended December 31, 2018.
Total Number of
Shares Purchased
Maximum Number of
as Part of Publicly
Shares that May Yet be
Period
Shares Purchased(1)
Paid for Shares(1)
or Programs
Plans or Programs
Total Number of
Average Price
Announced Plans
Purchased Under the
October 1, 2018 through October 31, 2018
November 1, 2018 through November 30, 2018
December 1, 2018 through December 31, 2018
Total
— $
4,222
—
4,222
—
15.32
—
15.32
N/A
N/A
N/A
N/A
N/A
N/A
(1) The number of shares purchased represents shares of common stock surrendered by one of our employees to satisfy his statutory minimum federal and
state tax obligations associated with the vesting of restricted shares of common stock issued under the Amended Plan. With respect to these shares, the
price paid per share is based on the fair value at the time of surrender.
Item 6.
Selected Financial Data.
The following selected historical consolidated and combined financial information should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical consolidated and
combined financial statements as of December 31, 2018 and 2017 and for the three years ended December 31, 2018 and the
related notes included elsewhere in this Annual Report on Form 10-K. The selected historical consolidated financial
information as of and for the years ended December 31, 2018, 2017, 2016, 2015 and 2014 has been derived from our audited
historical financial statements.
47
Operating Data:
Rental revenues
General contracting and real estate services revenues
Rental expenses
Real estate taxes
General contracting and real estate services expenses
Depreciation and amortization
Interest expense
Loss on extinguishment of debt
Gain on real estate dispositions and acquisitions
Net income
Net income attributable to stockholders
Net income per share—basic and diluted
Cash dividends declared per share
Balance Sheet Data:
Real estate investments, at cost
Accumulated depreciation
Net real estate investments
Real estate investments held for sale
Cash and cash equivalents
Notes receivable
Construction assets
Total assets
Indebtedness, net
Construction liabilities
Total liabilities
Total equity
Other Data:
Funds from operations(1)
Normalized funds from operations(1)
Cash provided by operating activities
Cash used for investing activities
Cash provided by financing activities
Years Ended December 31,
2018
2017
2016
2015
2014
($ in thousands, except per share data)
$
116,958
$
108,737
$
99,355
$
81,172
$
64,746
76,359
27,222
11,383
73,628
39,913
(19,087)
(11)
4,254
23,492
17,203
0.36
0.80
$
$
$
$
$ 1,176,586
(188,775)
987,811
929
21,254
138,683
17,512
$
$
$
$
$
194,034
159,030
171,268
103,321
25,422
10,528
21,904
9,629
19,204
7,782
186,590
153,375
165,344
37,321
(17,439)
(50)
8,087
29,925
21,047
0.50
0.76
$
$
$
$
35,328
(16,466)
(82)
30,533
42,755
28,074
0.85
0.72
$
$
$
$
23,153
(13,333)
(512)
18,394
31,183
19,642
0.75
0.68
$
$
$
$
16,667
5,743
98,754
17,569
(10,648)
—
2,211
12,759
7,691
0.36
0.64
994,437
(164,521)
829,916
$ 908,287
(139,553)
768,734
$ 633,591
(125,380)
508,211
$ 595,000
(116,099)
478,901
—
19,959
83,058
24,178
—
21,942
59,546
39,543
40,232
26,989
7,825
36,623
8,538
25,883
—
19,704
$ 1,265,382
$ 1,043,123
$ 982,468
$ 689,547
$ 588,022
694,239
53,833
809,492
455,890
517,272
51,036
622,840
420,283
522,180
61,297
633,490
348,978
377,593
54,291
463,827
225,720
356,345
43,452
426,116
161,906
$
64,339
$
59,651
$
47,980
$
35,942
$
28,117
66,458
56,087
(240,563)
185,611
59,332
51,236
(95,355)
41,842
50,921
56,985
(223,031)
161,426
38,659
33,266
(57,961)
24,401
28,594
31,362
(105,306)
80,945
________________________________________
(1) For definitions and discussion of FFO and Normalized FFO, see the section below entitled "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations--Non-GAAP Financial Measures." The
following table sets forth a reconciliation of our FFO and Normalized FFO to net income, the most directly comparable
GAAP equivalent, for the periods presented:
48
Net income
Depreciation and amortization(1)
Gain on operating real estate dispositions(2)
Impairment of real estate assets
Funds from operations
Acquisition, development and other pursuit costs
Impairment of intangible assets and liabilities
Loss on extinguishment of debt
Change in fair value of interest rate derivatives
Severance related costs
Normalized funds from operations
Years Ended December 31,
2018
2017
2016
2015
2014
($ in thousands)
$
23,492
$
29,925
$
42,755
$
31,183
$
12,759
40,178
(833)
1,502
64,339
$
$
352
117
11
951
688
66,458
$
$
37,321
(7,595)
—
59,651
648
110
50
(1,127)
—
59,332
35,328
(30,103)
—
47,980
1,563
$
23,153
(18,394)
—
35,942
1,935
$
$
355
82
941
41
512
229
17,569
(2,211)
—
28,117
229
15
—
233
—
50,921
$
—
38,659
$
—
28,594
$
________________________________________
(1) The adjustment for depreciation and amortization for the year ended December 31, 2018 includes depreciation and
amortization attributable to our investment in One City Center, which is an unconsolidated real estate investment.
(2) The adjustment for gain on operating real estate dispositions for the year ended December 31, 2018 excludes the gain on the
River City industrial facility because this property was sold before being placed into service. The adjustment for gain on
operating real estate dispositions for the year ended December 31, 2017 excludes the gain on the land outparcel at Sandbridge
Commons because this was a non-operating parcel. Additionally, the adjustment for gain on real estate dispositions for the year
ended December 31, 2016 excludes the gain on the Newport News Economic Authority building because this property was sold
before being placed in service.
Item 7. 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, of which we are the
sole general partner and to which we refer in this Annual Report on Form 10-K as our Operating Partnership.
Business Description
We are a full service real estate company with extensive experience developing, building, owning, and managing high-
quality, institutional-grade office, retail, and multifamily properties in attractive markets throughout the Mid-Atlantic and
Southeastern United States. As of December 31, 2018, our operating property portfolio was comprised of 39 retail properties,
four office properties, and five multifamily properties. In addition to our operating property portfolio, we had two office
properties, four multifamily properties, and three retail properties in various stages of development or stabilization as of
December 31, 2018. We also provide general contracting services to third parties and invest in development projects through
mezzanine lending arrangements.
Substantially all of our assets are held by, and all of our operations are conducted through, our Operating Partnership.
We are the sole general partner of our Operating Partnership and, as of December 31, 2018, we owned, through a combination
of direct and indirect interests, 74.5% of the outstanding OP units in our Operating Partnership.
We elected to be taxed as a REIT for U.S. federal income tax purposes commencing with the taxable year ended
December 31, 2013.
Our principal executive office is located at 222 Central Park Avenue, Suite 2100, Virginia Beach, Virginia 23462 in the
Armada Hoffler Tower at the Virginia Beach Town Center. In addition, we have construction offices located at 249 Central Park
Avenue, Suite 300, Virginia Beach, Virginia 23462 and 1300 Thames Street, Suite 30, Baltimore, Maryland 21231. The
telephone number for our principal executive office is (757) 366-4000. We maintain a website at www.armadahoffler.com. The
information on, or accessible through, our website is not incorporated into and does not constitute a part of this report.
49
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated
financial statements that have been prepared in accordance with GAAP. The preparation of these financial statements requires
us to exercise our best judgment in making estimates that affect the reported amounts of assets, liabilities, revenues, and
expenses. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the
circumstances. We evaluate our estimates on an ongoing basis, based upon current available information. Actual results could
differ from these estimates.
We believe the following accounting policies and estimates are the most critical to understanding our reported
financial results as their effect on our financial condition and results of operations is material.
Rental Revenues
We lease our properties under operating leases and recognize base rents on a straight-line basis over the lease term. We
also recognize revenue from tenant recoveries, through which tenants reimburse us for expenses paid by us such as utilities,
janitorial, repairs and maintenance, security and alarm, parking lot and grounds, general and administrative, management fees,
insurance, and real estate taxes on an accrual basis. Our rental revenues are reduced by the amount of any leasing incentives on
a straight-line basis over the term of the applicable lease. We include a renewal period in the lease term only if it appears at
lease inception that the renewal is reasonably assured. We begin recognizing rental revenue when the tenant has the right to
take possession of or controls the physical use of the property under lease. We maintain control of the physical use of the
property under lease if we serve as the general contractor for the buildout of leasehold improvements.
Rental revenue is recognized subject to management’s evaluation of tenant credit risk. The extended collection period
for accrued straight-line rental revenue along with our evaluation of tenant credit risk may result in the non-recognition of all or
a portion of straight-line rental revenue until the collection of such revenue is reasonably assured.
General Contracting and Real Estate Services Revenues
We recognize general contracting revenues as a customer obtains control of promised goods or services in an amount
that reflects the consideration we expect to receive in exchange for those goods or services. For each construction contract, we
identify the performance obligations, which typically include the delivery of a single building constructed according to the
specifications of the contract. We estimate the total transaction price, which generally includes a fixed contract price and may
also include variable components such as early completion bonuses, liquidated damages, or cost savings to be shared with the
customer. Variable components of the contract price are included in the transaction price to the extent that it is probable that a
significant reversal of revenue will not occur. We recognize the estimated transaction price as revenue as we satisfy our
performance obligations; we estimate our progress in satisfying performance obligations for each contract using the input
method, based on the proportion of incurred costs relative to total estimated construction costs at completion. Provisions for
estimated losses on uncompleted contracts are recognized immediately in the period in which such losses are determined.
We recognize real estate services revenues from property development and management as we satisfy our performance
obligations under these service arrangements.
Operating Property Acquisitions
In connection with operating property acquisitions, we identify and recognize all assets acquired and liabilities
assumed at their relative fair values as of the acquisition date. The purchase price allocations to tangible assets, such as land,
site improvements, and buildings and improvements, are presented within income producing property in the consolidated
balance sheets and depreciated over their estimated useful lives. Acquired lease intangible assets and liabilities are presented
within other assets and liabilities in the consolidated balance sheets and amortized over their respective lease terms. We
amortize in-place lease assets as depreciation and amortization expense on a straight-line basis over the remaining term of the
related leases. We amortize above-market lease assets as reductions to rental revenues on a straight-line basis over the
remaining term of the related leases. We amortize below-market lease liabilities as increases to rental revenues on a straight-
line basis over the remaining term of the related leases. We amortize below-market ground lease assets as increases to rental
expenses on a straight-line basis over the remaining term of the related leases. Prior to October 1, 2016, we expensed all costs
incurred related to operating property acquisitions. On October 1, 2016, we adopted newly issued accounting guidance that
allows capitalization of costs related to operating property acquisitions.
50
We value land based on a market approach, looking to recent sales of similar properties, adjusting for differences due
to location, the state of entitlement, and the shape and size of the parcel. Improvements to land are valued using a replacement
cost approach. The approach applies industry standard replacement costs adjusted for geographic specific considerations and
reduced by estimated depreciation. The value of buildings acquired is estimated using the replacement cost approach, assuming
the buildings were vacant at acquisition. The replacement cost approach considers the composition of the structures acquired,
adjusted for an estimate of depreciation. The estimate of depreciation is made considering industry standard information and
depreciation curves for the identified asset classes. The value of acquired lease intangible assets and liabilities considers the
estimated cost of leasing the properties as if the acquired buildings were vacant, as well as the value of the current leases
relative to market-rate leases. The in-place lease value is determined using an estimated total lease-up time and lost rental
revenues during such time. The value of current leases relative to market-rate leases is based on market rents obtained for
market comparables. Given the significance of unobservable inputs used in the valuation of acquired real estate assets, we
classify them as Level 3 inputs in the fair value hierarchy.
We value debt assumed in connection with operating property acquisitions based on a discounted cash flow analysis of
the expected cash flows of the debt. Such analysis considers the contractual terms of the debt, including the period to maturity,
credit characteristics, and other terms of the arrangements, which are Level 3 inputs in the fair value hierarchy.
Real Estate Project Costs
We capitalize direct and certain indirect costs clearly associated with the development, redevelopment, construction,
leasing, or expansion of our real estate assets. Capitalized project costs include direct material, labor, subcontract costs, real
estate taxes, insurance, utilities, ground rent, interest on borrowing obligations, and salaries and related personnel costs.
We capitalize direct and indirect project costs associated with the initial construction or redevelopment of a property
up to the time the property is substantially complete and ready for its intended use. We believe the completion of the building
shell is the proper basis for determining substantial completion of initial construction.
We also capitalize direct and indirect costs, including interest costs, on vacant space during extended lease-up periods
after construction of the building shell has been completed if costs are being incurred to prepare the vacant space for its
intended use. If costs and activities incurred to prepare the vacant space for its intended use cease, then cost capitalization is
also discontinued until such activities are resumed. Once necessary work has been completed on a vacant space, project costs
are no longer capitalized. In addition, all leasing commissions paid to third parties for new leases or lease renewals are
capitalized.
We depreciate buildings on a straight-line basis over 39 years and tenant improvements over the shorter of their
estimated useful lives or the term of the related lease.
Real Estate Impairment
We evaluate our real estate assets for impairment whenever events or changes in circumstances indicate that their
carrying amounts may not be recoverable. If such an evaluation is necessary, we compare the carrying amount of any such real
estate asset with the undiscounted expected future cash flows that are directly associated with, and that are expected to arise as
a direct result of, its use and eventual disposition. Our estimate of the expected future cash flows attributable to a real estate
asset is based upon, among other things, our estimates regarding future market conditions, rental rates, occupancy levels, tenant
improvements, leasing commissions, tenant concessions, and assumptions regarding the residual value of our properties. If the
carrying amount of a real estate asset exceeds its associated undiscounted expected future cash flows, we recognize an
impairment loss to reduce the carrying amount of the real estate asset to its fair value based on marketplace participant
assumptions.
Interest Income
Interest income on notes receivable is accrued based on the contractual terms of the loans and when, in the opinion of
management, it is deemed collectible. Many loans provide for accrual of interest that will not be paid until maturity of the loan.
Interest is recognized on these loans at the accrual rate subject to management's determination that accrued interest is ultimately
collectible, based on the underlying collateral and the status of development activities, as applicable. If management cannot
make this determination, recognition of interest income may be fully or partially deferred until it is ultimately paid.
51
Notes Receivable Impairment
We evaluate the collectibility of both the interest on and principal of each of our notes receivable based primarily upon
the financial condition of the individual borrowers and the value of the underlying development project. A loan is determined to
be impaired when, based upon then-current information, it is no longer probable that we will be able to collect all contractual
amounts due from the borrower. We consider factors such as the progress of development activities, including leasing activities,
projected development costs, and current and projected loan balances. The amount of impairment loss recognized is measured
as the difference between the carrying amount of the loan and its estimated realizable value.
Guarantees
We measure and record a liability for the fair value of our guarantees on a nonrecurring basis upon issuance using
Level 3 internally-developed inputs. These guarantees typically relate to payments that we could be required to make to senior
lenders on our mezzanine loan investments. We base our estimated fair value on the market approach, which compares the
guarantee terms and credit characteristics of the underlying development project to other projects for which guarantee pricing
terms are available. The offsetting entry for the guarantee liability is a premium on the related loan receivable. The liability is
amortized on a straight-line basis over the remaining term of the guarantee. On a quarterly basis, we assess the likelihood of a
contingent liability in connection with these guarantees and will record an additional guarantee liability if the remaining
unamortized guarantee liability is determined to be insufficient.
Segment Results of Operations
As of December 31, 2018, we operated our business in four segments: (i) office real estate, (ii) retail real estate,
(iii) multifamily residential real estate, and (iv) general contracting and real estate services that are conducted through our
taxable REIT subsidiaries (“TRS”). Net operating income (segment revenues minus segment expenses) (“NOI”) is the measure
used by management to assess segment performance and allocate our resources among our segments. NOI is not a measure of
operating income or cash flows from operating activities as measured by GAAP and is not indicative of cash available to fund
cash needs. As a result, NOI should not be considered an alternative to cash flows as a measure of liquidity. Not all companies
calculate NOI in the same manner. We consider NOI to be an appropriate supplemental measure to net income because it assists
both investors and management in understanding the core operations of our real estate and construction businesses. See Note 3
to our consolidated financial statements in Item 8 of this Annual Report on Form 10-K for a reconciliation of NOI to net
income, the most directly comparable GAAP measure.
We define same store properties as those that we owned and operated and that were stabilized for the entirety of both
periods compared. We generally consider a property to be stabilized upon the earlier of: (i) the quarter after the property
reaches 80% occupancy or (ii) the thirteenth quarter after the property receives its certificate of occupancy. Additionally, any
property that is fully or partially taken out of service for the purpose of redevelopment is no longer considered stabilized until
the redevelopment activities are complete, the asset is placed back into service, and the occupancy criterion above is again met.
A property may also be fully or partially taken out of service as a result of a partial disposition, depending on the significance
of the portion of the property disposed. Finally, any property classified as held for sale is taken out of service for the purpose of
computing same store operating results.
Office Segment Data
Rental revenues
Property expenses
NOI
Square feet(1)
Occupancy(1)
________________________________________
(1) Stabilized properties as of the end of the periods presented.
52
Years Ended December 31,
2018
2017
2016
($ in thousands)
$
$
20,701
7,892
12,809
$
$
19,207
7,342
11,865
$
$
20,929
7,560
13,369
796,509
799,855
847,240
93.3%
89.9%
86.8%
Rental revenues for the year ended December 31, 2018 increased $1.5 million compared to the year ended
December 31, 2017. NOI for the year ended December 31, 2018 increased $0.9 million compared to the year ended
December 31, 2017. The increase in rental revenues and NOI resulted from new tenants and renewals across the Town Center
office portfolio, most notably at 4525 Main Street. These increases were partially offset by the disposition of the
Commonwealth of Virginia-Chesapeake and Commonwealth of Virginia-Virginia Beach properties, which occurred in the third
quarter of 2017.
Rental revenues for the year ended December 31, 2017 decreased $1.7 million compared to the year ended
December 31, 2016. NOI for the year ended December 31, 2017 decreased $1.5 million compared to the year ended
December 31, 2016. The decreases in rental revenues and NOI resulted from the disposition of four properties, including
Richmond Tower and Oyster Point, which occurred in the first quarter and third quarter of 2016, respectively, as well as the
Commonwealth of Virginia-Chesapeake and Commonwealth of Virginia-Virginia Beach properties, which occurred in the third
quarter of 2017.
Office Same Store Results
Office same store rental revenues, property expenses, and NOI for the comparative years ended December 31, 2018
and 2017 and December 31, 2017 and 2016 were as follows:
Years Ended
December 31,
Years Ended
December 31,
2018 (1)
2017 (1)
Change
2017 (2)
2016 (2)
Change
Rental revenues
Property expenses
Same Store NOI
Non-Same Store NOI
Segment NOI
($ in thousands)
$ 14,125
$ 13,615
$
5,496
8,629
4,180
$
5,196
8,419
3,446
$ 12,809
$ 11,865
$
$
$
510
300
210
734
944
$ 13,615
$ 14,323
$
5,435
8,180
3,685
$
5,273
9,050
4,319
$ 11,865
$ 13,369
$
$
(708)
162
(870)
(634)
$ (1,504)
________________________________________
(1) Same store excludes 4525 Main Street and the Commonwealth of Virginia-Chesapeake and Commonwealth of Virginia-
Virginia Beach office buildings.
(2) Same store excludes 4525 Main Street, the Richmond Tower building, the Oyster Point building, and the Commonwealth
of Virginia-Chesapeake and Commonwealth of Virginia-Virginia Beach office buildings.
Same store rental revenues and NOI for the year ended December 31, 2018 increased compared to the year ended
December 31, 2017 due to new tenants and renewals across the same store office portfolio.
Same store rental revenues and NOI for the year ended December 31, 2017 decreased compared to the year ended
December 31, 2016 due to the expansion and relocation of a tenant from One Columbus to 4525 Main Street during the fourth
quarter of 2016 and the expansion and relocation of another tenant from Two Columbus to 4525 Main Street during the third
quarter of 2017. For the year ended December 31, 2017, the NOI from these tenants that relocated to 4525 Main Street are
included in Non-Same Store NOI. In addition, decreased occupancy at the Armada Hoffler Tower contributed to the period-
over-period decrease in office same store NOI.
53
Retail Segment Data
Rental revenues
Property expenses
NOI
Square feet(1)
Occupancy(1)
Years Ended December 31,
2018
2017
2016
($ in thousands)
$
$
67,959
17,704
50,255
$
$
63,109
16,409
46,700
$
$
56,511
14,511
42,000
3,702,733
3,498,480
3,592,558
96.2%
96.5%
95.8%
________________________________________
(1) Stabilized properties as of the end of the periods presented.
Rental revenues for the year ended December 31, 2018 increased $4.9 million compared to the year ended
December 31, 2017. NOI for the year ended December 31, 2018 increased $3.6 million compared to the year ended
December 31, 2017. The increases in rental revenues and NOI resulted primarily from property acquisitions and new real estate
placed into service during 2018 and 2017. During the year ended December 31, 2018, we acquired Indian Lakes Crossing,
Parkway Centre, and Lexington Square and placed into service Premier Retail as well as certain outparcels at Lightfoot
Marketplace. During the year ended December 31, 2017, we acquired an outparcel phase of Wendover Village.
Rental revenues for the year ended December 31, 2017 increased $6.6 million compared to the year ended
December 31, 2016. NOI for the year ended December 31, 2017 increased $4.7 million compared to the year ended
December 31, 2016. The increases in rental revenues and NOI resulted primarily from property acquisitions and new real estate
placed into service during 2017 and 2016. During the year ended December 31, 2017, we acquired an outparcel phase of
Wendover Village. During the year ended December 31, 2016, we acquired the 11-property retail portfolio, Southgate Square,
Southshore Shops, Columbus Village II, and Renaissance Square and placed into service Brooks Crossing Retail and Lightfoot
Marketplace.
Retail Same Store Results
Retail same store rental revenues, property expenses, and NOI for the comparative years ended December 31, 2018
and 2017 and December 31, 2017 and 2016 were as follows:
Rental revenues
Property expenses
Same Store NOI
Non-Same Store NOI
Segment NOI
Years Ended
December 31,
Years Ended
December 31,
2018 (1)
2017 (1)
Change
2017 (2)
2016 (2)
Change
($ in thousands)
$
$
$
56,693
13,156
43,537
6,718
50,255
$
$
$
56,348
12,844
43,504
3,196
46,700
$
$
$
345
312
33
3,522
3,555
$
$
$
37,707
10,757
26,950
19,750
46,700
$
$
$
37,154
10,241
26,913
15,087
42,000
$
$
$
553
516
37
4,663
4,700
________________________________________
(1) Same store excludes Lightfoot Marketplace, Brooks Crossing, the outparcel phase of Wendover Village, Indian Lakes
Crossing, Parkway Centre, Lexington Square, Premier Retail, Broad Creek Shopping Center, and Waynesboro Commons.
(2) Same store excludes the 11-property retail portfolio, Southgate Square, Lightfoot Marketplace, Southshore Shops, Brooks
Crossing, Columbus Village II, Renaissance Square, and the outparcel phase of Wendover Village.
Same store rental revenues and NOI for the year ended December 31, 2018 increased slightly compared to the year
ended December 31, 2017. The increases in rental revenues from new tenants and renewals were mostly offset by increases in
real estate taxes and operating expenses across the same store portfolio.
54
Same store rental revenues and NOI for the year ended December 31, 2017 increased compared to the year ended
December 31, 2016 primarily because of higher occupancy at Sandbridge Commons, Broad Creek, Hanbury Village, North
Point, Providence, and 249 Central Park. These increases were partially offset by lower occupancy at Columbus Village and
increased administrative expense, maintenance and repair expense, and bad debt expense.
Multifamily Segment Data
Rental revenues
Property expenses
NOI
Apartment units
Occupancy
Years Ended December 31,
2018
2017
2016
$
$
($ in thousands)
$
$
28,298
13,009
15,289
1,586
$
$
26,421
12,199
14,222
1,266
21,915
9,462
12,453
1,266
97.3%
92.9%
94.3%
Rental revenues for the year ended December 31, 2018 increased $1.9 million compared to the year ended
December 31, 2017. NOI increased $1.1 million compared to the year ended December 31, 2017. The increases in rental
revenues and NOI resulted primarily from increased occupancy and increased rental rates at Johns Hopkins Village, as well as
the delivery of Premier Apartments, for which the final phase was placed into service during the fourth quarter of 2018, and the
delivery of Greenside Apartments, portions of which were placed into service in the third and fourth quarters of 2018. Increased
occupancy at Liberty Apartments and increased rates at Smith's Landing also contributed to the increases.
Rental revenues for the year ended December 31, 2017 increased $4.5 million compared to the year ended
December 31, 2016. NOI increased $1.8 million compared to the year ended December 31, 2016. The increases in rental
revenues and NOI resulted primarily from the delivery of Johns Hopkins Village in August 2016.
Multifamily Same Store Results
Multifamily same store rental revenues, property expenses, and NOI for the comparative years ended December 31,
2018 and 2017 and December 31, 2017 and 2016 were as follows:
Rental revenues
Property expenses
Same Store NOI
Non-Same Store NOI
Segment NOI
Years Ended
December 31,
Years Ended
December 31,
2018 (1)
2017 (1)
Change
2017 (2)
2016 (2)
Change
($ in thousands)
$
$
$
11,834
4,989
6,845
8,444
15,289
$
$
$
11,473
4,869
6,604
7,618
14,222
$
$
$
361
120
241
826
1,067
$
$
$
18,892
8,876
10,016
4,206
14,222
$
$
$
19,194
8,410
10,784
1,669
12,453
$
$
$
(302)
466
(768)
2,537
1,769
________________________________________
(1) Same store excludes Johns Hopkins Village, Greenside Apartments, Premier Apartments, and the Cosmopolitan.
(2) Same store excludes Johns Hopkins Village.
Same store rental revenues and NOI for the year ended December 31, 2018 increased compared to the year ended
December 31, 2017 primarily as a result of increased occupancy at Liberty Apartments and increased rates at Smith's Landing.
Same store rental revenues for the year ended December 31, 2017 decreased compared to the year ended
December 31, 2016 primarily because of lower occupancy at The Cosmopolitan in the Town Center of Virginia Beach
attributed to the loss of retail tenants at the property and construction activities at an adjacent property. In addition, NOI
decreased due to higher expenses for repairs and maintenance, property taxes, administration, and utilities.
55
General Contracting and Real Estate Services Segment Data
Segment revenues
Gross profit
Operating margin
Construction backlog
Years Ended December 31,
2018
2017
2016
($ in thousands)
$
$
$
76,359
2,731
3.6%
165,863
$
$
$
194,034
7,444
3.8%
49,167
$
$
$
159,030
5,655
3.6%
217,718
Segment revenues for the year ended December 31, 2018 decreased $117.7 million compared to the year ended
December 31, 2017. Gross profit for the year ended December 31, 2018 decreased $4.7 million compared to the year ended
December 31, 2017. The decrease in segment revenues resulted from a lower level of new third-party contracts during 2018
until December 2018, when the Interlock Commercial and Solis Apartments at Interlock projects commenced.
Segment revenues for the year ended December 31, 2017 increased $35.0 million compared to the year ended
December 31, 2016. Gross profit for the year ended December 31, 2017 increased $1.8 million compared to the year ended
December 31, 2016. The increase in segment revenues resulted from work performed on several large projects in the backlog as
of December 31, 2016, including Annapolis Junction, Point Street, and City Center.
