Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Business of Organization
Armada Hoffler Properties, Inc. (the "Company") is a full-service real estate company with extensive experience developing, building, owning, and managing high-quality, institutional-grade office, retail, and multifamily properties in attractive markets primarily throughout the Mid-Atlantic and Southeastern United States.
The Company is a real estate investment trust ("REIT"), the sole general partner of Armada Hoffler, L.P. (the "Operating Partnership") and, as of September 30, 2021, owned 74.6% 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 September 30, 2021, the Company's property portfolio consisted of 57 stabilized 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
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 nine months ended September 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.
Net operating income of the Company’s reportable segments for the three and nine months ended September 30, 2021 and 2020 was as follows (in thousands):
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2021
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2020
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2021
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2020
|
Office real estate
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Rental revenues
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$
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11,933
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$
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11,456
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|
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$
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35,324
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|
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$
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32,142
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Rental expenses
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3,409
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|
3,042
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|
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9,222
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|
|
7,879
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Real estate taxes
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1,547
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|
1,375
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4,318
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3,749
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Segment net operating income
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6,977
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7,039
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21,784
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20,514
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Retail real estate
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Rental revenues
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20,223
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15,669
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57,682
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54,794
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Rental expenses
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3,270
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2,618
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9,119
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8,096
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Real estate taxes
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2,100
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1,808
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6,307
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5,981
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Segment net operating income
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14,853
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11,243
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42,256
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40,717
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Multifamily residential real estate
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Rental revenues
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17,404
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12,511
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49,673
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34,904
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Rental expenses
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6,038
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4,563
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16,500
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11,932
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Real estate taxes
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1,896
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1,577
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5,689
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3,596
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Segment net operating income
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9,470
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6,371
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27,484
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19,376
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General contracting and real estate services
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Segment revenues
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17,502
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58,617
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71,473
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163,283
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Segment expenses
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15,944
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56,509
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68,350
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157,401
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Segment gross profit
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1,558
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2,108
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3,123
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|
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5,882
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Net operating income
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$
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32,858
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$
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26,761
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$
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94,647
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$
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86,489
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Rental expenses represent costs directly associated with the operation and management of the Company’s real estate properties. Rental expenses include asset management expenses, property management fees, repairs and maintenance, insurance, and utilities.
General contracting and real estate services revenues for the three months ended September 30, 2021 and 2020 exclude revenue related to intercompany construction contracts of $8.6 million and $3.2 million, respectively, as it is eliminated in consolidation. General contracting and real estate services revenues for the nine months ended September 30, 2021 and 2020 exclude revenue related to intercompany construction contracts of $16.0 million and $24.7 million, respectively.
General contracting and real estate services expenses for the three months ended September 30, 2021 and 2020 exclude expenses related to intercompany construction contracts of $8.6 million and $3.2 million, respectively. General contracting and real estate services expenses for the nine months ended September 30, 2021 and 2020 exclude expenses related to intercompany construction contracts of $16.0 million and $24.5 million, respectively.
The following table reconciles net operating income to net income, the most directly comparable GAAP measure, for the three and nine months ended September 30, 2021 and 2020 (in thousands):
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2021
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2020
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2021
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2020
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Net operating income
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$
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32,858
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$
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26,761
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$
|
94,647
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$
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86,489
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Depreciation and amortization
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(16,886)
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(14,176)
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(52,237)
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(42,232)
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Amortization of right-of-use assets - finance leases
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(278)
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(147)
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(745)
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(440)
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General and administrative expenses
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(3,449)
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(2,601)
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(10,957)
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(9,382)
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Acquisition, development and other pursuit costs
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(8)
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(26)
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(111)
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(555)
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Impairment charges
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—
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(47)
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(3,122)
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(205)
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Gain (loss) on real estate dispositions, net
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(113)
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3,612
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3,604
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6,388
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Interest income
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3,766
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|
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4,417
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|
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14,628
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16,055
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Interest expense
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(8,827)
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(7,523)
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(25,220)
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(22,938)
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Change in fair value of derivatives and other
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131
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318
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838
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(1,424)
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Unrealized credit loss release (provision)
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617
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33
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284
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(227)
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Other income (expense), net
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(105)
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177
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81
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|
521
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Income tax benefit
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42
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28
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522
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|
220
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Net income
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$
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7,748
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$
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10,826
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$
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22,212
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|
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$
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32,270
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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.
