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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 FORM 10-Q
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2018
 
or
 
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                      to                     
 
Commission file number: 001-35908
 
ARMADA HOFFLER PROPERTIES, INC.
(Exact Name of Registrant as Specified in its Charter)
 
Maryland
46-1214914
(State of Organization)
(IRS 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)
 
 
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.    x  Yes     ◻  No
 
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).    x  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
x
 
 
 
 
Non-Accelerated Filer
 ◻ (Do not check if a smaller reporting company)
Smaller Reporting Company
 ◻ 
 
 
Emerging Growth Company
 x 
 
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.   x
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  
◻ Yes     x  No



 
As of May 2, 2018, the Registrant had 45,237,043 shares of common stock outstanding.




Table of Contents

ARMADA HOFFLER PROPERTIES, INC.
 
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2018
 
Table of Contents
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





Table of Contents

PART I. Financial Information
 
Item 1.    Financial Statements
 
ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Balance Sheets
 
(In thousands, except par value and share data)
 
 
March 31,
2018
 
December 31,
2017
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Real estate investments:
 
 
 
 
Income producing property
 
$
936,579

 
$
910,686

Held for development
 
1,473

 
680

Construction in progress
 
120,850

 
83,071

 
 
1,058,902

 
994,437

Accumulated depreciation
 
(171,205
)
 
(164,521
)
Net real estate investments
 
887,697

 
829,916

Cash and cash equivalents
 
15,804

 
19,959

Restricted cash
 
3,502

 
2,957

Accounts receivable, net
 
16,125

 
15,691

Notes receivable
 
88,973

 
83,058

Construction receivables, including retentions
 
21,336

 
23,933

Construction contract costs and estimated earnings in excess of billings
 
315

 
245

Equity method investments
 
12,821

 
11,411

Other assets
 
55,216

 
55,953

Total Assets
 
$
1,101,789

 
$
1,043,123

LIABILITIES AND EQUITY
 
 
 
 
Indebtedness, net
 
$
589,634

 
$
517,272

Accounts payable and accrued liabilities
 
11,333

 
15,180

Construction payables, including retentions
 
41,516

 
47,445

Billings in excess of construction contract costs and estimated earnings
 
2,235

 
3,591

Other liabilities
 
40,170

 
39,352

Total Liabilities
 
684,888

 
622,840

 
 
 
 
 
Stockholders’ equity:
 
 
 
 
Preferred stock, $0.01 par value, 100,000,000 shares authorized, none issued and outstanding as of March 31, 2018 and December 31, 2017
 

 

Common stock, $0.01 par value, 500,000,000 shares authorized, 45,205,575 and 44,937,763 shares issued and outstanding as of March 31, 2018 and December 31, 2017, respectively
 
452

 
449

Additional paid-in capital
 
289,699

 
287,407

Distributions in excess of earnings
 
(65,190
)
 
(61,166
)
Total stockholders’ equity
 
224,961

 
226,690

Noncontrolling interests
 
191,940

 
193,593

Total Equity
 
416,901

 
420,283

Total Liabilities and Equity
 
$
1,101,789

 
$
1,043,123


See Notes to Condensed Consolidated Financial Statements.

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Table of Contents

ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statements of Income 

(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended 
 March 31,
 
 
2018
 
2017
Revenues
 
 
 
 
Rental revenues
 
$
28,699

 
$
27,232

General contracting and real estate services revenues
 
23,050

 
63,519

Total revenues
 
51,749

 
90,751

 
 
 
 
 
Expenses
 
 
 
 
Rental expenses
 
6,424

 
6,068

Real estate taxes
 
2,813

 
2,509

General contracting and real estate services expenses
 
22,414

 
61,196

Depreciation and amortization
 
9,278

 
9,475

General and administrative expenses
 
2,961

 
2,986

Acquisition, development and other pursuit costs
 
84

 
47

Impairment charges
 

 
4

Total expenses
 
43,974

 
82,285

Operating income
 
7,775

 
8,466

Interest income
 
2,232

 
1,398

Interest expense
 
(4,373
)
 
(4,535
)
Gain on real estate dispositions
 

 
3,395

Change in fair value of interest rate derivatives
 
969

 
294

Other income
 
114

 
37

Income before taxes
 
6,717

 
9,055

Income tax benefit (provision)
 
266

 
(302
)
Net income
 
6,983

 
8,753

Net income attributable to noncontrolling interests
 
(1,943
)
 
(2,817
)
Net income attributable to stockholders
 
$
5,040

 
$
5,936

Net income attributable to stockholders per share (basic and diluted)
 
$
0.11

 
$
0.16

Weighted-average common shares outstanding (basic and diluted)
 
45,132

 
37,622

Dividends and distributions declared per common share and unit
 
$
0.20

 
$
0.19


See Notes to Condensed Consolidated Financial Statements.

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Table of Contents

ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statement of Equity
 
(In thousands, except share data)
(Unaudited)
 
 
 
Shares of common stock
 
Common Stock
 
Additional paid-in capital
 
Distributions in excess of earnings
 
Total stockholders' equity
 
Noncontrolling interests
 
Total Equity
Balance, January 1, 2018
 
44,937,763

 
$
449

 
$
287,407

 
$
(61,166
)
 
$
226,690

 
$
193,593

 
$
420,283

Net income
 

 

 

 
5,040

 
5,040

 
1,943

 
6,983

Restricted stock awards
 
105,362

 
1

 
499

 

 
500

 

 
500

Restricted stock award forfeitures
 
(550
)
 

 
(4
)
 

 
(4
)
 

 
(4
)
Issuance of operating partnership units for acquisitions
 

 

 

 

 

 
1,696

 
1,696

Redemption of operating partnership units
 
163,000

 
2

 
1,797

 

 
1,799

 
(1,804
)
 
(5
)
Dividends and distributions declared
 

 

 

 
(9,064
)
 
(9,064
)
 
(3,488
)
 
(12,552
)
Balance, March 31, 2018
 
45,205,575

 
$
452

 
$
289,699

 
$
(65,190
)
 
$
224,961

 
$
191,940

 
$
416,901

 
See Notes to Condensed Consolidated Financial Statements.

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ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
Three Months Ended 
 March 31,
 
 
2018
 
2017
OPERATING ACTIVITIES
 
 
 
 
Net income
 
$
6,983

 
$
8,753

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation of buildings and tenant improvements
 
6,773

 
6,473

Amortization of leasing costs and in-place lease intangibles
 
2,505

 
3,002

Accrued straight-line rental revenue
 
(562
)
 
(383
)
Amortization of leasing incentives and above or below-market rents
 
(56
)
 
(47
)
Accrued straight-line ground rent expense
 
84

 
138

Bad debt expense
 
52

 
68

Noncash stock compensation
 
549

 
411

Impairment charges
 

 
4

Noncash interest expense
 
326

 
277

Gain on real estate dispositions
 

 
(3,395
)
Change in the fair value of interest rate derivatives
 
(969
)
 
(294
)
Changes in operating assets and liabilities:
 
 
 
 
Property assets
 
1,771

 
1,391

Property liabilities
 
(3,827
)
 
(875
)
Construction assets
 
3,482

 
(13,137
)
Construction liabilities
 
(11,183
)
 
5,888

Net cash provided by operating activities
 
5,928

 
8,274

INVESTING ACTIVITIES
 
 
 
 
Development of real estate investments
 
(26,438
)
 
(6,456
)
Tenant and building improvements
 
(2,246
)
 
(2,069
)
Acquisitions of real estate investments, net of cash received
 
(33,368
)
 
(6,767
)
Dispositions of real estate investments
 

 
4,441

Notes receivable issuances
 
(5,607
)
 
(1,413
)
Leasing costs
 
(680
)
 
(493
)
Contributions to equity method investments
 
(1,410
)
 
(559
)
Net cash used for investing activities
 
(69,749
)
 
(13,316
)
FINANCING ACTIVITIES
 
 
 
 
Proceeds from sales of common stock
 

 
3,523

Offering costs
 

 
(161
)
Debt issuances, credit facility and construction loan borrowings
 
111,498

 
44,952

Debt and credit facility repayments, including principal amortization
 
(39,273
)
 
(44,530
)
Debt issuance costs
 
(201
)
 
(471
)
Redemption of operating partnership units
 
(5
)
 
(50
)
Dividends and distributions
 
(11,808
)
 
(9,726
)
Net cash provided by (used for) financing activities
 
60,211

 
(6,463
)
Net decrease in cash and cash equivalents
 
(3,610
)
 
(11,505
)
Cash, cash equivalents, and restricted cash, beginning of period
 
22,916

 
25,193

Cash, cash equivalents, and restricted cash, end of period
 
$
19,306

 
$
13,688

Supplemental Disclosures:
 
 
 
 
Noncash transactions:
 
 
 
 
Increase in dividends payable
 
$
744

 
$
644

(Decrease) increase in accounts payable and accrued liabilities for capital expenditures
 
$
(4,434
)
 
$
742

Issuance of operating partnership units for acquisitions

 
$
1,702

 
$

Redeemable noncontrolling interest from development
 
$

 
$
2,000

Deferred payment for land acquisition
 
$

 
$
600


See Notes to Condensed Consolidated Financial Statements.