The changes in construction backlog for each of the three years ended December 31, 2018 were as follows:
Beginning backlog
New contracts/change orders
Work performed
Ending backlog
Years Ended December 31,
2018
2017
2016
($ in thousands)
$
$
49,167
$
217,718
$
83,433
192,852
(76,156)
165,863
$
25,224
(193,775)
49,167
$
293,115
(158,830)
217,718
During the year ended December 31, 2018, we executed new contracts for the Interlock Commercial and Solis
Apartments at Interlock projects, which added $84.9 million and $62.3 million, respectively, to the December 31, 2018
backlog.
During the year ended December 31, 2017, we performed work on several significant projects, including Annapolis
Junction, Point Street, and City Center, resulting in work performed of $50.2 million, $40.7 million, and $31.3 million,
respectively.
During the year ended December 31, 2016, we executed several new contracts, including Annapolis Junction and the
Dinwiddie County administration building, which added $50.2 million and $23.0 million, respectively, to the December 31,
2016 backlog.
56
Consolidated Results of Operations
The following table summarizes our results of operations for the years ended December 31, 2018, 2017, and 2016:
Years Ended December 31,
2018
2017
2016
2018
Change
2017
Change
($ in thousands)
Revenues
Rental revenues
$ 116,958
$ 108,737
$
99,355
$
General contracting and real estate services revenues
Total revenues
76,359
193,317
194,034
302,771
159,030
258,385
8,221
(117,675)
(109,454)
$
9,382
35,004
44,386
Expenses
Rental expenses
Real estate taxes
General contracting and real estate services expenses
Depreciation and amortization
General and administrative expenses
Acquisition, development and other pursuit costs
Impairment charges
Total expenses
Gain on real estate dispositions
Operating income
Interest income
Interest expense
Equity in income of unconsolidated real estate entities
Loss on extinguishment of debt
Change in fair value of interest rate derivatives
Other income
Income before taxes
Income tax benefit (provision)
Net income
27,222
11,383
73,628
39,913
11,431
352
1,619
165,548
4,254
32,023
10,729
(19,087)
372
(11)
(951)
388
23,463
29
23,492
25,422
10,528
186,590
37,321
10,435
648
110
271,054
8,087
39,804
7,077
(17,439)
—
(50)
1,127
131
30,650
(725)
29,925
$
21,904
9,629
153,375
35,328
9,552
1,563
355
231,706
30,533
57,212
3,228
(16,466)
—
(82)
(941)
147
43,098
(343)
42,755
$
$
$
1,800
855
(112,962)
2,592
996
(296)
1,509
(105,506)
(3,833)
(7,781)
3,652
(1,648)
372
3,518
899
33,215
1,993
883
(915)
(245)
39,348
(22,446)
(17,408)
3,849
(973)
—
32
39
(2,078)
257
(7,187)
754
2,068
(16)
(12,448)
(382)
(6,433) $ (12,830)
Rental Revenues. Rental revenues by segment for the years ended December 31, 2018, 2017, and 2016 were as
follows:
Office
Retail
Multifamily
Years Ended December 31,
2018
2017
2016
2018
Change
2017
Change
($ in thousands)
$
20,701
$
19,207
$
20,929
$
1,494
$
67,959
63,109
28,298
$ 116,958
26,421
$ 108,737
$
56,511
21,915
99,355
$
4,850
1,877
8,221
$
(1,722)
6,598
4,506
9,382
Rental revenues increased $8.2 million during the year ended December 31, 2018 compared to the year ended
December 31, 2017. The increase in office rental revenues resulted primarily from new tenants and renewals most notably at
4525 Main Street, which more than offset the decreases in rental revenues resulting from dispositions of the Commonwealth of
Virginia-Chesapeake and Commonwealth of Virginia-Virginia Beach properties, which were sold in 2017. The increase in retail
rental revenues resulted primarily from property acquisitions and new real estate placed into service. During the year ended
December 31, 2018, we acquired Indian Lakes Crossing, Parkway Centre, and Lexington Square and placed into service
Premier Retail as well as certain outparcels at Lightfoot Marketplace. During the year ended December 31, 2017, we acquired
57
an outparcel phase of Wendover Village. The increase in multifamily rental revenues resulted primarily from increased
occupancy and increased rates at Johns Hopkins Village, the delivery of Premier Apartments, for which the final phase was
placed into service during the fourth quarter of 2018, the delivery of Greenside Apartments, portions of which were placed into
service in the third and fourth quarters of 2018, as well as increased occupancy at Liberty Apartments and increased rates at
Smith's Landing.
Rental revenues increased $9.4 million during the year ended December 31, 2017 compared to the year ended
December 31, 2016. The decrease in office rental revenues resulted primarily from the dispositions of Richmond Tower, Oyster
Point, Commonwealth of Virginia-Chesapeake, and Commonwealth of Virginia-Virginia Beach properties, which we sold in
2016 and 2017. The increase in retail rental revenues resulted primarily from property acquisitions and new real estate placed
into service. During the year ended December 31, 2016, we acquired the 11-property retail portfolio, Southgate Square,
Southshore Shops, Columbus Village II, and Renaissance Square and placed into service Brooks Crossing and Lightfoot
Marketplace. During the year ended December 31, 2017, we acquired the outparcel phase of Wendover Village. The increase in
multifamily rental revenues resulted primarily from the delivery of Johns Hopkins Village in August 2016 as well as increased
occupancy at Encore Apartments and Smith's Landing.
General Contracting and Real Estate Services Revenues. General contracting and real estate services revenues
decreased $117.7 million during the year ended December 31, 2018 compared to the year ended December 31, 2017. The
decrease resulted from a lower level of new third-party contracts during 2018 until December 2018, when the Interlock
Commercial and Solis Apartments at Interlock projects commenced.
General contracting and real estate services revenues increased $35.0 million during the year ended December 31,
2017 compared to the year ended December 31, 2016 as a result of several new large projects started subsequent to the first
quarter of 2016.
Rental Expenses. Rental expenses by segment for each of the three years ended December 31, 2018 were as follows:
Office
Retail
Multifamily
Years Ended December 31,
2018
2017
2016
2018
Change
2017
Change
($ in thousands)
$
5,858
$
5,483
$
5,560
$
10,903
10,461
27,222
$
10,234
9,705
25,422
$
9,116
7,228
21,904
$
$
375
669
756
1,800
$
$
(77)
1,118
2,477
3,518
Rental expenses increased $1.8 million during the year ended December 31, 2018 compared to the year ended
December 31, 2017. Office rental expenses increased primarily as a result of higher occupancy. Retail rental expenses increased
as a result of property acquisitions and new real estate placed into service. Multifamily rental expenses increased as a result of
new real estate placed into service and higher expenses for repairs and maintenance and utilities.
Rental expenses increased $3.5 million during the year ended December 31, 2017 compared to the year ended
December 31, 2016. Office rental expenses decreased primarily due to the disposition of four office properties in 2016 and
2017. Retail rental expenses increased because of property acquisitions and new real estate placed into service. Multifamily
rental expenses increased because of the delivery of Johns Hopkins Village in August 2016 and higher expenses for repairs and
maintenance, property taxes, administration, and utilities at the other multifamily properties.
58
Real Estate Taxes. Real estate taxes by segment for the years ended December 31, 2018, 2017, and 2016 were as
follows:
Office
Retail
Multifamily
Years Ended December 31,
2018
2017
2016
2018
Change
2017
Change
($ in thousands)
2,034
6,801
2,548
11,383
$
1,859
6,175
2,494
10,528
$
$
2,000
$
5,395
2,234
9,629
$
175
626
54
855
$
$
(141)
780
260
899
Real estate taxes increased $0.9 million during the year ended December 31, 2018 compared to the year ended
December 31, 2017. Office real estate taxes increased primarily as a result of higher occupancy. Retail real estate taxes
increased as a result of property acquisitions and new real estate placed into service. Multifamily real estate taxes increased
primarily as a result of new real estate placed into service.
Real estate taxes increased $0.9 million during the year ended December 31, 2017 compared to the year ended
December 31, 2016. Office real estate taxes decreased primarily because of the disposition of four office properties in 2016 and
2017. Retail real estate taxes increased because of property acquisitions, new real estate placed into service, and reassessments,
particularly at Wendover Village and North Hampton. Multifamily real estate taxes increased because of the reassessment of
Encore Apartments and The Cosmopolitan and the delivery of the retail portion Johns Hopkins Village in August 2016.
General Contracting and Real Estate Services Expenses. General contracting and real estate services expenses for the
year ended December 31, 2018 decreased $113.0 million compared to the year ended December 31, 2017. The decrease
resulted from a lower level of new third-party contracts during 2018 until December 2018, when the Interlock Commercial and
Solis Apartments at Interlock projects commenced. General contracting and real estate services expense for the year ended
December 31, 2017 increased $33.2 million compared to the year ended December 31, 2016 as a result of several new large
projects started subsequent to the first quarter of 2016.
Depreciation and Amortization. Depreciation and amortization for the year ended December 31, 2018 increased $2.6
million compared to the year ended December 31, 2017. The increase was attributable to property acquisitions, new real estate
placed into service, and accelerated depreciation relating to assets that were placed into redevelopment and was partially offset
by dispositions in 2017 and certain assets that became fully depreciated. Depreciation and amortization for the year ended
December 31, 2017 increased $2.0 million compared to the year ended December 31, 2016. The increase was attributable to
property acquisitions and new real estate placed into service and was partially offset by dispositions in 2016 and 2017.
General and Administrative Expenses. General and administrative expenses for the year ended December 31, 2018
increased $1.0 million compared to the year ended December 31, 2017. The increase was primarily due to $0.7 million of
severance related costs. General and administrative expenses for the year ended December 31, 2017 increased $0.9 million
compared to the year ended December 31, 2016 because of higher regulatory and compliance costs, costs relating to
information systems, as well as higher compensation expense and benefit costs from increased employee headcount.
Acquisition, Development and Other Pursuit Costs. During the year ended December 31, 2018, we recognized $0.4
million of costs relating primarily to predevelopment costs for projects that are no longer being pursued. During the year ended
December 31, 2017, we recognized $0.6 million of costs relating primarily to abandoned acquisitions. During the year ended
December 31, 2016, we recognized $1.6 million of costs primarily attributable to our acquisition of an 11-property retail
portfolio, Southgate Square, and Southshore Shops. We adopted new accounting guidance on October 1, 2016 which allowed
us to capitalize $0.7 million in costs related to the acquisitions of Renaissance Square and Columbus Village II.
Impairment Charges. Impairment charges during the years ended December 31, 2018 primarily relate to the
impairment of Waynesboro Commons, which has been classified as held for sale. Impairment charges during the years ended
December 31, 2017 and 2016 primarily relate to tenants that vacated prior to their lease expiration.
Interest Income. Interest income for the years ended December 31, 2018, 2017, and 2016 totaled $10.7 million, $7.1
million, and $3.2 million respectively, and was attributable to our mezzanine loans. As of December 31, 2018, 2017, and 2016,
our outstanding mezzanine loan balances were $139.1 million, $82.6 million, and $59.5 million, respectively.
59
Interest Expense. Interest expense for the year ended December 31, 2018 increased $1.6 million compared to the year
ended December 31, 2017 primarily as a result of the increase in interest rates between periods and the increase in net
indebtedness of $177.0 million during 2018 through increased borrowings on the corporate credit facility, construction loans,
and additional borrowings on the refinanced property loans. Interest expense for the year ended December 31, 2017 increased
$1.0 million compared to the year ended December 31, 2016 primarily because of rising interest rates, which was partially
offset by lower average debt balances.
Loss on Extinguishment of Debt. During the year ended December 31, 2018, we did not recognize any significant
losses on extinguishment of debt. During the year ended December 31, 2017, we recognized a $0.1 million loss on
extinguishment of debt as a result of the modification and extension of our credit facility which resulted in the departure of two
syndicated lenders from the facility. During the year ended December 31, 2016, we recognized a $0.1 million loss on
extinguishment of debt representing the unamortized debt issuance costs associated with our refinancing of the mortgages
secured by 249 Central Park Retail, South Retail, Fountain Plaza, 4525 Main Street, and Encore Apartments.
Gain on Real Estate Dispositions. During the year ended December 31, 2018, we recognized gains on real estate
dispositions of $4.3 million, which included a gain of $3.4 million on our sale of the River City industrial facility and a gain of
$0.8 million on our sale of the Home Depot building at Broad Creek Shopping Center. During the year ended December 31,
2017, we recognized gains on real estate dispositions of $8.1 million, which included a gain of $3.4 million on our sale of the
Greentree Wawa outparcel, a gain of $4.2 million on our sale of the Commonwealth of Virginia-Chesapeake and
Commonwealth of Virginia-Virginia Beach office buildings, and a gain of $0.5 million on our sale of the land outparcel at
Sandbridge Commons. During the year ended December 31, 2016, we recognized gains on real estate dispositions of $30.5
million, which consisted of a $26.2 million gain on the sale of Richmond Tower, a $3.8 million gain on Oyster Point, and a $0.4
million gain on the Newport News Economic Development Authority building.
Change in Fair Value of Interest Rate Derivatives. During the year ended December 31, 2018, we recognized losses on
changes in fair value of interest rate derivatives of $1.0 million due to decreases in forward interest rate curves for time periods
beginning two years from now. During the year ended December 31, 2017, we recognized gains on changes in fair value of
interest rate derivatives of $1.1 million, due to increases in forward interest rate curves. During the year ended December 31,
2016, we recognized losses on changes in fair value of interest rate derivatives of $0.9 million, which was primarily due to the
dedesignation of our interest rate swaps during the three months ended March 31, 2016. In 2016, all activity for both interest
rate caps and swaps were reclassified out of other income to this line item.
Other Income. Other income for the years ended December 31, 2018, 2017, and 2016 was relatively unchanged, with a
small increase in 2018 due to miscellaneous non-tenant income.
Income Taxes. Our TRS, through which we conduct our development and construction business, is subject to federal,
state, and local corporate income taxes. The income tax benefit (provision) recognized during the years ended December 31,
2018, 2017, and 2016 is attributable to the (losses) profits of our TRS. As a result of the Tax Reform Legislation in 2017, we
remeasured deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is
generally 25%. The provisional amounts recorded related to the remeasurement of the deferred tax balance was approximately
$0.2 million of tax expense during the year ended December 31, 2017.
Liquidity and Capital Resources
Overview
We believe our primary short-term liquidity requirements consist of general contractor expenses, operating expenses,
and other expenditures associated with our properties, including tenant improvements, leasing commissions and leasing
incentives, dividend payments to our stockholders required to maintain our REIT qualification, debt service, capital
expenditures, new real estate development projects, and strategic acquisitions. We expect to meet our short-term liquidity
requirements through net cash provided by operations, reserves established from existing cash, borrowings under construction
loans to fund new real estate development and construction, borrowings available under our credit facility, and net proceeds
from the sale of common stock through our at-the-market continuous equity offering program (the "ATM Program"), which is
discussed below.
Our long-term liquidity needs consist primarily of funds necessary for the repayment of debt at or prior to maturity,
general contracting expenses, property development and acquisitions, tenant improvements, and capital improvements. We
expect to meet our long-term liquidity requirements with net cash from operations, long-term secured and unsecured
60
indebtedness, and the issuance of equity and debt securities. We also may fund property development and acquisitions and
capital improvements using our credit facility pending long-term financing.
As of December 31, 2018, we had unrestricted cash and cash equivalents of $21.3 million available for both current
liquidity needs as well as development activities. As of December 31, 2018, we also had restricted cash in escrow of $2.8
million, some of which is available for capital expenditures at our operating properties. As of December 31, 2018, we had $21.9
million available under our credit facility to meet our short-term liquidity requirements.
We paid off the North Point Center Note 1 loan on January 31, 2019. We have no other loans scheduled to mature
during 2019.
ATM Program
On February 26, 2018, we commenced a new at-the-market continuous equity offering program (the "2018 ATM
Program") through which we are able to, from time to time, issue and sell shares of common stock having an aggregate offering
price of up to $125.0 million. During the year ended December 31, 2018, we issued and sold 4,617,409 shares of common
stock at a weighted average price of $14.39 per share under the 2018 ATM Program, receiving net proceeds of $65.2 million
after offering costs and commissions; commissions paid to underwriters totaled $1.0 million. During the three months ended
December 31, 2018, we issued and sold 389,431 shares of common stock at a weighted average price of $15.05 per share under
the 2018 ATM Program, receiving net proceeds of $5.7 million after offering costs and commissions; commissions paid to
underwriters totaled $0.1 million.
As of December 31, 2018, we had $58.5 million in availability under the 2018 ATM Program.
Credit Facility
On October 26, 2017, we entered into an amended and restated credit agreement (the "credit agreement”), which
provides for a $300.0 million credit facility comprised of a $150.0 million senior unsecured revolving credit facility (the
“revolving credit facility”) and a $150.0 million senior unsecured term loan facility (the “term loan facility” and, together with
the revolving credit facility, the “credit facility”), with a syndicate of banks. The credit facility replaced our prior $150.0
million revolving credit facility, which was scheduled to mature on February 20, 2019, and our prior $125.0 million term loan
facility, which was scheduled to mature on February 20, 2021. We intend to use future borrowings under the credit facility for
general corporate purposes, including funding acquisitions, mezzanine lending, and development and redevelopment of
properties in our portfolio and for working capital.
The credit facility includes an accordion feature that allows the total commitments to be increased to as much as
$450.0 million, subject to certain conditions, including obtaining commitments from any one or more lenders. On March 28,
2018, we increased the maximum commitments of the credit facility to $330.0 million using the accordion feature, with an
increase of the term loan facility to $180.0 million. The revolving credit facility has a scheduled maturity date of October 26,
2021, with two six-month extension options, subject to certain conditions, including payment of a 0.075% extension fee at each
extension. The term loan facility has a scheduled maturity date of October 26, 2022.
The revolving credit facility bears interest at LIBOR plus a margin ranging from 1.40% to 2.00% and the term loan
facility bears interest at LIBOR plus a margin ranging from 1.35% to 1.95%, in each case depending on our total leverage. We
are also obligated to pay an unused commitment fee of 15 or 25 basis points on the unused portions of the commitments under
the revolving credit facility, depending on the amount of borrowings under the credit facility. If we attain investment grade
credit ratings from S&P and Moody’s, we may elect to have borrowings become subject to interest rates based on our credit
ratings.
The Operating Partnership is the borrower under the credit facility, and its obligations under the credit facility are
guaranteed by us and certain of its subsidiaries that are not otherwise prohibited from providing such guaranty.
The credit agreement contains customary representations and warranties and financial and other affirmative and
negative covenants. Our ability to borrow under the credit facility is subject to our ongoing compliance with a number of
financial covenants, affirmative covenants and other restrictions, including the following:
•
Total leverage ratio of not more than 60% (or 65% for the two consecutive quarters following any acquisition that is
equal to or greater than 10% of our total asset value (as defined in the credit agreement), but only up to two times
during the term of the credit facility);
61
•
•
•
•
•
Ratio of adjusted EBITDA (as defined in the credit agreement) to fixed charges of not less than 1.50 to 1.0;
Tangible net worth of not less than the sum of 75% of tangible net worth (as defined in the credit agreement) as of
September 30, 2017 and 75% of the net equity proceeds received after June 30, 2017;
Ratio of secured indebtedness to total asset value of not more than 40%;
Ratio of secured recourse debt to total asset value of not more than 20%;
Total unsecured leverage ratio of not more than 60% (or 65% for the two consecutive quarters following any
acquisition that is equal to or greater than 10% of our total asset value, but only up to two times during the term of the
credit facility);
Unencumbered interest coverage ratio (as defined in the credit agreement) of not less than 1.75 to 1.0;
•
•
Ratio of unencumbered NOI (as defined in the credit agreement) to all unsecured debt of not less than 12%;
• Maintenance of a minimum of at least 15 unencumbered properties (as defined in the credit agreement) with an
unencumbered asset value (as defined in the credit agreement) of not less than $300.0 million at any time; and
• Minimum occupancy rate (as defined in the credit agreement) for all unencumbered properties of not less than 80% at
any time.
The credit facility limits our ability to pay cash dividends. However, so long as no default or event of default exists,
the credit agreement allows us to pay cash dividends with respect to any 12-month period in an amount not to exceed the
greater of: (i) 95% of adjusted funds from operations (as defined in the credit agreement) or (ii) the amount required for us (a)
to maintain our status as a REIT and (b) to avoid income or excise tax under the Code. If certain defaults or events of default
exist, we may pay cash dividends with respect to any 12-month period to the extent necessary to maintain our status as a REIT.
The credit facility also restricts the amount of capital that we can invest in specific categories of assets, such as unimproved
land holdings, development properties, notes receivable, mortgages, mezzanine loans, and unconsolidated affiliates, and
restricts the amount of stock and OP units that we may repurchase during the term of the credit facility.
We may, at any time, voluntarily prepay any loan under the credit facility in whole or in part without premium or
penalty.
The credit agreement includes customary events of default, in certain cases subject to customary periods to cure. The
occurrence of an event of default, following the applicable cure period, would permit the lenders to, among other things,
declare the unpaid principal, accrued and unpaid interest, and all other amounts payable under the credit facility to be
immediately due and payable.
We are currently in compliance with all covenants under the credit agreement.
On January 31, 2019, we increased the maximum commitments under the credit facility to $355.0 million using the
accordion feature, with an increase of the term loan facility to $205.0 million.
62
Consolidated Indebtedness
The following table sets forth our consolidated indebtedness as of December 31, 2018 ($ in thousands):
Secured Debt
Amount
Outstanding
Interest
Rate(a)
North Point Center Note 1 (b)
$
Greenside (Harding Place)
Premier (Town Center Phase VI)
Hoffler Place (King Street)
Summit Place (Meeting Street)
Effective Rate for
Variable-Rate
Balance at
Debt
Maturity Date
Maturity
6.45%
February 5, 2019
$
9,333
LIBOR + 2.95%
LIBOR + 3.50%
LIBOR + 3.24%
LIBOR + 3.24%
LIBOR + 1.60%
3.25%
3.25%
3.78%
4.57%
LIBOR + 1.75%
LIBOR + 1.60%
LIBOR + 1.60%
LIBOR + 1.60%
LIBOR + 1.75%
LIBOR + 1.60%
LIBOR + 1.55%
LIBOR + 1.25%
7.25%
4.50%
4.05%
5.66%
3.35%
5.45%
6.00%
5.74%
5.74%
4.10%
4.25%
4.10%
4.10%
4.10%
February 24, 2020
June 29, 2020
January 1, 2021
January 1, 2021
April 29, 2021
September 10, 2021
September 10, 2021
August 15, 2022
January 6, 2023
January 17, 2023
August 10, 2023
August 10, 2023
August 10, 2023
4.77% (e)
October 12, 2023
4.10%
4.05%
July 1, 2025
July 12, 2025
4.19% (e)
August 7, 2025
September 15, 2025
September 1, 2028
June 1, 2035
November 1, 2043
July 1, 2051
25,902
19,214
11,445
11,057
19,462
30,774
24,006
17,109
4,223
7,248
15,935
6,992
9,594
10,500
6,910
7,283
45,967
1,344
12,090
—
—
—
9,352
25,902
19,214
11,445
11,057
21,442
32,034
24,966
19,019
4,671
8,258
17,045
7,483
10,257
10,500
6,910
7,283
52,708
2,346
14,940
18,985
14,437
44,468
Southgate Square
4525 Main Street (c)
Encore Apartments (c)
Hanbury Village
Socastee Commons
Sandbridge Commons
249 Central Park Retail (d)
South Retail (d)
Fountain Plaza Retail (d)
Lightfoot Marketplace
Brooks Crossing Office
Market at Mill Creek
Johns Hopkins Village
North Point Center Note 2
Lexington Square
Smith's Landing
Liberty Apartments
The Cosmopolitan
Total secured debt
Unsecured Debt
$
394,722
$ 296,388
Senior unsecured revolving credit
facility
126,000
LIBOR+1.40%-2.00%
Senior unsecured term loan
80,000
LIBOR+1.35%-1.95%
Senior unsecured term loan
50,000
LIBOR+1.35%-1.95%
Senior unsecured term loan
50,000
LIBOR+1.35%-1.95%
4.05%
4.00%
3.50% (e)
4.28% (e)
Total unsecured debt
$
306,000
Total principal balances
Unamortized GAAP adjustments
700,722
(6,483)
Indebtedness, net
$
694,239
________________________________________
(a) LIBOR is determined by individual lenders.
(b) On January 31, 2019, North Point Center Note 1 was paid off.
(c) Cross collateralized.
(d) Cross collateralized.
(e) Subject to an interest rate swap agreement.
63
October 26, 2021
126,000
October 26, 2022
October 26, 2022
October 26, 2022
80,000
50,000
50,000
$ 306,000
602,388
—
$ 602,388
We currently are in compliance with all covenants on our outstanding indebtedness.
As of December 31, 2018, our outstanding indebtedness matures during the following years ($ in thousands):
Year
2019
2020
2021
2022
2023
Thereafter
Amount Due(1)
Percentage of
Total
$
$
14,926 (2)
51,742
228,565
201,912
58,508
145,069
700,722
2 %
7 %
33 %
29 %
8 %
21 %
100%
________________________________________
(1) Includes scheduled principal amortization payments.
(2) North Point Note 1, which had an outstanding principal balance of $9,333, was paid off on January 31, 2019.
Interest Rate Derivatives
On February 20, 2015, we entered into a $50.0 million floating-to-fixed interest rate swap attributable to one-month
LIBOR indexed interest payments. The $50.0 million interest rate swap has a fixed rate of 2.00%, an effective date of March 1,
2016, and a maturity date of February 20, 2020. We entered into this interest rate swap agreement in connection with the senior
unsecured term loan facility with an original balance of $50.0 million that bears interest at LIBOR plus 1.35% to 1.95%,
depending on our total leverage.
On April 23, 2018, we entered into a floating-to-fixed interest rate swap attributable to one-month LIBOR-indexed
interest payments with a notional amount of $50.0 million. The interest rate swap has a fixed rate of 2.783%, an effective date
of May 1, 2018, and a maturity date of May 1, 2023.
On July 27, 2018, we entered into a LIBOR interest rate swap agreement that effectively fixes the interest rate of the
new Johns Hopkins Village note payable at 4.19% per annum with a maturity date of August 7, 2025. We designated the
interest rate swap as a cash flow hedge for accounting purposes.
On October 12, 2018, we entered into a LIBOR interest rate swap agreement that effectively fixes the interest rate of
the initial $10.5 million tranche of the new Lightfoot Marketplace note payable at 4.77% per annum until stabilization and
4.62% per annum thereafter. The swap matures on October 12, 2023. We designated the interest rate swap as a cash flow hedge
for accounting purposes.