Rental revenue for the three and nine months ended September 30, 2021 and 2020 comprised the following (in thousands):
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2021
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2020
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2021
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2020
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Base rent and tenant charges
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$
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48,391
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$
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37,532
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$
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137,675
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|
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$
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117,812
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Accrued straight-line rental adjustment
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883
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|
|
1,925
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|
|
4,210
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|
|
3,435
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Lease incentive amortization
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|
(167)
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|
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(164)
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|
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(485)
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|
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(497)
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Above/below market lease amortization
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453
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|
343
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|
|
1,279
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|
|
1,090
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Total rental revenue
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$
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49,560
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$
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39,636
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$
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142,679
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$
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121,840
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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.
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.
Overlook Village
On July 28, 2021, the Company acquired Overlook Village, a retail center in Asheville, North Carolina, for a contract price of $28.3 million plus capitalized acquisition costs of $0.1 million.
Greenbrier Square
On August 24, 2021, the Company acquired Greenbrier Square, a Kroger-anchored retail center in Chesapeake, Virginia, for total consideration of $36.5 million plus capitalized acquisition costs of $0.3 million. As a part of this acquisition, the Company assumed a note payable of $20.0 million.
The following table summarizes the purchase price allocation (including acquisition costs) based on relative fair value of the assets acquired and intangible liabilities assumed for the three operating properties purchased during the nine months ended September 30, 2021 (in thousands):
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Delray Beach Plaza
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Overlook Village
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Greenbrier Square
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Land
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$
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—
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$
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6,328
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$
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8,549
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Site improvements
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4,607
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|
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1,727
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|
|
1,974
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Building and improvements
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22,544
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|
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18,375
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|
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19,196
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In-place leases
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7,209
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|
|
3,997
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|
|
6,659
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Above-market leases
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—
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|
|
81
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|
|
1,753
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Below-market leases
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|
(3,121)
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(2,146)
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(1,365)
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Finance lease liabilities
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|
(27,940)
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|
|
—
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|
|
—
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Finance lease right-of-use assets
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|
24,466
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|
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—
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|
|
—
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Fair value adjustment on acquired debt
|
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—
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|
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—
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|
|
11
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Net assets acquired
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$
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27,765
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|
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$
|
28,362
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|
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$
|
36,777
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Property Dispositions
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.
Impairment and Disposal of Real Estate
During the three months ended March 31, 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 anticipated a decline in cash flows due to the expiration of the anchor tenant lease. The Company had not re-leased the anchor tenant space and had determined that it was not probable that this space would be leased at rates sufficient to recover the Company’s investment in the property. The Company 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 during the first quarter of 2021. On August 25, 2021, the Company completed the sale of Socastee Commons for a price of $3.8 million. The loss on disposition was $0.1 million.
Real Estate Investments Held for Sale
During the three months ended September 30, 2021, the Company classified the Johns Hopkins Village multifamily property in real estate investments held for sale. The transaction is subject to customary closing conditions and is expected to close in the fourth quarter of 2021.
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 nine months ended September 30, 2021, the Company invested $8.1 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 September 30, 2021 and December 31, 2020, the carrying value of the Company's investment in Harbor Point Parcel 3 was $9.2 million and $1.1 million, respectively. For the nine months ended September 30, 2021, Harbor Point Parcel 3 had no operating activity, and therefore the Company received no allocated income.
Based on the terms of the operating agreement, the Company has concluded that Harbor Point Parcel 3 is a VIE and that the Company holds a variable interest. The Company does not have the power to direct the activities of the project that most significantly impact its performance. Accordingly, the Company is not the project's primary beneficiary and, therefore, does not consolidate Harbor Point Parcel 3 in its consolidated financial statements. The Company has significant influence over the project due to its 50% ownership as well as certain rights and responsibilities relating to the development project. The Company's investment in the project is recorded as an equity method investment in the consolidated balance sheets.