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Table of Contents

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 the sole general partner of Armada Hoffler, L.P. (the “Operating Partnership”), and as of March 31, 2018 owned 72.2% of the economic interest in the Operating Partnership, of which 0.1% is held as general partnership units. The operations of the Company are carried on primarily through the Operating Partnership and the wholly owned subsidiaries of the Operating Partnership.

As of March 31, 2018, the Company's 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
%
One Columbus
 
Office
 
Virginia Beach, Virginia*
 
100
%
Two Columbus
 
Office
 
Virginia Beach, Virginia*
 
100
%
249 Central Park Retail
 
Retail
 
Virginia Beach, Virginia*
 
100
%
Alexander Pointe
 
Retail
 
Salisbury, North Carolina
 
100
%
Bermuda Crossroads
 
Retail
 
Chester, Virginia
 
100
%
Broad Creek Shopping Center
 
Retail
 
Norfolk, Virginia
 
100
%
Broadmoor Plaza
 
Retail
 
South Bend, Indiana
 
100
%
Brooks Crossing(1)
 
Retail
 
Newport News, Virginia
 
65
%
Columbus Village
 
Retail
 
Virginia Beach, Virginia*
 
100
%
Columbus Village II
 
Retail
 
Virginia Beach, Virginia*
 
100
%
Commerce Street Retail
 
Retail
 
Virginia Beach, Virginia*
 
100
%
Courthouse 7-Eleven
 
Retail
 
Virginia Beach, Virginia
 
100
%
Dick's at Town Center
 
Retail
 
Virginia Beach, Virginia*
 
100
%
Dimmock Square
 
Retail
 
Colonial Heights, Virginia
 
100
%
Fountain Plaza Retail
 
Retail
 
Virginia Beach, Virginia*
 
100
%
Gainsborough Square
 
Retail
 
Chesapeake, Virginia
 
100
%
Greentree Shopping Center
 
Retail
 
Chesapeake, Virginia
 
100
%
Hanbury Village
 
Retail
 
Chesapeake, Virginia
 
100
%
Harper Hill Commons
 
Retail
 
Winston-Salem, North Carolina
 
100
%
Harrisonburg Regal
 
Retail
 
Harrisonburg, Virginia
 
100
%
Indian Lakes Crossing
 
Retail
 
Virginia Beach, Virginia
 
100
%
Lightfoot Marketplace(2)
 
Retail
 
Williamsburg, Virginia
 
70
%
North Hampton Market
 
Retail
 
Taylors, South Carolina
 
100
%
North Point Center
 
Retail
 
Durham, North Carolina
 
100
%
Oakland Marketplace
 
Retail
 
Oakland, Tennessee
 
100
%
Parkway Centre
 
Retail
 
Moultrie, Georgia
 
100
%
Parkway Marketplace
 
Retail
 
Virginia Beach, Virginia
 
100
%
Patterson Place
 
Retail
 
Durham, North Carolina
 
100
%
Perry Hall Marketplace
 
Retail
 
Perry Hall, Maryland
 
100
%
Providence Plaza
 
Retail
 
Charlotte, North Carolina
 
100
%
Renaissance Square
 
Retail
 
Davidson, North Carolina
 
100
%

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Property
    
Segment
    
Location
 
Ownership Interest
Sandbridge Commons
 
Retail
 
Virginia Beach, Virginia
 
100
%
Socastee Commons
 
Retail
 
Myrtle Beach, South Carolina
 
100
%
Southgate Square
 
Retail
 
Colonial Heights, Virginia
 
100
%
Southshore Shops
 
Retail
 
Chesterfield, Virginia
 
100
%
South Retail
 
Retail
 
Virginia Beach, Virginia*
 
100
%
South Square
 
Retail
 
Durham, North Carolina
 
100
%
Stone House Square
 
Retail
 
Hagerstown, Maryland
 
100
%
Studio 56 Retail
 
Retail
 
Virginia Beach, Virginia*
 
100
%
Tyre Neck Harris Teeter
 
Retail
 
Portsmouth, Virginia
 
100
%
Waynesboro Commons
 
Retail
 
Waynesboro, Virginia
 
100
%
Wendover Village
 
Retail
 
Greensboro, North Carolina
 
100
%
Encore Apartments
 
Multifamily
 
Virginia Beach, Virginia*
 
100
%
Johns Hopkins Village
 
Multifamily
 
Baltimore, Maryland
 
100
%
Liberty Apartments
 
Multifamily
 
Newport News, Virginia
 
100
%
Smith's Landing
 
Multifamily
 
Blacksburg, Virginia
 
100
%
The Cosmopolitan
 
Multifamily
 
Virginia Beach, Virginia*
 
100
%
                                                
 
 
 
 
 
 
(1)
The Company is entitled to a preferred return of 8% on its investment in Brooks Crossing.
(2)
The Company is entitled to a preferred return of 9% on its investment in Lightfoot Marketplace.
*Located in the Town Center of Virginia Beach
 
As of March 31, 2018, the following properties that the Company consolidates for financial statement purposes were under development or construction: 
Property
    
Segment
    
Location
 
Ownership Interest
 
Premier (Town Center Phase VI)
 
Mixed-use
 
Virginia Beach, Virginia*
 
100
%
 
Greenside (Harding Place)(1)
 
Multifamily
 
Charlotte, North Carolina
 
80
%
 
Hoffler Place (King Street)
 
Multifamily
 
Charleston, South Carolina
 
92.5
%
 
Summit Place (Meeting Street)
 
Multifamily
 
Charleston, South Carolina
 
90
%
 
Brooks Crossing office tower (2)
 
Office
 
Newport News, Virginia
 
65
%
 
Lightfoot Outparcel (3)
 
Retail
 
Williamsburg, Virginia
 
70
%
 
Market at Mill Creek (4)
 
Retail
 
Mount Pleasant, South Carolina
 
70
%
 
River City
 
Industrial
 
Chesterfield, Virginia
 
100
%
 
 
 
 
 
 
 
 
 
(1)    The Company is entitled to a preferred return of 9% on a portion of its investment in Harding Place.
(2)     The Company is entitled to a preferred return of 8% on its investment in Brooks Crossing.
(3)    The Company is entitled to a preferred return of 9% on its investment in Lightfoot Outparcel.
(4)    The Company is entitled to a preferred return of 10% on its investment in Market at Mill Creek.

*Located in the Town Center of Virginia Beach
 
Please see Note 5 for information related to the Company’s investment in Durham City Center II, LLC, which is an unconsolidated subsidiary that the Company accounts for using the equity method of accounting.
 
2. Summary of Significant Accounting Policies
 
Basis of Presentation
 
The accompanying condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).
 

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The condensed consolidated financial statements include the financial position and results of operations of the Company and its consolidated subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
 
In the opinion of management, the condensed consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are necessary for the fair presentation of the financial condition and results of operations for the interim periods presented.

The accompanying condensed consolidated financial statements were prepared in accordance with the requirements for interim financial information. Accordingly, these interim financial statements have not been audited and exclude certain disclosures required for annual financial statements. Also, the operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These interim financial statements should be read in conjunction with the audited consolidated financial statements of the Company included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
 
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.
 
Significant Accounting Policies

General Contracting and Real Estate Services Revenues

On January 1, 2018, the Company adopted the new accounting standard codified in Accounting Standards Codification 606 - Revenue from Contracts with Customers (see also "Recent Accounting Pronouncements" below). The Company recognizes general contracting revenues as a customer obtains control of promised goods or services in an amount that reflects the consideration the Company expects to receive in exchange for those goods or services. For each construction contract, the Company identifies the performance obligations, which typically include the delivery of a single building constructed according to the specifications of the contract. The Company estimates the total transaction price, which generally includes a fixed contract price and may also include variable components such as early completion bonuses, liquidated damages, or cost savings to be shared with the customer. Variable components of the contract price are included in the transaction price to the extent that it is probable that a significant reversal of revenue will not occur. The Company recognizes the estimated transaction price as revenue as it satisfies its performance obligations, and the Company estimates its progress in satisfying performance obligations for each contract using the percentage-of-completion method, based on the proportion of incurred costs to total estimated construction costs at completion. Construction contract costs include all direct material, direct labor, subcontract costs, and overhead costs directly related to contract performance. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, are all significant judgments that may result in revisions to costs and income and are recognized in the period in which they are determined. Provisions for estimated losses on uncompleted contracts are recognized immediately in the period in which such losses are determined. The Company defers pre-contract costs when such costs are directly associated with specific anticipated contracts and their recovery is probable.
 
