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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM
 10-Q
☑    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the quarterly period ended June 30, 2021  
or 
☐    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the transition period from                      to                      
Commission File Number: 001-35908
ARMADA HOFFLER PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
Maryland 46-1214914
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
222 Central Park Avenue , Suite 2100
Virginia Beach , Virginia 23462
(Address of principal executive offices) (Zip Code)
 
(757) 366-4000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.01 par value per share AHH New York Stock Exchange
6.75% Series A Cumulative Redeemable Perpetual Preferred Stock, $0.01 par value per share AHHPrA New York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes     ☐  No 
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).    ☒  Yes     ☐  No 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. 
Large Accelerated Filer
☐
 Accelerated Filer ☒
Non-Accelerated Filer ☐ Smaller Reporting Company ☐
Emerging Growth Company ☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  
☐ Yes     ☒  No
As of August 3, 2021, the registrant had 60,991,015 shares of common stock, $0.01 par value per share, outstanding. In addition, as of August 3, 2021, Armada Hoffler, L.P., the registrant's operating partnership subsidiary, had 20,853,485 units of limited partnership interest ("OP Units") outstanding (other than OP Units held by the registrant).

ARMADA HOFFLER PROPERTIES, INC.
 
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2021
 
Table of Contents
 
  Page
 
1
 
1
1
2
3
5
7
 
 
 
 
 
 
 
 
 
 
 




PART I. Financial Information
 
Item 1.    Financial Statements
 
ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Balance Sheets
(In thousands, except par value and share data)
  June 30,
2021		 December 31,
2020
  (Unaudited)  
ASSETS    
Real estate investments:    
Income producing property $ 1,756,836  $ 1,680,943 
Held for development 11,294  13,607 
Construction in progress 37,167  63,367 
  1,805,297  1,757,917 
Accumulated depreciation (278,010) (253,965)
Net real estate investments 1,527,287  1,503,952 
Real estate investments held for sale —  1,165 
Cash and cash equivalents 43,493  40,998 
Restricted cash 9,749  9,432 
Accounts receivable, net 30,227  28,259 
Notes receivable, net 112,446  135,432 
Construction receivables, including retentions, net 13,823  38,735 
Construction contract costs and estimated earnings in excess of billings 85  138 
Equity method investment 6,999  1,078 
Operating lease right-of-use assets 32,640  32,760 
Finance lease right-of-use assets 47,544  23,544 
Acquired lease intangible assets 55,807  58,154 
Other assets 40,358  43,324 
Total Assets $ 1,920,458  $ 1,916,971 
LIABILITIES AND EQUITY    
Indebtedness, net $ 964,396  $ 963,845 
Accounts payable and accrued liabilities 20,395  23,900 
Construction payables, including retentions 18,470  49,821 
Billings in excess of construction contract costs and estimated earnings 4,137  6,088 
Operating lease liabilities 41,719  41,659 
Finance lease liabilities 45,997  17,954 
Other liabilities 57,725  56,902 
Total Liabilities 1,152,839  1,160,169 
Stockholders’ equity:    
Preferred stock, $0.01 par value, 100,000,000 shares authorized:
6.75% Series A Cumulative Redeemable Perpetual Preferred Stock, 9,980,000 shares authorized, 6,843,418 shares issued and outstanding as of June 30, 2021 and December 31, 2020
 171,085  171,085 
Common stock, $0.01 par value, 500,000,000 shares authorized; 60,991,603 and 59,073,220 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively
 610  591 
Additional paid-in capital 496,111  472,747 
Distributions in excess of earnings (124,697) (112,356)
Accumulated other comprehensive loss (5,914) (8,868)
Total stockholders’ equity 537,195  523,199 
Noncontrolling interests in investment entities 634  488 
Noncontrolling interests in Operating Partnership 229,790  233,115 
Total Equity 767,619  756,802 
Total Liabilities and Equity $ 1,920,458  $ 1,916,971 

See Notes to Condensed Consolidated Financial Statements.
1

ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statements of Comprehensive Income 
(In thousands, except per share data)
(Unaudited)
  Three Months Ended 
June 30,		 Six Months Ended 
June 30,
  2021 2020 2021 2020
Revenues        
Rental revenues $ 47,378  $ 39,915  $ 93,119  $ 82,204 
General contracting and real estate services revenues 18,408  57,398  53,971  104,666 
Total revenues 65,786  97,313  147,090  186,870 
Expenses        
Rental expenses 11,292  8,309  22,124  17,684 
Real estate taxes 5,465  4,233  10,771  8,566 
General contracting and real estate services expenses 18,131  55,342  52,406  100,892 
Depreciation and amortization 17,285  13,777  35,351  28,056 
Amortization of right-of-use assets - finance leases 278  146  467  293 
General and administrative expenses 3,487  2,988  7,508  6,781 
Acquisition, development and other pursuit costs 32  502  103  529 
Impairment charges 83  —  3,122  158 
Total expenses 56,053  85,297  131,852  162,959 
Gain on real estate dispositions —  2,776  3,717  2,776 
Operating income 9,733  14,792  18,955  26,687 
Interest income 6,746  4,412  10,862  11,638 
Interest expense (8,418) (7,227) (16,393) (15,415)
Change in fair value of derivatives and other 314  (6) 707  (1,742)
Unrealized credit loss release (provision) (388) 117  (333) (260)
Other income (expense), net 7  286  186  344 
Income before taxes 7,994  12,374  13,984  21,252 
Income tax benefit (provision) 461  (65) 480  192 
Net income 8,455  12,309  14,464  21,444 
Net (income) loss attributable to noncontrolling interests:
Investment entities —  44  —  136 
Operating Partnership (1,429) (3,051) (2,240) (5,286)
Net income attributable to Armada Hoffler Properties, Inc. 7,026  9,302  12,224  16,294 
Preferred stock dividends (2,887) (1,175) (5,774) (2,242)
Net income attributable to common stockholders $ 4,139  $ 8,127  $ 6,450  $ 14,052 
Net income attributable to common stockholders per share (basic and diluted) $ 0.07  $ 0.14  $ 0.11  $ 0.25 
Weighted-average common shares outstanding (basic and diluted) 60,409  56,668  59,918  56,533 
Comprehensive income:        
Net income $ 8,455  $ 12,309  $ 14,464  $ 21,444 
Unrealized cash flow hedge gains (losses) (469) (2,279) 1,807  (9,768)
Realized cash flow hedge losses reclassified to net income 1,103  798  2,181  1,190 
Comprehensive income 9,089  10,828  18,452  12,866 
Comprehensive (income) loss attributable to noncontrolling interests:
Investment entities —  44  —  136 
Operating Partnership (1,592) (2,646) (3,274) (2,937)
Comprehensive income attributable to Armada Hoffler Properties, Inc. $ 7,497  $ 8,226  $ 15,178  $ 10,065 