6. Notes Receivable and Current Expected Credit Losses
Notes Receivable
The Company had the following notes receivable outstanding as of September 30, 2021 and December 31, 2020 ($ in thousands):
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Outstanding loan amount
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|
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Interest compounding
|
Development Project
|
|
September 30,
2021
|
|
December 31,
2020
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Maximum loan commitment
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Interest rate
|
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|
|
|
|
|
|
|
|
|
|
Delray Beach Plaza
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$
|
—
|
|
|
$
|
14,289
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|
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$
|
17,000
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|
|
15.0
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%
|
(a)
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Annually
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|
|
|
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|
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Interlock Commercial
|
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92,254
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|
|
85,318
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|
|
107,000
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|
|
15.0
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%
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(b)
|
None
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Nexton Multifamily
|
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18,549
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|
|
—
|
|
|
22,315
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|
|
11.0
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%
|
|
Annually
|
Solis Apartments at Interlock
|
|
—
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|
|
28,969
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|
|
41,100
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|
|
13.0
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%
|
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Annually
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Total mezzanine
|
|
110,803
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|
|
128,576
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|
|
$
|
187,415
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|
|
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|
|
Other notes receivable
|
|
7,124
|
|
|
6,809
|
|
|
|
|
|
|
|
Notes receivable guarantee premium
|
|
1,631
|
|
|
2,631
|
|
|
|
|
|
|
|
Allowance for credit losses
|
|
(1,394)
|
|
(c)
|
(2,584)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total notes receivable
|
|
$
|
118,164
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|
|
$
|
135,432
|
|
|
|
|
|
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|
________________________________________
(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%.
(c) The amount excludes $0.1 million of CECL allowance that relates to the unfunded commitments, which was recorded as a liability under Other Liabilities in our consolidated balance sheet.
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 nine months ended September 30, 2021 and 2020 as follows (in thousands):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 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
|
|
397
|
|
|
—
|
|
|
658
|
|
|
—
|
|
|
Nexton Square
|
|
—
|
|
|
380
|
|
|
—
|
|
|
1,177
|
|
|
Interlock Commercial
|
|
3,260
|
|
(b)
|
3,189
|
|
(b)
|
9,644
|
|
(b)
|
9,364
|
|
(b)
|
Solis Apartments at Interlock
|
|
—
|
|
|
847
|
|
|
4,005
|
|
(c)
|
2,522
|
|
|
Total mezzanine
|
|
3,657
|
|
|
4,416
|
|
|
14,307
|
|
|
16,020
|
|
|
Other interest income
|
|
109
|
|
|
1
|
|
|
321
|
|
|
35
|
|
|
Total interest income
|
|
$
|
3,766
|
|
|
$
|
4,417
|
|
|
$
|
14,628
|
|
|
$
|
16,055
|
|
|
________________________________________
(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 September 2021, the loan was modified to increase the maximum loan commitment to $107.0 million and to modify and clarify certain rights and responsibilities under the loan.
During the three months ended September 30, 2021, the borrower repaid $5.0 million, comprised of $3.8 million of principal and $1.2 million of accrued interest. During the nine months ended September 30, 2021, the borrower repaid $11.0 million of this loan, comprised of $6.8 million of principal and $4.2 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.
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 September 30, 2021, the 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 September 30, 2021 and obtained industry loan loss data relative to these risk ratings. Each of the outstanding loans as of September 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 September 30, 2021, the Company reported $118.2 million of notes receivable, net of allowances of $1.4 million. Changes in the allowance for the three and nine months ended September 30, 2021 and 2020 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Beginning balance
|
|
$
|
2,129
|
|
|
$
|
3,085
|
|
|
$
|
2,584
|
|
|
$
|
—
|
|
Cumulative effect of accounting change
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,825
|
|
Unrealized credit loss provision (release)
|
|
(617)
|
|
|
(33)
|
|
|
(284)
|
|
|
227
|
Extinguishment due to acquisition
|
|
—
|
|
|
—
|
|
|
(788)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance (a)
|
|
$
|
1,512
|
|
|
$
|
3,052
|
|
|
$
|
1,512
|
|
|
$
|
3,052
|
|
________________________________________
(a) The amount as of September 30, 2021 includes $0.1 million of allowance related to the unfunded commitments, which was recorded as Other liabilities on the Consolidated Balance Sheet.