The Company recognizes real estate services revenues from property development and management services as it satisfies its performance obligations under these service arrangements.

The Company assesses whether multiple contracts with a single counterparty should be combined into a single contract for revenue recognition purposes based on factors such as the timing of the negotiation and execution of the contracts and whether the economic substance of the contracts was contemplated separately or in tandem.

See the Company's Annual Report on Form 10-K for the year ended December 31, 2017 for a description of other accounting principles upon which basis the accompanying consolidated financial statements were prepared.

Recent Accounting Pronouncements
 
On May 28, 2014, the Financial Accounting Standards Board ("FASB") issued a new standard that provides a single, comprehensive model for recognizing revenue from contracts with customers. While the new standard does not supersede

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the guidance on accounting for leases, it changes the way the Company recognizes revenue from construction and development contracts with third party customers. The Company adopted this standard on January 1, 2018 using the modified retrospective method, applying this standard to all contracts not yet completed as of that date. In applying the standard to the Company’s future construction contracts, certain pre-contract costs incurred by the Company are now deferred and amortized over the period during which construction obligations are fulfilled. Previously, these costs were immediately recorded as general contracting expenses upon commencement of construction, with the corresponding general contracting revenue also recorded. Applying the standard to the Company’s uncompleted contracts as of January 1, 2018 did not result in material differences to these contracts in aggregate, and no cumulative adjustment to distributions in excess of earnings was recorded as of January 1, 2018.
 
On February 25, 2016, the FASB issued a new lease standard that requires lessees to recognize most leases in their balance sheets as lease liabilities with corresponding right-of-use assets. The new standard also makes targeted changes to lessor accounting. The new standard will be effective for the Company on January 1, 2019 and requires a modified retrospective transition approach for all leases existing at, or entered into after, the beginning of the earliest comparative period presented, with an option to use certain transition relief. Management is currently evaluating the potential impact of the new standard on the Company’s consolidated financial statements. The Company is the lessee on certain ground leases and equipment leases, which represents a majority of the Company's current operating lease payments, and expects to record right-of-use assets and lease liabilities for these leases under the new standard.
  
In 2016, the FASB issued new guidance that addresses eight classification issues related to the statement of cash flows and requires the presentation of total changes in cash, cash equivalents, restricted cash, and restricted cash equivalents in the statement of cash flows. The Company adopted this new guidance effective December 31, 2017, applying it retrospectively to each period presented. The new guidance requires that the statement of cash flows show changes in restricted cash in addition to changes in cash and cash equivalents. No additional changes were required to be made to the Company's consolidated statements of cash flows. The following table sets forth the items from the Company's consolidated balance sheets that are included in cash, cash equivalents, and restricted cash in the consolidated statements of cash flows (in thousands):

 
Balance as of
 
March 31, 2018
 
December 31, 2017
 
March 31, 2017
 
December 31, 2016
Cash and cash equivalents
$
15,804

 
$
19,959

 
$
10,039

 
$
21,942

Restricted cash
3,502

 
2,957

 
3,649

 
3,251

Cash, cash equivalents, and restricted cash
$
19,306

 
$
22,916

 
$
13,688

 
$
25,193


The following table summarizes the changes made to net cash provided by operating activities and net cash used in investing activities in the consolidated statement of cash flows for the three months ended March 31, 2017 on a retrospective basis (in thousands, no changes were made to net cash provided by (used in) financing activities):

 
Three months ended
 
March 31, 2017
Operating activities as originally presented
$
7,907

Adjustments
367

Operating activities after adjustments
$
8,274

 
 
Investing activities as originally presented
$
(13,347
)
Adjustments
$
31

Investing activities after adjustments
$
(13,316
)

On February 22, 2017, the FASB issued new guidance that clarifies the scope and application of guidance on sales or transfers of nonfinancial assets and in substance nonfinancial assets to customers, including partial sales. The new guidance applies to all nonfinancial assets, including real estate, and defines an in substance nonfinancial asset. The Company adopted the new guidance on January 1, 2018, and it did not have a material impact on the Company’s consolidated financial statements.

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On August 28, 2017, the FASB issued new guidance that simplifies some of the requirements relating to accounting for derivatives and hedging. The new guidance eliminates the requirement to separately measure and report hedge ineffectiveness for a highly effective hedge and also simplifies certain documentation and assessment requirements relating to the determination of hedge effectiveness. The new guidance will be effective for the Company on January 1, 2019, with early adoption permitted. The Company does not currently have any derivatives designated as hedging instruments for accounting purposes but may designate new derivative contracts as hedging instruments in the future. The application of this guidance to future hedging relationships could reduce or eliminate the gains and losses that would otherwise be recorded for these derivative instruments.

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

Net operating income of the Company’s reportable segments for the three months ended March 31, 2018 and 2017 was as follows (in thousands): 
 
 
Three Months Ended 
 March 31,
 
 
2018
 
2017
 
 
(Unaudited)
Office real estate
 
 
 
 
Rental revenues
 
$
5,100

 
$
4,906

Rental expenses
 
1,446

 
1,325

Real estate taxes
 
502

 
450

Segment net operating income
 
3,152

 
3,131

Retail real estate
 
 
 
 
Rental revenues
 
16,711

 
15,631

Rental expenses
 
2,657

 
2,520

Real estate taxes
 
1,683

 
1,450

Segment net operating income
 
12,371

 
11,661

Multifamily residential real estate
 
 
 
 
Rental revenues
 
6,888

 
6,695

Rental expenses
 
2,321

 
2,223

Real estate taxes
 
628

 
609

Segment net operating income
 
3,939

 
3,863

General contracting and real estate services
 
 
 
 
Segment revenues
 
23,050

 
63,519

Segment expenses
 
22,414

 
61,196

Segment gross profit
 
636

 
2,323

Net operating income
 
$
20,098

 
$
20,978

 
General contracting and real estate services revenues for the three months ended March 31, 2018 and 2017 exclude revenue related to intercompany construction contracts of $25.9 million and $5.9 million, respectively.

General contracting and real estate services expenses for the three months ended March 31, 2018 and 2017 exclude expenses related to intercompany construction contracts of $25.6 million and $5.7 million, respectively.


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General contracting and real estate services expenses for the three months ended March 31, 2018 and 2017 include noncash stock compensation expense of $0.3 million and $0.2 million, respectively.

The following table reconciles net operating income to net income, the most directly comparable GAAP measure, for the three months ended March 31, 2018 and 2017 (in thousands): 
 
 
Three Months Ended 
 March 31,
 
 
2018
 
2017
 
 
(Unaudited)
Net operating income
 
$
20,098

 
$
20,978

Depreciation and amortization
 
(9,278
)
 
(9,475
)
General and administrative expenses
 
(2,961
)
 
(2,986
)
Acquisition, development and other pursuit costs
 
(84
)
 
(47
)
Impairment charges
 

 
(4
)
Interest income
 
2,232

 
1,398

Interest expense
 
(4,373
)
 
(4,535
)
Gain on real estate dispositions
 

 
3,395

Change in fair value of interest rate derivatives
 
969

 
294

Other income
 
114

 
37

Income tax (provision) benefit
 
266

 
(302
)
Net income
 
$
6,983

 
$
8,753

 
General and administrative expenses for the three months ended March 31, 2018 and 2017 include noncash stock compensation expense of $0.8 million and $0.4 million, respectively.

4. Real Estate Investment
 
Property Acquisitions
 
On January 9, 2018, the Company acquired Indian Lakes Crossing, a Harris Teeter-anchored shopping center in Virginia Beach, Virginia, for a contract price of $14.7 million plus capitalized acquisition costs of $0.2 million.

On January 29, 2018, the Company acquired Parkway Centre, a newly developed Publix-anchored shopping center in Moultrie, Georgia for total consideration of $11.3 million (comprised of $9.6 million in cash and $1.7 million in the form of Class A units of limited partnership interest in the Operating Partnership ("Class A Units")) plus capitalized acquisition costs of $0.3 million.