See Notes to Condensed Consolidated Financial Statements.
2

ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statements of Equity

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

  Preferred stock Common stock Additional paid-in capital Distributions in excess of earnings Accumulated other comprehensive loss Total stockholders' equity Noncontrolling interests in investment entities Noncontrolling interests in Operating Partnership Total equity
Balance, December 31, 2019 $ 63,250  $ 563  $ 455,680  $ (106,676) $ (4,240) $ 408,577  $ 4,462  $ 242,408  $ 655,447 
Cumulative effect of accounting change(1)
 —  —  —  (2,185) —  (2,185) —  (824) (3,009)
Net income (loss) —  —  —  6,992  —  6,992  (92) 2,235  9,135 
Unrealized cash flow hedge losses —  —  —  —  (5,438) (5,438) —  (2,051) (7,489)
Realized cash flow hedge losses reclassified to net income —  —  —  —  285  285  —  107  392 
Net proceeds from issuance of common stock —  1  1,348  —  —  1,349  —  —  1,349 
Restricted stock awards, net —  1  776  —  —  777  —  —  777 
Dividends declared on preferred stock —  —  —  (1,067) —  (1,067) —  —  (1,067)
Dividends and distributions declared on common shares and units ($0.22 per share and unit)
 —  —  —  (12,454) —  (12,454) —  (4,680) (17,134)
Balance, March 31, 2020 63,250  565  457,804  (115,390) (9,393) 396,836  4,370  237,195  638,401 
Net income (loss) —  —  —  9,302  —  9,302  (44) 3,051  12,309 
Unrealized cash flow hedge losses —  —  —  —  (1,657) (1,657) —  (622) (2,279)
Realized cash flow hedge losses reclassified to net income —  —  —  —  580  580  —  218  798 
Net proceeds from issuance of cumulative redeemable perpetual preferred stock 96  —  (5) —  —  91  —  —  91 
Net proceeds from issuance of common stock —  5  4,411  —  —  4,416  —  —  4,416 
Restricted stock awards, net —  —  515  —  —  515  —  —  515 
Acquisition of noncontrolling interest in real estate entity —  —  (2,386) —  —  (2,386) (3,744) —  (6,130)
Dividends declared on preferred stock —  —  —  (1,175) —  (1,175) —  —  (1,175)
Balance, June 30, 2020 $ 63,346  $ 570  $ 460,339  $ (107,263) $ (10,470) $ 406,522  $ 582  $ 239,842  $ 646,946 

(1) The Company recorded cumulative effect adjustments related to the new Current Expected Credit Losses ("CECL") standard in the first quarter of 2020.

See Notes to Condensed Consolidated Financial Statements.
4

ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)(Unaudited)
  Six Months Ended 
June 30,
  2021 2020
OPERATING ACTIVITIES    
Net income $ 14,464  $ 21,444 
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation of buildings and tenant improvements 25,209  20,814 
Amortization of leasing costs, in-place lease intangibles and below market ground rents - operating leases 10,142  7,242 
Accrued straight-line rental revenue (3,327) (1,510)
Amortization of leasing incentives and above or below-market rents (508) (414)
Amortization of right-of-use assets - finance leases 467  293 
Accrued straight-line ground rent expense 81  7 
Unrealized credit loss provision 333  260 
Adjustment for uncollectable lease accounts 562  1,486 
Noncash stock compensation 1,440  1,451 
Impairment charges 3,122  158 
Noncash interest expense 1,329  854 
Gain on real estate dispositions (3,717) (2,776)
Change in fair value of derivatives and other (707) 1,742 
Changes in operating assets and liabilities:    
Property assets (1,469) (4,544)
Property liabilities (2,968) 3,389 
Construction assets 26,865  (6,556)
Construction liabilities (34,645) 18,047 
Interest receivable 3,967  (11,633)
Net cash provided by operating activities 40,640  49,754 
INVESTING ACTIVITIES    
Development of real estate investments (19,476) (39,854)
Tenant and building improvements (4,817) (5,003)
Acquisitions of real estate investments, net of cash received (28,173) (8,853)
Dispositions of real estate investments, net of selling costs 9,156  89,383 
Notes receivable issuances (19,796) (17,599)
Notes receivable paydowns 38,490  2,413 
Leasing costs (1,068) (1,656)
Leasing incentives —  (1,179)
Contributions to equity method investments (5,921) — 
Net cash provided by (used for) investing activities (31,605) 17,652 
FINANCING ACTIVITIES    
Proceeds from issuance of cumulative redeemable perpetual preferred stock, net —  91 
Proceeds from issuance of common stock, net 23,097  5,765 
Common shares tendered for tax withholding (553) (534)
Debt issuances, credit facility and construction loan borrowings 19,119  74,672 
Debt and credit facility repayments, including principal amortization (18,379) (80,283)
Debt issuance costs (2,024) (36)
Acquisition of NCI in consolidated RE investments (804) — 
Dividends and distributions (26,679) (35,549)
Net cash used for financing activities (6,223) (35,874)
Net increase (decrease) in cash, cash equivalents, and restricted cash 2,812  31,532 
Cash, cash equivalents, and restricted cash, beginning of period 50,430  43,579 
Cash, cash equivalents, and restricted cash, end of period (1)
 $ 53,242  $ 75,111 

See Notes to Condensed Consolidated Financial Statements.
5

ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statements of Cash Flows (Continued)
(In thousands)(Unaudited)
Six Months Ended 
June 30,
2021 2020
Supplemental Disclosures (noncash transactions):
Increase (decrease) in dividends and distributions payable $ 4,351  $ (16,173)
Increase (decrease) in accrued capital improvements and development costs 2,058  (8,622)
Note payable issued in acquisition of noncontrolling interest in real estate investment —  6,130 
Operating Partnership units redeemed for common shares 131  — 
Recognition of finance lease right-of-use assets 24,466  — 
Recognition of finance lease liabilities 27,940  — 

(1) The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the Condensed Consolidated Statements of Cash Flows (in thousands):
  June 30, 2021 June 30, 2020
Cash and cash equivalents $ 43,493  $ 70,979 
Restricted cash (a)
 9,749  4,132 
Cash, cash equivalents, and restricted cash $ 53,242  $ 75,111 
(a) Restricted cash represents amounts held by lenders for real estate taxes, insurance, and reserves for capital improvements.





See Notes to Condensed Consolidated Financial Statements.

6

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

The Company is a real estate investment trust ("REIT"), the sole general partner of Armada Hoffler, L.P. (the "Operating Partnership") and, as of June 30, 2021, 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 thereof.
 
As of June 30, 2021, the Company's property portfolio consisted of 56 operating properties and three properties either under development or not yet stabilized.

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

2. Significant Accounting Policies
 
Basis of Presentation
 
The accompanying condensed consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles ("GAAP").
 
The condensed consolidated financial statements include the financial position and results of operations of the Company and its consolidated subsidiaries, including the Operating Partnership, its wholly-owned subsidiaries, and any interests in variable interest entities ("VIEs") where the Company has been determined to be the primary beneficiary. All significant intercompany transactions and balances have been eliminated in consolidation.
 
In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for the fair presentation of the financial condition, and results of operations for the interim periods presented.