As of December 31, 2018, we were party to the following LIBOR interest rate cap agreements ($ in thousands):
Effective Date
February 7, 2017
June 23, 2017
September 18, 2017
November 28, 2017
March 7, 2018
July 16, 2018
December 11, 2018
Total
Maturity Date
Strike Rate
Notional Amount
March 1, 2019
July 1, 2019
October 1, 2019
December 1, 2019
April 1, 2020
August 1, 2020
January 1, 2021
1.50% $
1.50%
1.50%
1.50%
2.25%
2.50%
2.75%
$
50,000
50,000
50,000
50,000
50,000
50,000
50,000
350,000
64
Contractual Obligations
The following table summarizes the future payments for known contractual obligations as of December 31, 2018 (in
thousands):
Contractual Obligations
Payments due by period
Total
Less than
1 year
1 – 3
years
3 – 5
years
More than
5 years
Principal payments of long-term indebtedness (1)
$ 700,722
$
14,926
$ 280,307
$ 260,420
$ 145,069
Ground and other operating leases
Long-term debt—fixed interest
Long-term debt—variable interest(2) (3)
Tenant-related and other commitments
Total(4)
________________________________________
117,514
95,050
46,976
25,772
$ 986,034
$
2,127
13,408
15,621
17,085
63,167
4,659
25,613
24,011
4,767
15,954
6,415
105,961
40,075
929
8,572
$ 343,162
—
$ 287,556
115
$ 292,149
(1) Does not reflect $12,000 in additional borrowings on the revolving line of credit in January 2019 and a $15,000 paydown
on the revolving line of credit in February 2019. North Point Note 1, which had an outstanding principal balance of $9,333,
was paid off on January 31, 2019.
(2) For long-term debt that bears interest at variable rates, we estimated future interest payments using the indexed rates as of
December 31, 2018. LIBOR as of December 31, 2018 was 250 basis points.
(3) Assumes the balance outstanding of $126.0 million and the weighted average interest rate of 4.05% in effect at
December 31, 2018 remain in effect until maturity of our secured revolving credit facility. Amounts also include unused
credit facility fees assuming the balance outstanding at December 31, 2018 remains outstanding through maturity of our
secured revolving credit facility.
(4) Contractual obligations above do not include funding obligations to non-wholly owned development projects as well as
unfunded mezzanine loan commitments due to the uncertainty of the timing and amounts of certain of these obligations.
Refer to "Item 1. Business" for information about our development projects and mezzanine loans.
Off-Balance Sheet Arrangements
In connection with our mezzanine lending activities, we have 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 us as of
December 31, 2018 (in thousands):
Development project
1405 Point
The Residences at Annapolis Junction
Delray Plaza
Nexton Square
Interlock Commercial
Solis Apartments at Interlock
City Center
Total
$
$
Payment guarantee
amount
25,000
8,300
4,750 (a)
— (b)
— (c)
— (d)
18,457 (e)
56,507
(a) On January 8, 2019, the mezzanine loan and senior construction loan were modified, and the payment guarantee amount
increased to $5.2 million.
(b) As of December 31, 2018, this payment guarantee was not yet effective because the senior construction loan had not yet been
executed. On February 8, 2019, the senior construction loan was executed and the $12.6 million payment guarantee became
effective. We have also guaranteed completion of the development project to the senior construction lender.
(c) As of December 31, 2018, this $30.7 million payment guarantee was not yet effective because the senior construction loan had
not yet been executed. Once the senior construction loan is executed, we will also guarantee completion of the development project
to the senior lender. We have also guaranteed completion of the development project to Georgia Tech, the ground lessor.
(d) There is no payment guarantee for the senior construction loan on this project. We have guaranteed completion of the
development project to the senior lender.
65
(e) Durham City Center is accounted for as an equity method investment.
We have entered into a standby letter of credit for $2.1 million as a guarantee of the senior construction loan on the
Point Street Apartments construction project and a standby letter of credit for $0.3 million as a guarantee of the tenant buildout
for a tenant at Columbus Village. Letters of credit generally are available for draw down in the event we do not perform.
Cash Flows
Operating Activities
Investing Activities
Financing Activities
Net Increase (Decrease)
Cash, Cash Equivalents, and Restricted Cash, Beginning of Period
Cash, Cash Equivalents, and Restricted Cash, End of Period
Years Ended
December 31,
2018
2017
Change
($ in thousands)
$
$
$
$
56,087
(240,563)
185,611
1,135
22,916
24,051
$
$
$
$
$
51,236
(95,355)
41,842
(2,277) $
25,193
22,916
4,851
(145,208)
143,769
3,412
Net cash provided by operating activities for the year ended December 31, 2018 increased $4.9 million compared to
the year ended December 31, 2017 primarily as a result of increased cash provided by property operations, proceeds received
from the sale of the Annapolis Junction purchase option, and interest payments received for the Annapolis Junction mezzanine
loan. These increases were partially offset by timing differences in construction assets and liabilities.
Net cash used for investing activities for the year ended December 31, 2018 increased $145.2 million compared to the
year ended December 31, 2017 primarily due to increased development activity, acquisition activity, and issuances of
mezzanine loans.
Net cash provided by financing activities for the year ended December 31, 2018 increased $143.8 million compared to
the year ended December 31, 2017 primarily due to increased borrowing activity on our unsecured credit facility and
construction loans.
Operating Activities
Investing Activities
Financing Activities
Net Increase (Decrease)
Cash, Cash Equivalents, and Restricted Cash, Beginning of Period
Cash, Cash Equivalents, and Restricted Cash, End of Period
Years Ended
December 31,
2017
2016
Change
($ in thousands)
$
51,236
(95,355)
41,842
(2,277) $
25,193
22,916
$
$
$
56,985
(223,031)
161,426
(4,620) $
29,813
25,193
$
$
$
$
(5,749)
127,676
(119,584)
2,343
Net cash provided by operating activities for the year ended December 31, 2017 decreased $5.7 million compared to
the year ended December 31, 2016 primarily as a result of the timing of construction payables and receivables. This was
partially offset by increased cash generated by property operations.
Net cash used for investing activities for the year ended December 31, 2017 decreased $127.7 million compared to the
year ended December 31, 2016 primarily due to decreased acquisition and development activity. Cash outflows for acquisitions
totaled $30.0 million for the year ended December 31, 2017 compared to $195.6 million for the year ended December 31, 2016.
Additionally, cash used for development activities and issuances of notes receivable was lower for the year ended December
31, 2017 compared to the year ended December 31, 2016.
66
Net cash provided by financing activities for the year ended December 31, 2017 decreased $119.6 million compared to
the year ended December 31, 2016 primarily as a result of decreased net debt issuances and borrowings, which was partially
offset by increased common stock issuances.
Non-GAAP Financial Measures
FFO and Normalized FFO
We calculate FFO in accordance with the standards established by the National Association of Real Estate Investment
Trusts ("Nareit"). Nareit defines FFO as net income (loss) (calculated in accordance with GAAP), excluding gains (or losses)
from sales of depreciable operating property, real estate related depreciation and amortization (excluding amortization of
deferred financing costs), impairment of real estate assets, and after adjustments for unconsolidated partnerships and joint
ventures.
FFO is a supplemental non-GAAP financial measure. Management uses FFO as a supplemental performance measure
because we believe that FFO is beneficial to investors as a starting point in measuring our operational performance.
Specifically, in excluding real estate related depreciation and amortization and gains and losses from property dispositions,
which do not relate to or are not indicative of operating performance, FFO provides a performance measure that, when
compared year-over-year, captures trends in occupancy rates, rental rates, and operating costs. We also believe that, as a widely
recognized measure of the performance of REITs, FFO will be used by investors as a basis to compare our operating
performance with that of other REITs.
However, because FFO excludes depreciation and amortization and captures neither the changes in the value of our
properties that result from use or market conditions nor the level of capital expenditures and leasing commissions necessary to
maintain the operating performance of our properties, all of which have real economic effects and could materially impact our
results from operations, the utility of FFO as a measure of our performance is limited. In addition, other equity REITs may not
calculate FFO in accordance with the Nareit definition as we do, and, accordingly, our calculation of FFO may not be
comparable to such other REITs’ calculation of FFO. Accordingly, FFO should be considered only as a supplement to net
income as a measure of our performance. FFO should not be used as a measure of our liquidity, nor is it indicative of funds
available to fund our cash needs, including our ability to pay dividends or service indebtedness. FFO also should not be used as
a supplement to or substitute for cash flow from operating activities computed in accordance with GAAP.
We also believe that the computation of FFO in accordance with Nareit’s definition includes certain items that are not
indicative of the results provided by our operating property portfolio and affect the comparability of our year-over-year
performance. Accordingly, management believes that Normalized FFO is a more useful performance measure that excludes
certain items, including but not limited to, debt extinguishment losses and prepayment penalties, impairment of intangible
assets and liabilities, property acquisition, development, and other pursuit costs, mark-to-market adjustments for interest rate
derivatives, severance related costs, and other non-comparable items.
67
The following table sets forth a reconciliation of FFO and Normalized FFO for each of the three years ended
December 31, 2018 to net income, the most directly comparable GAAP measure:
Net income
Depreciation and amortization
Gain on operating real estate dispositions
Impairment of real estate assets
Funds from operations
Acquisition, development and other pursuit costs
Impairment of intangible assets and liabilities
Loss on extinguishment of debt
Change in fair value of interest rate derivatives
Severance related costs
Normalized funds from operations
Years Ended December 31,
2018
2017
2016
($ in thousands)
23,492
$
29,925
$
40,178
(833)
1,502
64,339
$
352
117
11
951
688
66,458
$
37,321
(7,595)
—
59,651
648
110
50
(1,127)
—
59,332
$
$
42,755
35,328
(30,103)
—
47,980
1,563
355
82
941
—
50,921
$
$
$
The adjustment for depreciation and amortization for the year ended December 31, 2018 includes depreciation and
amortization attributable to our investment in One City Center, which is an unconsolidated real estate investment.
The adjustment for gain on operating real estate dispositions for the year ended December 31, 2018 excludes the gain
on the River City industrial facility because this property was sold before being placed into service. The adjustment for gain on
operating real estate dispositions for the year ended December 31, 2017 excludes the gain on the land outparcel at Sandbridge
Commons because this was a non-operating parcel. Additionally, the adjustment for gain on real estate dispositions for the year
ended December 31, 2016 excludes the gain on the Newport News Economic Authority building because this property was sold
before being placed in service.
Inflation
Substantially all of our office and retail leases provide for the recovery of increases in real estate taxes and operating
expenses. In addition, substantially all of the leases provide for annual rent increases. We believe that inflationary increases
may be offset in part by the contractual rent increases and expense escalations previously described. In addition, our
multifamily leases generally have lease terms ranging from 7 to 15 months with a majority having 12-month lease terms
allowing negotiation of rental rates at term end, which we believe reduces our exposure to the effects of inflation.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
The primary market risk to which we are exposed is interest rate risk. Our primary interest rate exposure is LIBOR.
We primarily use fixed interest rate financing to manage our exposure to fluctuations in interest rates. On a limited basis, we
also use derivative financial instruments to manage interest rate risk. We do not use these derivatives for trading or other
speculative purposes.
As of December 31, 2018 and excluding unamortized GAAP adjustments, approximately $348.4 million, or 49.7%, of
our debt had fixed interest rates and approximately $352.3 million, or 50.3%, had variable interest rates. Considering interest
rate swaps and caps, 99.7% of our debt is either fixed-rate or economically hedged. As of December 31, 2018, LIBOR was
approximately 250 basis points. Assuming no change in the level of our variable-rate debt or derivative instruments, if interest
rates were to increase by 100 basis points, our cash flow would decrease by approximately $0.5 million per year due to our
interest rate derivatives. Assuming no change in the level of our variable-rate debt or derivative instruments, if LIBOR were
reduced by 100 basis points, our cash flow would increase by approximately $1.4 million per year.
Item 8.
Financial Statements and Supplementary Data.
Our consolidated financial statements and supplementary data are included as a separate section of this Annual Report
on Form 10-K commencing on page F-1 and are incorporated herein by reference.
68
Item 9.
Changes and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Controls and Procedures.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) that are designed to ensure that information required to be
disclosed in our reports under the Exchange Act is processed, recorded, summarized and reported within the time periods
specified in the rules and regulations of the SEC and that such information is accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any
controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
We have carried out an evaluation, under the supervision and with the participation of management, including our
Chief Executive Officer and Chief Financial Officer, regarding the effectiveness of our disclosure controls and procedures as of
December 31, 2018, the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and
Chief Financial Officer have concluded, as of December 31, 2018, that our disclosure controls and procedures were effective in
ensuring that information required to be disclosed by us in reports filed or submitted under the Exchange Act (i) is processed,
recorded, summarized, and reported within the time periods specified in the SEC's rules and forms and (ii) is accumulated and
communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to
allow for timely decisions regarding required disclosure.
Management’s Annual Report on Internal Control over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an
evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2018 based on the Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework). Based on that evaluation, the Company’s management concluded that our internal control over financial reporting
was effective as of December 31, 2018.
Our internal control over financial reporting as of December 31, 2018 has been audited by Ernst & Young LLP, an
independent registered public accounting firm, as stated in their report, which is included elsewhere herein.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) during the quarter ended December 31, 2018 that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.
Other Information.
None.
69
Item 10.
Directors, Executive Officers and Corporate Governance.
PART III
This information is incorporated by reference from the Company’s Proxy Statement with respect to the 2019 Annual
Meeting of Stockholders to be filed with the SEC no later than April 30, 2019.
Item 11.
Executive Compensation.
This information is incorporated by reference from the Company’s Proxy Statement with respect to the 2019 Annual
Meeting of Stockholders to be filed with the SEC no later than April 30, 2019.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
This information is incorporated by reference from the Company’s Proxy Statement with respect to the 2019 Annual
Meeting of Stockholders to be filed with the SEC no later than April 30, 2019.
Item 13.
Certain Relationships and Related Transactions, and Director Independence.
This information is incorporated by reference from the Company’s Proxy Statement with respect to the 2019 Annual
Meeting of Stockholders to be filed with the SEC no later than April 30, 2019.
Item 14.
Principal Accountant Fees and Services.
This information is incorporated by reference from the Company’s Proxy Statement with respect to the 2019 Annual
Meeting of Stockholders to be filed with the SEC no later than April 30, 2019.
70
Item 15.
Exhibits and Financial Statement Schedules.
The following is a list of documents filed as a part of this report:
PART IV
(1)
Financial Statements
Included herein at pages F-1 through F-46.
(2)
Financial Statement Schedules
The following financial statement schedule is included herein at pages F-47 through F-49:
Schedule III—Consolidated Real Estate Investments and Accumulated Depreciation
All other schedules for which provision is made in Regulation S-X are either not required to be included herein under
the related instructions, are inapplicable, or the related information is included in the footnotes to the applicable financial
statements and, therefore, have been omitted.
(3)
Exhibits
The exhibits required to be filed by Item 601 of Regulation S-K are listed in the Index to Exhibits of this report and
incorporated by reference herein.
Item 16.
Form 10-K Summary.
None.
71
Exhibit
Number
3.1
3.2
4.1
10.1
10.2†
10.3†
10.4†
INDEX TO EXHIBITS
Description
Articles of Amendment and Restatement of Armada Hoffler Properties, Inc. (Incorporated by reference to
Exhibit 4.1 to the Company’s Registration Statement on Form S-3, filed on June 2, 2014)
Amended and Restated Bylaws of Armada Hoffler Properties, Inc. (Incorporated by Reference to Exhibit 3.2
to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed on
February 23, 2018)
Form of Certificate of Common Stock of Armada Hoffler Properties, Inc. (Incorporated by reference to Exhibit
4.1 to the Company’s Registration Statement on Form S-11/A, filed on May 2, 2013)
Amended and Restated Agreement of Limited Partnership of Armada Hoffler, L.P. (Incorporated by reference
to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q, filed on November 12, 2013)
Armada Hoffler Properties, Inc. Amended and Restated 2013 Equity Incentive Plan (Incorporated by reference
to Exhibit 10.1 to the Company’s Registration Statement on Form S-8, filed on June 15, 2017)
Form of Restricted Stock Award Agreement (Time Vesting) (Incorporated by reference to Exhibit 10.3 to the
Company’s Registration Statement on Form S-11/A, filed on May 2, 2013)
Indemnification Agreement between Armada Hoffler Properties, Inc. and each of the Directors and Officers
listed on Schedule A thereto (Incorporated by Reference to Exhibit 10.4 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2015, filed on March 2, 2016)
10.5†*
Armada Hoffler, L.P. Amended and Restated Executive Severance Benefit Plan with the participants listed on
Schedule A thereto.
10.6
10.7
10.8
Form of Restricted Stock Award Agreement for Directors (Incorporated by reference to Exhibit 10.44 to the
Company’s Registration Statement on Form S-11/A, filed on May 2, 2013)
Amendment No. 1, dated as of March 19, 2014, to the First Amended and Restated Agreement of Limited
Partnership of Armada Hoffler, L.P., dated as of May 13, 2013 (Incorporated by reference to Exhibit 10.1 to
the Company’s Quarterly Report on Form 10-Q, filed on May 15, 2014)
Amendment No. 2, dated as of July 10, 2015, to the First Amended and Restated Agreement of Limited
Partnership of Armada Hoffler, L.P., dated as of May 13, 2013 (Incorporated by reference to Exhibit 10.1 to
the Company’s Current Report on Form 8-K, filed on July 16, 2015)
10.9†*
Armada Hoffler Properties, Inc. Amended and Restated Short-Term Incentive Program.
10.10
10.11
10.12
10.13
Purchase and Sale Agreement, dated as of December 3, 2015, by and between DDR-SAU South Square,
L.L.C., DDR-SAU Durham Patterson, L.L.C., DDR-SAU Wendover Phase II, L.L.C., DDR-SAU Salisbury
Alexander, L.L.C., DDR-SAU Winston-Salem Harper Hill, L.L.C., DDR-SAU Greer North Hampton Market,
L.L.C., DDR-SAU Nashville Willowbrook, L.L.C., DDR-SAU South Bend Broadmoor, L.L.C., DDR-SAU
Oakland, L.L.C., DDR-SAU Waynesboro, L.L.C., DDR-SAU Pasadena Red Bluff Limited Partnership and
AHP Acquisitions, LLC (Incorporated by reference to Exhibit 10.55 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 2015, filed on March 2, 2016)
First Amendment to Purchase and Sale Agreement, dated as of December 14, 2015, by and between DDR-
SAU South Square, L.L.C., DDR-SAU Durham Patterson, L.L.C., DDR-SAU Wendover Phase II, L.L.C.,
DDR-SAU Salisbury Alexander, L.L.C., DDR-SAU Winston-Salem Harper Hill, L.L.C., DDR-SAU Greer
North Hampton Market, L.L.C., DDR-SAU Nashville Willowbrook, L.L.C., DDR-SAU South Bend
Broadmoor, L.L.C., DDR-SAU Oakland, L.L.C., DDR-SAU Waynesboro, L.L.C., DDR-SAU Pasadena Red
Bluff Limited Partnership and AHP Acquisitions, LLC (Incorporated by reference to Exhibit 10.56 to the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed on March 2,
2016)
Form of Performance Unit Award Agreement (Incorporated by reference to Exhibit 10.57 to the Company's
Annual Report on Form 10-K, filed March 1, 2017)
Amended and Restated Credit Agreement, dated as of October 26, 2017, among Armada Hoffler, L.P. as
Borrower, Armada Hoffler Properties, Inc., as Parent, Bank of America, N.A., as Administrative Agent, and the
other agents and Lenders party thereto (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q, filed November 1, 2017)
72
Exhibit
Number
10.14
Amended and Restated Guaranty Agreement, dated as of October 26, 2017, among certain subsidiaries of
Armada Hoffler, L.P. named therein for the benefit of the Administrative Agent and the Lenders named in the
Amended and Restated Credit Agreement (Incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q, filed November 1, 2017)
Description
10.15†*
Separation Agreement by and among Armada Hoffler Properties, Inc. and Eric Smith, dated as of November 9,
2018.
21.1*
23.1*
31.1*
31.2*
32.1**
32.2**
List of Subsidiaries of Armada Hoffler Properties, Inc.
Consent of Ernst & Young LLP, Independent Public Accounting Firm
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
101.INS*
XBRL Instance Document
101.SCH*
XBRL Taxonomy Extension Schema Document
101.CAL*
XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*
XBRL Taxonomy Extension Presentation Linkbase Document
*
**
†
Filed herewith
Furnished herewith
Management contract or compensatory plan or arrangement
73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 28, 2019
ARMADA HOFFLER PROPERTIES, INC.
By:
/s/ Louis S. Haddad
Louis S. Haddad
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
/s/ Daniel A. Hoffler
Daniel A. Hoffler
/s/ A. Russell Kirk
A. Russell Kirk
/s/ Louis S. Haddad
Louis S. Haddad
/s/ Michael P. O’Hara
Title
Executive Chairman and Director
Date
February 28, 2019
Vice Chairman and Director
February 28, 2019
President, Chief Executive Officer and Director
February 28, 2019
(principal executive officer)
Chief Financial Officer, Treasurer, and Secretary
February 28, 2019
Michael P. O’Hara
(principal financial officer and principal accounting officer)
/s/ George F. Allen
George F. Allen
/s/ James A. Carroll
James A. Carroll
/s/ James C. Cherry
James C. Cherry
/s/ Eva S. Hardy
Eva S. Hardy
/s/ John W. Snow
John W. Snow
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
February 28, 2019
Director
Director
Director
Director
Director
74
Armada Hoffler Properties, Inc.
Form 10-K
For the Fiscal Year Ended December 31, 2018
Item 8, Item 15(a)(1) and (2)
Index to Financial Statements and Schedule
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2018, 2017, and 2016
Consolidated Statements of Equity for the Years Ended December 31, 2018, 2017, and 2016
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017, and 2016
Notes to Consolidated Financial Statements
Schedule III—Consolidated Real Estate Investments and Accumulated Depreciation
F-2
F-3
F-4
F-5
F-6
F-7
F-9
F-47
F-1
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Armada Hoffler Properties, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Armada Hoffler Properties, Inc.’s internal control over financial reporting as of December 31, 2018, based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Armada Hoffler Properties, Inc. (the Company)
maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on the
COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the 2018 consolidated financial statements of the Company and our report dated February 28, 2019 expressed an
unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual
Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal
control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Tysons, Virginia
February 28, 2019
F-2
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Armada Hoffler Properties, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Armada Hoffler Properties, Inc. (the Company) as of
December 31, 2018 and 2017, the related consolidated statements of comprehensive income, equity and cash flows for each of
the three years in the period ended December 31, 2018, and the related notes and Financial Statement Schedule listed in the
Index at Item 15(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2018 and
2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in
conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework), and our report dated February 28, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company's auditor since 2012.
Tysons, Virginia
February 28, 2019
F-3
ARMADA HOFFLER PROPERTIES, INC.
Consolidated Balance Sheets
(In thousands, except par value and share data)
ASSETS
Real estate investments:
Income producing property
Held for development
Construction in progress
Accumulated depreciation
Net real estate investments
Real estate held for sale
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Notes receivable
Construction receivables, including retentions
Construction contract costs and estimated earnings in excess of billings
Equity method investments
Other assets
Total Assets
LIABILITIES AND EQUITY
Indebtedness, net
Accounts payable and accrued liabilities
Construction payables, including retentions
Billings in excess of construction contract costs and estimated earnings
Other liabilities
Total Liabilities
Stockholders’ equity:
Preferred stock, $0.01 par value, 100,000,000 shares authorized, none issued and
outstanding as of December 31, 2018 and 2017, respectively
Common stock, $0.01 par value, 500,000,000 shares authorized, 50,013,731 and 44,937,763
shares issued and outstanding as of December 31, 2018 and 2017, respectively
Additional paid-in capital
Distributions in excess of earnings
Accumulated other comprehensive loss
Total stockholders’ equity
Noncontrolling interests
Total Equity
DECEMBER 31,
2018
2017
$
1,037,917
$
910,686
2,994
135,675
1,176,586
(188,775)
987,811
929
21,254
2,797
19,016
138,683
16,154
1,358
22,203
55,177
680
83,071
994,437
(164,521)
829,916
—
19,959
2,957
15,691
83,058
23,933
245
11,411
55,953
$
$
1,265,382
$
1,043,123
694,239
$
517,272
15,217
50,796
3,037
46,203
15,180
47,445
3,591
39,352
809,492
622,840
—
500
357,353
(82,699)
(1,283)
273,871
182,019
455,890
—
449
287,407
(61,166)
—
226,690
193,593
420,283
Total Liabilities and Equity
$
1,265,382
$
1,043,123
See Notes to Consolidated Financial Statements.
F-4
ARMADA HOFFLER PROPERTIES, INC.
Consolidated Statements of Comprehensive Income
(In thousands, except per share and unit data)
Revenues
Rental revenues
General contracting and real estate services revenues
Total revenues
Expenses
Rental expenses
Real estate taxes
General contracting and real estate services expenses
Depreciation and amortization
General and administrative expenses
Acquisition, development and other pursuit costs
Impairment charges
Total expenses
Gain on real estate dispositions
Operating income
Interest income
Interest expense
Equity in income of unconsolidated real estate entities
Loss on extinguishment of debt
Change in fair value of interest rate derivatives
Other income
Income before taxes
Income tax benefit (provision)
Net income
Net income attributable to noncontrolling interests
Net income attributable to stockholders
Net income per share and unit:
Basic and diluted
Weighted-average outstanding:
Common shares
Common units
Basic and diluted
Comprehensive income:
Net income
Unrealized cash flow hedge losses
Realized cash flow hedge losses reclassified to net income
Comprehensive income
Comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to stockholders
YEARS ENDED DECEMBER 31,
2018
2017
2016
$
116,958
$
108,737
$
76,359
193,317
27,222
11,383
73,628
39,913
11,431
352
1,619
165,548
4,254
32,023
10,729
(19,087)
372
(11)
(951)
388
23,463
29
23,492
(6,289)
17,203
$
194,034
302,771
25,422
10,528
186,590
37,321
10,435
648
110
271,054
8,087
39,804
7,077
(17,439)
—
(50)
1,127
131
30,650
(725)
29,925
(8,878)
21,047
$
99,355
159,030
258,385
21,904
9,629
153,375
35,328
9,552
1,563
355
231,706
30,533
57,212
3,228
(16,466)
—
(82)
(941)
147
43,098
(343)
42,755
(14,681)
28,074
0.36
$
0.50
$
0.85
47,512
17,242
64,754
23,492
(1,894)
169
21,767
(5,847)
15,920
42,423
17,758
60,181
33,057
17,167
50,224
$
29,925
$
42,755
—
—
29,925
(8,878)
21,047
$
—
—
42,755
(14,681)
28,074
$
$
$
$
$
See Notes to Consolidated Financial Statements.