The following table summarizes the purchase price allocation (including acquisition costs) based on relative fair value of the assets acquired and liabilities assumed for the two operating properties purchased during the three months ended March 31, 2018 (in thousands):
 
 
Indian Lakes Crossing
 
Parkway Centre
Land
 
$
10,926

 
$
1,372

Site improvements
 
531

 
696

Building and improvements
 
1,913

 
7,168

In-place leases
 
1,648

 
2,346

Above-market leases
 
11

 

Below-market leases
 
(175
)
 
(10
)
Net assets acquired
 
$
14,854

 
$
11,572


On November 30, 2017, the Company entered into a lease agreement with Bottling Group, LLC for a new distribution facility that the Company will develop and construct for expected delivery in the fourth quarter of 2018. On January 29,

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2018, the Company acquired undeveloped land in Chesterfield, Virginia, a portion of which will serve as the site for this facility, for a contract price of $2.4 million plus capitalized acquisition costs of $0.1 million.

On January 18, 2018, the Company entered into an operating agreement with a partner to develop a Lowes Foods-anchored shopping center in Mount Pleasant, South Carolina. The Company has a 70% ownership interest in the partnership. The partnership, Market at Mill Creek Partners, LLC acquired undeveloped land on February 16, 2018 for a contract price of $2.9 million plus capitalized acquisition costs of $0.1 million. The Company is responsible for funding the equity requirements of this development. Management has concluded that this entity is a variable interest entity ("VIE") as it lacks sufficient equity to fund its operations without additional financial support. The Company is the developer of the shopping center and has the power to direct the activities of the project that most significantly impact its performance and is the party most closely associated with the project. Therefore, the Company is the project's primary beneficiary and consolidates the project in its consolidated financial statements.

5. Equity Method Investment

City Center

On February 25, 2016, the Company acquired a 37% interest in Durham City Center II, LLC (“City Center”) for purposes of developing a 22-story mixed use tower in Durham, North Carolina. During the three months ended March 31, 2018, the Company invested an additional $1.3 million in City Center. As of March 31, 2018 and December 31, 2017, the Company had invested $12.2 million and $10.9 million, respectively, in City Center, and the carrying value of the Company's investment was $12.8 million and $11.4 million, respectively. The Company has agreed to guarantee 37% of the construction loan for City Center; however, the loan is collateralized by 100% of the assets of City Center. As of March 31, 2018 and December 31, 2017, $33.0 million and $29.2 million, respectively, had been drawn against the construction loan, of which $12.3 million and $11.2 million, respectively, was attributable to the Company's portion of the loan.
 
For the three months ended March 31, 2018 and 2017, City Center did not have any operating activity, and therefore the Company did not receive any distributions or allocated income. 
 
Based on the terms of City Center’s operating agreement, the Company has concluded that City Center is a VIE and that the Company holds a variable interest. The Company does not have the power to direct the activities of the project that most significantly impact its performance. Accordingly, the Company is not the project’s primary beneficiary and, therefore, does not consolidate City Center in its consolidated financial statements.

6. Notes Receivable

Point Street Apartments

On October 15, 2015, the Company agreed to invest up to $28.2 million in the Point Street Apartments project in the Harbor Point area of Baltimore, Maryland. Point Street Apartments is an estimated $98.0 million development project with plans for a 17-story building comprised of 289 residential units and 18,000 square feet of street-level retail space. Beatty Development Group (“BDG”) is the developer of the project and has engaged the Company to serve as construction general contractor. Portions of Point Street Apartments opened during the first quarter of 2018, and the remaining portions are scheduled to open during the second quarter of 2018; however, management can provide no assurances that the remaining portions of Point Street Apartments will open on the anticipated timeline or be completed at the anticipated cost.
 
BDG secured a senior construction loan of up to $67.0 million to fund the development and construction of Point Street Apartments on November 10, 2016. The Company has agreed to guarantee $25.0 million of the senior construction loan in exchange for the option to purchase up to an 88% controlling interest in Point Street Apartments upon completion of the project as follows: (i) an option to purchase a 79% indirect interest in Point Street Apartments for $27.3 million, exercisable within one year from the project’s completion (the “First Option”) and (ii) provided that the Company has exercised the First Option, an option to purchase an additional 9% indirect interest in Point Street Apartments for $3.1 million, exercisable within 27 months from the project’s completion (the “Second Option”). The Company currently has a $2.1 million letter of credit for the guarantee of the senior construction loan.
 
The Company’s investment in the Point Street Apartments project is in the form of a loan pursuant to which BDG may borrow up to $28.2 million (the “BDG loan”). Interest on the BDG loan accrues at 8.0% per annum and matures on the earliest of: (i) November 1, 2018, which may be extended by BDG under two one-year extension options, (ii) the maturity

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date or earlier termination of the senior construction loan, or (iii) the date the Company exercises the Second Option as described further below.
 
In the event the Company exercises the First Option, BDG is required to pay down the outstanding BDG loan in full, with the difference between the BDG loan and $28.2 million applied to the senior construction loan. In the event the Company exercises the Second Option, BDG is required to simultaneously repay any remaining amounts outstanding under the BDG loan, with any excess proceeds received from the exercise of the Second Option applied against the senior construction loan. In the event the Company does not exercise either the First Option or the Second Option, the interest rate on the BDG loan will automatically be reduced to the interest rate on the senior construction loan for the remaining term of the BDG loan.
 
As of March 31, 2018 and December 31, 2017, the Company had funded $23.2 million and $22.4 million, respectively, under the BDG loan. During the three months ended March 31, 2018 and 2017, the Company recognized $0.5 million and $0.4 million, respectively, of interest income on the BDG loan. No portion of the note receivable balance is past due, and the Company has not recorded an impairment balance on the note.

Management has concluded that this entity is a VIE. Because BDG is the developer of Point Street Apartments, the Company does not have the power to direct the activities of the project that most significantly impact its performance, nor is the Company the party most closely associated with the project. Therefore, the Company is not the project's primary beneficiary and does not consolidate the project in its consolidated financial statements.

Annapolis Junction

On April 21, 2016, the Company entered into a note receivable with a maximum balance of $48.1 million in connection with the Annapolis Junction Apartments project in Maryland ("Annapolis Junction"). Annapolis Junction Apartments is an estimated $106.0 million development project with plans for 416 residential units. It is part of a mixed-use development project that is also planned to have 17,000 square feet of retail space and a 150-room hotel. Annapolis Junction Apartments Owner, LLC (“AJAO”) is the developer of the residential component and has engaged the Company to serve as construction general contractor for the residential component. The final portions of Annapolis Junction opened during the first quarter of 2018.
 
AJAO secured a senior construction loan of up to $60.0 million to fund the development and construction of Annapolis Junction's residential component on September 30, 2016. The Company has agreed to guarantee up to $25.0 million of the senior construction loan in exchange for the option to purchase up to an 88% controlling interest in Annapolis Junction as follows: (i) an option to purchase an 80% indirect interest in Annapolis Junction's residential component for the lesser of the seller’s budgeted or actual cost, exercisable until December 19, 2018 (the “First Option”) and (ii) provided that the Company has exercised the First Option, an option to purchase an additional 8% indirect interest in Annapolis Junction for the lesser of the seller’s actual or budgeted cost, exercisable within until March 2019 (the “Second Option”).
 
The Company’s investment in the Annapolis Junction project is in the form of a loan under which AJAO may borrow up to $48.1 million, including a $6.0 million interest reserve (the “AJAO loan”). Interest on the AJAO loan accrues at 10.0% per annum and matures on the earliest of: (i) December 21, 2020, which may be extended by AJAO under two one-year extension options, (ii) the maturity date or earlier termination of the senior construction loan, or (iii) the date the Company exercises the Second Option as described further below. In the event that the Company exercises the First Option, AJAO is required to simultaneously pay down both the senior construction loan and the AJAO loan by 80%, at which time the interest rate on the AJAO loan will automatically be reduced to the interest rate on the senior construction loan. In the event the Company exercises the Second Option, AJAO is required to simultaneously repay any remaining amounts outstanding under the AJAO loan, with any excess proceeds received from the exercise of the Second Option applied against the remaining balance of the senior construction loan. In the event that the Company does not exercise either the First Option or the Second Option, the interest rate on the AJAO loan will automatically be reduced to the interest rate on the senior construction loan for the remaining term of the AJAO loan. 

The balance on the Annapolis Junction note was $44.1 million and $43.0 million as of March 31, 2018 and December 31, 2017, respectively. During the three months ended March 31, 2018 and 2017, the Company recognized $1.1 million and $1.0 million, respectively, of interest income on the note.