The accompanying condensed consolidated financial statements were prepared in accordance with the requirements for interim financial information. Accordingly, these interim financial statements have not been audited and exclude certain disclosures required for annual financial statements. Also, the operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year, particularly in light of the novel coronavirus ("COVID-19") pandemic and its effects on the domestic and global economies during interim periods in 2020 and 2021. The pandemic has led to continuous changes in operational restrictions imposed by governments and other authorities around the world, including federal, state, and local authorities in the United States instituting restrictions on freedom of movement and business operations such as travel bans, border closings, business closures, quarantines, and shelter-in-place orders, causing many of the Company’s tenants, particularly in the Company’s retail portfolio, to suspend or limit operations for certain periods of time. While operations in many areas have been allowed to fully or partially re-open, no assurance can be given that such closures or restrictions will not be reinstituted in the future. The extent of the COVID-19 pandemic’s effect on our business activity will depend on future developments, including the duration and intensity of the pandemic, the timing and effectiveness of COVID-19 vaccines (including against COVID-19 variant strains), the duration of, or the reinstatement of, government measures to mitigate the pandemic or address its effects and the timing and effectiveness of vaccine administration, all of which are uncertain and difficult to predict. Due to the uncertainty surrounding the COVID-19 pandemic, we are not able at this time to estimate the full effect of these factors on our business. These interim financial statements should be read in conjunction with the audited consolidated financial statements of the Company included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.
 
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
7

judgment after considering past, current, and expected events and economic conditions. Actual results could differ significantly from management’s estimates.

Reclassifications

Certain items have been reclassified from their prior year classifications to conform to the current year presentation. The amounts previously classified as Interest expense on indebtedness and Interest expense on finance leases for the three and six months ended June 30, 2020 in the Condensed Consolidated Statement of Comprehensive Income are now included in a single line item as Interest expense. These reclassifications had no effect on net income or stockholders' equity as previously reported.

Recent Accounting Pronouncements

Recently Issued Accounting Standards Not Yet Adopted:

Reference Rate Reform

In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-04 Reference Rate Reform - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848), which became effective on March 12, 2020 and generally can be applied through December 31, 2022. ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and may be elected over time as reference rate reform activities occur. The Company is currently evaluating the effect that adopting this standard may have on its Consolidated Financial Statements.

Earnings Per Share

In August 2020, the FASB issued ASU 2020-06 an update to ASC Topic 470 and ASC Topic 815, which will be effective beginning January 1, 2022. ASU 2020-06 simplifies the accounting for convertible instruments and removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception. This ASU also simplifies diluted earnings per share calculation in certain areas and provides updated disclosure requirements. The Company is currently evaluating the impact of ASU 2020-06 on its consolidated financial statements.

Other Accounting Policies

See the Company's Annual Report on Form 10-K for the year ended December 31, 2020 for a description of other accounting principles upon which basis the accompanying consolidated financial statements were prepared.

3. Segments
 
Net operating income (segment revenues minus segment expenses) is the measure used by the Company’s chief operating decision-maker to assess segment performance. Net operating income is not a measure of operating income or cash flows from operating activities as measured by GAAP and is not indicative of cash available to fund cash needs. As a result, net operating income should not be considered an alternative to cash flows as a measure of liquidity. Not all companies calculate net operating income in the same manner. The Company considers net operating income to be an appropriate supplemental measure to net income because it assists both investors and management in understanding the core operations of the Company’s real estate and construction businesses.

8

Net operating income of the Company’s reportable segments for the three and six months ended June 30, 2021 and 2020 was as follows (in thousands): 
  Three Months Ended June 30, Six Months Ended June 30,
  2021 2020 2021 2020
Office real estate    
Rental revenues $ 11,756  $ 10,494  $ 23,391  $ 20,686 
Rental expenses 2,938  2,291  5,813  4,837 
Real estate taxes 1,413  1,228  2,771  2,374 
Segment net operating income 7,405  6,975  14,807  13,475 
Retail real estate    
Rental revenues 19,204  18,714  37,459  39,125 
Rental expenses 3,013  2,458  5,849  5,478 
Real estate taxes 2,180  2,007  4,207  4,173 
Segment net operating income 14,011  14,249  27,403  29,474 
Multifamily residential real estate    
Rental revenues 16,418  10,707  32,269  22,393 
Rental expenses 5,341  3,560  10,462  7,369 
Real estate taxes 1,872  998  3,793  2,019 
Segment net operating income 9,205  6,149  18,014  13,005 
General contracting and real estate services    
Segment revenues 18,408  57,398  53,971  104,666 
Segment expenses 18,131  55,342  52,406  100,892 
Segment gross profit 277  2,056  1,565  3,774 
Net operating income $ 30,898  $ 29,429  $ 61,789  $ 59,728 
 
Rental expenses represent costs directly associated with the operation and management of the Company’s real estate properties. Rental expenses include asset management expenses, property management fees, repairs and maintenance, insurance, and utilities.

General contracting and real estate services revenues for the three months ended June 30, 2021 and 2020 exclude revenue related to intercompany construction contracts of $5.4 million and $8.4 million, respectively, as it is eliminated in consolidation. General contracting and real estate services revenues for the six months ended June 30, 2021 and 2020 exclude revenue related to intercompany construction contracts of $7.4 million and $21.5 million, respectively.

General contracting and real estate services expenses for the three months ended June 30, 2021 and 2020 exclude expenses related to intercompany construction contracts of $5.4 million and $8.3 million, respectively. General contracting and real estate services expenses for the six months ended June 30, 2021 and 2020 exclude expenses related to intercompany construction contracts of $7.4 million and $21.3 million, respectively.


9

The following table reconciles net operating income to net income, the most directly comparable GAAP measure, for the three and six months ended June 30, 2021 and 2020 (in thousands): 
  Three Months Ended June 30, Six Months Ended June 30,
  2021 2020 2021 2020
Net operating income $ 30,898  $ 29,429  $ 61,789  $ 59,728 
Depreciation and amortization (17,285) (13,777) (35,351) (28,056)
Amortization of right-of-use assets - finance leases (278) (146) (467) (293)
General and administrative expenses (3,487) (2,988) (7,508) (6,781)
Acquisition, development and other pursuit costs (32) (502) (103) (529)
Impairment charges (83) —  (3,122) (158)
Gain on real estate dispositions —  2,776  3,717  2,776 
Interest income 6,746  4,412  10,862  11,638 
Interest expense (8,418) (7,227) (16,393) (15,415)
Change in fair value of derivatives and other 314  (6) 707  (1,742)
Unrealized credit loss release (provision) (388) 117  (333) (260)
Other income (expense), net 7  286  186  344 
Income tax benefit (provision) 461  (65) 480  192 
Net income $ 8,455  $ 12,309  $ 14,464  $ 21,444 
 
General and administrative expenses represent costs not directly associated with the operation and management of the Company’s real estate properties and general contracting and real estate services businesses, including corporate office personnel salaries and benefits, bank fees, accounting fees, legal fees, and other corporate office expenses.

4. Leases

Lessee Disclosures

As a lessee, the Company has nine ground leases on eight properties. These ground leases have maximum lease terms (including renewal options) that expire between 2074 and 2117. The exercise of lease renewal options is at the Company's sole discretion. The depreciable life of assets and leasehold improvements are limited by the expected lease term. Six of these leases have been classified as operating leases and three of these leases have been classified as finance leases. The Company's lease agreements do not contain any residual value guarantees or material restrictive covenants.