F-5
l
a
t
o
T
y
t
i
u
q
E
s
t
s
e
r
e
t
n
i
y
t
i
u
q
e
s
s
o
l
g
n
i
l
l
o
r
t
n
o
c
n
o
N
’
s
r
e
d
l
o
h
k
c
o
t
s
e
v
i
s
n
e
h
e
r
p
m
o
c
l
a
t
o
T
d
e
t
a
l
u
m
u
c
c
A
r
e
h
t
o
s
n
o
i
t
u
b
i
r
t
s
i
D
f
o
s
s
e
c
x
e
n
i
s
g
n
i
n
r
a
e
l
a
n
o
i
t
i
d
d
A
-
d
i
a
p
l
a
t
i
p
a
c
n
i
n
o
m
m
o
C
k
c
o
t
s
f
o
s
e
r
a
h
S
n
o
m
m
o
c
k
c
o
t
s
0
2
7
,
5
2
2
$
2
7
1
,
6
7
1
$
8
4
5
,
9
4
$
)
8
4
6
(
$
)
0
1
0
,
3
5
(
$
6
0
9
,
2
0
1
$
0
0
3
$
9
5
3
,
6
7
0
,
0
3
5
5
7
,
2
4
8
4
0
,
1
2
2
0
,
7
6
2
6
1
,
1
8
7
2
,
7
4
)
8
5
(
0
0
4
—
—
1
8
6
,
4
1
)
6
5
(
8
7
1
,
1
2
)
9
4
9
,
5
3
(
)
0
4
5
,
1
1
(
8
7
9
,
8
4
3
5
3
8
,
0
0
2
)
2
(
5
2
9
,
9
2
1
8
3
,
1
9
3
4
4
,
1
—
—
—
8
7
8
,
8
)
1
1
5
(
2
8
9
)
5
5
1
,
5
(
)
4
9
1
,
4
(
)
6
7
7
,
5
4
(
)
8
0
9
,
2
1
(
3
8
2
,
0
2
4
3
9
5
,
3
9
1
2
9
4
,
3
2
)
4
9
8
,
1
(
9
6
1
4
4
2
,
5
6
4
6
5
,
1
)
2
3
(
6
9
1
,
2
)
4
8
4
(
9
8
2
,
6
2
4
—
—
—
1
0
2
,
2
)
5
9
5
,
2
(
)
1
2
8
,
5
(
)
7
3
5
,
2
5
(
)
1
0
8
,
3
1
(
4
7
0
,
8
2
8
4
6
2
2
0
,
7
6
2
6
1
,
1
0
0
1
,
6
2
)
2
(
)
9
0
4
,
4
2
(
3
4
1
,
8
4
1
)
2
(
7
4
0
,
1
2
1
8
3
,
1
9
3
4
4
,
1
)
1
6
9
(
)
3
9
4
,
1
(
)
8
6
8
,
2
3
(
0
9
6
,
6
2
2
3
0
2
,
7
1
)
0
1
4
,
1
(
7
2
1
4
4
2
,
5
6
4
6
5
,
1
)
2
3
(
)
5
(
6
2
2
,
3
)
6
3
7
,
8
3
(
—
8
4
6
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
)
0
1
4
,
1
(
7
2
1
—
—
—
—
—
—
—
—
—
—
—
4
7
0
,
8
2
)
9
0
4
,
4
2
(
)
5
4
3
,
9
4
(
7
4
0
,
1
2
—
—
—
—
—
)
8
6
8
,
2
3
(
)
6
6
1
,
1
6
(
3
0
2
,
7
1
—
—
—
—
—
—
—
)
6
3
7
,
8
3
(
—
—
9
6
9
,
6
6
1
6
1
,
1
0
8
0
,
6
2
)
2
(
—
—
—
3
5
1
0
2
—
—
—
—
—
—
7
4
1
,
1
0
1
5
5
8
,
2
1
3
,
5
0
0
0
,
0
0
0
,
2
4
1
1
,
7
9
1
4
7
3
1
6
3
,
0
9
4
,
7
3
)
2
(
—
7
0
3
,
1
9
2
4
4
,
1
)
1
6
9
(
—
)
3
9
4
,
1
(
—
4
7
1
—
—
—
—
—
—
—
)
1
6
4
(
3
7
1
,
7
9
—
0
9
6
,
0
5
3
,
7
7
0
4
,
7
8
2
9
4
4
3
6
7
,
7
3
9
,
4
4
—
—
—
8
9
1
,
5
6
2
6
5
,
1
)
2
3
(
)
5
(
—
3
2
2
,
3
—
—
—
6
4
2
—
—
3
—
—
—
—
—
)
3
0
4
,
4
(
—
4
0
7
,
8
3
3
8
5
2
,
4
2
1
9
0
4
,
7
1
6
,
4
0
9
8
,
5
5
4
$
9
1
0
,
2
8
1
$
1
7
8
,
3
7
2
$
)
3
8
2
,
1
(
$
)
9
9
6
,
2
8
(
$
3
5
3
,
7
5
3
$
0
0
5
$
1
3
7
,
3
1
0
,
0
5
g
n
i
d
l
o
h
h
t
i
w
x
a
t
f
o
t
e
n
,
s
d
r
a
w
a
k
c
o
t
s
d
e
t
c
i
r
t
s
e
R
k
c
o
t
s
n
o
m
m
o
c
f
o
s
e
l
a
s
m
o
r
f
s
d
e
e
c
o
r
p
t
e
N
e
g
d
e
h
w
o
l
f
h
s
a
c
f
o
n
o
i
t
a
n
g
i
s
e
d
e
D
s
t
i
n
u
p
i
h
s
r
e
n
t
r
a
p
g
n
i
t
a
r
e
p
o
f
o
n
o
i
t
p
m
e
d
e
R
s
t
n
e
m
t
s
e
v
n
i
e
t
a
t
s
e
l
a
e
r
f
o
s
n
o
i
t
i
s
i
u
q
c
A
d
e
r
a
l
c
e
d
s
n
o
i
t
u
b
i
r
t
s
i
d
d
n
a
s
d
n
e
d
i
v
i
D
6
1
0
2
,
1
3
r
e
b
m
e
c
e
D
,
e
c
n
a
l
a
B
e
m
o
c
n
i
t
e
N
6
1
0
2
,
1
y
r
a
u
n
a
J
,
e
c
n
a
l
a
B
e
m
o
c
n
i
t
e
N
e
t
a
t
s
e
l
a
e
r
n
i
s
t
s
e
r
e
t
n
i
g
n
i
l
l
o
r
t
n
o
c
n
o
n
f
o
s
n
o
i
t
i
s
i
u
q
c
A
s
t
n
e
m
t
s
e
v
n
i
g
n
i
d
l
o
h
h
t
i
w
x
a
t
f
o
t
e
n
,
s
d
r
a
w
a
k
c
o
t
s
d
e
t
c
i
r
t
s
e
R
k
c
o
t
s
n
o
m
m
o
c
f
o
s
e
l
a
s
m
o
r
f
s
d
e
e
c
o
r
p
t
e
N
s
e
r
u
t
i
e
f
r
o
f
d
r
a
w
a
k
c
o
t
s
d
e
t
c
i
r
t
s
e
R
s
t
i
n
u
p
i
h
s
r
e
n
t
r
a
p
g
n
i
t
a
r
e
p
o
f
o
n
o
i
t
p
m
e
d
e
R
d
e
r
a
l
c
e
d
s
n
o
i
t
u
b
i
r
t
s
i
d
d
n
a
s
d
n
e
d
i
v
i
D
7
1
0
2
,
1
3
r
e
b
m
e
c
e
D
,
e
c
n
a
l
a
B
e
m
o
c
n
i
t
e
N
t
e
n
o
t
d
e
i
f
i
s
s
a
l
c
e
r
s
e
s
s
o
l
e
g
d
e
h
w
o
l
f
h
s
a
c
d
e
z
i
l
a
e
R
e
m
o
c
n
i
s
e
s
s
o
l
e
g
d
e
h
w
o
l
f
h
s
a
c
d
e
z
i
l
a
e
r
n
U
g
n
i
d
l
o
h
h
t
i
w
x
a
t
f
o
t
e
n
,
s
d
r
a
w
a
k
c
o
t
s
d
e
t
c
i
r
t
s
e
R
k
c
o
t
s
n
o
m
m
o
c
f
o
s
e
l
a
s
m
o
r
f
s
d
e
e
c
o
r
p
t
e
N
s
e
r
u
t
i
e
f
r
o
f
d
r
a
w
a
k
c
o
t
s
d
e
t
c
i
r
t
s
e
R
s
n
o
i
t
i
s
i
u
q
c
a
r
o
f
s
t
i
n
u
p
i
h
s
r
e
n
t
r
a
p
g
n
i
t
a
r
e
p
o
f
o
e
c
n
a
u
s
s
I
s
t
i
n
u
p
i
h
s
r
e
n
t
r
a
p
g
n
i
t
a
r
e
p
o
f
o
n
o
i
t
p
m
e
d
e
R
d
e
r
a
l
c
e
d
s
n
o
i
t
u
b
i
r
t
s
i
d
d
n
a
s
d
n
e
d
i
v
i
D
8
1
0
2
,
1
3
r
e
b
m
e
c
e
D
,
e
c
n
a
l
a
B
.
s
t
n
e
m
e
t
a
t
S
l
a
i
c
n
a
n
i
F
d
e
t
a
d
i
l
o
s
n
o
C
o
t
s
e
t
o
N
e
e
S
6
-
F
.
C
N
I
,
S
E
I
T
R
E
P
O
R
P
R
E
L
F
F
O
H
A
D
A
M
R
A
y
t
i
u
q
E
f
o
s
t
n
e
m
e
t
a
t
S
d
e
t
a
d
i
l
o
s
n
o
C
)
a
t
a
d
e
r
a
h
s
t
p
e
c
x
e
,
s
d
n
a
s
u
o
h
t
n
I
(
ARMADA HOFFLER PROPERTIES, INC.
Consolidated Statements of Cash Flows
(In thousands)
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of buildings and tenant improvements
Amortization of leasing costs and in-place lease intangibles
Accrued straight-line rental revenue
Amortization of leasing incentives and above or below-market rents
Accrued straight-line ground rent expense
Bad debt expense
Noncash stock compensation
Impairment charges
Noncash interest expense
Noncash loss on extinguishment of debt
Gain on real estate dispositions
Adjustment for Annapolis Junction purchase option (1)
Change in the fair value of interest rate derivatives
Equity in income of unconsolidated real estate entities
Changes in operating assets and liabilities:
Property assets
Property liabilities
Construction assets
Construction liabilities
Interest receivable
Net cash provided by operating activities
INVESTING ACTIVITIES
Development of real estate investments
Tenant and building improvements
Acquisitions of real estate investments, net of cash received
Dispositions of real estate investments, net of selling costs
Notes receivable issuances
Notes receivable paydowns
Leasing costs
Leasing incentives
Contributions to equity method investments
Net cash used for investing activities
FINANCING ACTIVITIES
Proceeds from sales of common stock
Offering costs
Common shares tendered for tax withholding
Debt issuances, credit facility and construction loan borrowings
Debt and credit facility repayments, including principal amortization
Debt issuance costs
Redemption of operating partnership units
Dividends and distributions
Net cash provided by financing activities
Net increase (decrease) in cash, cash equivalents, and restricted cash
Cash, cash equivalents, and restricted cash, beginning of period (2)
Cash, cash equivalents, and restricted cash, end of period (2)
YEARS ENDED DECEMBER 31,
2018
2017
2016
$
23,492
$
29,925
$
42,755
30,395
9,518
(2,731)
(266)
214
419
1,281
1,619
1,116
11
(4,254)
4,489
951
(372)
(3,539)
1,709
7,554
(15,248)
(271)
56,087
(133,791)
(11,723)
(57,544)
34,673
(58,208)
1,165
(4,607)
(108)
(10,420)
(240,563)
66,457
(1,213)
(409)
349,580
(173,855)
(1,457)
(2,595)
(50,897)
185,611
1,135
22,916
25,974
11,347
(1,222)
(195)
530
564
1,323
110
1,274
50
(8,087)
—
(1,127)
—
(2,415)
2,793
17,573
(20,110)
(7,071)
51,236
(45,730)
(12,252)
(30,026)
12,557
(16,219)
—
(2,235)
(274)
(1,176)
(95,355)
96,044
(4,663)
(289)
162,585
(160,661)
(2,403)
(5,155)
(43,616)
41,842
(2,277)
25,193
$
24,051
$
22,916
$
23,453
11,875
(1,091)
(85)
371
203
1,082
355
980
82
(30,533)
—
941
—
(2,964)
3,979
(6,385)
15,189
(3,222)
56,985
(57,425)
(6,698)
(195,645)
96,670
(48,499)
—
(2,374)
(236)
(8,824)
(223,031)
68,475
(1,453)
(218)
316,852
(186,533)
(1,796)
(58)
(33,843)
161,426
(4,620)
29,813
25,193
See Notes to Consolidated Financial Statements.
F-7
ARMADA HOFFLER PROPERTIES, INC.
Consolidated Statements of Cash Flows (Continued)
(In thousands)
Supplemental cash flow information:
Cash paid for interest
Cash refunded (paid) for income taxes
Increase in dividends payable
Common shares and OP units issued for acquisitions (3)
Change in accrued capital improvements and development costs
Operating Partnership units redeemed for common shares
Debt principal extinguished in conjunction with real estate sales
Debt principal assumed in conjunction with real estate acquisitions
Redeemable noncontrolling interest from development
Deferred payment for land acquisition
$
$
$
$
$
$
$
$
$
$
(17,319)
555
1,640
1,702
18,310
3,715
$
$
$
$
$
$
— $
— $
— $
— $
(16,318)
(371)
2,160
506
10,899
$
$
$
$
$
— $
5,594
$
— $
2,000
600
$
$
(15,326)
(121)
2,106
47,278
(8,183)
—
6,400
21,150
—
—
(1) See Note 6 to the consolidated financial statements. Borrower paid $5.0 million in exchange for the Company's purchase option. Recognition of income was
initially deferrred and is being recognized as additional interest income on the note receivable over the one-year remaining term.
(2) The following table sets forth the items from the Company's Consolidated Balance Sheets that are included in cash, cash equivalents, and restricted cash in
the consolidated statements of cash flows:
Cash and cash equivalents
Restricted cash
Cash, cash equivalents, and restricted cash
As of December 31
2018
2017
$
$
21,254
$
2,797
24,051
$
19,959
2,957
22,916
(3) 2017 issuance consists of OP Units contingently issuable upon the satisfaction of certain conditions relating to the Johns Hopkins Village property. These
OP Units were issued in 2018.
See Notes to Consolidated Financial Statements.
F-8
ARMADA HOFFLER PROPERTIES, INC.
Notes to Consolidated Financial Statements
1.
Business and 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"), and is the sole general partner of Armada Hoffler, L.P. (the
“Operating Partnership”), and as of December 31, 2018, owned 74.5% 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. Both the
Company and the Operating Partnership were formed on October 12, 2012 and commenced operations upon
completion of the underwritten initial public offering of shares of the Company’s common stock (the “IPO”) and
certain related formation transactions on May 13, 2013.
F-9
As of December 31, 2018, the Company's operating portfolio consisted of the following properties:
Property
Segment
Location
Ownership
Interest
4525 Main Street
Armada Hoffler Tower
One Columbus
Two Columbus
249 Central Park Retail
Alexander Pointe
Bermuda Crossroads
Broad Creek Shopping Center
Broadmoor Plaza
Columbus Village
Columbus Village II
Commerce Street Retail
Courthouse 7-Eleven
Dick’s at Town Center
Dimmock Square
Fountain Plaza Retail
Gainsborough Square
Greentree Shopping Center
Hanbury Village
Harper Hill Commons
Harrisonburg Regal
Indian Lakes Crossing
Lexington Square
Lightfoot Marketplace
North Hampton Market
North Point Center
Oakland Marketplace
Parkway Centre
Parkway Marketplace
Patterson Place
Perry Hall Marketplace
Providence Plaza
Renaissance Square
Sandbridge Commons
Socastee Commons
Southgate Square
Southshore Shops
South Retail
South Square
Stone House Square
Studio 56 Retail
Tyre Neck Harris Teeter
Wendover Village
Encore Apartments
Johns Hopkins Village
Liberty Apartments
Smith’s Landing
The Cosmopolitan
Office
Office
Office
Office
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Retail
Multifamily
Multifamily
Multifamily
Multifamily
Multifamily
Virginia Beach, Virginia*
Virginia Beach, Virginia*
Virginia Beach, Virginia*
Virginia Beach, Virginia*
Virginia Beach, Virginia*
Salisbury, North Carolina
Chester, Virginia
Norfolk, Virginia
South Bend, Indiana
Virginia Beach, Virginia*
Virginia Beach, Virginia*
Virginia Beach, Virginia*
Virginia Beach, Virginia
Virginia Beach, Virginia*
Colonial Heights, Virginia
Virginia Beach, Virginia*
Chesapeake, Virginia
Chesapeake, Virginia
Chesapeake, Virginia
Winston-Salem, North Carolina
Harrisonburg, Virginia
Virginia Beach, Virginia
Lexington, South Carolina
Williamsburg, Virginia
Taylors, South Carolina
Durham, North Carolina
Oakland, Tennessee
Moultrie, Georgia
Virginia Beach, Virginia
Durham, North Carolina
Perry Hall, Maryland
Charlotte, North Carolina
Davidson, North Carolina
Virginia Beach, Virginia
Myrtle Beach, South Carolina
Colonial Heights, Virginia
Chesterfield, Virginia
Virginia Beach, Virginia*
Durham, North Carolina
Hagerstown, Maryland
Virginia Beach, Virginia*
Portsmouth, Virginia
Greensboro, North Carolina
Virginia Beach, Virginia*
Baltimore, Maryland
Newport News, Virginia
Blacksburg, Virginia
Virginia Beach, Virginia*
(1)
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
70%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
________________________________________
*
(1)
Located in the Town Center of Virginia Beach
The Company is entitled to a preferred return of 9% on its investment in Lightfoot Marketplace.
F-10
As of December 31, 2018, the following properties were either under development or not yet stabilized:
Property
Premier Apartments (Town Center Phase VI)
Segment
Multifamily
Location
Virginia Beach, Virginia*
Premier Retail (Town Center Phase VI)
Retail
Virginia Beach, Virginia*
Greenside (Harding Place)
Hoffler Place (King Street)
Summit Place (Meeting Street)
Brooks Crossing Retail
Brooks Crossing Office
Lightfoot outparcel
Market at Mill Creek
Wills Wharf
Multifamily
Multifamily
Multifamily
Retail
Office
Retail
Retail
Charlotte, North Carolina
Charleston, South Carolina
Charleston, South Carolina
Newport News, Virginia
Newport News, Virginia
Williamsburg, Virginia
Mount Pleasant, South Carolina
Mixed-use
Baltimore, Maryland
Ownership
Interest
100%
100%
80% (1)
93%
90%
65% (2)
65% (2)
70% (3)
70% (4)
100%
________________________________________
*Located in the Town Center of Virginia Beach
(1) The Company is entitled to a preferred return of 9% on a portion of its investment in Greenside.
(2) The Company is entitled to a preferred return of 8% on its investment in Brooks Crossing.
(3) The Company is entitled to a preferred return of 9% on its investment in Lightfoot.
(4) The Company is entitled to a preferred return of 10% on its investment in Market at Mill Creek.
2.
Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements were prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”).
The consolidated financial statements include the financial position and results of operations of the Company, 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.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the amounts reported and disclosed. Such estimates are based on management’s historical
experience and best judgment after considering past, current, and expected events and economic conditions. Actual
results could differ from management’s estimates.
Segments
Segment information is prepared on the same basis that management reviews information for operational decision-
making purposes. Management evaluates the performance of each of the Company’s properties individually and
aggregates such properties into segments based on their economic characteristics and classes of tenants. The Company
operates in four business segments: (i) office real estate, (ii) retail real estate, (iii) multifamily residential real estate,
and (iv) general contracting and real estate services. The Company’s general contracting and real estate services
business develops and builds properties for its own account and also provides construction and development services
to both related and third parties.
Reclassifications
Certain amounts previously reported in the consolidated financial statements have been reclassified in the
accompanying consolidated financial statements to conform to the current period's presentation.
F-11
The Company has included gain on real estate dispositions as a component of operating income to present gain on real
estate dispositions in accordance with ASC 360-10-45-5. The change was made for the prior periods as the Securities
and Exchange Commission has eliminated Rule 3-15(a) of Regulation S-X, which had required REIT's to present
gains and losses on sale of properties outside of continuing operations in the income statement. The rule change is
effective for all filings made on or after November 5, 2018.
During the second quarter of 2018, the Company identified certain immaterial classification errors on the Company's
Consolidated Statements of Cash Flows and determined that, in the Quarterly Report on Form 10-Q for the quarter
ended June 30, 2018 and future periodic reports, the Company would correct these classification errors. One
classification error was corrected by including within the changes in operating assets and liabilities in the operating
activities section a new line item for "Interest receivable." A corresponding adjustment was recorded to reduce the
amount of "Notes receivable issuances" within investing activities on the consolidated statement of cash flows. These
reclassifications totaled $7.1 million and $3.2 million during the years ended December 31, 2017 and 2016,
respectively. These reclassifications decreased "Net cash provided by operating activities" and "Net cash used for
investing activities" by an equal and offsetting amount. These reclassifications did not have any impact on the
Consolidated Balance Sheets, Consolidated Statements of Comprehensive Income, Consolidated Statement of Equity,
or any other operating measure for the periods affected.
These amounts were previously presented as "Notes receivable issuances," a component of net cash used for investing
activities on the Consolidated Statements of Cash Flows, resulting in overstatements in cash provided by operating
activities and overstatements of cash used in investing activities. These amounts represent interest earned on
mezzanine loans that were funded by additional borrowings as provided for in the mezzanine loan agreements. These
amounts are now classified as changes in interest receivable, a non-cash adjustment to calculate net cash provided by
operating activities.
The second classification error was corrected by including within financing activities on the Consolidated Statements
of Cash Flows a new line item for “Common shares tendered for tax withholding.” A corresponding adjustment was
recorded to the "Changes in operating assets and liabilities: Property liabilities" within operating activities on the
Consolidated Statements of Cash Flows. This reclassification totaled $0.3 million and $0.2 million during the years
ended December 31, 2017 and 2016, respectively. These reclassifications increased “Net cash provided by operating
activities” and decreased “Net cash provided by financing activities” by an equal and offsetting amount.
Revenue Recognition
Rental Revenues
The Company leases its properties under operating leases and recognizes base rents when earned on a straight-line
basis over the lease term. Rental revenues include $2.7 million, $1.2 million and $1.1 million of straight-line rent
adjustments for the years ended December 31, 2018, 2017, and 2016, respectively. The Company begins recognizing
rental revenue when the tenant has the right to take possession of or controls the physical use of the property under
lease. The extended collection period for accrued straight-line rental revenue along with the Company’s evaluation of
tenant credit risk may result in the nonrecognition of all or a portion of straight-line rental revenue until the collection
of such revenue is probable. The Company recognizes contingent rental revenue (e.g., percentage rents based on
tenant sales thresholds) when the sales thresholds are met. Contingent rents included in rental revenues were $0.3
million, $0.4 million, and $0.4 million for the years ended December 31, 2018, 2017, and 2016, respectively. The
Company recognizes leasing incentives as reductions to rental revenue on a straight-line basis over the lease
term. Leasing incentive amortization was $0.7 million, $0.8 million, and $0.8 million for the years ended
December 31, 2018, 2017, and 2016, respectively. The Company recognizes fair value adjustments recorded at the
time of lease assumption in rental income on a straight line basis as a reduction to revenue over the remaining life of
the lease or any renewal periods for which the Company determines have value at the time of acquisition. The
Company recognizes cost reimbursement revenue for real estate taxes, operating expenses, and common area
maintenance costs on an accrual basis during the periods in which the expenses are incurred. The Company recognizes
lease termination fees either upon termination or amortizes them over any remaining lease term.
F-12
General Contracting and Real Estate Services Revenues
On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued a new standard that provides a single,
comprehensive model for recognizing revenue from contracts with customers. While the new standard does not
supersede the guidance on accounting for leases, it changes the way the Company recognizes revenue from
construction and development contracts with third party customers. The Company adopted this standard on January 1,
2018 using the modified retrospective method, applying this standard to all contracts not yet completed as of that date.
In applying the standard to the Company’s future construction contracts, certain pre-contract costs incurred by the
Company are now deferred and amortized over the period during which construction obligations are fulfilled.
Previously, these costs were immediately recorded as general contracting expenses upon commencement of
construction, with the corresponding general contracting revenue also recorded. Applying the standard to the
Company’s uncompleted contracts as of January 1, 2018 did not result in material differences to these contracts in
aggregate, and no cumulative adjustment to distributions in excess of earnings was recorded as of January 1, 2018.
The Company recognizes general contracting revenues as a customer obtains control of promised goods or services in
an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. For
each construction contract, the Company identifies the performance obligations, which typically include the delivery
of a single building constructed according to the specifications of the contract. The Company estimates the total
transaction price, which generally includes a fixed contract price and may also include variable components such as
early completion bonuses, liquidated damages, or cost savings to be shared with the customer. Variable components of
the contract price are included in the transaction price to the extent that it is probable that a significant reversal of
revenue will not occur. The Company recognizes the estimated transaction price as revenue as it satisfies its
performance obligations; the Company estimates its progress in satisfying performance obligations for each contract
using the input method, based on the proportion of incurred costs relative to total estimated construction costs at
completion. Construction contract costs include all direct material, direct labor, subcontract costs, and overhead costs
directly related to contract performance. Changes in job performance, job conditions, and estimated profitability,
including those arising from contract penalty provisions and final contract settlements, are all significant judgments
that may result in revisions to costs and income and are recognized in the period in which they are determined.
Provisions for estimated losses on uncompleted contracts are recognized immediately in the period in which such
losses are determined. The Company defers precontract costs when such costs are directly associated with specific
anticipated contracts and their recovery is probable.
The Company recognizes real estate services revenues from property development and management as it satisfies its
performance obligations under these service arrangements.
The Company assesses whether multiple contracts with a single counterparty may be combined into a single contract
for the revenue recognition purposes based on factors such as the timing of the negotiation and execution of the
contracts and whether the economic substance of the contracts was contemplated separately or in tandem.
Real Estate Investments
Income producing property primarily includes land, buildings, and tenant improvements and is stated at cost. Real
estate investments held for development include land and capitalized development costs. The Company reclassifies
real estate investments held for development to construction in progress upon commencement of construction.
Construction in progress is stated at cost. Direct and certain indirect costs clearly associated with the development,
redevelopment, construction, leasing, or expansion of real estate assets are capitalized as a cost of the property.
Repairs and maintenance costs are expensed as incurred.
The Company capitalizes direct and indirect project costs associated with the initial development of a property until
the property is substantially complete and ready for its intended use. Capitalized project costs include preacquisition,
development, and preconstruction costs including overhead, salaries, and related costs of personnel directly involved,
real estate taxes, insurance, utilities, ground rent, and interest. Interest capitalized during the years ended
December 31, 2018, 2017, and 2016 was $5.0 million, $1.3 million and $1.0 million, respectively. Overhead, salaries
and related personnel costs capitalized during the years ended December 31, 2018, 2017, and 2016 were $3.1 million,
$2.4 million and $1.7 million, respectively.
The Company capitalizes preacquisition development costs directly identifiable with specific properties when the
acquisition of such properties is probable. Capitalized preacquisition development costs are presented within other
F-13
assets in the consolidated balance sheets. Capitalized preacquisition development costs as of December 31, 2018 and
2017 were $1.2 million and $1.4 million, respectively. Costs attributable to unsuccessful projects are expensed.
Income producing property is depreciated on a straight-line basis over the following estimated useful lives:
Buildings
Capital improvements
Equipment
Tenant improvements
Operating Property Acquisitions
39 years
5—20 years
3—7 years
Term of the related lease
(or estimated useful life, if shorter)
In connection with operating property acquisitions, the Company identifies and recognizes all assets acquired and
liabilities assumed at their estimated fair values or relative fair values subsequent to the adoption of the new
accounting guidance discussed below, as of the acquisition date. The purchase price allocations to tangible assets, such
as land, site improvements, and buildings and improvements are presented within income producing property in the
consolidated balance sheets and depreciated over their estimated useful lives. Acquired lease intangibles are presented
within other assets and other liabilities in the consolidated balance sheets and amortized over their respective lease
terms. The Company amortizes in-place lease assets as depreciation and amortization expense on a straight-line basis
over the remaining term of the related leases. The Company amortizes above-market lease assets as reductions to
rental revenues on a straight-line basis over the remaining term of the related leases. The Company amortizes below-
market lease liabilities as increases to rental revenues on a straight-line basis over the remaining term of the related
leases. The Company amortizes below-market ground lease assets as increases to rental expenses on a straight-line
basis over the remaining term of the related leases. Prior to October 1, 2016, the Company expensed all costs incurred
related to operating property acquisitions. On October 1, 2016, the Company adopted newly issued accounting
guidance that allows capitalization of costs related to operating property acquisitions that do not meet the definition of
a business under the new guidance discussed below under "Recent Accounting Pronouncements".