Management has concluded that this entity is a VIE. Because AJAO is the developer of Annapolis Junction, the Company does not have the power to direct the activities of the project that most significantly impact its performance, nor is the

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Company the party most closely associated with the project. Therefore, the Company is not the project's primary beneficiary and does not consolidate the project in its consolidated financial statements.

North Decatur Square

On May 15, 2017, the Company entered into a note receivable with a maximum principal balance of $21.8 million for the development of an estimated $37.0 million Whole Foods-anchored center located in Decatur, Georgia. On January 31, 2018, the note was amended to increase the maximum amount of the note to $25.7 million. The borrower of the note and developer of the shopping center is North Decatur Square Holdings, LLC ("NDSH"). The mezzanine loan bears interest at an annual rate of 15%. The note matures on the earliest of (i) May 15, 2022, (ii) the maturity of the senior construction loan, (iii) the sale of NDSH, or (iv) the sale of the center.

As of March 31, 2018 and December 31, 2017, the Company had funded $14.6 million and $11.8 million, respectively, on this note. During the three months ended March 31, 2018, the Company recognized $0.5 million of interest income on this note. No portion of the note receivable balance is past due, and the Company has not recorded an impairment balance on the note.

Management has concluded that this entity is a VIE. Because NDSH is the developer of North Decatur Square, the Company does not have the power to direct the activities of the project that most significantly impact its performance. Therefore, the Company is not the project's primary beneficiary and does not consolidate the project in its consolidated financial statements.

Delray Plaza

On October 27, 2017, the Company entered into a note receivable with a maximum principal balance of $13.1 million for the development of a $20.0 million Whole Foods-anchored center located in Delray Beach, Florida. The borrower of the note and developer of the shopping center is Delray Plaza Holdings, LLC ("DPH"). The mezzanine loan bears interest at an annual rate of 15%. The note matures on the earliest of (i) October 27, 2020, (ii) the date of any sale or refinance of the development project, or (iii) the disposition or change in control of the development project.

As of March 31, 2018 and December 31, 2017, the Company had funded $6.3 million and $5.4 million, respectively, on this note. During the three months ended March 31, 2018, the Company recognized $0.2 million of interest income on this note. No portion of the note receivable balance is past due, and the Company has not recorded an impairment balance on the note.

Management has concluded that this entity is a VIE. Because DPH is the developer of Delray Plaza, the Company does not have the power to direct the activities of the project that most significantly impact its performance. Therefore, the Company is not the project's primary beneficiary and does not consolidate the project in its consolidated financial statements.

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 March 31, 2018 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 three months ended March 31, 2018 (in thousands):

 
 
Construction contract costs and estimated earnings in excess of billings
 
Billings in excess of construction contract costs and estimated earnings
Balance as of January 1, 2018
 
$
245

 
$
3,591

Revenue recognized that was included in the balance at the beginning of the period
 

 
(3,591
)
Increases due to new billings, excluding amounts recognized as revenue during the period
 

 
2,313

Transferred to receivables
 
(245
)
 

Construction contract costs and estimated earnings not billed during the period
 
315

 

Changes due to cumulative catch-up adjustment arising from changes in the estimate of the stage of completion
 

 
(78
)
Balance as of March 31, 2018
 
$
315

 
$
2,235


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 $0.5 million and $0.3 million were deferred as of March 31, 2018 and December 31, 2017, 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 March 31, 2018 and December 31, 2017, construction receivables included retentions of $9.4 million and $12.9 million, respectively. The Company expects to collect substantially all construction receivables as of March 31, 2018 during the next twelve months. As of March 31, 2018 and December 31, 2017, construction payables included retentions of $16.8 million and $16.3 million, respectively. The Company expects to pay substantially all construction payables as of March 31, 2018 during the next twelve months.

The Company’s net position on uncompleted construction contracts comprised the following as of March 31, 2018 and December 31, 2017 (in thousands):

 
March 31,
2018
 
December 31,
2017
Costs incurred on uncompleted construction contracts
$
542,790

 
$
520,368

Estimated earnings
18,673

 
18,070

Billings
(563,383
)
 
(541,784
)
Net position
$
(1,920
)
 
$
(3,346
)

 
March 31,
2018
 
December 31,
2017
Construction contract costs and estimated earnings in excess of billings
$
315

 
$
245

Billings in excess of construction contract costs and estimated earnings
(2,235
)
 
(3,591
)
Net position
$
(1,920
)
 
$
(3,346
)


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The Company’s balances and changes in construction contract price allocated to unsatisfied performance obligations (backlog) as of March 31, 2018 and December 31, 2017 were as follows (in thousands):

 
 
Three Months Ended March 31,
 
 
2018
 
2017
Beginning backlog
 
$
49,167

 
$
217,718

New contracts/change orders
 
4,569

 
3,441

Work performed
 
(23,003
)
 
(63,437
)
Ending backlog
 
$
30,733

 
$
157,722


The Company expects to complete a majority of the uncompleted contracts as of March 31, 2018 during the next 12 to 18 months.
8. Indebtedness
 
Credit Facility
 
On October 26, 2017, the Operating Partnership entered into an amended and restated credit agreement (the “credit agreement”), which provides for a $300.0 million senior credit facility comprised of a $150.0 million senior unsecured revolving credit facility (the "revolving credit facility") and a $150.0 million senior unsecured term loan facility (the "term loan facility" and, together with the revolving credit facility, the "credit facility"), with a syndicate of banks.
 
The credit facility includes an accordion feature that allows the total commitments to be increased to $450.0 million, subject to certain conditions, including obtaining commitments from any one or more lenders. The revolving credit facility has a scheduled maturity date of October 26, 2021, with two six-month extension options, subject to certain conditions, including payment of a 0.075% extension fee at each extension. The term loan facility has a scheduled maturity date of October 26, 2022.
 
On March 28, 2018, the Operating Partnership increased the maximum commitments under the credit facility to $330.0 million using the accordion feature, with an increase of the term loan facility to $180.0 million.

The revolving credit facility bears interest at LIBOR plus a margin ranging from 1.40% to 2.00% and the term loan facility bears interest at LIBOR plus a margin ranging from 1.35% to 1.95%, in each case depending on the Company's total leverage. The Company is also obligated to pay an unused commitment fee of 15 or 25 basis points on the unused portions of the commitments under the revolving credit facility, depending on the amount of borrowings under the credit facility.

As of March 31, 2018 and December 31, 2017, the outstanding balance on the revolving credit facility was $108.0 million and $66.0 million, respectively, and the outstanding balance on the term loan facility was $180.0 million and $150.0 million, respectively. As of March 31, 2018, the effective interest rates on the revolving credit facility and the term loan facility were 3.43% and 3.38%, respectively. The Company may, at any time, voluntarily prepay any loan under the credit facility in whole or in part without premium or penalty.

The Operating Partnership is the borrower under the credit facility, and its obligations under the credit facility are guaranteed by the Company and certain of its subsidiaries that are not otherwise prohibited from providing such guaranty. The credit agreement contains customary representations and warranties and financial and other affirmative and negative covenants. The Company's ability to borrow under the credit facility is subject to ongoing compliance with a number of financial covenants, affirmative covenants and other restrictions. The credit agreement includes customary events of default, in certain cases subject to customary cure periods. The occurrence of an event of default, if not cured within the applicable cure period, would permit the lenders to, among other things, declare the unpaid principal, accrued and unpaid interest and all other amounts payable under the credit facility to be immediately due and payable.

The Company is currently in compliance with all covenants under the credit agreement.

Subsequent to March 31, 2018

In April 2018, the Company increased its borrowings under the revolving credit facility by $19.0 million.


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Other Financing Activity
 
On January 22, 2018, the Company extended the Sandbridge Commons note. The note bears interest at a rate of LIBOR plus a spread of 1.75% and will mature on January 17, 2023.

On March 27, 2018, the Company paid off Columbus Village Note 1 and Columbus Village Note 2 in full for an aggregate amount of $8.3 million.

During the three months ended March 31, 2018, the Company borrowed $9.5 million under its construction loans to fund new development and construction.

9. Derivative Financial Instruments
 
The Company may enter into interest rate derivative contracts to manage exposure to interest rate risks. The Company does not use derivative financial instruments for trading or speculative purposes. Derivative financial instruments are recognized at fair value and presented within other assets and 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 income. For derivatives that qualify as cash flow hedges, the effective portion of the gain or loss is reported as a component of other comprehensive loss and reclassified into earnings in the periods during which the hedged forecasted transaction affects earnings.