Lessor Disclosures

As a lessor, the Company leases its properties under operating leases and recognizes base rents on a straight-line basis over the lease term. The Company also recognizes revenue from tenant recoveries, through which tenants reimburse the Company on an accrual basis for certain expenses such as utilities, janitorial services, repairs and maintenance, security and alarms, parking lot and ground maintenance, administrative services, management fees, insurance, and real estate taxes. Rental revenues are reduced by the amount of any leasing incentives amortized on a straight-line basis over the term of the applicable lease. In addition, the Company recognizes contingent rental revenue (e.g., percentage rents based on tenant sales thresholds) when the sales thresholds are met. Many tenant leases include one or more options to renew, with renewal terms that can extend the lease term from one to 15 years or more. The exercise of lease renewal options is at the tenant's sole discretion. The Company includes a renewal period in the lease term only if it appears at lease inception that the renewal is reasonably assured.

10

Rental revenue for the three and six months ended June 30, 2021 and 2020 comprised the following (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
  2021 2020 2021 2020
Base rent and tenant charges $ 45,686  $ 38,767  $ 89,284  $ 80,280 
Accrued straight-line rental adjustment 1,436  953  3,327  1,510 
Lease incentive amortization (159) (160) (318) (333)
Above/below market lease amortization 415  355  826  747 
Total rental revenue $ 47,378  $ 39,915  $ 93,119  $ 82,204 

5. Real Estate Investment
 
Property Acquisitions

Delray Beach Plaza

On February 26, 2021, the Company acquired Delray Beach Plaza, a Whole Foods-anchored retail property located in Delray Beach, Florida, for a contract price of $27.6 million plus capitalized transaction costs of $0.2 million. The developer of this property repaid the Company's mezzanine note receivable of $14.3 million at the time of the acquisition.

Delray Beach Plaza
Site improvements $ 4,607 
Building and improvements 22,544 
In-place leases 7,209 
Below-market leases (3,121)
Finance lease liabilities (27,940)
Finance lease right-of-use assets 24,466 
Net assets acquired $ 27,765 

Hoffler Place

On June 28, 2021, the Company purchased the remaining 7.5% ownership interest in Hoffler Place for a cash payment of $0.3 million.

Summit Place

On June 28, 2021, the Company purchased the remaining 10% ownership interest in Summit Place for a cash payment of $0.5 million.

Property Disposition

On January 4, 2021, the Company completed the sale of the 7-Eleven outparcel at Hanbury Village for a sales price of $2.9 million. The gain on disposition was $2.4 million.

On January 14, 2021, the Company completed the sale of a land outparcel at Nexton Square for a sale price of $0.9 million. There was no gain or loss on the disposition. In conjunction with the sale, the Company paid down the Nexton Square loan by $0.8 million.

On March 16, 2021, the Company completed the sale of Oakland Marketplace for a sale price of $5.5 million. The gain on disposition was $1.1 million.

On March 18, 2021, the Company completed the sale of easement rights at Courthouse 7-Eleven for a sale price of $0.3 million. The gain on disposition was $0.2 million.

11

Impairment of Real Estate

During the six months ended June 30, 2021, the Company recognized impairment of real estate of $3.0 million related to the Socastee Commons shopping center in Myrtle Beach, South Carolina. The Company anticipates a decline in cash flows due to the expiration of the anchor tenant lease. The Company has not re-leased the anchor tenant space and has determined that it is not probable that this space will be leased in the near future at rates sufficient to recover the Company’s investment in the property. The Company has recorded an impairment loss equal to the excess of the book value of the property’s assets over the estimated fair value of the property.

Equity Method Investment

Harbor Point Parcel 3

The Company owns a 50% interest in Harbor Point Parcel 3, a joint venture with Beatty Development Group, for purposes of developing T. Rowe Price's new global headquarters office building in Baltimore, Maryland. The Company is a noncontrolling partner in the joint venture and will serve as the project's general contractor. During the six months ended June 30, 2021, the Company invested $5.9 million in Harbor Point Parcel 3. The Company has an estimated equity commitment of up to $30.0 million relating to this project. As of June 30, 2021 and December 31, 2020, the carrying value of the Company's investment in Harbor Point Parcel 3 was $7.0 million and $1.1 million, respectively. For the six months ended June 30, 2021, Harbor Point Parcel 3 had no operating activity, and therefore the Company received no allocated income.

Based on the terms of the operating agreement, the Company has concluded that Harbor Point Parcel 3 is a VIE and that the Company holds a variable interest. The Company 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 Harbor Point Parcel 3 in its consolidated financial statements. The Company has significant influence over the project due to its 50% ownership as well as certain rights and responsibilities relating to the development project. The Company's investment in the project is recorded as an equity method investment in the consolidated balance sheets.

6. Notes Receivable and Current Expected Credit Losses

Notes Receivable

The Company had the following notes receivable outstanding as of June 30, 2021 and December 31, 2020 ($ in thousands):
Outstanding loan amount Interest compounding
Development Project June 30,
2021		 December 31,
2020		 Maximum loan commitment Interest rate
Delray Beach Plaza $ —  $ 14,289  $ 17,000  15.0  %
(a)
 Annually
Interlock Commercial 93,991  85,318  103,000  15.0  %
(b)
 None
Nexton Multifamily 11,716  —  22,315  11.0  % Annually
Solis Apartments at Interlock —  28,969  41,100  13.0  % Annually
Total mezzanine 105,707  128,576  $ 183,415 
Other notes receivable 7,018  6,809 
Notes receivable guarantee premium 1,850  2,631 
Allowance for credit losses (2,129) (2,584)
Total notes receivable $ 112,446  $ 135,432 
________________________________________
(a) Loan was placed on nonaccrual status effective April 1, 2020.
(b) $3.0 million of this loan is subject to an interest rate of 18%.


12

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 generally added to the loan receivable balances. The Company recognized interest income for the three and six months ended June 30, 2021 and 2020 as follows (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
Development Project 2021 2020 2021 2020
The Residences at Annapolis Junction $ —  $ — 
(a)
 $ —  $ 2,468 
(a)(b)
Delray Beach Plaza —  — 
(a)
 — 
(a)
 489 
(a)
Nexton Multifamily 261  —  261  — 
Nexton Square —  405  —  797 
Interlock Commercial 3,310 
(b)
 3,157 
(b)
 6,384 
(b)
 6,175 
(b)
Solis Apartments at Interlock 3,068 
(c)
 838  4,005 
(c)
 1,675 
Total mezzanine 6,639  4,400  10,650  11,604 
Other interest income 107  12  212  34 
Total interest income $ 6,746  $ 4,412  $ 10,862  $ 11,638 
________________________________________
(a) Loan was placed on nonaccrual status effective April 1, 2020.
(b) Includes recognition of interest income related to an exit fee that is due upon repayment of the loan.
(c) Includes prepayment premium of $2.4 million from early payoff of the loan.

Delray Beach Plaza

On February 26, 2021, the Company acquired Delray Beach Plaza, a Whole Foods-anchored retail property located in Delray Beach, Florida for a contract price of $27.6 million plus capitalized transaction costs of $0.2 million. The developer of this property repaid the Company's mezzanine note receivable of $14.3 million at the time of the acquisition, which consisted of $12.3 million of principal and $2.0 million of accrued interest.

Interlock Commercial

In March 2021, the Company loaned an additional $7.5 million as part of the Interlock Commercial loan to fund project costs due to an additional equity requirement to reduce the senior loan. In June 2021, the borrower repaid $6.1 million of this loan, comprised of $3.0 million of principal and $3.1 million of accrued interest.