The Company places loans on non-accrual status when the loan balance, together with the balance of any senior loan, approximately equals the estimated realizable value of the underlying development project. As of December 31, 2020, the Company had one loan with non-accrual status with an amortized cost basis of $13.6 million. As of September 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 September 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.
The following table summarizes the changes to the balances in the Company’s construction contract costs and estimated earnings in excess of billings account and the billings in excess of construction contract costs and estimated earnings account for the nine months ended September 30, 2021 and 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30, 2021
|
|
Nine Months Ended
September 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
|
|
—
|
|
|
3,791
|
|
|
—
|
|
|
7,237
|
|
Transferred to receivables
|
|
(665)
|
|
|
—
|
|
|
(468)
|
|
|
—
|
|
Construction contract costs and estimated earnings not billed during the period
|
|
370
|
|
|
—
|
|
|
215
|
|
|
—
|
|
Changes due to cumulative catch-up adjustment arising from changes in the estimate of the stage of completion
|
|
527
|
|
|
(1,117)
|
|
|
219
|
|
|
(152)
|
|
Ending balance
|
|
$
|
370
|
|
|
$
|
2,674
|
|
|
$
|
215
|
|
|
$
|
7,085
|
|
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 $2.6 million and $1.7 million were deferred as of September 30, 2021 and
December 31, 2020, respectively. Amortization of pre-contract costs for the nine months ended September 30, 2021 and 2020 was $0.2 million and $0.7 million, respectively.
Construction receivables and payables include retentions, which are amounts that are generally withheld until the completion of the contract or the satisfaction of certain restrictive conditions such as fulfillment guarantees. As of September 30, 2021 and December 31, 2020, construction receivables included retentions of $7.1 million and $17.1 million, respectively. The Company expects to collect substantially all construction receivables outstanding as of September 30, 2021 during the next twelve months. As of September 30, 2021 and December 31, 2020, construction payables included retentions of $6.5 million and $17.7 million, respectively. The Company expects to pay substantially all construction payables outstanding as of September 30, 2021 during the next twelve months.
The Company’s net position on uncompleted construction contracts comprised the following as of September 30, 2021 and December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
Costs incurred on uncompleted construction contracts
|
$
|
360,247
|
|
|
$
|
461,725
|
|
Estimated earnings
|
14,427
|
|
|
13,205
|
|
Billings
|
(376,978)
|
|
|
(480,880)
|
|
Net position
|
$
|
(2,304)
|
|
|
$
|
(5,950)
|
|
|
|
|
|
Construction contract costs and estimated earnings in excess of billings
|
$
|
370
|
|
|
$
|
138
|
|
Billings in excess of construction contract costs and estimated earnings
|
(2,674)
|
|
|
(6,088)
|
|
Net position
|
$
|
(2,304)
|
|
|
$
|
(5,950)
|
|
The above table reflects the net effect of projects closed as of September 30, 2021 and December 31, 2020, respectively.
The Company’s balances and changes in construction contract price allocated to unsatisfied performance obligations (backlog) as of September 30, 2021 and 2020 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Beginning backlog
|
|
$
|
70,219
|
|
|
$
|
193,742
|
|
|
$
|
71,258
|
|
|
$
|
242,622
|
|
New contracts/change orders
|
|
53,590
|
|
|
(12,461)
|
|
|
106,992
|
|
|
43,469
|
|
Work performed
|
|
(16,944)
|
|
|
(58,590)
|
|
|
(71,385)
|
|
|
(163,400)
|
|
Ending backlog
|
|
$
|
106,865
|
|
|
$
|
122,691
|
|
|
$
|
106,865
|
|
|
$
|
122,691
|
|
The Company expects to complete a majority of the uncompleted contracts in place as of September 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 September 30, 2021 and December 31, 2020, the outstanding balance on the revolving credit facility was $30.0 million and $10.0 million, respectively. The outstanding balance on the term loan facility was $205.0 million as of both dates. As of September 30, 2021, the effective interest rates on the revolving credit facility and the term loan facility were 1.58% and 1.53%, 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 $134 million as of September 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.
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.