On March 7, 2018, the Operating Partnership entered into a LIBOR interest rate cap agreement on a notional amount of $50.0 million at a strike rate of 2.25% for a premium of $0.3 million. The interest rate cap expires on April 1, 2020.
 
The Company’s derivatives were comprised of the following as of March 31, 2018 and December 31, 2017 (in thousands): 
 
 
March 31, 2018
 
December 31, 2017
 
 
(Unaudited)
 
 
 
 
 
 
 
 
Notional
Amount
 
Fair Value
 
Notional
Amount
 
Fair Value
 
 
 
 
Asset
 
Liability
 
 
 
Asset
 
Liability
Interest rate swaps
 
$
56,033

 
$
289

 
$

 
$
56,079

 
$
10

 
$
(69
)
Interest rate caps
 
320,000

 
2,446

 

 
345,000

 
1,515

 

Total
 
$
376,033

 
$
2,735

 
$

 
$
401,079

 
$
1,525

 
$
(69
)

The changes in the fair value of the Company’s derivatives during the three months ended March 31, 2018 and 2017 were comprised of the following (in thousands): 
 
 
Three Months Ended 
 March 31,
 
 
2018
 
2017
Interest rate swaps
 
$
348

 
$
261

Interest rate caps
 
621

 
33

Total change in fair value of interest rate derivatives
 
$
969

 
$
294


The Company has not designated any of its current derivatives as hedging instruments under GAAP.

Subsequent to March 31, 2018

On April 23, 2018, the Operating Partnership entered into a floating-to-fixed interest rate swap attributable to one-month LIBOR indexed interest payments with a notional amount of $50.0 million. The interest rate swap has a fixed rate of 2.783%, an effective date of May 1, 2018, and a maturity date of May 1, 2023.

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10. Equity
 
Stockholders’ Equity
 
On February 26, 2018, the Company commenced an at-the-market continuous equity offering program (the “ATM Program”) through which the Company may, from time to time, issue and sell shares of its common stock having an aggregate offering price of up to $125.0 million. During the three months ended March 31, 2018, the Company did not issue any shares of common stock under the ATM Program.

As of March 31, 2018 and December 31, 2017, the Company’s authorized capital was 500 million shares of common stock and 100 million shares of preferred stock. The Company had 45,205,575 and 44,937,763 shares of common stock issued and outstanding as of March 31, 2018 and December 31, 2017, respectively. No shares of preferred stock were issued and outstanding as of March 31, 2018 or December 31, 2017.
 
Noncontrolling Interests
 
As of March 31, 2018 and December 31, 2017, the Company held a 72.2% and 72.0% interest, respectively, in the Operating Partnership. The Company is the primary beneficiary of the Operating Partnership as it has the power to direct the activities of the Operating Partnership and the rights to absorb 72.2% of the net income of the Operating Partnership. As the primary beneficiary, the Company consolidates the financial position and results of operations of the Operating Partnership. Noncontrolling interests in the Company represent units of limited partnership interest in the Operating Partnership not held by the Company. As of March 31, 2018, there were 17,440,861 Class A Units not held by the Company. The Company's financial position and results of operations are the same as those of the Operating Partnership. The noncontrolling interest for the consolidated entities under development or construction (see Note 1) was zero as of March 31, 2018 and December 31, 2017.
 
On January 2, 2018, due to the holders of Class A Units tendering an aggregate of 163,000 Class A Units for redemption by the Operating Partnership, the Company elected to satisfy the redemption request through the issuance of an equal number of shares of common stock.

As partial consideration for the acquisition of Columbus Village, the Operating Partnership issued 1,000,000 class B units of limited partnership interest in the Operating Partnership ("Class B Units") on July 10, 2015 and issued 275,000 class C units of limited partnership interest in the Operating Partnership ("Class C Units") on January 10, 2017. The Class B Units were automatically converted to Class A Units on July 10, 2017. The Class C Units were automatically converted into Class A Units on January 10, 2018.

As partial consideration for the acquisition of Parkway Centre, the Operating Partnership issued 117,228 Class A Units on January 29, 2018.

Common Stock Dividends and Class A Unit Distributions
 
On January 4, 2018, the Company paid cash dividends of $8.5 million to common stockholders and the Operating Partnership paid cash distributions of $3.3 million to holders of Class A Units.

On February 22, 2018, the Board of Directors declared a cash dividend and distribution of $0.20 per share and unit payable on April 5, 2018 to stockholders and unitholders of record on March 28, 2018.

Subsequent to March 31, 2018

On April 2, 2018, due to the holders of Class A Units tendering an aggregate of 187,142 Class A Units for redemption by the Operating Partnership, the Company elected to satisfy the redemption request with an aggregate cash payment of $2.5 million.

On April 5, 2018, the Company paid cash dividends of $9.0 million to common stockholders and the Operating Partnership paid cash distributions of $3.5 million to holders of Class A Units.

On April 17, 2018, the Operating Partnership issued 36,684 Class A Units to the former noncontrolling interest holder of John Hopkins Village due to the satisfaction of a contingent event that was part of the redemption of its redeemable noncontrolling interest in Johns Hopkins Village in December 2017.

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During April 2018, the Company issued and sold an aggregate of 31,468 shares of common stock at a weighted average price of $13.79 per share under the ATM Program, receiving net proceeds, after offering costs and commissions, of $0.4 million.

11. Stock-Based Compensation
 
On June 14, 2017, the Company's stockholders approved the Company's Amended and Restated 2013 Equity Incentive Plan (the "Amended Plan"), which, among other things, increased the number of shares of the Company's common stock reserved for issuance under the Amended Plan by 1,000,000 shares, from 700,000 shares to 1,700,000 shares. As of March 31, 2018, there were 1,050,269 shares available for issuance under the Amended Plan.

During the three months ended March 31, 2018, the Company granted an aggregate of 131,065 shares of restricted stock to employees and non-employee directors with a weighted average grant date fair value of $13.35 per share. Employee restricted stock awards generally vest over a period of two years: one-third immediately on the grant date and the remaining two-thirds in equal amounts on the first two anniversaries following the grant date, subject to continued service to the Company. Non-employee director restricted stock awards vest either immediately upon grant or over a period of one year, subject to continued service to the Company.
 
During the three months ended March 31, 2018, the Company issued performance-based awards in the form of restricted stock units to certain employees. The performance period for these awards is three years, with a required two-year service period immediately following the expiration of the performance period in order to fully vest. The compensation expense and the effect on the Company’s weighted average diluted shares calculation were immaterial.

During the three months ended March 31, 2018 and 2017, the Company recognized $0.8 million and $0.7 million, respectively, of stock-based compensation expense. As of March 31, 2018, there were 135,484 nonvested restricted shares outstanding; the total unrecognized compensation expense related to nonvested restricted shares was $1.3 million, which the Company expects to recognize over the next 24 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 
The carrying amounts and fair values of the Company’s financial instruments, all of which are based on Level 2 inputs, as of March 31, 2018 and December 31, 2017, were as follows (in thousands): 
 
 
March 31, 2018
 
December 31, 2017
 
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
 
(Unaudited)
 
 

 
 

Indebtedness
 
$
589,634

 
$
586,717

 
$
517,272

 
$
518,417

Interest rate swap liabilities
 

 

 
69

 
69

Interest rate swap and cap assets
 
2,735

 
2,735

 
1,525

 
1,525

 
13. Related Party Transactions
 
The Company provides general contracting and real estate services to certain related party entities that are not included in these condensed consolidated financial statements. Revenue from construction contracts with related party entities of the Company for the three months ended March 31, 2018 and 2017 was $1.2 million and $6.6 million, respectively, and gross profit from such contracts for the three months ended March 31, 2018 and 2017 was $0.2 million for each period.

Real estate services fees from affiliated entities of the Company were not significant for the three months ended March 31, 2018 or 2017. In addition, affiliated entities also reimburse the Company for monthly maintenance and facilities management services provided to the properties. Cost reimbursements earned by the Company from affiliated entities were not significant for the three months ended March 31, 2018 and 2017
 

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The Operating Partnership entered into tax protection agreements that indemnify certain directors and executive officers of the Company from their tax liabilities resulting from the potential future sale of certain of the Company’s properties within seven (or, in a limited number of cases, ten) years of the completion of the Company’s initial public offering and formation transactions completed on May 13, 2013. In addition, the tax protection agreements provide that the Operating Partnership will offer certain of the original contributors, including certain of the Company’s directors and executive officers, the opportunity to guarantee debt, or, alternatively, to enter into a deficit restoration obligation, for ten years from the closing of the Company’s initial public offering in a manner intended to provide an allocation of Operating Partnership liabilities to the partner for U.S. federal income tax purposes. Pursuant to these tax protection agreements, certain of the Company’s executive officers have guaranteed approximately $0.3 million of the Operating Partnership’s outstanding debt as of March 31, 2018.
 