Nexton Multifamily

On April 1, 2021, the Company entered into a $22.3 million preferred equity investment for the development of a multifamily property located in Summerville, South Carolina, adjacent to the Company's Nexton Square property. The investment has economic terms consistent with a note receivable, including a mandatory redemption or maturity on October 1, 2026, and it is accounted for as a note receivable. The Company's investment bears interest at a rate of 11%, compounded annually. The Company funded $11.5 million of this investment during the six months ended June 30, 2021.

Management has concluded that this entity is a VIE. Because the other investor in the project, TP Nexton LLC, is the developer of Nexton Multifamily, the Company does not have the power to direct the activities of the project that most significantly impact its performance. Accordingly, the Company is not the project's primary beneficiary and does not consolidate the project in its consolidated financial statements.

Solis Apartments at Interlock

On June 7, 2021 the borrower paid off the Solis Apartments at Interlock note receivable in full. The Company received a total of $33.0 million, which consisted of $23.2 million outstanding principal, $7.4 million of accrued interest, and a prepayment premium of $2.4 million that resulted from the early payoff of the loan.

Allowance for Loan Losses

The Company is exposed to credit losses primarily through its mezzanine lending activities. As of June 30, 2021, the
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Company had two mezzanine loans, both of which are financing development projects in various stages of completion or lease-up. Each of these projects is subject to a loan that is senior to the Company’s mezzanine loan. Interest on these loans is paid in kind and is generally not expected to be paid until a sale of the project after completion of the development.

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

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

On a quarterly basis, the Company compares the risk inherent in its loans to industry loan loss data experienced during past business cycles. The Company updated the risk ratings for each of its notes receivable as of June 30, 2021 and obtained industry loan loss data relative to these risk ratings. Each of the outstanding loans as of June 30, 2021 was Pass-rated.

At December 31, 2020, the Company reported $135.4 million of notes receivable, net of allowances of $2.6 million. At June 30, 2021, the Company reported $112.4 million of notes receivable, net of allowances of $2.1 million. Changes in the allowance for the three and six months ended June 30, 2021 and 2020 were as follows (in thousands):
Three Months Ended June 30, Six Months Ended June 30,
  2021 2020 2021 2020
Beginning balance $ 1,741  $ 3,202  $ 2,584  $ — 
Cumulative effect of accounting change —  —  —  2,825 
Unrealized credit loss provision (release) 388  (117) 333  260
Extinguishment due to acquisition —  —  (788) — 
Ending balance $ 2,129  $ 3,085  $ 2,129  $ 3,085 

The Company places loans on non-accrual status when the loan balance, together with the balance of any senior loan, approximately equals the estimated realizable value of the underlying development project. As of December 31, 2020, the Company had one loan with non-accrual status with an amortized cost basis of $13.6 million. As of June 30, 2021, there were no loans on non-accrual status.

7. Construction Contracts

Construction contract costs and estimated earnings in excess of billings represent reimbursable costs and amounts earned under contracts in progress as of the balance sheet date. Such amounts become billable according to contract terms, which usually consider the passage of time, achievement of certain milestones, or completion of the project. The Company expects to bill and collect substantially all construction contract costs and estimated earnings in excess of billings as of June 30, 2021 during the next twelve months.  
 
Billings in excess of construction contract costs and estimated earnings represent billings or collections on contracts made in advance of revenue recognized.

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The following table summarizes the changes to the balances in the Company’s construction contract costs and estimated earnings in excess of billings account and the billings in excess of construction contract costs and estimated earnings account for the six months ended June 30, 2021 and 2020 (in thousands):
Six Months Ended 
June 30, 2021		 Six Months Ended 
June 30, 2020
Construction contract costs and estimated earnings in excess of billings Billings in excess of construction contract costs and estimated earnings Construction contract costs and estimated earnings in excess of billings Billings in excess of construction contract costs and estimated earnings
Beginning balance $ 138  $ 6,088  $ 249  $ 5,306 
Revenue recognized that was included in the balance at the beginning of the period —  (6,088) —  (5,306)
Increases due to new billings, excluding amounts recognized as revenue during the period —  4,191  —  9,320 
Transferred to receivables (464) —  (285) — 
Construction contract costs and estimated earnings not billed during the period 85  —  333  — 
Changes due to cumulative catch-up adjustment arising from changes in the estimate of the stage of completion 326  (54) 36  — 
Ending balance $ 85  $ 4,137  $ 333  $ 9,320 

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 $2.4 million and $1.7 million were deferred as of June 30, 2021 and December 31, 2020, respectively. Amortization of pre-contract costs for the six months ended June 30, 2021 and 2020 was $0.2 million and $0.4 million, respectively.
 
Construction receivables and payables include retentions, amounts that are generally withheld until the completion of the contract or the satisfaction of certain restrictive conditions such as fulfillment guarantees. As of June 30, 2021 and December 31, 2020, construction receivables included retentions of $6.4 million and $17.1 million, respectively. The Company expects to collect substantially all construction receivables outstanding as of June 30, 2021 during the next twelve months. As of June 30, 2021 and December 31, 2020, construction payables included retentions of $6.6 million and $17.7 million, respectively. The Company expects to pay substantially all construction payables outstanding as of June 30, 2021 during the next twelve months.

The Company’s net position on uncompleted construction contracts comprised the following as of June 30, 2021 and December 31, 2020 (in thousands):
  June 30, 2021 December 31, 2020
Costs incurred on uncompleted construction contracts $ 957,444  $ 905,037 
Estimated earnings 33,645  32,130 
Billings (995,141) (943,117)
Net position $ (4,052) $ (5,950)
Construction contract costs and estimated earnings in excess of billings $ 85  $ 138 
Billings in excess of construction contract costs and estimated earnings (4,137) (6,088)
Net position $ (4,052) $ (5,950)

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The Company’s balances and changes in construction contract price allocated to unsatisfied performance obligations (backlog) as of June 30, 2021 and 2020 were as follows (in thousands):
  Three Months Ended June 30, Six Months Ended June 30,
  2021 2020 2021 2020
Beginning backlog $ 38,838  $ 235,642  $ 71,258  $ 242,622 
New contracts/change orders 50,278  15,490  53,402  55,930 
Work performed (18,897) (57,390) (54,441) (104,810)
Ending backlog $ 70,219  $ 193,742  $ 70,219  $ 193,742 

The Company expects to complete a majority of the uncompleted contracts in place as of June 30, 2021 during the next 12 to 18 months.

8. Indebtedness
 
Credit Facility

The Company has a senior credit facility that was amended and restated on October 3, 2019, which provides for a $355.0 million credit facility comprised of a $150.0 million senior unsecured revolving credit facility (the "revolving credit facility") and a $205.0 million senior unsecured term loan facility (the "term loan facility" and, together with the revolving credit facility, the "credit facility"), with a syndicate of banks.
 