On August 24, 2021, as a part of the Greenbrier Square acquisition, the Company assumed a note payable of $20.0 million. The loan bears interest at a fixed rate of 3.74% and will mature on October 10, 2027.
In September 2021, the loan covenants for the syndicated loan secured by Wills Wharf were modified to extend the deadline for the Company to meet a lease-up requirement included in the loan agreement from October 1, 2021 to February 1, 2022.
On September 30, 2021, the Company refinanced the loan secured by Thames Street Wharf. The new $71.0 million loan bears interest at a rate of Bloomberg Short-Term Bank Yield Index ("BSBY") plus a spread of 1.30% and will mature on September 30, 2026. The Company simultaneously entered into an interest rate swap agreement that effectively fixes the interest rate at 2.35% for the term of the loan.
During the nine months ended September 30, 2021, the Company borrowed $13.3 million under its existing construction loans to fund new development and construction.
9. Derivative Financial Instruments
The Company enters into interest rate derivative contracts to manage exposure to interest rate risks. The Company does not use derivative financial instruments for trading or speculative purposes. Derivative financial instruments are recognized at fair value and presented within other assets and other liabilities in the condensed consolidated balance sheets. Gains and losses resulting from changes in the fair value of derivatives that are neither designated nor qualify as hedging instruments are recognized within the change in fair value of interest rate derivatives in the condensed consolidated statements of comprehensive income. For derivatives that qualify as cash flow hedges, the gain or loss is reported as a component of other comprehensive income (loss) and reclassified into earnings in the periods during which the hedged forecasted transaction affects earnings.
As of September 30, 2021, the Company had the following LIBOR and Secured Overnight Financing Rate ("SOFR") interest rate caps ($ 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
|
|
(a)
|
1.75% (LIBOR)
|
|
|
|
87
|
|
1/28/2020
|
|
2/1/2022
|
|
50,000
|
|
(a)
|
1.75% (LIBOR)
|
|
|
|
62
|
|
3/2/2020
|
|
3/1/2022
|
|
100,000
|
|
(a)
|
1.50% (LIBOR)
|
|
|
|
111
|
|
7/1/2020
|
|
7/1/2023
|
|
100,000
|
|
(a)
|
0.50% (LIBOR)
|
|
|
|
232
|
|
11/1/2020
|
|
11/1/2023
|
|
84,375
|
|
(a)
|
1.84% (SOFR)
|
|
|
(b)
|
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
|
|
________________________________________
(a) Designated as a cash flow hedge.
(b) 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.
As of September 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
|
%
|
|
4.23
|
%
|
|
5/1/2018
|
|
5/1/2023
|
John Hopkins Village
|
|
50,123
|
|
(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
|
%
|
|
4.47
|
%
|
|
10/12/2018
|
|
10/12/2023
|
249 Central Park Retail, South Retail, and Fountain Plaza Retail
|
|
33,501
|
|
(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
|
%
|
|
3.71
|
%
|
|
4/1/2019
|
|
10/26/2022
|
Senior unsecured term loan
|
|
25,000
|
|
(a)
|
|
1-month LIBOR
|
|
0.50
|
%
|
|
1.95
|
%
|
|
4/1/2020
|
|
4/1/2024
|
Senior unsecured term loan
|
|
25,000
|
|
(a)
|
|
1-month LIBOR
|
|
0.50
|
%
|
|
1.95
|
%
|
|
4/1/2020
|
|
4/1/2024
|
Senior unsecured term loan
|
|
25,000
|
|
(a)
|
|
1-month LIBOR
|
|
0.55
|
%
|
|
2.00
|
%
|
|
4/1/2020
|
|
4/1/2024
|
Thames Street Wharf
|
|
71,000
|
|
(a)
|
|
1-month BSBY
|
(b)
|
1.05
|
%
|
|
2.35
|
%
|
|
9/30/2021
|
|
9/30/2026
|
Total
|
|
$
|
340,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
________________________________________
(a) Designated as a cash flow hedge.
(b) This interest rate swap is subject to BSBY, which has been identified as an alternative to LIBOR. LIBOR will be phased out beginning December 31, 2021.
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 $4.6 million of net hedging losses from accumulated other comprehensive loss into earnings to offset the variability of the hedged items during this period.