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. 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.
 
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 $43.8 million and $44.9 million as of March 31, 2018 and December 31, 2017, respectively.
 
The Operating Partnership has entered into standby letters of credit using the available capacity under the credit facility. Letters of credit generally are available for draw down in the event the Company does not perform. As of both March 31, 2018 and December 31, 2017, the Operating Partnership had total outstanding letters of credit of $2.1 million. The amounts outstanding at March 31, 2018 and December 31, 2017 were comprised of a $2.1 million letter of credit related to the guarantee on the Point Street Apartments senior construction loan.

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Table of Contents

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
References to “we,” “our,” “us,” and “our company” refer to Armada Hoffler Properties, Inc., a Maryland corporation, together with our consolidated subsidiaries, including Armada Hoffler, L.P., a Virginia limited partnership (the “Operating Partnership”), of which we are the sole general partner. The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report.
 
Forward-Looking Statements
 
This report contains forward-looking statements within the meaning of the federal securities laws. We caution investors that any forward-looking statements presented in this report, or which management may make orally or in writing from time to time, are based on beliefs and assumptions made by, and information currently available to, management. When used, the words “anticipate,” “believe,” “expect,” “intend,” “may,” “might,” “plan,” “estimate,” “project,” “should,” “will,” “result” and similar expressions, which do not relate solely to historical matters, are intended to identify forward-looking statements. Such statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. We caution you that while forward-looking statements reflect our good faith beliefs when we make them, they are not guarantees of future performance and are impacted by actual events when they occur after we make such statements. We expressly disclaim any responsibility to update forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Accordingly, investors should use caution in relying on past forward-looking statements, which are based on results and trends at the time they are made, to anticipate future results or trends.
 
Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise, and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:
 
adverse economic or real estate developments, either nationally or in the markets in which our properties are located; 
our failure to develop the properties in our development pipeline successfully, on the anticipated timeline, or at the anticipated costs; 
our failure to generate sufficient cash flows to service our outstanding indebtedness; 
defaults on, early terminations of, or non-renewal of leases by tenants, including significant tenants; 
bankruptcy or insolvency of a significant tenant or a substantial number of smaller tenants; 
difficulties in identifying or completing development, acquisition, or disposition opportunities; 
our failure to successfully operate developed and acquired properties; 
our failure to generate income in our general contracting and real estate services segment in amounts that we anticipate; 
fluctuations in interest rates and increased operating costs;
our failure to obtain necessary outside financing on favorable terms or at all; 
our inability to extend the maturity of or refinance existing debt or comply with the financial covenants in the agreements that govern our existing debt; 
financial market fluctuations; 
risks that affect the general retail environment or the market for office properties or multifamily units; 
the competitive environment in which we operate; 
decreased rental rates or increased vacancy rates; 
conflicts of interests with our officers and directors; 
lack or insufficient amounts of insurance; 

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environmental uncertainties and risks related to adverse weather conditions and natural disasters; 
other factors affecting the real estate industry generally; 
our failure to maintain our qualification as a real estate investment trust (“REIT”) for U.S. federal income tax purposes; 
limitations imposed on our business and our ability to satisfy complex rules in order for us to maintain our qualification as a REIT for U.S. federal income tax purposes;
changes in governmental regulations or interpretations thereof, such as real estate and zoning laws and increases in real property tax rates and taxation of REITs; and
potential negative impacts from the recent changes to the U.S. tax laws.
 
While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events, or other changes after the date of this Quarterly Report on Form 10-Q, except as required by applicable law. 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 identified in other documents that we file from time to time with the U.S. Securities and Exchange Commission (the “SEC”).
 
Business Description
 
We are a full-service real estate company with extensive experience developing, building, owning and managing high-quality, institutional-grade office, retail and multifamily properties in attractive markets primarily throughout the Mid-Atlantic and Southeastern United States. As of March 31, 2018, 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
%
One Columbus
 
Office
 
Virginia Beach, Virginia*
 
100
%
Two Columbus
 
Office
 
Virginia Beach, Virginia*
 
100
%
249 Central Park Retail
 
Retail
 
Virginia Beach, Virginia*
 
100
%
Alexander Pointe
 
Retail
 
Salisbury, North Carolina
 
100
%
Bermuda Crossroads
 
Retail
 
Chester, Virginia
 
100
%
Broad Creek Shopping Center
 
Retail
 
Norfolk, Virginia
 
100
%
Broadmoor Plaza
 
Retail
 
South Bend, Indiana
 
100
%
Brooks Crossing(1)
 
Retail
 
Newport News, Virginia
 
65
%
Columbus Village
 
Retail
 
Virginia Beach, Virginia*
 
100
%
Columbus Village II
 
Retail
 
Virginia Beach, Virginia*
 
100
%
Commerce Street Retail
 
Retail
 
Virginia Beach, Virginia*
 
100
%
Courthouse 7-Eleven
 
Retail
 
Virginia Beach, Virginia
 
100
%
Dick's at Town Center
 
Retail
 
Virginia Beach, Virginia*
 
100
%
Dimmock Square
 
Retail
 
Colonial Heights, Virginia
 
100
%
Fountain Plaza Retail
 
Retail
 
Virginia Beach, Virginia*
 
100
%
Gainsborough Square
 
Retail
 
Chesapeake, Virginia
 
100
%
Greentree Shopping Center
 
Retail
 
Chesapeake, Virginia
 
100
%
Hanbury Village
 
Retail
 
Chesapeake, Virginia
 
100
%
Harper Hill Commons
 
Retail
 
Winston-Salem, North Carolina
 
100
%
Harrisonburg Regal
 
Retail
 
Harrisonburg, Virginia
 
100
%
Indian Lakes Crossing
 
Retail
 
Virginia Beach, Virginia
 
100
%

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Property
    
Segment
    
Location
 
Ownership Interest
Lightfoot Marketplace(2)
 
Retail
 
Williamsburg, Virginia
 
70
%
North Hampton Market
 
Retail
 
Taylors, South Carolina
 
100
%
North Point Center
 
Retail
 
Durham, North Carolina
 
100
%
Oakland Marketplace
 
Retail
 
Oakland, Tennessee
 
100
%
Parkway Centre
 
Retail
 
Moultrie, Georgia
 
100
%
Parkway Marketplace
 
Retail
 
Virginia Beach, Virginia
 
100
%
Patterson Place
 
Retail
 
Durham, North Carolina
 
100
%
Perry Hall Marketplace
 
Retail
 
Perry Hall, Maryland
 
100
%
Providence Plaza
 
Retail
 
Charlotte, North Carolina
 
100
%
Renaissance Square
 
Retail
 
Davidson, North Carolina
 
100
%
Sandbridge Commons
 
Retail
 
Virginia Beach, Virginia
 
100
%
Socastee Commons
 
Retail
 
Myrtle Beach, South Carolina
 
100
%
Southgate Square
 
Retail
 
Colonial Heights, Virginia
 
100
%
Southshore Shops
 
Retail
 
Chesterfield, Virginia
 
100
%
South Retail
 
Retail
 
Virginia Beach, Virginia*
 
100
%
South Square
 
Retail
 
Durham, North Carolina
 
100
%
Stone House Square
 
Retail
 
Hagerstown, Maryland
 
100
%
Studio 56 Retail
 
Retail
 
Virginia Beach, Virginia*
 
100
%
Tyre Neck Harris Teeter
 
Retail
 
Portsmouth, Virginia
 
100
%
Waynesboro Commons
 
Retail
 
Waynesboro, Virginia
 
100
%
Wendover Village
 
Retail
 
Greensboro, North Carolina
 
100
%
Encore Apartments
 
Multifamily
 
Virginia Beach, Virginia*
 
100
%
Johns Hopkins Village
 
Multifamily
 
Baltimore, Maryland
 
100
%
Liberty Apartments
 
Multifamily
 
Newport News, Virginia
 
100
%
Smith's Landing
 
Multifamily
 
Blacksburg, Virginia
 
100
%
The Cosmopolitan
 
Multifamily
 
Virginia Beach, Virginia*
 
100
%
                                                
 
 
 
 
 
 
(1)
We are entitled to a preferred return of 8% on our investment in Brooks Crossing.
(2)
We are entitled to a preferred return of 9% on our investment in Lightfoot Marketplace.
*Located in the Town Center of Virginia Beach