The credit facility includes an accordion feature that allows the total commitments to be further increased to $700.0 million, subject to certain conditions, including obtaining commitments from any one or more lenders. The revolving credit facility has a scheduled maturity date of January 24, 2024, with two six-month extension options, subject to certain conditions, including payment of a 0.075% extension fee at each extension. The term loan facility has a scheduled maturity date of January 24, 2025.
The revolving credit facility bears interest at LIBOR (the London Inter-Bank Offered Rate) plus a margin ranging from 1.30% to 1.85% and the term loan facility bears interest at LIBOR plus a margin ranging from 1.25% to 1.80%, in each case depending on the Company's total leverage. The Company is also obligated to pay an unused commitment fee of 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 June 30, 2021, there was no balance outstanding on the revolving credit facility. As of December 31, 2020, the outstanding balance on the revolving credit facility was $10.0 million. The outstanding balance on the term loan facility was $205.0 million as of both dates. As of June 30, 2021, the effective interest rates on the revolving credit facility and the term loan facility were 1.70% and 1.65%, respectively. The Company may, at any time, voluntarily prepay any loan under the credit facility in whole or in part without premium or penalty. The Company's unencumbered borrowing pool will support revolving borrowings of up to $115 million as of June 30, 2021.

The Operating Partnership is the borrower, 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.

On January 7, 2021, the Operating Partnership entered into a $15.0 million standby letter of credit using the available capacity under the credit facility to guarantee the funding of its investment in the Harbor Point Parcel 3 joint venture, which is the developer of T. Rowe Price's new global headquarters. This letter of credit is available for draw down on the revolving credit facility in the event the Company does not meet its equity requirement.

The Company is currently in compliance with all covenants governing the credit facility.

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Other 2021 Financing Activity

On January 15, 2021, the Company refinanced the loan secured by 4525 Main Street and Encore Apartments. The Company increased the balance by $1.5 million, bringing the total balance of the loan to $57.0 million. The new loan bears interest at a rate of 2.93% and will mature on February 10, 2026.

On January 28, 2021, the Company refinanced the Nexton Square loan and paid the balance down by $2.0 million, bringing the balance to $20.1 million. The loan bears interest at a rate of LIBOR plus a spread of 2.25% (LIBOR has a 0.25% floor) and will mature on February 1, 2023.

On March 8, 2021, the Company obtained a loan secured by Delray Beach Plaza in the amount of $14.5 million. The loan bears interest at a rate of LIBOR plus a spread of 3.00% and will mature on March 8, 2026.

On April 15, 2021, the Company refinanced the $19.5 million Southgate Square loan. The loan bears interest at a rate of LIBOR plus a spread of 2.25% (LIBOR has a 0.75% floor) and will mature on April 29, 2024. The loan term may be extended for an additional two years under the satisfaction of certain criteria.

On May 5, 2021, the Company entered into a $35.1 million construction loan agreement for the Chronicle Mill development project. The loan bears interest rate at LIBOR plus a spread of 3.00% (LIBOR has a 0.25% floor). The loan matures on May 5, 2024 and has two 12-month extension options.

During the six months ended June 30, 2021, the Company borrowed $3.4 million under its existing construction loans to fund new development and construction.

In July 2021, the Company modified the loan secured by Johns Hopkins Village. The modification makes changes to certain loan covenants. As a result of this modification, the Company is currently in compliance with all loan covenants.

9. Derivative Financial Instruments
 
The Company enters into interest rate derivative contracts to manage exposure to interest rate risks. The Company does not use derivative financial instruments for trading or speculative purposes. Derivative financial instruments are recognized at fair value and presented within other assets and other liabilities in the condensed consolidated balance sheets. Gains and losses resulting from changes in the fair value of derivatives that are neither designated nor qualify as hedging instruments are recognized within the change in fair value of interest rate derivatives in the condensed consolidated statements of comprehensive income. For derivatives that qualify as cash flow hedges, the gain or loss is reported as a component of other comprehensive income (loss) and reclassified into earnings in the periods during which the hedged forecasted transaction affects earnings.

As of June 30, 2021, the Company had the following LIBOR and Secured Overnight Financing Rate ("SOFR") interest rate caps ($ in thousands):
Effective Date Maturity Date Notional Amount Strike Rate Premium Paid
5/15/2019 6/1/2022 $ 100,000 
2.50% (LIBOR)
 $ 288 
1/10/2020 2/1/2022 50,000 
(b)
1.75% (LIBOR)
 87 
1/28/2020 2/1/2022 50,000 
(b)
1.75% (LIBOR)
 62 
3/2/2020 3/1/2022 100,000 
(b)
1.50% (LIBOR)
 111 
7/1/2020 7/1/2023 100,000 
(b)
0.50% (LIBOR)
 232 
11/1/2020 11/1/2023 84,375 
(b)
1.84% (SOFR)
(a)
 91 
2/2/2021 2/1/2023 100,000 
0.50% (LIBOR)
 45 
3/4/2021 4/1/2023 14,479 
2.50% (LIBOR)
 4 
5/5/2021 5/1/2023 50,000 
0.50% (LIBOR)
 75 
5/5/2021 5/1/2023 35,100 
0.50% (LIBOR)
 55 
6/16/2021 7/1/2023 100,000 
0.50% (LIBOR)
 120 
Total $ 783,954  $ 1,170 
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________________________________________
(a) This interest rate cap is subject to SOFR, which has been identified as the alternative to LIBOR. LIBOR will be phased out beginning December 31, 2021.
(b) Designated as a cash flow hedge.

As of June 30, 2021, the Company held the following floating-to-fixed interest rate swaps ($ in thousands):
Related Debt Notional Amount Index Swap Fixed Rate Debt effective rate Effective Date Expiration Date
Senior unsecured term loan $ 50,000  1-month LIBOR 2.78  % 4.33  % 5/1/2018 5/1/2023
John Hopkins Village 50,367 
(a)
 1-month LIBOR 2.94  % 4.19  % 8/7/2018 8/7/2025
Senior unsecured term loan 10,500 
(a)
 1-month LIBOR 3.02  % 4.57  % 10/12/2018 10/12/2023
249 Central Park Retail, South Retail, and Fountain Plaza Retail 33,629 
(a)
 1-month LIBOR 2.25  % 3.85  % 4/1/2019 8/10/2023
Senior unsecured term loan 50,000 
(a)
 1-month LIBOR 2.26  % 3.81  % 4/1/2019 10/26/2022
Thames Street Wharf 70,000 
(a)
 1-month LIBOR 0.51  % 1.81  % 3/26/2020 6/26/2024
Senior unsecured term loan 25,000 
(a)
 1-month LIBOR 0.50  % 2.05  % 4/1/2020 4/1/2024
Senior unsecured term loan 25,000 
(a)
 1-month LIBOR 0.50  % 2.05  % 4/1/2020 4/1/2024
Senior unsecured term loan 25,000 
(a)
 1-month LIBOR 0.55  % 2.10  % 4/1/2020 4/1/2024
Total $ 339,496 
________________________________________
(a) Designated as a cash flow hedge.

For the interest rate swaps and caps designated as cash flow hedges, realized losses are reclassified out of accumulated other comprehensive loss to interest expense in the Condensed Consolidated Statements of Comprehensive Income due to payments made to the swap counterparty. During the next 12 months, the Company anticipates reclassifying approximately $4.2 million of net hedging losses from accumulated other comprehensive loss into earnings to offset the variability of the hedged items during this period.