The Company values land based on a market approach, looking to recent sales of similar properties, adjusting for
differences due to location, the state of entitlement, as well as the shape and size of the parcel. Improvements to land
are valued using a replacement cost approach. The approach applies industry standard replacement costs adjusted for
geographic specific considerations and reduced by estimated depreciation. The value of buildings acquired is
estimated using the replacement cost approach, assuming the buildings were vacant at acquisition. The replacement
cost approach considers the composition of the structures acquired, adjusted for an estimate of depreciation. The
estimate of depreciation is made considering industry standard information and depreciation curves for the identified
asset classes. The value of acquired lease intangibles considers the estimated cost of leasing the properties as if the
acquired buildings were vacant, as well as the value of the current leases relative to market-rate leases. The in-place
lease value is determined using an estimated total lease-up time and lost rental revenues during such time. The value
of current leases relative to market-rate leases is based on market rents obtained for market comparables. Given the
significance of unobservable inputs used in the valuation of acquired real estate assets, the Company classifies them as
Level 3 inputs in the fair value hierarchy.
The Company values debt assumed in connection with operating property acquisitions based on a discounted cash
flow analysis of the expected cash flows of the debt. Such analysis considers the contractual terms of the debt,
including the period to maturity, credit characteristics, and other terms of the arrangements, which are Level 3 inputs
in the fair value hierarchy.
Real Estate Sales
The Company accounts for the sale of real estate assets and any related gain in accordance with the accounting
guidance applicable to sales of real estate, which establishes standards for recognition of profit on all real estate sales
transactions other than retail land sales. The Company recognizes the sale and associated gain or loss once it transfers
control of the real estate asset and the Company does not have significant continuing involvement.
F-14
Real Estate Investments Held for Sale
Real estate assets classified as held for sale are reported at the lower of their carrying value or their fair value, less
estimated costs to sell. Once a property is classified as held for sale, it is no longer depreciated. A property is classified
as held for sale when: (i) senior management commits to a plan to sell the property, (ii) the property is available for
immediate sale in its present condition, subject only to conditions usual and customary for such sales, (iii) an active
program to locate a buyer and other actions required to complete the plan to sell have been initiated, (iv) the sale is
expected to be completed within one year, (v) the property is being actively marketed for sale at a price that is
reasonable in relation to its current fair value, and (vi) actions required to complete the plan indicate that it is unlikely
that significant changes to the plan will be made or that the plan will be withdrawn.
As of December 31, 2018, the Waynesboro Commons shopping center was classified as held for sale. No properties
were held for sale as of December 31, 2017.
Impairment of Long Lived Assets
The Company evaluates its real estate assets for impairment on a property by property basis whenever events or
changes in circumstances indicate that their carrying amounts may not be recoverable. If such an evaluation is
necessary, the Company compares the carrying amount of any such real estate asset with the undiscounted expected
future cash flows that are directly associated with, and that are expected to arise as a direct result of, its use and
eventual disposition. If the carrying amount of a real estate asset exceeds the associated estimate of undiscounted
expected future cash flows, an impairment loss is recognized to reduce the real estate asset’s carrying value to its fair
value. The impairment charges recognized during the year ended December 31, 2018 primarily relate to the $1.5
million impairment of Waynesboro Commons, which was classified as of held for sale as of December 31, 2018.
Impairment charges recognized during the years ended December 31, 2017 and 2016 represent unamortized leasing or
acquired intangible assets related to vacated tenants.
Interest Income
Interest income on notes receivable is accrued based on the contractual terms of the loans and when it is deemed
collectible. Many loans provide for accrual of interest that will not be paid until maturity of the loan. Interest is
recognized on these loans at the accrual rate subject to the determination that accrued interest is ultimately collectible,
based on the underlying collateral and the status of development activities, as applicable. If this determination cannot
be made, recognition of interest income may be fully or partially deferred until it is ultimately paid.
Cash and Cash Equivalents
Cash and cash equivalents include demand deposits, investments in money market funds, and investments with an
original maturity of three months or less.
Restricted Cash
Restricted cash represents amounts held by lenders for real estate taxes, insurance, and reserves for capital
improvements.
Accounts Receivable, net
Accounts receivable include amounts from tenants for base rents, contingent rents, and cost reimbursements as well as
accrued straight-line rental revenue. As of December 31, 2018 and 2017, accrued straight-line rental revenue presented
within accounts receivable in the consolidated balance sheets was $15.2 million and $12.8 million, respectively.
The Company’s evaluation of the collectability of accounts receivable and the adequacy of the allowance for doubtful
accounts is based primarily upon evaluations of individual receivables, current economic conditions, historical
experience, and other relevant factors. The Company establishes reserves for tenant receivables outstanding over 90
days. For all such tenants, the Company also reserves any related accrued straight-line rental revenue. Additional
reserves are recorded for more current amounts, as applicable, when the Company has determined collectability to be
doubtful. As of December 31, 2018 and 2017, the allowance for doubtful accounts was $0.6 million and $0.5 million,
respectively. The Company presents bad debt expense within rental expenses in the consolidated statements of
comprehensive income.
F-15
Notes Receivable
Notes receivable represent financing to third parties in the form of mortgage or mezzanine loans for the development
of new real estate. The Company's mezzanine loans are typically made to borrowers who have little or no equity in the
underlying development projects. Mezzanine loans are secured, in part, by pledges of ownership interests of the
entities that own the underlying real estate. The loans generally have junior liens on the respective real estate projects.
The Company evaluates the collectability of both the interest on and principal of each of its notes receivable based
primarily upon the financial condition of the individual borrowers. The Company considers factors such as the
progress of development activities, including leasing activities, projected development costs, and current and projected
loan balances. A loan is determined to be impaired when, based upon then-current information, it is no longer probable
that the Company will be able to collect all contractual amounts due from the borrower. The amount of impairment
loss recognized is measured as the difference between the carrying amount of the loan and its estimated realizable
value.
Guarantees
The Company measures and records a liability for the fair value of its guarantees on a nonrecurring basis upon
issuance using Level 3 internally-developed inputs. These guarantees typically relate to payments that could be
required of the Company to senior lenders on its mezzanine loan investments. The Company bases its estimated fair
value on the market approach, which compares the guarantee terms and credit characteristics of the underlying
development project to other projects for which guarantee pricing terms are available. The offsetting entry for the
guarantee liability is a premium on the related loan receivable. The liability is amortized on a straight-line basis over
the remaining term of the guarantee. On a quarterly basis, the Company assesses the likelihood of a contingent liability
in connection with these guarantees and will record an additional guarantee liability if the unamortized guarantee
liability is insufficient.
Leasing Costs
Commissions paid by the Company to third parties to originate a lease are deferred and amortized as depreciation and
amortization expense on a straight-line basis over the term of the related lease. Leasing costs are presented within
other assets in the consolidated balance sheets.
Leasing Incentives
Incentives paid by the Company to tenants are deferred and amortized as reductions to rental revenues on a straight-
line basis over the term of the related lease. Leasing incentives are presented within other assets in the consolidated
balance sheets.
Debt Issuance Costs
Financing costs are deferred and amortized as interest expense using the effective interest method over the term of the
related debt. Debt issuance costs are presented as a direct deduction from the carrying value of the associated debt
liability in the consolidated balance sheets.
Derivative Financial Instruments
The Company may enter into interest rate derivatives to manage exposure to interest rate risks. The Company does not
use derivative financial instruments for trading or speculative purposes. The Company recognizes derivative financial
instruments at fair value and presents them within other assets and liabilities in the 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 caption in the 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.
F-16
Stock-Based Compensation
The Company measures the compensation cost of restricted stock awards based on the grant date fair value. The
Company recognizes compensation cost for the vesting of restricted stock awards using the accelerated attribution
method. Compensation cost associated with the vesting of restricted stock awards is presented within either general
and administrative expenses or general contracting and real estate services expenses in the consolidated statements of
comprehensive income. Total stock-based compensation expense recognized during the years ended December 31,
2018, 2017, and 2016 was $1.3 million, $1.3 million and $1.1 million, respectively. Stock-based compensation for
personnel directly involved in the construction and development of a property is capitalized. During the years ended
December 31, 2018, 2017, and 2016, the Company capitalized $0.7 million, $0.4 million, and $0.3 million,
respectively, of stock-based compensation. The effect of forfeitures of awards is recorded as they occur.
Income Taxes
The Company has elected to be taxed as a REIT for U.S. federal income tax purposes. For continued qualification as a
REIT for federal income tax purposes, the Company must meet certain organizational and operational requirements,
including a requirement to pay distributions to stockholders of at least 90% of annual taxable income, excluding net
capital gains. As a REIT, the Company generally is not subject to income tax on net income distributed as dividends to
stockholders. The Company is subject to state and local income taxes in some jurisdictions and, in certain
circumstances, may also be subject to federal excise taxes on undistributed income. In addition, certain of the
Company’s activities must be conducted by subsidiaries that have elected to be treated as a taxable REIT subsidiary
(“TRS”) subject to both federal and state income taxes. The Operating Partnership conducts its development and
construction businesses through the TRS. The related income tax provision or benefit attributable to the profits or
losses of the TRS and any taxable income of the Company is reflected in the consolidated financial statements.
The Company uses the liability method of accounting for deferred income tax in accordance with GAAP. Under this
method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary
differences between the carrying value of existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using the statutory rates expected to be applied in the periods in which those
temporary differences are settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized
in the period of the change. A valuation allowance is recorded on the Company’s deferred tax assets when it is more
likely than not that such assets will not be realized. When evaluating the realizability of the Company’s deferred tax
assets, all evidence, both positive and negative, is evaluated. Items considered in this analysis include the ability to
carry back losses, the reversal of temporary differences, tax planning strategies, and expectations of future earnings.
Under GAAP, the amount of tax benefit to be recognized is the amount of benefit that is more likely than not to be
sustained upon examination. Management analyzes its tax filing positions in the U.S. federal, state and local
jurisdictions where it is required to file income tax returns for all open tax years. If, based on this analysis,
management determines that uncertainties in tax positions exist, a liability is established. The Company recognizes
accrued interest and penalties related to unrecognized tax positions in the provision for income taxes. If recognized,
the entire amount of unrecognized tax positions would be recorded as a reduction to the provision for income taxes.
Discontinued Operations
Disposals representing a strategic shift that has or will have a major effect on the Company’s operations and financial
results are reported as discontinued operations.
Net Income Per Share and Unit
The Company calculates net income per share and unit based upon the weighted average shares and units outstanding.
Diluted net income per share and unit is calculated after giving effect to all significant potential dilutive shares
outstanding during the period. Potential dilutive shares outstanding during the period include nonvested restricted
stock awards. However, there were no significant potential dilutive shares or units outstanding for each of the three
years ended December 31, 2018. As a result, basic and diluted outstanding shares and units were the same for all
periods presented. See Note 11 for the changes in the Company’s nonvested restricted awards during the year ended
December 31, 2018.
F-17
Recent Accounting Pronouncements
On February 25, 2016, the FASB issued a new lease standard that requires lessees to recognize most leases in their
balance sheets as lease liabilities with corresponding right-of-use assets. The new standard also makes targeted
changes to lessor accounting. The new standard will be effective for the Company on January 1, 2019 and requires a
modified retrospective transition approach for all leases existing at, or entered into after, the beginning of the earliest
comparative period presented, with an option to use certain transition relief. Management is currently evaluating the
potential impact of the new standard on the Company’s consolidated financial statements. The Company is the lessee
on certain long-term ground leases, which represents a majority of the Company's current operating lease payments,
and expects to record lease liabilities and corresponding right-of-use assets totaling between $30.0 million and $45.0
million for these leases under the new standard. The Company anticipates utilizing certain transition relief under the
new standard that will allow the Company not to reassess the classification of any expired or existing leases, the
treatment of initial direct costs relating to these leases, and any lease components of existing service contracts.
Additionally, the Company, as lessor, anticipates utilizing a practical expedient allowing the Company to not allocate
the consideration in a lease to a separate lease component and a nonlease component (relating to certain common area
maintenance activities).
On January 5, 2017, the FASB issued new guidance that modifies the definition of a business. Under this new
guidance, many real estate acquisitions will now be considered asset acquisitions, allowing costs associated with these
acquisitions to be capitalized. The Company adopted this guidance on October 1, 2016, resulting in the capitalization
of approximately $0.7 million of acquisition costs related to two acquisitions in the fourth quarter of 2016. If the
Company had adopted this guidance on January 1, 2016, approximately $1.4 million in acquisition costs would have
been capitalized.
On February 22, 2017, the FASB issued new guidance that clarifies the scope and application of guidance on sales or
transfers of nonfinancial assets and in substance nonfinancial assets to customers, including partial sales. The new
guidance applies to all nonfinancial assets, including real estate, and defines an in substance nonfinancial asset. The
Company adopted the new guidance on January 1, 2018, and it did not have a material impact on the Company's
consolidated financial statements.
On August 28, 2017, the FASB issued new guidance that simplifies some of the requirements relating to accounting
for derivatives and hedging. The new guidance eliminates the requirement to separately measure and report hedge
ineffectiveness for a highly effective hedge and also simplifies certain documentation and assessment requirements
relating to the determination of hedge effectiveness. The Company adopted this guidance effective July 1, 2018. The
application of this guidance to hedging relationships generally eliminates the gains and losses that would otherwise be
recorded for these derivative instruments.
3.
Segments
Net operating income (segment revenues minus segment expenses) is the measure used by the Company’s chief
operating decision-maker to assess segment performance. Net operating income is not a measure of operating income
or cash flows from operating activities as measured by GAAP and is not indicative of cash available to fund cash
needs. As a result, net operating income should not be considered an alternative to cash flows as a measure of
liquidity. Not all companies calculate net operating income in the same manner. The Company considers net operating
income to be an appropriate supplemental measure to net income because it assists both investors and management in
understanding the core operations of the Company’s real estate and construction businesses.
F-18
Net operating income of the Company’s reportable segments for the years ended December 31, 2018, 2017, and 2016
was as follows (in thousands):
Office real estate
Rental revenues
Rental expenses
Real estate taxes
Segment net operating income
Retail real estate
Rental revenues
Rental expenses
Real estate taxes
Segment net operating income
Multifamily residential real estate
Rental revenues
Rental expenses
Real estate taxes
Segment net operating income
General contracting and real estate services
Segment revenues
Segment expenses
Segment gross profit
Net operating income
Years Ended December 31,
2018
2017
2016
$
20,701
$
19,207
$
20,929
5,858
2,034
12,809
67,959
10,903
6,801
50,255
28,298
10,461
2,548
15,289
76,359
73,628
2,731
5,483
1,859
11,865
63,109
10,234
6,175
46,700
26,421
9,705
2,494
14,222
194,034
186,590
7,444
$
81,084
$
80,231
$
5,560
2,000
13,369
56,511
9,116
5,395
42,000
21,915
7,228
2,234
12,453
159,030
153,375
5,655
73,477
Rental expenses represent costs directly associated with the operation and management of the Company’s real estate
properties. Rental expenses include asset management fees, property management fees, repairs and maintenance,
insurance, and utilities.
General contracting and real estate services revenues for the years ended December 31, 2018, 2017, and 2016 exclude
revenue related to intercompany construction contracts of $134.4 million, $51.5 million and $43.3 million,
respectively, as it is eliminated in consolidation. General contracting and real estate services expenses for the years
ended December 31, 2018, 2017, and 2016 exclude expenses related to intercompany construction contracts of $133.4
million, $51.0 million and $42.7 million, respectively, as it is eliminated in consolidation. General contracting and real
estate services expenses for the years ended December 31, 2018, 2017, and 2016 include noncash stock compensation
expense of $0.2 million, $0.3 million, and $0.2 million, respectively.
F-19
The following table reconciles net operating income to net income for the years ended December 31, 2018, 2017, and
2016 (in thousands):
Net operating income
Depreciation and amortization
General and administrative expenses
Acquisition, development and other pursuit costs
Impairment charges
Interest income
Interest expense
Equity in income of unconsolidated real estate entities
Loss on extinguishment of debt
Gain on real estate dispositions
Change in fair value of interest rate derivatives
Other income
Income tax benefit (provision)
Net income
Years Ended December 31,
2018
2017
2016
$
$
81,084
(39,913)
(11,431)
(352)
(1,619)
10,729
(19,087)
372
(11)
4,254
(951)
388
29
$
23,492
$
80,231
(37,321)
(10,435)
(648)
(110)
7,077
(17,439)
—
(50)
8,087
1,127
131
(725)
29,925
$
$
73,477
(35,328)
(9,552)
(1,563)
(355)
3,228
(16,466)
—
(82)
30,533
(941)
147
(343)
42,755
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. General and
administrative expenses include corporate office personnel salaries and benefits, bank fees, accounting fees, legal fees
and other corporate office expenses. General and administrative expenses for the years ended December 31, 2018,
2017, and 2016 include noncash stock compensation expense of $1.1 million, $0.9 million and $0.7 million,
respectively.
4.
Operating Leases
The Company’s commercial tenant leases generally range from five to 20 years, but certain leases with anchor tenants
may be longer. The Company’s commercial tenant leases provide for minimum rental payments during each of the
next five years and thereafter as follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total
$
$
71,838
63,981
57,295
51,271
43,338
180,729
468,452
Lease terms on multifamily apartment units generally range from seven to 15 months, with a majority having 12-
month lease terms. Apartment leases are not included in the preceding table as the remaining terms as of December 31,
2018 are generally less than one year.
F-20
5.
Real Estate Investments and Equity Method Investments
The Company’s real estate investments comprised the following as of December 31, 2018 and 2017 (in thousands):
Land
Land improvements
Buildings and improvements
Development and construction costs
Real estate investments
Land
Land improvements
Buildings and improvements
Development and construction costs
Real estate investments
2018 Operating Property Acquisitions
December 31, 2018
Income
producing
property
Held
for
development
Construction
in
progress
Total
$
192,677
$
2,994
$
17,961
$
213,632
53,521
791,719
—
—
—
—
—
—
117,714
53,521
791,719
117,714
$
1,037,917
$
2,994
$
135,675
$
1,176,586
December 31, 2017
Income
producing
property
Held
for
development
Construction
in
progress
Total
$
175,885
$
680
$
21,212
$
197,777
44,681
690,120
—
—
—
—
—
—
61,859
44,681
690,120
61,859
$
910,686
$
680
$
83,071
$
994,437
On January 9, 2018, the Company acquired Indian Lakes Crossing, a Harris Teeter-anchored shopping center in
Virginia Beach, Virginia, for a contract price of $14.7 million plus capitalized acquisition costs of $0.2 million.
On January 29, 2018, the Company acquired Parkway Centre, a newly developed Publix-anchored shopping center in
Moultrie, Georgia, for total consideration of $11.3 million (comprised of $9.6 million in cash and $1.7 million in the
form of Class A units of limited partnership interest in the Operating Partnership ("Class A Units")) plus capitalized
acquisition costs of $0.3 million.
On August 28, 2018, the Company acquired Lexington Square, a newly developed Lowes Foods-anchored shopping
center in Lexington, South Carolina, for a purchase price of $26.8 million, consisting of cash consideration of $24.2
million and $2.6 million of additional consideration in the form of Class A Units issuable in increments to the seller
upon the fulfillment of certain occupancy thresholds within the first 18 months of the Company's ownership. No Class
A Units have been issued as of December 31, 2018 for this acquisition. As part of this transaction, the Company also
capitalized acquisition costs of $0.4 million.
F-21
The following table summarizes the purchase price allocation (including acquisition costs) based on relative fair value
of the assets acquired and liabilities assumed for the three operating properties purchased during the year ended
December 31, 2018 (in thousands):
Indian Lakes
Crossing
Parkway Centre
Lexington Square
Land
$
10,926
$
1,372
$
Site improvements
Building and improvements
In-place leases
Above-market leases
Below-market leases
Net assets acquired
531
1,913
1,648
11
(175)
$
14,854
$
696
7,168
2,346
—
(10)
11,572
$
3,036
7,396
10,387
4,113
89
(447)
24,574
2017 Operating Property Acquisitions
On July 25, 2017, the Company acquired an outparcel phase of Wendover Village in Greensboro, North Carolina for a
contract price of $14.3 million plus capitalized acquisition costs of $0.1 million. The following table summarizes the
purchase price allocation, including acquisition costs, for this property (in thousands):
Land
Site improvements
Building and improvements
In-place leases
Above-market leases
Below-market leases
Net assets acquired
$
$
5,550
232
6,977
1,382
327
(50)
14,418
2016 Operating Property Acquisitions
On January 14, 2016, the Company completed the acquisition of an 11-property retail portfolio totaling 1.1 million
square feet for $170.5 million.
On April 29, 2016, the Company completed the acquisition of Southgate Square, a 220,000 square foot retail center
located in Colonial Heights, Virginia, for aggregate consideration of $39.5 million, comprised of the assumption of
$21.1 million in debt (which approximated fair value as of the closing date) and 1,575,185 Class A Units.
As part of the Southgate Square purchase agreement, the Company acquired an option to purchase an adjacent
undeveloped land parcel from the seller. The option for the land parcel was valid for an initial period of two years and
was extended for one additional year. The purchase price would be determined by applying a mutually agreed upon
capitalization rate to the base rent of tenants provided by the seller and approved by the Company. On October 12,
2018, the Company entered into a development agreement with the seller to purchase the adjacent parcel and develop
the parcel for a build-to-suite retail tenant for consideration of $5.3 million.
On August 4, 2016, the Company completed the acquisition of Southshore Shops, a 40,000 square foot retail center
located in Midlothian, Virginia, for aggregate consideration of $9.3 million, comprised of $6.7 million in cash and
189,160 Class A Units.
On October 13, 2016, the Company completed the acquisition of Columbus Village II, a 92,000 square foot retail and
entertainment center located in Virginia Beach, Virginia for aggregate consideration of 2,000,000 shares of the
Company's common stock, which, based on the closing stock price on the date of the acquisition, led to an acquisition
price of $26.2 million, excluding capitalized acquisition costs.
F-22
On November 17, 2016, the Company completed the acquisition of Renaissance Square, an 80,000 square foot retail
center located in Davidson, North Carolina, for $17.1 million, excluding capitalized acquisition costs.
The following table summarizes the purchase price allocation (including acquisition costs for Columbus Village II and
Renaissance Square) of the assets acquired and liabilities assumed during the year ended December 31, 2016 (in
thousands):
Retail
Portfolio
Southgate
Square
Southshore
Shops
Columbus
Village II
Renaissance
Square
Land
Site improvements
Building and improvements
In-place leases
Above-market leases
Below-market leases
Net assets acquired
$
66,260
3,870
88,820
20,630
1,960
(11,040)
$ 170,500
$
$
8,890
2,140
23,810
5,990
100
(1,400)
39,530
$
$
1,770
490
6,019
1,140
120
(190)
9,349
$
$
14,536
939
9,983
2,225
—
(939)
26,744
$
$
6,730
303
8,137
2,008
70
(10)
17,238
Total
$ 98,186
7,742
136,769
31,993
2,250
(13,579)
$ 263,361
Subsequent to December 31, 2018
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.
Other 2018 Real Estate Transactions
On November 30, 2017, the Company entered into a lease agreement with Bottling Group, LLC for a new distribution
facility that the Company developed and constructed. On January 29, 2018, the Company acquired undeveloped land
in Chesterfield, Virginia, a portion of which serves as the site for this facility, for a contract price of $2.4 million plus
capitalized acquisition costs of $0.1 million. On December 20, 2018, the Company sold the completed facility for
$25.9 million, resulting in a gain of $3.4 million.
On January 18, 2018, the Company entered into an operating agreement with a partner to develop a Lowes Foods-
anchored shopping center in Mount Pleasant, South Carolina. The Company has a 70% ownership interest in the
partnership. The partnership, Market at Mill Creek Partners, LLC, acquired undeveloped land on February 16, 2018
for a contract price of $2.9 million plus capitalized acquisition costs of $0.1 million. The Company is responsible for
funding the equity requirements of this development. As of December 31, 2018, the book value of the Company's
investment in the project totaled $21.1 million. Management has concluded that this entity is a VIE as it lacks
sufficient equity to fund its operations without additional financial support. The Company is the developer of the
shopping center and has the power to direct the activities of the project that most significantly impact its performance
and is the party most closely associated with the project. Therefore, the Company is the project's primary beneficiary
and consolidates the project in its consolidated financial statements.
On April 2, 2018, the Company acquired undeveloped land in Newport News, Virginia for less than $0.1 million. This
land parcel is being used in the development of the Brooks Crossing Office property.
On May 24, 2018, the Company completed the sale of the Wawa outparcel at Indian Lakes Crossing for a contract
price of $4.4 million. There was no gain or loss on the disposition.
On July 2, 2018, the Company executed a ground lease for the site of a new mixed-use development project at Wills
Wharf, a site in the Harbor Point area of Baltimore, Maryland. The lease has an initial term of five years and includes
ten extension options of seven years each.
On December 31, 2018, the Company sold the leasehold interest in the building previously leased by Home Depot at
Broad Creek Shopping Center for $2.4 million, resulting in a gain on sale of $0.8 million.
F-23
Other 2017 Real Estate Transactions
On January 4, 2017, the Company acquired undeveloped land in Charleston, South Carolina for a contract price of
$7.1 million plus capitalized acquisition costs of $0.2 million. The Company is using the land for the development of
the Hoffler Place property.
On January 20, 2017, the Company completed the sale of the Wawa outparcel at Greentree Shopping Center. Net
proceeds after transaction costs were $4.4 million. The gain on the disposition was $3.4 million.
On July 11, 2017, the Company acquired undeveloped land in Charleston, South Carolina for a contract price of $7.2
million plus capitalized acquisition costs of $0.1 million. The Company is using the land for the development of the
Summit Place property.
On July 13, 2017, the Company completed the sale of two office properties leased by the Commonwealth of Virginia
in Chesapeake, Virginia and Virginia Beach, Virginia. Aggregate net proceeds from the dispositions of the properties
after transaction costs and repayment of the loan associated with the Chesapeake, Virginia property were $7.9 million,
and the aggregate gain on the dispositions was $4.2 million.
On August 10, 2017, the Company completed the sale of a land outparcel at Sandbridge Commons. Net proceeds after
transaction costs and a partial loan paydown were $0.3 million. The gain on the disposition was $0.5 million.
Other 2016 Real Estate Transactions
On January 7, 2016, the Company completed the sale of a building constructed for the Economic Development
Authority of Newport News, Virginia. Net proceeds after transaction costs were $6.6 million. The gain on the
disposition was $0.4 million.
On January 8, 2016, the Company completed the sale of the Richmond Tower office building for $78.0 million. Net
proceeds after transaction costs were $77.0 million. The gain on the disposition of Richmond Tower was $26.2
million.
On June 20, 2016, the Company completed the sale of the Willowbrook Commons property located in Nashville,
Tennessee for $9.2 million. The gain on the sale of the Willowbrook Commons property was less than $0.1 million.