The Company’s derivatives were comprised of the following as of September 30, 2021 and December 31, 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 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
|
|
|
$
|
—
|
|
|
$
|
(2,030)
|
|
|
$
|
50,000
|
|
|
$
|
—
|
|
|
$
|
(3,056)
|
|
Interest rate caps
|
|
399,579
|
|
|
217
|
|
|
—
|
|
|
150,000
|
|
|
4
|
|
|
—
|
|
Total derivatives not designated as accounting hedges
|
|
449,579
|
|
|
217
|
|
|
(2,030)
|
|
|
200,000
|
|
|
4
|
|
|
(3,056)
|
|
Derivatives designated as accounting hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
290,124
|
|
|
—
|
|
|
(7,380)
|
|
|
290,231
|
|
|
—
|
|
|
(11,797)
|
|
Interest rate caps
|
|
384,375
|
|
|
144
|
|
|
—
|
|
|
384,375
|
|
|
86
|
|
|
—
|
|
Total derivatives
|
|
$
|
1,124,078
|
|
|
$
|
361
|
|
|
$
|
(9,410)
|
|
|
$
|
874,606
|
|
|
$
|
90
|
|
|
$
|
(14,853)
|
|
The changes in the fair value of the Company’s derivatives during the three and nine months ended September 30, 2021 and 2020 were comprised of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Interest rate swaps
|
|
$
|
(60)
|
|
|
$
|
323
|
|
|
$
|
2,315
|
|
|
$
|
(10,907)
|
|
Interest rate caps
|
|
(234)
|
|
|
(111)
|
|
|
(27)
|
|
|
(391)
|
|
Total change in fair value of interest rate derivatives
|
|
$
|
(294)
|
|
|
$
|
212
|
|
|
$
|
2,288
|
|
|
$
|
(11,298)
|
|
Comprehensive income statement presentation:
|
|
|
|
|
|
|
|
|
Change in fair value of derivatives and other
|
|
$
|
166
|
|
|
$
|
330
|
|
|
$
|
941
|
|
|
$
|
(1,412)
|
|
Unrealized cash flow hedge gains (losses)
|
|
(460)
|
|
|
(118)
|
|
|
1,347
|
|
|
(9,886)
|
|
Total change in fair value of interest rate derivatives
|
|
$
|
(294)
|
|
|
$
|
212
|
|
|
$
|
2,288
|
|
|
$
|
(11,298)
|
|
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 nine months ended September 30, 2021, the Company issued and sold 2,118,670 shares of common stock at a weighted average price of $13.21 per share under the ATM Program, receiving net proceeds, after offering costs and commissions, of $27.4 million. During the nine months ended September 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 $234.5 million remained unsold under the ATM Program as of November 2, 2021.
Noncontrolling Interests
As of September 30, 2021 and December 31, 2020, the Company held a 74.6% and 73.9% common interest in the Operating Partnership, respectively. As of September 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 74.6% of the net income of the Operating Partnership. As the primary beneficiary, the Company consolidates the financial position and results of operations of the Operating Partnership. Noncontrolling interests in the Operating Partnership represent units of limited partnership interest in the Operating Partnership not held by the Company. As of September 30, 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 September 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.
Dividends and Distributions
During the nine months ended September 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
|
|
Common Stock/Class A Units
|
|
09/02/2021
|
|
09/29/2021
|
|
10/07/2021
|
|
0.16
|
|
|
13,148
|
|
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
|
|
Series A Preferred Stock
|
|
09/02/2021
|
|
10/01/2021
|
|
10/15/2021
|
|
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 September 30, 2021, there were 608,441 shares available for issuance under the Equity Plan.
During the nine months ended September 30, 2021, the Company granted an aggregate of 165,685 shares of restricted stock to employees and non-employee directors with a weighted average grant date fair value of $12.87 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 September 30, 2021 and 2020, the Company recognized $0.5 million and $0.5 million, respectively, of stock-based compensation cost. During the nine months ended September 30, 2021 and 2020, the Company
recognized $2.1 million and $2.3 million, respectively, of stock-based compensation cost. As of September 30, 2021, there were 152,453 nonvested restricted shares outstanding; the total unrecognized compensation expense related to nonvested restricted shares was $1.1 million, which the Company expects to recognize over the next 30 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.