The Company’s derivatives were comprised of the following as of June 30, 2021 and December 31, 2020 (in thousands): 
  June 30, 2021 December 31, 2020
  Notional
Amount		 Fair Value Notional
Amount		 Fair Value
  Asset Liability   Asset Liability
Derivatives not designated as accounting hedges
Interest rate swaps $ 50,000  $ —  $ (2,339) $ 50,000  $ —  $ (3,056)
Interest rate caps 399,579  359  —  150,000  4  — 
Total derivatives not designated as accounting hedges 449,579  359  (2,339) 200,000  4  (3,056)
Derivatives designated as accounting hedges
Interest rate swaps 289,497  —  (8,075) 290,231  —  (11,797)
Interest rate caps 384,375  236  —  384,375  86  — 
Total derivatives $ 1,123,451  $ 595  $ (10,414) $ 874,606  $ 90  $ (14,853)

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The changes in the fair value of the Company’s derivatives during the three and six months ended June 30, 2021 and 2020 were comprised of the following (in thousands): 
  Three Months Ended June 30, Six Months Ended June 30,
  2021 2020 2021 2020
Interest rate swaps $ (86) $ (2,147) $ 2,375  $ (11,230)
Interest rate caps (34) (138) 207  (280)
Total change in fair value of interest rate derivatives $ (120) $ (2,285) $ 2,582  $ (11,510)
Comprehensive income statement presentation:
Change in fair value of derivatives and other $ 348  $ (6) $ 775  $ (1,742)
Unrealized cash flow hedge gains (losses) (468) (2,279) 1,807  (9,768)
Total change in fair value of interest rate derivatives $ (120) $ (2,285) $ 2,582  $ (11,510)

10. Equity
 
Stockholders’ Equity

On March 10, 2020, the Company commenced an at-the-market continuous equity offering program (the "ATM Program") through which the Company may, from time to time, issue and sell shares of its common stock and shares of its 6.75% Series A Cumulative Redeemable Perpetual Preferred Stock (the "Series A Preferred Stock") having an aggregate offering price of up to $300.0 million, to or through its sales agents and, with respect to shares of its common stock, may enter into separate forward sales agreements to or through the forward purchaser. During the six months ended June 30, 2021, the Company issued and sold 1,786,524 shares of common stock at a weighted average price of $13.19 per share under the ATM Program, receiving net proceeds, after offering costs and commissions, of $23.1 million. During the six months ended June 30, 2021, the Company did not issue any shares of Series A Preferred Stock under the ATM Program. Shares having an aggregate offering price of $241.4 million remained unsold under the ATM Program as of August 3, 2021.

Noncontrolling Interests
 
As of June 30, 2021 and December 31, 2020, the Company held a 74.5% and 73.9% common interest in the Operating Partnership, respectively. As of June 30, 2021, the Company also held a preferred interest in the Operating Partnership in the form of preferred units with a liquidation preference of $171.1 million. The Company is the primary beneficiary of the 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 Operating Partnership represent units of limited partnership interest in the Operating Partnership not held by the Company. As of June 30, 2021, there were 20,853,485 Class A units of limited partnership interest in the Operating Partnership ("Class A Units") not held by the Company. The Company's financial position and results of operations are the same as those of the Operating Partnership.

Additionally, the Operating Partnership owns a majority interest in certain non-wholly-owned operating and development properties. The noncontrolling interest for investment entities of $0.6 million relates to the minority partners' interest in certain joint venture entities as of June 30, 2021. The noncontrolling interest for consolidated real estate entities was $0.5 million as of December 31, 2020.

On January 4, 2021, a holder of Class A Units tendered 12,000 Class A Units for redemption by the Operating Partnership, which the Company elected to satisfy by issuing an equal number of shares of common stock.

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Dividends and Distributions

During the six months ended June 30, 2021, the following dividends/distributions were declared or paid:
Equity type Declaration Date Record Date Payment Date Dividends per Share/Unit Aggregate Dividends/Distributions on Stock and Units (in thousands)
Common Stock/Class A Units 11/10/2020 12/30/2020 01/07/2021 $ 0.11  $ 8,793 
Common Stock/Class A Units 02/09/2021 03/31/2021 04/08/2021 0.15  12,112 
Common Stock/Class A Units 05/03/2021 06/30/2021 07/08/2021 0.16  13,095 
Series A Preferred Stock 11/10/2020 01/04/2021 01/15/2021 0.421875  2,887 
Series A Preferred Stock 02/09/2021 04/01/2021 04/15/2021 0.421875  2,887 
Series A Preferred Stock 05/03/2021 07/01/2021 07/15/2021 0.421875  2,887 

11. Stock-Based Compensation
 
The Company’s Amended and Restated 2013 Equity Incentive Plan (the "Equity Plan") permits the grant of restricted stock awards, stock options, stock appreciation rights, performance units, and other equity-based awards up to an aggregate of 1,700,000 shares of common stock. As of June 30, 2021, there were 608,924 shares available for issuance under the Equity Plan.

During the six months ended June 30, 2021, the Company granted an aggregate of 164,465 shares of restricted stock to employees and non-employee directors with a weighted average grant date fair value of $12.86 per share. Of those shares, 43,646 were surrendered by the employees for income tax withholdings. Employee restricted stock awards generally vest over a period of two years: one-third immediately on the grant date and the remaining two-thirds in equal amounts on the first two anniversaries following the grant date, subject to continued service to the Company. Beginning with grants made in 2021, executive officers' restricted shares generally vest over a period of three years: two-fifths immediately on the grant date and the remaining three-fifths in equal amounts on the first three anniversaries following the grant date, subject to continued service to the Company. Non-employee director restricted stock awards vest either immediately upon grant or over a period of one year, subject to continued service to the Company. Unvested restricted stock awards are entitled to receive dividends from their grant date.

During the three months ended June 30, 2021 and 2020, the Company recognized $0.5 million of stock-based compensation cost for each period. During the six months ended June 30, 2021 and 2020, the Company recognized $1.7 million and $1.8 million, respectively, of stock-based compensation cost. As of June 30, 2021, there were 153,190 nonvested restricted shares outstanding; the total unrecognized compensation expense related to nonvested restricted shares was $1.4 million, which the Company expects to recognize over the next 33 months.

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

Financial assets and liabilities whose fair values are not measured at fair value but for which the fair value is disclosed include the Company's notes receivable and indebtedness. The fair value is estimated by discounting the future cash flows of each instrument at estimated market rates consistent with the maturity, credit characteristics, and other terms of the arrangements, which are Level 3 inputs under the fair value hierarchy.
 
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In certain cases, the inputs used to estimate the fair value may fall into different levels of the fair value hierarchy. For disclosure purposes, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.

Considerable judgment is used to estimate the fair value of financial instruments. The estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments.