On July 29, 2016, the Company completed the sale of the Kroger Junction property located in Pasadena, Texas for
$3.7 million. The loss on the sale of the Kroger Junction property was less than $0.1 million.
On August 30, 2016, the Company entered into an operating agreement with Southern Apartment Group-Harding,
LLC to jointly develop an apartment development project in Charlotte, North Carolina (Greenside). During the year
ended December 31, 2016, the Company purchased $5.7 million of land in conjunction with the project.
On September 15, 2016, the Company completed the sale of the Oyster Point office property for $6.4 million. Net
proceeds after transaction costs and settlement of liabilities were not significant. The gain on the disposition of Oyster
Point was $3.8 million.
On December 22, 2016, the Company completed the sale of land adjacent to the Brooks Crossing development for
$0.4 million. The gain on the disposition of the land was less than $0.1 million.
Equity Method Investments
City Center
On February 25, 2016, the Company acquired a 37% interest in Durham City Center II, LLC (“City Center”) for
purposes of developing a 22-story mixed-use tower in Durham, North Carolina. The Company is a minority partner in
the joint venture and serves as the project's general contractor, with full ownership of the office and retail portions of
the project. During the years ended December 31, 2018 and 2017, the Company invested $7.3 million and $11.2
million, respectively, in the City Center project. As of December 31, 2018 and 2017, the Company had invested $21.3
million and $10.9 million, respectively, in City Center, and the carrying value of the Company's investment was $22.2
million and $11.4 million, respectively. The Company has agreed to guarantee the commercial component of the
F-24
construction loan for City Center; however, the loan is collateralized by 100% of the assets of City Center. As of
December 31, 2018 and 2017, $48.9 million and $29.2 million, respectively, had been drawn against the construction
loan, of which $18.5 million and $11.2 million, respectively, was attributable to the Company's portion of the loan.
For the year ended December 31, 2018, City Center had operating income of $0.4 million allocated to the Company.
For the years ended December 31, 2017 and 2016, City Center had no operating activity, and therefore the Company
received no allocated income.
Based on the terms of City Center’s operating agreement, the Company has concluded that City Center is a VIE, and
that the Company holds a variable interest. The Company does not have the power to direct the activities of the project
that most significantly impact its performance. Accordingly, the Company is not the project’s primary beneficiary and,
therefore, does not consolidate City Center in its consolidated financial statements.
6.
Notes Receivable
The Company had the following loans receivable outstanding as of December 31, 2018 and December 31, 2017 ($ in
thousands):
Development Project
1405 Point
The Residences at Annapolis Junction
North Decatur Square
Delray Plaza
Nexton Square
Interlock Commercial
Solis Apartments at Interlock
Total mezzanine
Other notes receivable
Notes receivable guarantee premium
Notes receivable discount, net (a)
Outstanding loan amount
December
31, 2018
December
31, 2017
Maximum
loan
commitment
Interest
rate
Interest
compounding
$
30,238
$
22,444
$
36,361
18,521
7,032
14,855
18,269
13,821
43,021
11,790
5,379
—
—
—
31,032
48,105
29,673
15,000
21,000
95,000
41,100
8.0%
10.0%
15.0%
15.0%
15.0%
15.0%
13.0%
Monthly
Monthly
Annually
Annually
Monthly
None
Annually
139,097
82,634
$
280,910
1,275
2,800
(4,489)
424
—
—
Total notes receivable
$ 138,683
$
83,058
_______________________________________
(a) Represents the remaining unamortized portion of the $5.0 million option purchase fee for The Residences at
Annapolis Junction paid by the borrower in November 2018.
F-25
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 years ended December 31, 2018, 2017, and 2016 as
follows (in thousands):
Development Project
1405 Point
The Residences at Annapolis Junction
North Decatur Square
Delray Plaza
Nexton Square
Interlock Commercial
Solis Apartments at Interlock
Total mezzanine
Other interest income
Total interest income
Years Ended December 31,
2018
2017
2016
$
2,080
$
4,939 (a)
2,212
928
235
202
55
10,651
78
1,741
4,132
1,035
163
—
—
—
7,071
6
$
1,204
2,018
—
—
—
—
—
3,222
6
$
10,729
$
7,077
$
3,228
________________________________________
(a) Includes amortization of the $5.0 million option purchase fee paid by the borrower in November 2018.
As of December 31, 2018 and 2017, there was no allowance for loan losses. During the years ended December 31,
2018, 2017, and 2016, there was no provision for loan losses recorded for any of the Company's notes receivable.
1405 Point
On October 15, 2015, the Company entered into a note receivable with a maximum principal balance of $28.2 million
for the 1405 Point project in the Harbor Point area of Baltimore, Maryland (also known as Point Street Apartments).
On November 11, 2018, this loan was modified to increase the maximum amount of the loan to $31.0 million.
1405 Point is a 17-story building comprising 289 residential units and 18,000 square feet of street-level retail space.
Beatty Development Group (“BDG”) is the developer of the project and has engaged the Company to serve as
construction general contractor. 1405 Point opened during the first quarter of 2018 and is subject to a ground lease
from an affiliate of BDG.
BDG secured a senior construction loan of up to $67.0 million to fund the development and construction of 1405 Point
on November 10, 2016. The Company agreed to guarantee $25.0 million of the senior construction loan in exchange
for the option to purchase up to an 88% controlling interest in 1405 Point upon completion of the project as follows:
(i) an option to purchase a 79% indirect interest in 1405 Point for $27.6 million, exercisable within one year from the
project’s completion (the “First Option”) and (ii) provided that the Company has exercised the First Option, an option
to purchase an additional 9% indirect interest in 1405 Point for $3.1 million, exercisable within 27 months from the
project’s completion (the “Second Option”). On December 31, 2018, the Second Option was modified to allow the
Company to purchase the remaining 21% of the project prior to July 31, 2020 in exchange for increased payments
under the ground lease.
The Company currently has a $2.1 million letter of credit for the guarantee of the senior construction loan.
Interest on the BDG mezzanine loan accrues at 8.0% per annum. The BDG mezzanine loan matures on the earliest of:
(i) November 1, 2020, (ii) the maturity date or earlier termination of the senior construction loan, or (iii) the date the
Company exercises the First Option as described above.
In the event the Company exercises the First Option, BDG is required to pay down the outstanding BDG mezzanine
loan in full, with the difference between the BDG loan and $28.2 million applied to the senior construction loan. In the
event the Company does not exercise either the First Option or the Second Option, the interest rate on the BDG loan
will automatically be reduced to the interest rate on the senior construction loan for the remaining term of the BDG
loan.
F-26
Management has concluded that this entity is a VIE. Because BDG is the developer and operator of 1405 Point, the
Company does not have the power to direct the activities of the project that most significantly impact its performance.
Therefore, the Company is not the project's primary beneficiary and does not consolidate the project in its
consolidated financial statements.
The Residences at Annapolis Junction
On April 21, 2016, the Company entered into a note receivable with a maximum principal balance of $48.1 million in
the Annapolis Junction residential component of the Annapolis Junction Town Center project in Maryland (“Annapolis
Junction”). Annapolis Junction is an apartment development project with 416 residential units. It is part of a mixed-use
development project that is also planned to have 17,000 square feet of retail space and a 150-room hotel. Annapolis
Junction Apartments Owner, LLC (“AJAO”) is the developer of the residential component and engaged the Company
to serve as construction general contractor for the residential component. Annapolis Junction opened during 2017 and
2018 and is currently in lease-up.
AJAO secured a senior construction loan of up to $60.0 million to fund the development and construction of
Annapolis Junction's residential component on September 30, 2016. The Company agreed to guarantee up to $25.0
million of the senior construction loan in exchange for the option to purchase up to an 88% controlling interest
in Annapolis Junction upon completion of the project as follows: (i) an option to purchase an 80% indirect interest in
Annapolis Junction's residential component for 91% of the lesser of the seller’s budgeted or actual cost, exercisable
within one year from the project’s completion (the “First Option”) and (ii) provided that the Company exercised the
First Option, an option to purchase an additional 8% indirect interest in Annapolis Junction for 9% of the lesser of the
seller’s actual or budgeted cost, exercisable within 27 months from the project’s completion (the “Second Option”).
Interest on the AJAO loan accrues at 10.0% per annum. 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. The Company has
agreed to guarantee $8.3 million of the senior loan, and the AJAO loan will mature concurrent with the new senior
loan. In conjunction with this refinancing, the Company sold the First Option and Second Option to AJAO for a price
of $5.0 million. Additionally, AJAO repaid $11.1 million of the outstanding mezzanine loan balance, which comprises
a $9.9 million payment of accrued interest and a $1.2 million payment of principal. The Option sale proceeds of $5.0
million is being accounted for as a loan discount that will be recognized as interest income over the one year term of
the loan using the effective interest method.
Management has concluded that this entity is a VIE. Because AJAO is the developer of Annapolis Junction, the
Company does not have the power to direct the activities of the project that most significantly impact its performance.
Therefore, the Company is not the project's primary beneficiary and does not consolidate the project in its
consolidated financial statements.
North Decatur Square
On May 15, 2017, the Company invested in the development of an estimated $34.0 million Whole Foods-anchored
center located in Decatur, Georgia. The Company's investment is in the form of a mezzanine loan of up to $21.8
million to the developer, North Decatur Square Holdings, LLC ("NDSH"). Interest on the loan bears interest at a rate
of 15.0% per annum. The note matures on the earliest of (i) May 15, 2022, (ii) the maturity of the senior construction
loan, (iii) the sale of NDSH, or (iv) the sale of the center. NDSH is current on this loan. During 2018, this loan was
modified to increase the maximum amount of the loan to $29.7 million due to an increase in the square footage of the
Whole Foods store.
Management has concluded that this entity is a VIE. Because NDSH is the developer of North Decatur Square, the
Company does not have the power to direct the activities of the project that most significantly impact its performance.
Therefore, the Company is not the project's primary beneficiary and does not consolidate the project in its
consolidated financial statements.
F-27
Delray Plaza
On October 27, 2017, the Company invested in the development of an estimated $20.0 million Whole Foods-anchored
center located in Delray Beach, Florida. The Company's investment was in the form of a mezzanine loan of up to
$13.1 million to the developer, Delray Plaza Holdings, LLC ("DPH"). The Company has agreed to guarantee payment
of up to $4.8 million of the senior construction loan. On January 8, 2019, this loan was modified to increase the
maximum amount of the loan to $15.0 million and the payment guarantee amount increased to $5.2 million. The
mezzanine loan bears interest at a rate of 15.0% per annum. The note matures on the earliest of (i) October 27, 2020,
(ii) the date of any sale or refinance of the development project, or (iii) the disposition or change in control of the
development project.
Management has concluded that this entity is a VIE. Because DPH is the developer of Delray Plaza, the Company
does not have the power to direct the activities of the project that most significantly impact its performance. Therefore,
the Company is not the project's primary beneficiary and does not consolidate the project in its consolidated financial
statements.
Nexton Square
On August 31, 2018, the Company financed a $2.2 million bridge loan to SC Summerville Brighton, LLC
("Brighton"), the developer of Nexton Square, a shopping center development project located in Summerville, South
Carolina. The shopping center may comprise as many as 16 buildings. On November 7, 2018, the Company increased
the maximum loan amount to $4.9 million. This loan was subsequently modified as described below.
On December 4, 2018, the Company entered into a mezzanine loan agreement with Brighton, which provides for a
maximum capacity of $21.0 million. The previous loan was repaid from proceeds of the mezzanine loan. This note
bears interest at a rate of 15.0% per annum (which will decrease to 10.0% upon completion of certain portions of the
project). The modified note matures on the earliest of (i) December 4, 2020, (ii) the maturity date of the senior
construction loan, including any extension options available and exercised under that loan, or (iii) the date of any sale,
transfer, or refinancing of the project.
The Company agreed to guarantee 50% of the senior construction loan in exchange for the option to purchase the
property upon completion according to a predetermined formula, which is primarily dependent upon Brighton's
leasing activities and the extent to which Brighton elects to complete all or a portion of the total planned space, if
applicable, in response to leasing activities.
On February 8, 2019, Brighton closed on a senior construction loan with a maximum borrowing capacity of $25.2
million. Brighton used proceeds from its original draw in part to repay $2.1 million of the mezzanine loan.
Management has concluded that this entity is a VIE. Because Brighton is the developer of Nexton Square, the
Company does not have the power to direct the activities of the project that most significantly impact its performance.
Therefore, the Company is not the project's primary beneficiary and does not consolidate the project in its
consolidated financial statements.
Interlock Commercial
In October 2018, the Company financed a bridge loan with a maximum commitment of $4.0 million to The Interlock,
LLC ("Interlock"), the developer of the office and retail components of The Interlock, a new mixed-use public-private
partnership with Georgia Tech in West Midtown Atlanta. This loan was subsequently modified as described below.
On December 21, 2018, the Company entered into a mezzanine loan agreement with Interlock for a maximum
principal amount of $67.0 million and a total maximum commitment, including accrued interest reserves, of $95.0
million. The previous loan was repaid from proceeds of the mezzanine loan. The mezzanine loan bears interest at a
rate of 15.0% per annum and matures at the earlier of (i) 24 months after the original maturity date or earlier
termination date of the senior construction loan or (ii) any sale, transfer, or refinancing of the project. In the event that
the maturity date is established as being 24 months after the original maturity date or earlier termination date of the
senior construction loan, Interlock will have the right to extend the maturity date for 5 years.
The Company has agreed to guarantee payment of 35% of the senior construction loan. Interlock had not yet obtained
a senior construction loan as of December 31, 2018. See Note 18 for additional discussion.
F-28
Management has concluded that this entity is a VIE. Because Interlock is the developer of The Interlock, the Company
does not have the power to direct the activities of the project that most significantly impact its performance. Therefore,
the Company is not the project's primary beneficiary and does not consolidate the project in its consolidated financial
statements.
Solis Apartments at Interlock
On December 21, 2018, the Company entered into a mezzanine loan agreement with Interlock Mezz Borrower, LLC
("Solis Interlock"), the developer of Solis Apartments at Interlock, which is the apartment component of The Interlock.
The mezzanine loan has a maximum principal commitment of $25.2 million and a total maximum commitment,
including accrued interest reserves, of $41.1 million. The mezzanine loan bears interest at a rate of 13.0% per annum
and matures on the earlier of (a) the later of (i) December 21, 2021 or (ii) the maturity date or earlier termination date
of the senior construction loan, including any extensions of the senior construction loan, or (b) the date of any sale of
the project or refinance of the loan.
Management has concluded that this entity is a VIE. Because Solis Interlock is the developer of Solis Apartments at
Interlock, the Company does not have the power to direct the activities of the project that most significantly impact its
performance. Therefore, the Company is not the project's primary beneficiary and does not consolidate the project in
its consolidated financial statements.
Guarantee liabilities
As of December 31, 2018, the Company had outstanding payment guarantees for the senior loans on Residences at
Annapolis Junction, Delray Plaza, and 1405 Point, as described above. As of December 31, 2018, the Company has
recorded a guarantee liability of $2.8 million, representing their unamortized fair value. These guarantees are
classified as other liabilities on the Company's consolidated balance sheets, with a corresponding adjustment to the
notes receivable balance on the consolidated balance sheets. See Note 18 for additional information on the Company's
outstanding guarantees.
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 December 31, 2018 during the year ending December 31, 2019.
Billings in excess of construction contract costs and estimated earnings represent billings or collections on contracts
made in advance of revenue recognized.
F-29
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 year ended December 31, 2018 (in thousands):
Construction contract costs
and estimated earnings in
excess of billings
Billings in excess of
construction contract costs
and estimated earnings
Balance as of January 1, 2018
Revenue recognized that was included in the balance
at the beginning of the period
Increases due to new billings, excluding amounts
recognized as revenue during the period
Transferred to receivables
Construction contract costs and estimated earnings not
billed during the period
Changes due to cumulative catch-up adjustment
arising from changes in the estimate of the stage of
completion
Balance as of December 31, 2018
$
$
245
$
—
—
(245)
352
1,006
1,358
$
3,591
(3,591)
4,243
—
—
(1,206)
3,037
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 $1.4 million and $0.6 million were deferred as of December 31, 2018
and 2017, respectively. Amortization of pre-contract costs for the year ended December 31, 2018 totaled less than $0.1
million.
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 December 31,
2018 and 2017, construction receivables included retentions of $8.5 million and $9.9 million, respectively. The
Company expects to collect substantially all construction receivables as of December 31, 2018 during the year ending
December 31, 2019. As of December 31, 2018 and 2017, construction payables included retentions of $21.6 million
and $17.4 million, respectively. The Company expects to pay substantially all construction payables as of
December 31, 2018 during the year ending December 31, 2019.
The Company’s net position on uncompleted construction contracts comprised the following as of December 31, 2018
and 2017 (in thousands):
Costs incurred on uncompleted construction contracts
Estimated earnings
Billings
Net position
Construction contract costs and estimated earnings in excess of billings
Billings in excess of construction contract costs and estimated earnings
Net position
December 31,
2018
2017
594,006
$
520,368
20,375
(616,060)
(1,679) $
18,070
(541,784)
(3,346)
December 31,
2018
2017
$
1,358
(3,037)
(1,679) $
245
(3,591)
(3,346)
$
$
$
$
F-30
The Company's balances and changes in construction contract price allocated to unsatisfied performance obligations
(backlog) for each of the three years ended December 31, 2018 were as follows (in thousands):
Years Ended December 31,
2018
2017
2016
Beginning backlog
New contracts/change orders
Work performed
Ending backlog
$
$
49,167
$
217,718
$
83,433
192,852
(76,156)
165,863
$
25,224
(193,775)
49,167
$
293,115
(158,830)
217,718
The Company expects to complete a majority of the uncompleted contracts as of December 31, 2018 during the next
12 to 18 months.
F-31
8.
Indebtedness
The Company’s indebtedness comprised the following as of December 31, 2018 and 2017 (dollars in thousands):
Principal Balance
December 31,
2018
2017
Interest Rate
Maturity Date
December 31,
2018
Secured Debt
Columbus Village Note 1
Columbus Village Note 2
North Point Center Note 1 (b)
Greenside (Harding Place)
Premier (Town Center Phase VI)
Hoffler Place (King Street)
Summit Place (Meeting Street)
Southgate Square
4525 Main Street (c)
Encore Apartments (c)
Hanbury Village
Socastee Commons
Sandbridge Commons
249 Central Park Retail (d)
South Retail (d)
Fountain Plaza Retail (d)
Lightfoot Marketplace
Brooks Crossing Office
Market at Mill Creek
Johns Hopkins Village
North Point Center Note 2
Lexington Square
Smith's Landing
Liberty Apartments
The Cosmopolitan
Total secured debt
Unsecured Debt
$
— $
—
9,352
25,902
19,214
11,445
11,057
21,442
32,034
24,966
19,019
4,671
8,258
17,045
7,483
10,257
10,500
6,910
7,283
52,708
2,346
14,940
18,985
14,437
44,468
6,080
2,218
9,571
3,874
1,505
—
—
20,708
32,034
24,966
19,503
4,771
8,468
16,851
7,394
10,145
10,500
—
—
46,698
2,459
—
19,764
14,694
45,209
$
394,722
$
307,412
LIBOR + 2.00% (a)
LIBOR + 2.00%
April 5, 2018
April 5, 2018
6.45%
February 5, 2019
LIBOR + 2.95%
LIBOR + 3.50%
LIBOR + 3.24%
LIBOR + 3.24%
LIBOR + 1.60%
3.25%
3.25%
3.78%
4.57%
LIBOR + 1.75%
LIBOR + 1.60%
LIBOR + 1.60%
LIBOR + 1.60%
February 24, 2020
June 29, 2020
January 1, 2021
January 1, 2021
April 29, 2021
September 10, 2021
September 10, 2021
August 15, 2022
January 6, 2023
January 17, 2023
August 10, 2023
August 10, 2023
August 10, 2023
LIBOR + 1.75% (a)
October 12, 2023
LIBOR + 1.60%
LIBOR + 1.55%
July 1, 2025
July 12, 2025
LIBOR + 1.25% (a)
August 7, 2025
7.25%
4.50%
4.05%
5.66%
3.35%
September 15, 2025
September 1, 2028
June 1, 2035
November 1, 2043
July 1, 2051
Senior unsecured revolving credit facility
126,000
80,000
50,000
50,000
66,000
50,000
50,000
50,000
LIBOR+1.40%-2.00%
LIBOR+1.35%-1.95%
October 26, 2021
October 26, 2022
LIBOR+1.35%-1.95% (a)
October 26, 2022
LIBOR+1.35%-1.95% (a)
October 26, 2022
Senior unsecured term loan
Senior unsecured term loan
Senior unsecured term loan
Total unsecured debt
Total principal balances
Unamortized fair value adjustments
Unamortized debt issuance costs
$
$
306,000
700,722
$
$
216,000
523,412
(1,173)
(5,310)
(1,211)
(4,929)
Indebtedness, net
$
694,239
$
517,272
________________________________________
(a) Subject to an interest rate swap agreement.
(b) On January 31, 2019, North Point Note 1 was paid off.
(c) Cross collateralized.
(d) Cross collateralized.
F-32
The Company’s indebtedness was comprised of the following fixed and variable-rate debt as of December 31, 2018
and 2017 (in thousands):
December 31,
2018
2017
Fixed-rate debt
Variable-rate debt
Total principal balance
$
$
348,426
352,296
700,722
$
$
229,051
294,361
523,412
Certain loans require the Company to comply with various financial and other covenants, including the maintenance
of minimum debt coverage ratios. As of December 31, 2018, the Company was in compliance with all loan covenants.
Scheduled principal repayments and maturities during each of the next five years and thereafter are as follows (in
thousands):
Year
2019
2020
2021
2022
2023
Thereafter
Total
Scheduled
Principal
Payments
Maturities
Total Payments
$
5,593
$
9,333
$
6,626
5,821
4,803
11,264
71,475
45,116
222,744
197,109
47,244
73,594
$
105,582
$
595,140
$
14,926 (1)
51,742
228,565
201,912
58,508
145,069
700,722
________________________________________
(1) On January 31, 2019, North Point Note 1 was paid off; this is the only debt maturity in 2019.
Credit Facility
On October 26, 2017, the Operating Partnership entered into an amended and restated credit agreement (the “credit
agreement”), which provides for a $300.0 million credit facility comprised of a $150.0 million senior unsecured
revolving credit facility (the "revolving credit facility") and a $150.0 million senior unsecured term loan facility (the
“term loan facility” and, together with the revolving credit facility, the “credit facility”), with a syndicate of banks.
The amended credit facility replaces the prior $150.0 million revolving credit facility, which was scheduled to mature
on February 20, 2019, and the prior $125.0 million term loan facility, which was scheduled to mature on February 20,
2021.
The credit facility includes an accordion feature that allows the total commitments to be increased to $450.0 million,
subject to certain conditions, including obtaining commitments from any one or more lenders. The revolving credit
facility has a scheduled maturity date of October 26, 2021, with two six-month extension options, subject to certain
conditions, including payment of a 0.075% extension fee at each extension. The term loan facility has a scheduled
maturity date of October 26, 2022.
On March 28, 2018, the Operating Partnership increased the maximum commitments under the credit facility to
$330.0 million using the accordion feature, with an increase of the term loan facility to $180.0 million.
The revolving credit facility bears interest at LIBOR (the London Inter-Bank Offered Rate) plus a margin ranging
from 1.40% to 2.00%, and the term loan facility bears interest at LIBOR plus a margin ranging from 1.35% to 1.95%,
in each case depending on the Company's total leverage. The Company is also obligated to pay an unused commitment
fee of 15 or 25 basis points on the unused portions of the commitments under the revolving credit facility, depending
on the amount of borrowings under the credit facility. As of December 31, 2018, the interest rates on the revolving
credit facility and the term loan facility were 4.05% and 4.00%, respectively. If the Company attains investment grade
credit ratings from S&P and Moody’s, the Operating Partnership may elect to have borrowings become subject to
interest rates based on such credit ratings. The Company may, at any time, voluntarily prepay any loan under the credit
facility in whole or in part without premium or penalty.
F-33
The Operating Partnership is the borrower under the credit facility, and its obligations under the credit facility are
guaranteed by the Company and certain of its subsidiaries that are not otherwise prohibited from providing such
guaranty. The credit agreement contains customary representations and warranties and financial and other affirmative
and negative covenants. The Company's ability to borrow under the credit facility is subject to ongoing compliance
with a number of financial covenants, affirmative covenants, and other restrictions. The credit agreement includes
customary events of default, in certain cases subject to customary cure periods. The occurrence of an event of default,
if not cured within the applicable cure period, would permit the lenders to, among other things, declare the unpaid
principal, accrued and unpaid interest, and all other amounts payable under the credit facility to be immediately due
and payable.
The Company is currently in compliance with all covenants under the credit facility.
Other 2018 Financing Activity
On January 22, 2018, the Company extended and modified the Sandbridge Commons note. The note bears interest at a
rate of LIBOR plus a spread of 1.75% and will mature on January 17, 2023.
On March 27, 2018, the Company paid off Columbus Village Note 1 and Columbus Village Note 2 in full for an
aggregate amount of $8.3 million.
On May 31, 2018, the Company modified the Southgate Square note. The principal amount of the note was increased
to $22.0 million, and the note now bears interest at a rate of LIBOR plus a spread of 1.60%. This note will still mature
on April 29, 2021.
On June 1, 2018, the Company entered into a $16.3 million construction loan for the River City industrial facility in
Chesterfield, Virginia. The loan bore interest at a rate of LIBOR plus a spread of 1.50%. On December 20, 2018, the
Company sold the completed facility and paid the loan in full.
On June 14, 2018, the Company extended and modified the note secured by 249 Central Park Retail, Fountain Plaza
Retail, and South Retail. The principal amount of the note was increased to $35.0 million. The note bears interest at a
rate of LIBOR plus a spread of 1.60% and will mature on August 10, 2023.
On June 29, 2018, the Company entered into a $15.6 million construction loan for the Brooks Crossing Office
development project. The loan bears interest at a rate of LIBOR plus a spread of 1.60% and will mature on July 1,
2025.
On July 12, 2018, the Company entered into a $16.2 million construction loan for the Market at Mill Creek
development project in Mt. Pleasant, South Carolina. The loan bears interest at a rate of LIBOR plus a spread of
1.55% and will mature on July 12, 2025.
On July 27, 2018, the Company paid off the Johns Hopkins Village note and entered into a new loan. The principal
amount of the new loan is $53.0 million. The loan bears interest at a rate of LIBOR plus a spread of 1.25% and will
mature on August 7, 2025. The Company simultaneously entered into an interest rate swap agreement that effectively
fixes the interest rate at 4.19% for the term of the loan.
On August 28, 2018, the Company entered into a $15.0 million note secured by the newly acquired Lexington Square
shopping center. The note bears interest at a rate of 4.50% and will mature on September 1, 2028.
On October 12, 2018, the Company extended and modified the note secured by Lightfoot Marketplace. Under the
modified note, the Company may borrow up to $17.9 million. The Company has borrowed an initial tranche of $10.5
million on this note, which bears interest at a rate of LIBOR plus a spread of 1.75% until stabilization of the property,
whereupon the spread will be reduced to 1.60%. The note matures on October 12, 2023. The Company simultaneously
entered into an interest rate swap agreement that effectively fixes the interest rate of this initial tranche at 4.77% per
annum until stabilization and 4.62% per annum thereafter.