In certain cases, the inputs used to estimate the fair value may fall into different levels of the fair value hierarchy. For disclosure purposes, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
Considerable judgment is used to estimate the fair value of financial instruments. The estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments.
The carrying amounts and fair values of the Company’s financial instruments as of September 30, 2021 and December 31, 2020 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
|
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
Indebtedness, net (a)
|
|
$
|
1,018,547
|
|
|
$
|
1,037,473
|
|
|
$
|
963,845
|
|
|
$
|
980,714
|
|
Notes receivable, net
|
|
118,164
|
|
|
118,164
|
|
|
135,432
|
|
|
135,223
|
|
Interest rate swap liabilities
|
|
9,410
|
|
|
9,410
|
|
|
14,853
|
|
|
14,853
|
|
Interest rate swap and cap assets
|
|
361
|
|
|
361
|
|
|
90
|
|
|
90
|
|
_______________________________________
(a) The values as of September 30, 2021 include the loan reclassified to liabilities related to assets held for sale.
13. Related Party Transactions
The Company provides general contracting services to certain related party entities that are included in these condensed consolidated financial statements. Revenue from construction contracts with these entities for the three months ended September 30, 2021 and 2020 was $4.1 million and $15.9 million, respectively. Gross profit from such contracts was $0.8 million and $0.6 million for the three months ended September 30, 2021 and 2020, respectively. Revenue from construction contracts with these entities for the nine months ended September 30, 2021 and 2020 was $22.8 million and $35.4 million, respectively. Gross profit from such contracts was $1.5 million and $1.3 million for the nine months ended September 30, 2021 and 2020, respectively. As of September 30, 2021 and December 31, 2020, there was $3.9 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 $81.8 million with the developer of a mixed-use project, including an apartment building, retail space, and a parking garage located in Virginia Beach, Virginia. The developer is owned in part by certain executives of the Company, not including the Chief Executive Officer and Chief Financial Officer. These contracts were executed in 2019 and were substantially complete as of
September 30, 2021. Aggregate gross profit was projected at $3.8 million to the Company, representing a gross profit margin of 4.9% as of September 30, 2021. 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 September 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 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 September 30, 2021, the Company had an outstanding payment guarantee for Interlock Commercial for $37.5 million. The Company has recorded a $1.6 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 $2.1 million and $2.4 million as of September 30, 2021 and December 31, 2020, respectively. In addition, as of September 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.
Unfunded Loan Commitments
The Company has certain commitments related to its notes receivable investments that it may be required to fund in the future. The Company is generally obligated to fund these commitments at the request of the borrower or upon the occurrence of events outside of the Company's direct control. As of September 30, 2021, the Company had two notes receivable with commitments totaling approximately $6.6 million. If commitments are funded in the future, interest will be charged at rates consistent with the existing investments.
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
In October 2021, the Company sold Courthouse 7-Eleven for a contract price of $3.1 million. As of September 30, 2021, the property did not meet the criteria to be classified as held for sale.
Indebtedness
In October 2021, the Company borrowed $20.0 million under the revolving credit facility.
In October 2021, the Company borrowed $3.7 million on its construction loans to fund development activities.
Equity
On October 1, 2021, due to the holders of Class A Units tendering an aggregate of 220,000 Class A Units for redemption by the Operating Partnership, the Company elected to satisfy the redemption requests with an aggregate cash payment of $2.9 million.
In October 2021, the Company sold an aggregate of 181,562 shares of common stock at a weighted average price of $13.56 per share under the ATM Program, receiving net proceeds, after offering costs and commissions, of $2.4 million.
On October 25, 2021, the Company announced that its board of directors declared a cash dividend of $0.17 per common share for the fourth quarter of 2021. This represents a 6.25% increase over the prior quarter's cash dividend. The fourth quarter dividend will be payable in cash on January 6, 2022 to stockholders of record on December 29, 2021.
On October 25, 2021, the Company announced that its board of directors declared a cash dividend of $0.421875 per share of Series A Preferred Stock for the fourth quarter of 2021. The dividend will be payable in cash on January 14, 2022 to stockholders of record on January 3, 2022.