The carrying amounts and fair values of the Company’s financial instruments as of June 30, 2021 and December 31, 2020 were as follows (in thousands): 
  June 30, 2021 December 31, 2020
  Carrying
Value		 Fair
Value		 Carrying
Value		 Fair
Value
Indebtedness, net $ 964,396  $ 982,663  $ 963,845  $ 980,714 
Notes receivable, net 112,446  112,446  135,432  135,223 
Interest rate swap liabilities 10,414  10,414  14,853  14,853 
Interest rate swap and cap assets 595  595  90  90 
 
13. Related Party Transactions
 
The Company provides general contracting services to certain related party entities that are included in these condensed consolidated financial statements. Revenue from construction contracts with these entities for the three months ended June 30, 2021 and 2020 was $6.3 million and $11.0 million, respectively. Gross profit from such contracts was $0.2 million and $0.4 million for the three months ended June 30, 2021 and 2020, respectively. Revenue from construction contracts with these entities for the six months ended June 30, 2021 and 2020 was $18.7 million and $19.5 million, respectively. Gross profit from such contracts was $0.7 million and $0.7 million for the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021 and December 31, 2020, there was $5.1 million and $8.6 million, respectively, outstanding from related parties of the Company included in net construction receivables.

The general contracting services described above include contracts with an aggregate price of $82.2 million with the developer of a mixed-use project, including an apartment building, retail space, and a parking garage located in Virginia Beach, Virginia. The developer is owned in part by certain executives of the Company, not including the Chief Executive Officer and Chief Financial Officer. These contracts were executed in 2019 and are projected to result in aggregate gross profit of $3.1 million to the Company, representing a gross profit margin of 4.0%. As part of these contracts and per the requirements of the lender for this project, the Company issued a letter of credit for $9.5 million to secure certain performances of the Company's subsidiary construction company under the contracts, which remains outstanding as of June 30, 2021.

The Operating Partnership entered into tax protection agreements that indemnify certain directors and executive officers of the Company from their tax liabilities resulting from the potential future sale of certain of the Company’s properties within ten years of the completion of the Company’s initial public offering and formation transactions completed on May 13, 2013.

14. Commitments and Contingencies
 
Legal Proceedings
 
The Company is from time to time involved in various disputes, lawsuits, warranty claims, environmental and other matters arising in the ordinary course of business. Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters.
 
The Company currently is a party to various legal proceedings, none of which management expects will have a material adverse effect on the Company’s financial position, results of operations, or liquidity. Management accrues a liability for litigation if an unfavorable outcome is determined to be probable and the amount of loss can be reasonably estimated. If an unfavorable outcome is determined to be probable and a range of loss can be reasonably estimated, management accrues the best estimate within the range; however, if no amount within the range is a better estimate than any other, the minimum amount within the range is accrued. Legal fees related to litigation are expensed as incurred. Management does not believe
21

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. As of June 30, 2021, the Company had an outstanding payment guarantee for Interlock Commercial for $34.3 million. The Company has recorded a $1.9 million liability and corresponding addition to notes receivable relating to this guarantee.

Commitments
 
The Company has a bonding line of credit for its general contracting construction business and is contingently liable under performance and payment bonds, bonds for cancellation of mechanics liens and defect bonds. Such bonds collectively totaled $2.4 million as of June 30, 2021 and December 31, 2020. In addition, as of June 30, 2021, the Company has outstanding a letter of credit for $9.5 million to secure certain performances of the Company's subsidiary construction company under a related party project.
 
On January 7, 2021, the Operating Partnership entered into a $15.0 million standby letter of credit using the available capacity under the credit facility to guarantee the funding of its investment in the Harbor Point Parcel 3 joint venture, which is the developer of T. Rowe Price's new global headquarters. This letter of credit is available for draw down on the revolving credit facility in the event the Company does not meet its equity requirement.

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

Real Estate

On July 28, 2021, the Company acquired Overlook Village, a retail center in Asheville, North Carolina for a contract price of $28.4 million.

In July 2021, the Company entered into a purchase and sale agreement to sell Socastee Commons for a price of $3.8 million. The sale is expected to be completed by the end of 2021.

Indebtedness

In July 2021, the Company borrowed $25.0 million under the revolving credit facility to fund the acquisition of Overlook Village.

In July 2021, the Company borrowed $2.2 million on its construction loans to fund development activities.

In July 2021, the Company modified the John Hopkins Village loan. The modification makes changes to certain loan covenants. As a result of this modification, the Company is in compliance with the covenants of this loan agreement.




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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
References to "we," "our," "us," and "our company" refer to Armada Hoffler Properties, Inc., a Maryland corporation, together with our consolidated subsidiaries, including Armada Hoffler, L.P., a Virginia limited partnership (the "Operating Partnership"), of which we are the sole general partner. The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report.
 
Forward-Looking Statements
 
This report contains forward-looking statements within the meaning of the federal securities laws. We caution investors that any forward-looking statements presented in this report, or which management may make orally or in writing from time to time, are based on beliefs and assumptions made by, and information currently available to, management. When used, the words "anticipate," "believe," "expect," "intend," "may," "might," "plan," "estimate," "project," "should," "will," "result," and similar expressions, which do not relate solely to historical matters, are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties, and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties, and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated, or projected. We caution you that while forward-looking statements reflect our good faith beliefs when we make them, they are not guarantees of future performance and are impacted by actual events when they occur after we make such statements. We expressly disclaim any responsibility to update forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.
 
Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data, or methods which may be incorrect or imprecise, and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:
 
•the continuing impacts of the novel coronavirus ("COVID-19") pandemic, including a possible resurgence, measures intended to prevent or mitigate its spread, the timing or effectiveness of vaccines or other treatments, and our ability to accurately assess and predict such impacts on our results of operations, financial condition, acquisition and disposition activities, and growth opportunities;
▪our ability to commence or continue construction and development projects on the timeframes and terms currently anticipated;
▪our ability and the ability of our tenants to access funding under government programs designed to provide financial relief for U.S. businesses in light of the COVID-19 pandemic;
•continuing adverse economic or real estate developments, either nationally or in the markets in which our properties are located, including as a result of the COVID-19 pandemic;
•our 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; 
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•our inability to extend the maturity of or refinance existing debt or comply with the financial covenants in the agreements that govern our existing debt; 
•financial market fluctuations; 
•risks that affect the general retail environment or the market for office properties or multifamily units; 
•the competitive environment in which we operate; 
•decreased rental rates or increased vacancy rates; 
•conflicts of interests with our officers and directors; 
•lack or insufficient amounts of insurance; 
•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 changes to U.S. tax laws.

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We caution investors not to place undue reliance on these forward-looking statements and urge investors to carefully review the disclosures we make concerning risks and uncertainties in the sections entitled "Risk Factors" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our most recent Annual Report on Form 10-K, as well as risks, uncertainties and other factors discussed in this Quarterly Report on Form 10-Q, and other documents that we file from time to time with the Securities and Exchange Commission (the "SEC").
 
Business Description
 
We are a vertically-integrated, self-managed REIT with four decades of experience developing, building, acquiring and managing high-quality office, retail and multifamily properties located primarily in the Mid-Atlantic and Southeastern United States. We also provide general construction and development services to third-party clients, in addition to developing and building properties to be placed in our stabilized portfolio. As of June 30, 2021, our operating property portfolio consisted of the following properties:
Property Segment Location Ownership Interest
4525 Main Street Office Virginia Beach, Virginia* 100  %
Armada Hoffler Tower Office Virginia Beach, Virginia* 100  %
Brooks Crossing Office Office Newport News, Virginia 100  %
One City Center Office Durham, North Carolina 100  %
One Columbus Office Virginia Beach, Virginia* 100  %
Thames Street Wharf Office Baltimore, Maryland 100  %
Two Columbus Office