During the year ended December 31, 2018, the Company borrowed $86.9 million under its existing construction loans
to fund new development and construction and repaid $10.5 million in conjunction with the sale of the River City
industrial facility.
F-34
Subsequent to December 31, 2018
On January 31, 2019, the Company increased the maximum commitments under the credit facility to $355.0 million
using the accordion feature, with an increase of the term loan facility to $205.0 million.
On January 31, 2019, the Company paid off North Point Center Note 1.
Borrowings under the revolving credit facility were $123.0 million on February 26, 2019.
Other 2017 Financing Activity
On February 1, 2017, the Company paid off the North Point Center Note 5 in full for $0.6 million.
On February 24, 2017, the Company secured a $29.8 million construction loan for the Harding Place project in
Charlotte, North Carolina.
On April 7, 2017, the Company paid off the Harrisonburg Regal note in full for $3.2 million.
On April 19, 2017, the Company entered into a second amendment to the credit agreement for the Lightfoot
Marketplace loan, which amended certain definitions and covenant requirements.
On June 29, 2017, the Company secured a $27.9 million construction loan for the Town Center Phase VI project in
Virginia Beach, Virginia.
On July 13, 2017, the Company paid off the remaining balance of $4.9 million for the note secured by the
Commonwealth of Virginia building in Chesapeake, Virginia in conjunction with the sale of this property.
On August 9, 2017, the Company refinanced the Hanbury Village note. The new note matures in August 2022 and has
a fixed annual interest rate of 3.78%.
On August 10, 2017, the Company paid off $0.7 million of the Sandbridge Commons note in conjunction with the sale
of a land outparcel at this property.
On September 1, 2017, the Company entered into a modification of The Cosmopolitan note, which reduced the
interest rate from 3.75% to 3.35%.
On October 13, 2017, the Company paid down $5.0 million of the Liberty Apartments note.
On November 1, 2017, the Company extended the Lightfoot construction loan after paying the balance down to $10.5
million and paying an extension fee.
On December 28, 2017, the Company secured a $66.5 million construction loan for the 595 King Street and 530
Meeting Street development projects.
During the year ended December 31, 2017, the Company borrowed $8.9 million under its construction loans to fund
new development and construction.
Other 2016 Financing Activity
On August 8, 2016, the Company repaid the existing $15.1 million mortgage loan secured by 249 Central Park Retail,
the $6.7 million mortgage loan on South Retail, and the $7.6 million mortgage loan on Fountain Plaza and refinanced
them with a $35.0 million five-year term mortgage loan that bears interest at LIBOR plus 1.95% and matures on
August 8, 2021. The new mortgage loan is collateralized by all three properties. The loss on extinguishment of debt
recognized on the refinancing was less than $0.1 million.
On August 30, 2016, the Company repaid the existing $31.6 million construction loan secured by 4525 Main Street
and the $25.2 million construction loan on Encore Apartments and refinanced them with a $57.0 million five-year
term mortgage loan that bears interest at 3.25% and matures on September 10, 2021. The new mortgage is
F-35
collateralized by both properties. The loss on extinguishment of debt recognized on the refinancing was less than $0.1
million for the year ended December 31, 2016.
During the year ended December 31, 2016, the Company borrowed $44.4 million under its construction loans to fund
new development and construction.
9.
Derivative Financial Instruments
During the three years ended December 31, 2018, the Company had the following LIBOR interest rate caps ($ in
thousands):
Origination Date
Expiration Date
10/26/2015
10/15/2017
$
2/25/2016
6/17/2016
2/7/2017
6/23/2017
9/18/2017
7/28/2017
3/7/2018
7/16/2018
12/11/2018
3/1/2018
6/17/2018
3/1/2019
7/1/2019
10/1/2019
12/1/2019
4/1/2020
8/1/2020
1/1/2021
Notional
Amount
Strike Rate
Premium Paid
75,000
75,000
70,000
50,000
50,000
50,000
50,000
50,000
50,000
50,000
1.25% $
1.50%
1.00%
1.50%
1.50%
1.50%
1.50%
2.25%
2.50%
2.75%
137
57
150
187
154
199
359
310
319
210
On February 20, 2015, the Operating Partnership entered into a $50.0 million floating-to-fixed interest rate swap
attributable to one-month LIBOR indexed interest payments. The $50.0 million interest rate swap has a fixed rate of
2.00%, an effective date of March 1, 2016 and a maturity date of February 20, 2020. The Operating Partnership
entered into this interest rate swap agreement in connection with a $50.0 million term loan under the senior unsecured
term loan facility that bears interest at LIBOR plus 1.35% to 1.95%, depending on the Operating Partnership’s total
leverage. The Company designated this interest rate swap as a cash flow hedge of variable interest payments based on
one-month LIBOR.
On July 13, 2015, the Operating Partnership entered into a $6.5 million floating-to-fixed interest rate swap attributable
to one-month LIBOR indexed interest payments. The $6.5 million interest rate swap had a fixed rate of 3.05%, an
effective date of July 13, 2015 and a maturity date of April 5, 2018. The Company designated this interest rate swap as
a cash flow hedge of variable interest payments based on one-month LIBOR.
On April 23, 2018, the Operating Partnership entered into a floating-to-fixed interest rate swap attributable to one-
month LIBOR indexed interest payments with a notional amount of $50.0 million. The interest rate swap has a fixed
rate of 2.783%, an effective date of May 1, 2018, and a maturity date of May 1, 2023.
On July 27, 2018, the Company entered into a LIBOR interest rate swap agreement that effectively fixes the interest
rate of the new Johns Hopkins Village note payable at 4.19% per annum with a maturity date of August 7, 2025. The
Company has designated the interest rate swap as a cash flow hedge for accounting purposes.
On October 12, 2018, the Company entered into a LIBOR interest rate swap agreement that effectively fixes the
interest rate of the initial $10.5 million tranche of the new Lightfoot Marketplace note payable at 4.77% per annum
until stabilization and 4.62% per annum thereafter. The swap matures on October 12, 2023. The Company has
designated the interest rate swap as a cash flow hedge for accounting purposes.
During the year ended December 31, 2018, unrealized losses of $1.9 million were recorded to other comprehensive
loss, and $0.2 million of realized losses were reclassified out of accumulated other comprehensive loss to interest
expense due to payments made to swap counterparties during the year ended December 31, 2018 for interest rate
swaps designated as cash flow hedges. During the next 12 months, the Company anticipates reclassifying
approximately $0.3 million of net hedging losses from accumulated other comprehensive loss into earnings to offset
the variability of the hedged items during this period.
F-36
The Company’s derivatives comprised the following as of December 31, 2018 and 2017 (in thousands):
December 31,
2018
Fair Value
2017
Fair Value
Derivatives not designated as accounting
hedges
Interest rate swaps
Interest rate caps
Total derivatives not designated as
accounting hedges
Interest rate swaps designated as accounting
hedge
Total derivatives
Notional
Amount
Asset
Liability
Notional
Amount
Asset
Liability
$100,000
$
303
$
350,000
1,790
(749) $ 56,079
— 345,000
$
10
$
1,515
450,000
2,093
(749)
401,079
1,525
63,208
—
$513,208
$
2,093
(1,725)
—
$ (2,474) $401,079
—
$
1,525
$
(69)
—
(69)
—
(69)
The changes in the fair value of the Company’s derivatives during the years ended December 31, 2018, 2017, and
2016 was as follows (in thousands):
Interest rate swaps
Interest rate caps
Total change in fair value of interest rate derivatives
Comprehensive income statement presentation:
Change in fair value of interest rate derivatives
Unrealized cash flow hedge losses
Total
Years Ended December 31,
2018
2017
2016
$
$
$
$
(2,281) $
(564)
(2,845) $
(951) $
(1,894)
(2,845) $
770
357
1,127
1,127
—
1,127
$
$
$
$
(795)
(146)
(941)
(941)
—
(941)
Effective March 31, 2016, the Company determined that the short-cut method of hedge accounting was not
appropriate for two of its interest-rate swaps and, for accounting purposes, the hedge relationship was terminated. The
swaps were entered into in February and July 2015. Accordingly, changes in fair value of the swap should have been
recorded in income rather than other comprehensive income. The Company determined that the errors were immaterial
to all previously issued financial statements. The Company recognized $0.7 million of accumulated other
comprehensive income and $0.4 million, which was previously allocated to noncontrolling interest as of December 31,
2015, in earnings during the first quarter of 2016. Subsequent changes in the value of the interest rate swap for the
period from January 1, 2016 to December 31, 2018 were also recognized in earnings during the years ended
December 31, 2018 and 2017.
The Company has not designated any of its interest rate caps as hedging instruments for accounting purposes.
10.
Equity
Stockholders’ Equity
As of December 31, 2018 and 2017, the Company’s authorized capital was 500 million shares of common stock and
100 million shares of preferred stock. The Company had 50.0 million and 44.9 million shares of common stock issued
and outstanding as of December 31, 2018 and 2017, respectively. No shares of preferred stock were issued and
outstanding as of December 31, 2018 and 2017.
On May 5, 2015, the Company commenced an at-the-market continuous equity program through which the Company
was able to, from time to time, issue and sell shares of its common stock having an aggregate offering price of up to
$50.0 million (the "2015 ATM Program"). During the year ended December 31, 2016, the Company issued and sold
1,152,919 shares of common stock at a weighted average price of $10.87 per share, resulting in net proceeds to the
Company after offering costs and commissions of $12.2 million.
F-37
On May 4, 2016, the Company commenced a new at-the-market continuous equity offering program (the “2016 ATM
Program”) through which the Company was able to, from time to time, issue and sell shares of its common stock
having an aggregate offering price of up to $75.0 million. Upon commencing the 2016 ATM Program, the Company
simultaneously terminated the 2015 ATM Program. During the years ended December 31, 2017 and 2016, the
Company issued and sold 450,890 and 4,159,936 shares of common stock at a weighted average price of $14.08 and
$13.45 per share under the 2016 ATM Program, receiving net proceeds after offering costs and commissions of $6.2
million and $54.8 million, respectively.
On February 26, 2018, the Company commenced a new at-the-market continuous equity offering program (the "2018
ATM Program") through which the Company is able to, from time to time, issue and sell shares of its common stock
having an aggregate offering price of up to $125.0 million. Upon commencing the 2018 ATM Program, the Company
simultaneously terminated the 2016 ATM Program. During the year ended December 31, 2018, the Company issued
and sold 4,617,409 shares of common stock at a weighted average price of $14.39 per share under the 2018 ATM
Program, receiving net proceeds after offering costs and commissions of $65.2 million.
On October 13, 2016, the Company completed the acquisition of Columbus Village II, a stabilized retail asset for
aggregate consideration of 2,000,000 shares of common stock, which based on the closing stock price on the date of
the acquisition, resulting in an acquisition price of $26.2 million. On October 19, 2016, the Company filed a
registration statement covering resales of the shares pursuant to a registration rights agreement with the sellers.
On May 12, 2017, the Company completed an underwritten public offering of 6,900,000 shares of common stock at a
public offering price of $13.00 per share, which resulted in net proceeds after offering costs and commissions of $85.3
million.
Redeemable Noncontrolling Interests
The former noncontrolling interest holder of Johns Hopkins Village had an option to redeem the 20% noncontrolling
interest in that entity. The noncontrolling interest of $2.0 million was included in temporary equity. On December 21,
2017, the Company redeemed the noncontrolling interest for a cash payment of $2.0 million and contingent future
consideration of $0.5 million to be paid in Class A Units of the Operating Partnership upon the satisfaction of certain
conditions. On April 17, 2018, the Operating Partnership issued 36,684 Class A Units valued at $13.77 per unit due to
the satisfaction of these conditions.
Noncontrolling Interests
As of December 31, 2018 and 2017, the Company held a 74.5% and 72.0% interest in the Operating Partnership,
respectively. The Company is the primary beneficiary of the Operating Partnership as it has the power to direct the
activities of the Operating Partnership and the rights to absorb 74.5% of the net income of the Operating Partnership.
As the primary beneficiary, the Company consolidates the financial position and results of operations of the Operating
Partnership. Noncontrolling interests in the Company represent units of limited partnership interest in the Operating
Partnership not held by the Company. As of December 31, 2018, there were 17,110,404 Class A Units not held by the
Company. The Company's financial position and results of operations are the same as those of the Operating
Partnership.
The noncontrolling interest for the consolidated entities under development or construction (see Note 1) was zero as of
December 31, 2018 and 2017.
As partial consideration for Columbus Village, the Operating Partnership issued 1,000,000 class B units of limited
partnership interest in the Operating Partnership ("Class B Units") on July 10, 2015 and issued 275,000 class C units
of limited partnership interest in the Operating Partnership ("Class C Units") on January 10, 2017. The Class B Units
were automatically converted to Class A Units on July 10, 2017. The Class C Units were automatically converted to
Class A Units on January 10, 2018.
On January 10, 2017, the Operating Partnership issued 68,691 Class A Units to acquire the remaining 20% interest in
the Town Center Phase VI project.
On October 2, 2017, due to the request of holders of Class A Units to tender an aggregate 358,879 Class A Units for
redemption by the Operating Partnership, the Company elected to satisfy the redemption requests with an aggregate
cash payment of $4.9 million.
F-38
On January 2, 2018, due to the holders of Class A Units tendering an aggregate of 163,000 Class A Units for
redemption by the Operating Partnership, the Company elected to satisfy the redemption request through the issuance
of an equal number of shares of common stock.
As partial consideration for the acquisition of Parkway Centre, the Operating Partnership issued 117,228 Class A Units
on January 29, 2018.
On April 2, 2018, due to the holders of Class A Units tendering an aggregate of 187,142 Class A Units for redemption
by the Operating Partnership, the Company elected to satisfy the redemption request with an aggregate cash payment
of $2.5 million.
On April 17, 2018, the Operating Partnership issued 36,684 Class A Units to the former noncontrolling interest holder
of John Hopkins Village due to the satisfaction of a contingent event that was part of the redemption of its redeemable
noncontrolling interest in Johns Hopkins Village in December 2017.
On July 2, 2018, due to the holders of Class A Units tendering an aggregate of 123,504 Class A Units for redemption
by the Operating Partnership, the Company elected to satisfy the redemption requests through the issuance of an equal
number of shares of common stock.
On October 1, 2018, due to the holders of Class A Units tendering an aggregate of 56,495 Class A Units for
redemption by the Operating Partnership, the Company elected to satisfy the redemption requests through the issuance
of 52,200 shares of common stock and a cash payment of $0.1 million.
Holders of OP Units may not transfer their units without the Company’s prior consent as general partner of the
Operating Partnership. Subject to the satisfaction of certain conditions, holders of Class A Units may tender their units
for redemption by the Operating Partnership in exchange for cash equal to the market price of shares of the
Company’s common stock at the time of redemption or, at the Company’s option and sole discretion, for unregistered
or registered shares of common stock on a one-for-one basis. Accordingly, the Company presents OP Units of the
Operating Partnership not held by the Company as noncontrolling interests within equity in the consolidated balance
sheets.
Common Stock Dividends and Class A Unit Distributions
During the years ended December 31, 2018, 2017, and 2016, the Company declared dividends per share and
distributions per unit of $0.80, $0.76, and $0.72, respectively. During the years ended December 31, 2018, 2017, and
2016, the Company paid cash dividends totaling $38.7 million, $31.1 million, and $22.7 million, respectively, to
common stockholders, and the Operating Partnership paid cash distributions totaling $13.8 million, $12.6 million, and
$11.1 million, respectively to holders of Class A Units.
The tax treatment of dividends paid to common stockholders during the years ended December 31, 2018, 2017, and
2016 was as follows (unaudited):
Capital gains
Ordinary income
Return of capital
Total
Subsequent to December 31, 2018
Years ended December 31,
2018
2017
2016
9.49%
63.40%
27.11%
100.00%
9.06%
71.59%
19.35%
100.00%
—%
78%
22%
100%
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.
F-39
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. These dividends and distributions were
declared and accrued as of December 31, 2018.
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 December 31, 2018, the Company had 963,983 shares of
common stock reserved for issuance under the Equity Plan.
During the years ended December 31, 2018, 2017, and 2016, the Company granted an aggregate of 164,241, 118,361
and 121,243 shares of restricted stock to employees and nonemployee directors, respectively. The grant date fair value
of the restricted stock awards granted during the years ended December 31, 2018, 2017, and 2016 was $2.2 million,
$1.7 million and $1.4 million, respectively. 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. Nonemployee 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 years ended December 31, 2018, 2017, and 2016, the Company recognized $2.0 million, $1.5 million and
$1.2 million of stock-based compensation, respectively. As of December 31, 2018, the total unrecognized
compensation cost related to nonvested restricted shares was $0.6 million, substantially all of which the Company
expects to recognize over the next 15 months.
The following table summarizes the changes in the Company’s nonvested restricted stock awards during the year
ended December 31, 2018:
Nonvested as of January 1, 2018
Granted
Vested
Forfeited
Nonvested as of December 31, 2018
Restricted Stock
Awards
Weighted Average
Grant Date Fair
Value Per Share
112,789
$
164,241
(137,431)
(14,370)
125,229
$
13.14
13.66
13.22
13.55
13.68
Restricted stock awards granted and vested during the year ended December 31, 2018 include 30,016 shares tendered
by employees to satisfy minimum statutory tax withholding obligations.
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 Inputs—quoted prices in active markets for identical assets or liabilities
Level 2 Inputs—observable inputs other than quoted prices in active markets for identical assets and
liabilities
Level 3 Inputs—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.
F-40
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 measure fair value may fall into different levels of the fair value hierarchy. For
disclosure purposes, the level within which the fair value measurement is categorized is based on the lowest level
input that is significant to the fair value measurement.
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 December 31, 2018 and 2017 were
as follows (in thousands):
December 31,
2018
2017
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
$
694,239
$
688,437
$
517,272
$
138,683
138,683
2,474
2,093
2,474
2,093
83,058
69
1,525
518,417
83,058
69
1,525
Indebtedness, net
Notes receivable
Interest rate swap liabilities
Interest rate swap and cap assets
13.
Income Taxes
The income tax benefit (provision) for the years ended December 31, 2018, 2017, and 2016 comprised the following
(in thousands):
Federal income taxes:
Current
Deferred
State income taxes:
Current
Deferred
Income tax benefit (provision)
Years Ended December 31,
2018
2017
2016
$
$
(14) $
37
(1)
7
29
$
(516) $
(131)
(62)
(16)
(725) $
(197)
(109)
(24)
(13)
(343)
The legislation commonly known as the Tax Cuts and Jobs Act (the "Tax Act") was enacted on December 22, 2017.
The Tax Act reduced the U.S. federal corporate tax rate from 35% to 21% (including with respect to taxable REIT
subsidiaries), resulting in the Company's remeasuring its existing deferred tax balances. In addition, generally
beginning in 2018, the Tax Act alters the deductibility of certain items (e.g., interest expense) and allows the cost of
certain qualifying capital asset investments to be deducted fully in the year they were purchased, subject to a phase-
down of the deduction percentage over time. The provisional amounts recorded in the year ended December 31, 2017
related to the remeasurement of the deferred tax balance was approximately $0.2 million of tax expense. The
Company's accounting for the income tax effects of the Tax Act has been completed, and no further changes to the
accounting were made.
As of December 31, 2018 and 2017, the Company had $0.4 million and $0.3 million, respectively, of net deferred tax
assets representing basis differences in the assets of the TRS and stock-based compensation attributable to the TRS.
F-41
Management has evaluated the Company’s income tax positions and concluded that the Company has no uncertain
income tax positions as of December 31, 2018 and 2017. The Company is generally subject to examination by the
applicable taxing authorities for the tax years 2015 through 2018. The Company does not currently have any ongoing
tax examinations by taxing authorities.
14.
Other Assets
Other assets were comprised of the following as of December 31, 2018 and 2017 (in thousands):
Acquired lease intangibles, net
Leasing costs, net
Leasing incentives, net
Interest rate swaps and caps
Prepaid expenses and other
Advance deposits on property acquisitions
Preacquisition development costs
Other assets
15.
Other Liabilities
December 31,
2018
2017
$
29,182
$
29,881
10,881
3,592
2,093
8,165
50
1,214
9,651
4,217
1,515
8,937
400
1,352
$
55,177
$
55,953
Other liabilities were comprised of the following as of December 31, 2018 and 2017 (in thousands):
Dividends and distributions payable
Deferred ground rent payable
Acquired lease intangibles, net
Prepaid rent and other
Security deposits
Interest rate swaps
Other liabilities
16.
Acquired Lease Intangibles
December 31,
2018
2017
$
13,527
$
9,287
12,678
6,309
1,927
2,475
11,887
8,732
13,829
3,171
1,674
59
$
46,203
$
39,352
The following table summarizes the Company’s acquired lease intangibles as of December 31, 2018 (in thousands):
In-place lease assets
Above-market lease assets
Below-market lease liabilities
Below-market ground lease assets
December 31, 2018
Gross Carrying
Accumulated
Net Carrying
Amount
Amortization
Amount
$
57,689
$
32,370
$
4,917
18,692
1,920
2,676
6,014
299
25,319
2,241
12,678
1,621
F-42
The following table summarizes the Company’s acquired lease intangibles as of December 31, 2017 (in thousands):
In-place lease assets
Above-market lease assets
Below-market lease liabilities
Below-market ground lease assets
December 31, 2017
Gross Carrying
Accumulated
Net Carrying
Amount
Amortization
Amount
$
50,506
$
25,193
$
4,817
18,089
1,920
1,923
4,260
246
25,313
2,894
13,829
1,674
Amortization of in-place lease assets for the years ended December 31, 2018, 2017, and 2016 was $7.7 million, $9.7
million, and $10.2 million, respectively.
Amortization of above-market lease assets for the years ended December 31, 2018, 2017, and 2016 was $0.8 million,
$0.8 million, and $0.9 million, respectively.
Amortization of below-market lease liabilities for the years ended December 31, 2018, 2017, and 2016 was $1.8
million, $1.8 million, and $1.8 million, respectively.
Amortization of below-market ground lease assets for the years ended December 31, 2018, 2017, and 2016 was $0.1
million, $0.1 million, and $0.1 million, respectively.
As of December 31, 2018, the weighted-average remaining lives of in-place lease assets, above-market lease assets,
below-market lease liabilities, and below-market ground lease assets were 6.3 years, 5.6 years, 4.5 years, and 30.5
years, respectively. As of December 31, 2018, the weighted-average remaining life of below-market lease renewal
options was 13.6 years.
Estimated amortization of acquired lease intangibles for each of the five succeeding years is as follows (in thousands):
Year ending December 31,
2019
2020
2021
2022
2023
17.
Related Party Transactions
Rental Revenues
Rental Expenses
Amortization
Depreciation and
$
$
859
730
742
725
703
$
53
53
53
53
53
5,967
4,314
2,846
2,218
1,969
The Company provides general contracting and real estate services to certain related party entities that are included in
these consolidated financial statements. Revenue from construction contracts with related party entities of the
Company was $1.5 million, $7.6 million and $26.7 million for the years ended December 31, 2018, 2017, and 2016,
respectively. Gross profits from such contracts were $0.3 million, $0.4 million and $1.0 million for the years ended
December 31, 2018, 2017, and 2016, respectively. There were no amounts from related parties of the Company
included in construction receivables as of December 31, 2018. As of December 31, 2017, there was $0.2 million
outstanding from related parties of the Company included in construction receivables. Real estate services fees from
affiliated entities of the Company were not material for any of the years ended December 31, 2018, 2017, and 2016. In
addition, affiliated entities also reimburse the Company for monthly maintenance and facilities management services
provided to the properties. Cost reimbursements earned by the Company from affiliated entities were not material for
any of the years ended December 31, 2018, 2017, and 2016.
F-43
18.
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 its 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 by management 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 December 31, 2018 (in thousands):
Development project
1405 Point
The Residences at Annapolis Junction
Delray Plaza
Nexton Square
Interlock Commercial
Solis Apartments at Interlock
City Center
Total
$
$
Payment guarantee
amount
25,000
8,300
4,750 (a)
— (b)
— (c)
— (d)
18,457 (e)
56,507
________________________________________
(a) On January 8, 2019, the mezzanine loan and senior construction loan were modified, and the payment guarantee amount increased to $5.2
million.
(b) As of December 31, 2018, this payment guarantee was not yet effective because the senior construction loan had not yet been executed.
On February 8, 2019, the senior construction loan was executed and the $12.6 million payment guarantee became effective. The Company
has also guaranteed completion of the development project to the senior construction lender.
(c) As of December 31, 2018, this $30.7 million payment guarantee was not yet effective because the senior construction loan had not yet
been executed. Once the senior construction loan is executed, the Company will also guarantee completion of the development project to the
senior lender. The Company has also guaranteed completion of the development project to Georgia Tech, the ground lessor.
(d) There is no payment guarantee for the senior construction loan on this project. The Company has guaranteed completion of the
development project to the senior lender.
(e) Durham City Center is accounted for as an equity method investment.
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 $34.8 million and $44.9 million as of December 31, 2018 and 2017, respectively.
F-44
The Operating Partnership has entered into standby letters of credit using the available capacity under the credit
facility. The letters of credit relate to the guarantee of future performance on certain of the Company’s construction
contracts. Letters of credit generally are available for draw down in the event the Company does not perform. As of
December 31, 2018 and 2017, the Operating Partnership had total outstanding letters of credit of $2.1 million and $2.1
million, respectively. The amounts outstanding at December 31, 2018 and 2017 include a $2.1 million letter of credit
related to the guarantee on the Point Street Apartments senior construction loan.
The Company has six ground leases on five properties with initial terms that range from 20 to 65 years and options to
extend up to an additional 70 years in certain cases. The Company also leases automobiles and equipment.
Future minimum rental payments for all operating leases during each of the next five years and thereafter are as
follows (in thousands):
2019
2020
2021
2022
2023
Thereafter
Total
$
$
2,127
2,291
2,368
2,364
2,403
105,961
117,514
Ground rent expense for the years ended December 31, 2018, 2017, and 2016 was $2.4 million, $2.5 million and $2.0
million, respectively.
Concentrations of Credit Risk
The majority of the Company’s properties are located in Hampton Roads, Virginia. For the years ended December 31,
2018, 2017, and 2016, rental revenues from Hampton Roads properties represented 53%, 53% and 58%, respectively,
of the Company’s rental revenues. Many of the Company’s Hampton Roads properties are located in the Town Center
of Virginia Beach. For the years ended December 31, 2018, 2017, and 2016, rental revenues from Town Center
properties represented 42%, 38% and 41%, respectively, of the Company’s rental revenues.
A group of three construction customers comprised 55%, 41%, and 22% of the Company’s general contracting and
real estate services revenues for the years ended December 31, 2018, 2017, and 2016, respectively. The same
customers represented 28%, 20%, and 19% of the Company’s general contracting and real estate services segment
gross profit for the years ended December 31, 2018, 2017, and 2016, respectively.
F-45
19.
Selected Quarterly Financial Data (Unaudited)
The following tables summarize certain selected quarterly financial data for 2018 and 2017 (in thousands, except per
share data):
First
Second
Third
Fourth
2018 Quarters
Rental revenues
$
28,699
$
28,598
$
28,930
$
General contracting and real estate services revenues
Net operating income
Net income
Net income attributable to stockholders
Net income per share: basic and diluted
23,050
20,098
6,983
5,040
20,654
19,908
5,945
4,319
19,950
19,964
5,669
4,202
$
0.11
$
0.09
$
0.09
$
30,731
12,705
21,114
4,895
3,642
0.07
First
Second
Third
Fourth
2017 Quarters
Rental revenues
$
27,232
$
26,755
$
27,096
$
General contracting and real estate services revenues
Net operating income
Net income
Net income attributable to stockholders
Net income per share: basic and diluted
63,519
20,978
8,753
5,936
56,671
20,645
4,943
3,471
41,201
19,397
10,461
7,488
$
0.16
$
0.08
$
0.17
$
27,654
32,643
19,211
5,768
4,152
0.09
F-46
/
n
o
i
t
c
u
r
t
s
n
o
C
g
n
i
y
r
r
a
C
t
e
N
d
e
t
a
l
u
m
u
c
c
A
d
n
a
g
n
i
d
l
i
u
B
o
t
t
n
e
u
q
e
s
b
u
S
d
n
a
g
n
i
d
l
i
u
B
f
o
r
a
e
Y
t
n
u
o
m
A
g
n
i
y
r
r
a
C
s
s
o
r
G
d
e
z
i
l
a
t
i
p
a
C
t
s
o
C
t
s
o
C
l
a
i
t
i
n
I
n
o
i
t
i
s
i
u
q
c
A
)
1
(
t
n
u
o
m
A
n
o
i
t
a
i
c
e
r
p
e
D
l
a
t
o
T
s
t
n
e
m
e
v
o
r
p
m
I
d
n
a
L
n
o
i
t
i
s
i
u
q
c
A
s
t
n
e
m
e
v
o
r
p
m
I
d
n
a
L
s
e
c
n
a
r
b
m
u
c
n
E
4
1
0
2
2
0
0
2
6
1
0
2
4
8
9
1
9
0
0
2
8
1
0
2
4
0
0
2
6
1
0
2
/
7
9
9
1
3
1
0
2
/
1
0
0
2
1
0
0
2
-
7
9
9
1
6
1
0
2
/
0
8
9
1
6
1
0
2
5
1
0
2
/
0
8
9
1
6
1
0
2
/
5
9
9
1
8
0
0
2
1
1
0
2
2
0
0
2
0
8
5
,
0
4
7
3
8
,
0
3
3
5
5
,
4
1
5
2
7
,
0
1
8
6
0
,
2
1
5
6
6
,
8
1
8
2
4
,
7
2
1
5
5
2
,
7
6
1
3
,
8
1
3
7
,
4
1
2
5
9
,
4
3
2
9
,
0
1
0
9
2
,
2
2
5
5
,
6
1
9
6
5
,
4
2
6
4
8
,
1
0
6
8
,
1
5
1
3
,
6
4
1
0
2
/
8
9
9
1
7
4
8
,
6
1
4
0
0
2
9
9
9
1
4
1
0
2
6
0
0
2
6
1
0
2
/
4
0
0
2
9
9
9
1
8
1
0
2
/
8
0
0
2
8
1
0
2
8
9
9
1
6
1
0
2
8
1
0
2
/
7
1
0
2
6
1
0
2
/
4
0
0
2
8
6
2
,
4
7
5
2
,
6
5
3
4
,
4
7
3
3
,
6
1
6
8
5
,
0
1
5
0
6
,
3
6
0
2
,
9
8
5
3
,
9
1
6
5
5
,
0
2
4
5
7
,
3
2
1
4
4
,
6
1
2
6
9
,
3
1
$
7
3
2
,
6
$
7
1
8
,
6
4
$
5
3
8
,
5
4
$
2
8
9
$
5
3
8
,
5
4
$
$
$
6
1
8
,
1
3
—
0
1
1
,
1
1
1
1
9
,
7
—
4
7
0
,
7
5
5
0
7
8
9
7
,
8
5
5
5
,
2
5
3
0
,
4
0
4
3
,
1
5
5
1
1
9
0
,
2
9
3
9
4
1
5
,
1
0
9
1
7
3
3
,
4
9
3
6
,
1
3
6
3
,
3
2
2
4
,
3
0
0
7
0
2
9
,
6
4
2
9
7
9
0
,
2
4
8
—
5
6
2
6
7
3
,
1
1
6
4
,
1
7
2
5
,
3
1
3
5
6
,
2
6
3
5
5
,
4
1
5
3
8
,
1
2
9
7
9
,
9
1
5
6
6
,
8
1
7
7
6
,
0
6
8
7
0
,
4
1
5
7
8
,
0
2
6
2
9
,
9
1
5
6
6
,
8
1
$
$
2
0
5
,
4
8
1
$
6
5
0
,
0
8
1
3
5
0
,
6
1
$
1
4
3
,
5
1
$
$
1
2
0
,
9
6
8
2
,
7
1
7
8
9
,
8
3
6
2
,
2
1
5
4
4
,
2
3
4
6
,
8
1
8
0
5
,
5
2
0
6
3
,
3
0
5
0
,
2
2
5
6
,
0
1
6
8
4
,
8
1
1
3
6
,
7
9
7
6
,
9
5
3
1
,
5
7
5
2
,
3
2
0
1
5
,
1
1
2
0
7
,
5
0
9
2
,
9
8
5
3
,
9
1
1
2
8
,
0
2
0
3
1
,
5
2
2
0
9
,
7
1
9
8
4
,
7
2
1
7
9
,
4
6
3
8
,
1
1
7
8
9
,
8
3
5
8
,
9
8
2
3
,
2
2
1
0
,
1
1
2
7
9
,
0
1
2
4
2
,
3
3
4
0
,
1
5
8
5
,
0
1
6
8
3
,
3
1
6
0
2
,
7
0
5
4
,
7
2
3
0
,
4
4
6
4
,
9
1
0
7
6
,
8
8
4
1
,
4
1
8
2
,
2
3
1
4
,
6
1
6
8
7
,
7
1
2
0
5
,
7
1
2
5
6
,
0
1
3
5
5
,
5
2
5
7
4
0
6
9
3
5
—
6
7
9
,
1
6
4
4
,
4
2
1
7
0
5
0
,
4
0
5
4
,
5
—
7
1
1
0
1
4
,
2
1
3
6
,
7
6
3
5
,
4
1
7
6
8
1
1
7
0
0
,
1
5
2
4
0
0
1
,
5
9
2
2
,
2
3
0
1
,
1
3
9
7
,
3
0
4
8
,
2
4
5
5
,
1
9
0
0
,
7
5
4
9
,
2
5
3
0
,
3
8
2
6
,
7
0
5
2
,
7
6
3
9
,
1
$
$
7
7
6
,
0
6
8
7
0
,
4
1
6
0
6
,
0
1
6
2
9
,
9
1
5
6
6
,
8
1
7
8
7
,
9
6
1
1
4
3
,
5
1
1
9
5
9
1
,
1
7
8
9
,
8
3
4
8
8
2
3
,
2
7
7
8
0
5
2
4
2
,
3
3
4
0
,
1
5
8
5
,
0
1
0
6
2
6
0
2
,
7
0
5
4
,
7
2
3
0
,
4
7
4
6
4
,
9
1
0
6
1
8
4
1
,
4
—
3
1
4
,
6
1
2
0
5
,
7
1
2
4
4
3
5
5
,
5
2
7
4
-
F
$
$
—
—
—
9
6
2
,
0
1
—
—
9
6
2
,
0
1
—
0
8
8
,
4
1
4
6
,
0
1
—
—
0
1
0
,
9
5
3
1
,
0
1
2
2
9
,
0
1
—
—
—
6
2
1
,
3
1
—
—
—
—
—
0
1
5
,
8
—
4
7
2
,
2
—
—
6
8
7
,
7
1
0
1
2
,
0
1
$
2
8
9
$
4
3
0
,
2
3
$
t
e
e
r
t
S
n
i
a
M
5
2
5
4
e
c
i
f
f
O
6
7
9
,
1
)
2
(
—
$
$
5
7
4
0
6
9
3
5
—
6
4
4
,
4
2
1
7
0
5
0
,
4
0
5
4
,
5
—
7
1
1
0
1
4
,
2
1
3
6
,
7
6
3
5
,
4
1
7
6
8
1
1
7
0
0
,
1
5
2
4
0
0
1
,
5
9
2
2
,
2
3
0
1
,
1
3
9
7
,
3
0
4
8
,
2
4
5
5
,
1
9
0
0
,
7
5
4
9
,
2
5
3
0
,
3
8
2
6
,
7
0
5
2
,
7
6
3
9
,
1
)
2
(
)
2
(
—
—
—
0
1
9
,
6
$
$
4
4
9
,
8
3
5
4
0
,
7
1
$
$
)
2
(
)
2
(
)
2
(
)
2
(
)
2
(
)
2
(
)
2
(
)
2
(
)
2
(
)
2
(
)
2
(
)
2
(
)
2
(
)
2
(
)
2
(
)
2
(
)
2
(
—
—
—
—
—
—
—
—
—
—
—
7
5
2
,
0
1
—
—
9
1
0
,
9
1
—
—
—
3
8
2
,
7
0
4
9
,
4
1
0
0
5
,
0
1
—
8
9
6
,
1
1
r
e
w
o
T
r
e
l
f
f
o
H
a
d
a
m
A
r
e
c
i
f
f
O
g
n
i
s
s
o
r
C
s
k
o
o
r
B
s
u
b
m
u
l
o
C
e
n
O
s
u
b
m
u
l
o
C
o
w
T
f
r
a
h
W
s
l
l
i
W
e
c
i
f
f
o
l
a
t
o
T
l
i
a
t
e
R
r
e
t
n
e
C
g
n
i
p
p
o
h
S
k
e
e
r
C
d
a
o
r
B
l
i
a
t
e
R
k
r
a
P
l
a
r
t
n
e
C
9
4
2
s
d
a
o
r
s
s
o
r
C
a
d
u
m
r
e
B
e
t
n
i
o
P
r
e
d
n
a
x
e
l
A
l
i
a
t
e
R
g
n
i
s
s
o
r
C
s
k
o
o
r
B
a
z
a
l
P
r
o
o
m
d
a
o
r
B
I
I
e
g
a
l
l
i
V
s
u
b
m
u
l
o
C
e
g
a
l
l
i
V
s
u
b
m
u
l
o
C
l
i
a
t
e
R
t
e
e
r
t
S
e
c
r
e
m
m
o
C
r
e
t
n
e
C
n
w
o
T
t
a
s
’
k
c
i
D
n
e
v
e
l
E
-
7
e
s
u
o
h
t
r
u
o
C
l
i
a
t
e
R
a
z
a
l
P
n
i
a
t
n
u
o
F
e
r
a
u
q
S
h
g
u
o
r
o
b
s
n
i
a
G
e
r
a
u
q
S
k
c
o
m
m
D
i
r
e
t
n
e
C
g
n
i
p
p
o
h
S
e
e
r
t
n
e
e
r
G
s
n
o
m
m
o
C
l
l
i
H
r
e
p
r
a
H
l
a
g
e
R
g
r
u
b
n
o
s
i
r
r
a
H
g
n
i
s
s
o
r
C
s
e
k
a
L
n
a
i
d
n
I
k
e
e
r
C
l
l
i
M
t
a
t
e
k
r
a
M
e
r
a
u
q
S
n
o
t
g
n
i
x
e
L
e
g
a
l
l
i
V
y
r
u
b
n
a
H
e
c
a
l
p
t
e
k
r
a
M
t
o
o
f
t
h
g
i
L
t
e
k
r
a
M
n
o
t
p
m
a
H
h
t
r
o
N
r
e
t
n
e
C
t
n
i
o
P
h
t
r
o
N
n
o
i
t
a
i
c
e
r
p
e
D
d
e
t
a
l
u
m
u
c
c
A
d
n
a
s
t
n
e
m
t
s
e
v
n
I
e
t
a
t
s
E
l
a
e
R
d
e
t
a
d
i
l
o
s
n
o
C
—
I
I
I
E
L
U
D
E
H
C
S
8
1
0
2
,
1
3
r
e
b
m
e
c
e
D
8
9
9
1
6
1
0
2
/
4
0
0
2
8
1
0
2
/
7
1
0
2
6
1
0
2
/
4
0
0
2
5
1
0
2
/
1
0
0
2
8
1
0
2
5
1
0
2
/
7
0
0
2
6
1
0
2
/
8
0
0
2
5
1
0
2
2
0
0
2
5
1
0
2
/
0
0
0
2
6
1
0
2
/
7
7
9
1
6
1
0
2
/
1
9
9
1
6
1
0
2
/
6
0
0
2
5
1
0
2
/
8
0
0
2
7
0
0
2
1
1
0
2
3
9
0
,
5
9
2
0
,
3
2
0
0
,
9
5
8
5
,
3
3
9
5
7
,
0
1
0
1
7
,
1
1
4
9
9
,
1
2
9
9
6
,
4
1
1
5
9
,
0
1
9
9
0
,
7
2
3
8
,
3
1
4
7
,
5
2
1
1
0
,
3
3
3
3
8
,
7
8
9
8
,
0
2
0
4
6
,
1
7
1
2
,
2
7
1
0
2
-
6
1
0
2
/
4
0
0
2
5
7
2
,
8
3
4
4
7
8
8
8
,
1
4
3
2
5
6
0
,
2
2
1
2
,
1
2
3
1
5
2
6
7
9
3
,
1
5
3
7
8
6
1
,
1
5
2
2
,
4
0
5
4
,
1
5
2
3
,
2
6
9
4
3
1
9
1
3
1
,
2
9
8
0
,
1
3
1
8
,
1
7
3
8
,
5
7
1
9
,
4
6
3
2
,
9
0
5
6
,
5
3
1
7
9
,
1
1
2
4
8
,
1
1
1
9
3
,
3
2
4
2
3
,
5
1
9
1
1
,
2
1
4
3
8
,
7
7
5
0
,
8
1
9
1
,
7
2
6
3
3
,
5
3
9
2
3
,
8
9
2
0
,
3
2
3
5
5
,
2
6
0
3
,
3
8
8
0
,
0
4
7
8
9
,
3
7
6
7
,
3
4
6
8
,
7
1
9
5
,
0
2
1
3
7
,
8
7
7
8
,
0
1
1
4
4
,
3
1
4
9
5
,
8
4
9
2
,
7
4
1
5
,
5
7
6
8
,
7
1
6
0
,
3
1
6
4
4
,
6
2
9
5
5
,
6
9
6
6
,
6
1
7
7
4
,
2
6
0
3
,
3
8
2
8
,
1
2
0
5
8
,
1
0
5
1
,
1
2
7
3
,
1
9
5
0
,
5
1
5
6
9
0
4
2
,
3
0
5
9
,
9
0
3
7
,
6
5
2
8
,
4
0
2
3
,
2
0
9
1
0
3
1
,
4
1
0
9
8
,
8
0
7
7
,
1
0
6
3
,
6
6
7
—
0
6
2
,
8
1
7
1
6
7
6
7
,
3
—
1
1
4
5
1
4
7
7
8
,
0
1
5
5
1
2
7
0
,
1
4
3
1
4
9
2
,
7
7
6
8
,
7
1
9
3
6
9
4
0
5
9
1
3
7
7
4
,
2
6
0
3
,
3
8
2
1
)
3
(
)
3
(
4
1
0
2
4
1
0
2
—
6
1
0
2
)
3
(
—
8
1
0
2
4
1
0
2
/
3
1
0
2
6
0
0
2
3
1
0
2
/
9
0
0
2
9
8
5
,
6
2
5
3
6
4
,
7
2
5
0
1
,
9
4
3
1
4
,
4
3
6
3
3
,
4
6
4
9
2
,
4
2
7
9
8
,
8
2
7
8
9
,
4
3
6
1
2
,
0
3
9
8
0
,
7
3
0
0
8
,
0
3
3
4
9
9
,
2
1
1
8
,
7
8
9
$
$
$
$
$
9
7
0
,
7
8
8
8
3
—
8
8
0
,
4
1
8
3
,
5
1
6
3
,
4
2
9
2
—
—
1
5
8
,
6
1
6
2
,
3
2
2
2
6
,
4
4
5
7
7
,
8
8
1
$
$
8
6
6
,
3
1
6
$
6
8
5
,
3
3
4
1
5
5
,
1
3
$
8
5
2
,
0
3
$
$
2
8
0
,
0
8
1
$
5
9
9
,
6
8
1
3
9
2
,
1
$
8
5
2
,
0
3
3
9
4
,
9
4
3
1
4
,
4
3
7
1
7
,
9
6
5
5
6
,
8
2
9
8
1
,
9
2
7
8
9
,
4
3
7
6
0
,
7
3
0
5
3
,
0
6
2
8
7
,
3
4
6
3
1
,
7
2
7
1
7
,
9
6
5
7
0
,
5
2
9
8
1
,
9
2
2
2
7
,
7
2
7
6
0
,
7
3
5
6
3
,
9
5
1
1
7
,
5
7
7
2
,
7
—
0
8
5
,
3
—
5
6
2
,
7
—
5
8
9
2
8
7
,
3
4
6
3
1
,
7
2
7
1
7
,
9
6
1
8
5
,
1
9
8
1
,
9
2
2
2
7
,
7
2
2
6
9
,
1
5
6
3
,
9
5
$
$
$
4
9
9
,
2
2
2
4
,
5
7
3
$
$
—
1
1
3
,
9
4
3
6
8
5
,
6
7
1
1
$
,
3
5
9
,
2
6
9
$
$
$
1
1
1
,
6
2
4
9
9
,
2
$
$
—
2
1
7
,
0
9
2
3
3
6
,
3
1
2
$
4
9
4
,
7
4
6
$
$
$
$
$
—
0
7
3
,
3
4
6
8
,
7
0
8
1
,
0
2
6
1
3
,
8
—
9
6
3
,
2
1
9
3
4
,
8
—
—
0
8
3
,
5
0
7
6
,
2
1
0
5
9
,
5
2
9
0
5
,
6
0
5
3
,
6
1
—
—
0
0
7
,
1
2
1
9
5
,
6
4
2
—
—
—
—
—
—
4
9
4
,
3
2
—
—
5
0
1
,
5
3
9
9
5
,
8
5
9
5
4
,
5
1
3
0
5
8
,
1
0
5
1
,
1
2
7
3
,
1
9
5
0
,
5
1
5
6
9
0
4
2
,
3
0
5
9
,
9
0
3
7
,
6
5
2
8
,
4
0
2
3
,
2
0
9
1
)
2
(
)
2
(
)
2
(
)
2
(
)
2
(
)
2
(
)
2
(
—
—
—
—
—
—
—
9
1
2
,
6
8
5
2
,
8
1
7
6
,
4
3
8
4
,
7
0
3
1
,
4
1
)
2
(
—
0
9
8
,
8
0
7
7
,
1
0
6
3
,
6
6
7
—
0
6
2
,
8
1
)
2
(
)
2
(
)
2
(
)
2
(
)
2
(
—
—
—
—
—
2
4
4
,
1
2
2
8
0
,
0
8
1
$
5
1
8
,
8
3
1
$
$
1
1
7
,
5
7
7
2
,
7
—
0
8
5
,
3
—
5
6
2
,
7
—
5
8
9
3
9
2
,
1
$
$
$
$
1
1
1
,
6
2
4
9
9
,
2
3
3
6
,
3
1
2
$
$
$
6
6
9
,
4
2
2
0
9
,
5
2
5
4
4
,
1
1
8
0
7
,
2
5
7
3
4
,
4
1
5
9
9
,
2
1
7
5
0
,
1
1
5
8
9
,
8
1
8
6
4
,
4
4
3
6
9
,
6
1
2
—
2
2
7
,
4
9
3
$
$
$
$
$
e
c
a
l
p
t
e
k
r
a
M
d
n
a
l
k
a
O
e
c
a
l
p
t
e
k
r
a
M
y
a
w
k
r
a
P
e
r
t
n
e
C
y
a
w
k
r
a
P
e
c
a
l
P
n
o
s
r
e
t
t
a
P
e
c
a
l
p
t
e
k
r
a
M
l
l
a
H
y
r
r
e
P
s
n
o
m
m
o
C
e
g
d
i
r
b
d
n
a
S
e
r
a
u
q
S
e
c
n
a
s
s
i
a
n
e
R
s
n
o
m
m
o
C
e
e
t
s
a
c
o
S
a
z
a
l
P
e
c
n
e
d
i
v
o
r
P
l
i
a
t
e
R
r
e
i
m
e
r
P
e
r
a
u
q
S
e
t
a
g
h
t
u
o
S
s
p
o
h
S
e
r
o
h
s
h
t
u
o
S
e
r
a
u
q
S
e
s
u
o
H
e
n
o
t
S
l
i
a
t
e
R
6
5
o
i
d
u
t
S
l
i
a
t
e
R
h
t
u
o
S
e
r
a
u
q
S
h
t
u
o
S
r
e
t
e
e
T
s
i
r
r
a
H
k
c
e
N
e
r
y
T
e
g
a
l
l
i
V
r
e
v
o
d
n
e
W
l
i
a
t
e
r
l
a
t
o
T
y
l
i
m
a
f
i
t
l
u
M
)
e
c
a
l
P
g
n
i
d
r
a
H
(
e
d
i
s
n
e
e
r
G
)
t
e
e
r
t
S
g
n
i
K
(
e
c
a
l
P
r
e
l
f
f
o
H
s
t
n
e
m
t
r
a
p
A
e
r
o
c
n
E
e
g
a
l
l
i
V
s
n
i
k
p
o
H
s
n
h
o
J
s
t
n
e
m
t
r
a
p
A
y
t
r
e
b
i
L
s
t
n
e
m
t
r
a
p
A
r
e
i
m
e
r
P
)
t
e
e
r
t
S
g
n
i
t
e
e
M
(
e
c
a
l
P
t
i
m
m
u
S
s
t
n
e
m
t
s
e
v
n
i
e
t
a
t
s
e
l
a
e
R
t
n
e
m
p
o
l
e
v
e
d
r
o
f
d
l
e
H
n
a
t
i
l
o
p
o
m
s
o
C
e
h
T
y
l
i
m
a
f
i
t
l
u
m
l
a
t
o
T
g
n
i
d
n
a
L
s
’
h
t
i
m
S
8
4
-
F
.
8
1
0
2
,
1
3
r
e
b
m
e
c
e
D
f
o
s
a
n
o
i
l
l
i
m
3
.
8
6
8
$
s
a
w
s
e
s
o
p
r
u
p
x
a
t
e
m
o
c
n
i
l
a
r
e
d
e
f
r
o
f
e
t
a
t
s
e
l
a
e
r
f
o
t
n
u
o
m
a
g
n
i
y
r
r
a
c
t
e
n
e
h
T
)
1
(
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
_
.
8
1
0
2
,
1
3
r
e
b
m
e
c
e
D
f
o
s
a
y
t
i
l
i
c
a
f
t
i
d
e
r
c
e
h
t
r
o
f
l
a
r
e
t
a
l
l
o
c
e
s
a
b
g
n
i
w
o
r
r
o
B
)
2
(
.
8
1
0
2
,
1
3
r
e
b
m
e
c
e
D
f
o
s
a
s
s
e
r
g
o
r
p
n
i
n
o
i
t
c
u
r
t
s
n
o
C
)
3
(
s
r
a
e
y
9
3
s
r
a
e
y
0
2
—
5
s
r
a
e
y
7
—
3
e
s
a
e
l
d
e
t
a
l
e
r
e
h
t
f
o
m
r
e
T
)
r
e
t
r
o
h
s
f
i
,
e
f
i
l
l
u
f
e
s
u
d
e
t
a
m
i
t
s
e
r
o
(
d
e
t
a
l
u
m
u
c
c
A
n
o
i
t
a
i
c
e
r
p
e
D
e
t
a
t
s
E
l
a
e
R
s
t
n
e
m
t
s
e
v
n
I
,
1
3
r
e
b
m
e
c
e
D
7
1
0
2
8
1
0
2
7
1
0
2
8
1
0
2
3
5
5
,
9
3
1
$
1
2
5
,
4
6
1
$
7
8
2
,
8
0
9
$
7
3
4
,
4
9
9
$
—
—
—
)
6
0
0
,
1
(
4
7
9
,
5
2
1
2
5
,
4
6
1
—
—
)
2
8
5
(
)
9
5
5
,
5
(
5
9
3
,
0
3
2
4
1
,
4
8
0
6
7
,
2
1
)
6
4
1
,
0
1
(
)
6
0
6
(
—
6
2
9
,
4
4
1
3
1
6
1
5
,
)
0
2
4
,
1
1
(
)
0
7
9
,
2
(
—
$
5
7
7
,
8
8
1
$
7
3
4
,
4
9
9
$
6
8
5
,
6
7
1
,
1
$
s
t
n
e
m
e
v
o
r
p
m
i
l
a
t
i
p
a
C
s
t
n
e
m
e
v
o
r
p
m
i
t
n
a
n
e
T
t
n
e
m
p
i
u
q
E
s
g
n
i
d
l
i
u
B
s
t
n
e
m
e
v
o
r
p
m
i
d
n
a
s
t
s
o
c
n
o
i
t
c
u
r
t
s
n
o
C
r
a
e
y
e
h
t
f
o
g
n
i
n
n
i
g
e
b
t
a
e
c
n
a
l
a
B
r
a
e
y
e
h
t
f
o
d
n
e
t
a
e
c
n
a
l
a
B
s
n
o
i
t
a
c
i
f
i
s
s
a
l
c
e
R
n
o
i
t
a
i
c
e
r
p
e
D
s
n
o
i
t
i
s
i
u
q
c
A
s
n
o
i
t
i
s
o
p
s
i
D
:
s
e
v
i
l
l
u
f
e
s
u
d
e
t
a
m
i
t
s
e
g
n
i
w
o
l
l
o
f
e
h
t
r
e
v
o
s
i
s
a
b
e
n
i
l
-
t
h
g
i
a
r
t
s
a
n
o
d
e
t
a
i
c
e
r
p
e
d
s
i
y
t
r
e
p
o
r
p
g
n
i
c
u
d
o
r
p
e
m
o
c
n
I
9
4
-
F
C O R P O R A T E
Information
BOARD OF DIRECTORS
DANIEL A. HOFFLER
Executive Chairman of the Board
A. RUSSELL KIRK
Vice Chairman of the Board
LOUIS S. HADDAD
President and Chief Executive Officer
JOHN W. SNOW
Lead Independent Director
JAMES C. CHERRY
Independent Director
GEORGE F. ALLEN
Independent Director
EVA S. HARDY
Independent Director
JAMES A. CARROLL
Independent Director
EXECUTIVE MANAGEMENT
LOUIS S. HADDAD
President and Chief Executive Officer
MICHAEL P. O’HARA
Chief Financial Officer and Treasurer/Secretary
ERIC E. APPERSON
President of Construction
SHELLY R. HAMPTON
President of Asset Management
TRANSFER AGENT
Broadridge
2 Journal Square, 7th Floor
Jersey City, NJ 07306
201.714.3800
INVESTOR SERVICES
If you have questions regarding security
ownership or would like to request printed
information, please contact Michael O’Hara
at MOHara@ArmadaHoffler.com or call
757.383.9338.
SHAREHOLDER INFORMATION
CORPORATE OFFICE
Armada Hoffler Properties
222 Central Park Avenue, Suite 2100
Virginia Beach, VA 23462
757.366.4000
www.ArmadaHoffler.com
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Ernst & Young LLP
The Edgeworth Building
2100 East Cary Street, Suite 201
Richmond, VA 23223
804.344.6000
Annual Report Design by Curran & Connors, Inc. / www.curran-connors.com
ARMADA HOFFLER PROPERTIES
222 Central Park Avenue, Suite 2100
Virginia Beach, VA 23462
757.366.4000
www.ArmadaHoffler.com