As of March 31, 2018, the following properties that we consolidate for financial reporting purposes were either under development or construction: 
Property
    
Segment
    
Location
 
Ownership Interest
Premier (Town Center Phase VI)
 
Mixed-use
 
Virginia Beach, Virginia*
 
100
%
Greenside (Harding Place)(1)
 
Multifamily
 
Charlotte, North Carolina
 
80
%
Hoffler Place (King Street)
 
Multifamily
 
Charleston, South Carolina
 
92.5
%
Summit Place (Meeting Street)
 
Multifamily
 
Charleston, South Carolina
 
90
%
Brooks Crossing office tower (2)
 
Office
 
Newport News, Virginia
 
65
%
Lightfoot Outparcel (3)
 
Retail
 
Williamsburg, Virginia
 
70
%
Market at Mill Creek (4)
 
Retail
 
Mount Pleasant, South Carolina
 
70
%
River City
 
Industrial
 
Chesterfield, Virginia
 
100
%
 
 
 
 
 
 
 
(1) We are entitled to a preferred return of 9% on a portion of our investment in Harding Place.
(2) We are entitled to a preferred return of 8% on our investment in Brooks Crossing.
(3) We are entitled to a preferred return of 9% on our investment in Lightfoot Outparcel.
(4) We are entitled to a preferred return of 10% on our investment in Market at Mill Creek.


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*Located in the Town Center of Virginia Beach
 
Please see Note 5 to our condensed consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q for information related to our investment in Durham City Center II, LLC, which is an unconsolidated subsidiary that we account for under the equity method of accounting.

Acquisitions

On January 9, 2018, we acquired Indian Lakes Crossing, a Harris Teeter-anchored shopping center in Virginia Beach, Virginia, for a contract price of $14.7 million plus capitalized acquisition costs of $0.2 million.

On January 29, 2018, we acquired Parkway Centre, a newly developed Publix-anchored shopping center in Moultrie, Georgia for total consideration of $11.3 million ($9.6 million in cash and $1.7 million in the form of class A units of limited partnership interest in our Operating Partnership ("Class A Units") plus capitalized acquisition costs of $0.3 million.

On November 30, 2017, we entered into a lease agreement with Bottling Group, LLC for a new distribution facility that we will develop and construct for expected delivery in the fourth quarter of 2018. On January 29, 2018, we acquired undeveloped land in Chesterfield, Virginia, a portion of which will serve as the site for this facility, for a contract price of $2.4 million plus capitalized acquisition costs of $0.1 million.

On January 18, 2018, we entered into an operating agreement with a partner to develop a Lowes Foods-anchored shopping center in Mount Pleasant, South Carolina. The partnership, Market at Mill Creek Partners, LLC acquired undeveloped land on February 16, 2018 for a contract price of $2.9 million plus capitalized acquisition costs of $0.1 million.

First Quarter 2018 Highlights
 
The following highlights our results of operations and significant transactions for the three months ended March 31, 2018:
 
Net income of $7.0 million, or $0.11 per diluted share, compared to $8.8 million, or $0.16 per diluted share, for the three months ended March 31, 2017
Funds from operations ("FFO") of $16.3 million, or $0.26 per diluted share, compared to $14.8 million, or $0.27 per diluted share, for the three months ended March 31, 2017. See “Non-GAAP Financial Measures.” 
Normalized funds from operations (“Normalized FFO”) of $15.4 million, or $0.25 per diluted share, compared to $14.6 million, or $0.26 per diluted share, for the three months ended March 31, 2017. See “Non-GAAP Financial Measures.”
Core operating property portfolio occupancy at 95.6% as of March 31, 2018 compared to 94.2% as of December 31, 2017.
The Board of Directors declared a cash dividend of $0.20 per common share for the first quarter of 2018. This represents a 5.3% increase over the prior quarter's cash dividend and the fourth increase in four years, totaling 25% dividend growth during that period.
Added approximately 132,000 square feet of retail space through the acquisitions of Indian Lakes Crossing, a Harris Teeter-anchored center in Virginia Beach, Virginia and Parkway Centre, a Publix-anchored center in Moultrie, Georgia.




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Table of Contents

Segment Results of Operations
 
As of March 31, 2018, we operated our business in four segments: (i) office real estate, (ii) retail real estate, (iii) multifamily residential real estate and (iv) general contracting and real estate services, which are conducted through our taxable REIT subsidiaries (“TRS”). Net operating income (segment revenues minus segment expenses) ("NOI") is the measure used by management to assess segment performance and allocate our resources among our segments. NOI is not a measure of operating income or cash flows from operating activities as measured by accounting principles generally accepted in the United States (“GAAP”) and is not indicative of cash available to fund cash needs. As a result, NOI should not be considered an alternative to cash flows as a measure of liquidity. Not all companies calculate NOI in the same manner. We consider NOI to be an appropriate supplemental measure to net income because it assists both investors and management in understanding the core operations of our real estate and construction businesses. See Note 3 to our condensed consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q for a reconciliation of NOI to net income.
 
We define same store properties as those properties that we owned and operated and that were stabilized for the entirety of both periods presented. We generally consider a property to be stabilized upon until the earlier of: (i) the quarter after the property reaches 80% occupancy or (ii) the thirteenth quarter after the property receives its certificate of occupancy. Additionally, any property that is fully or partially taken out of service for the purpose of redevelopment is no longer considered stabilized until the redevelopment activities are complete and the assets are placed back into service.

Office Segment Data 
 
 
Three Months Ended March 31,
 
 
 
 
2018
 
2017
 
Change
Rental revenues
 
$
5,100

 
$
4,906

 
$
194

Property expenses
 
1,948

 
1,775

 
173

Segment NOI
 
$
3,152

 
$
3,131

 
$
21

 
Office segment NOI for the three months ended March 31, 2018 increased slightly compared to the three months ended March 31, 2017. The increase in revenues and expenses relate primarily to a new tenant at 4525 Main Street that moved in during December 2017. In addition, real estate tax expense and other expenses increased across the office portfolio and were not entirely recovered due to new full service office tenants who are still in their base years. The increases were partially offset by the disposition of the Commonwealth of Virginia-Chesapeake and Commonwealth of Virginia-Virginia Beach office buildings, which contributed an aggregate of $0.3 million in office segment NOI for the three months ended March 31, 2017.

Office Same Store Results
 
Office same store results for the three months ended March 31, 2018 exclude 4525 Main Street as well as the Commonwealth of Virginia-Chesapeake and Commonwealth of Virginia-Virginia Beach office buildings, which were both sold in the third quarter of 2017.
 

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Office same store rental revenues, property expenses and NOI for the three months ended March 31, 2018 and 2017 were as follows: 
 
 
Three Months Ended March 31,
 
 
 
 
2018
 
2017
 
Change
Rental revenues
 
$
3,454

 
$
3,514

 
$
(60
)
Property expenses
 
1,345

 
1,232

 
113

Same Store NOI
 
$
2,109

 
$
2,282

 
$
(173
)
Non-Same Store NOI
 
1,043

 
849

 
194

Segment NOI
 
$
3,152

 
$
3,131

 
$
21

 
Office same store NOI for the three months ended March 31, 2018 decreased 7.6% compared to the three months ended March 31, 2017 due to the expansion and relocation of a tenant from Two Columbus to 4525 Main Street during the three months ended September 30, 2017. For the three months ended March 31, 2018, the NOI from this tenant that relocated to 4525 Main Street was included in Non-Same Store NOI. In addition, real estate tax expense and other expenses increased across the office portfolio and were not entirely recovered due to new full service office tenants that are still in their base years.

Retail Segment Data

 
 
Three Months Ended March 31,
 
 
 
 
2018
 
2017
 
Change
Rental revenues
 
$
16,711

 
$
15,631

 
$
1,080

Property expenses
 
4,340

 
3,970

 
370

Segment NOI
 
$
12,371

 
$
11,661

 
$
710

 
Retail segment NOI for the three months ended March 31, 2018 increased $0.7 million compared to the three months ended March 31, 2017. The increase was a result of the acquisitions of Indian Lakes Crossing and Parkway Centre during the three months ended March 31, 2018, as well as the acquisition of the outparcel phase of Wendover Village and the completion of the Lightfoot Marketplace development subsequent to March 31, 2017.
  
Retail Same Store Results
 
Retail same store results for the three months ended March 31, 2018 exclude Lightfoot Marketplace, Brooks Crossing, the outparcel phase of Wendover Village, Indian Lakes Crossing, and Parkway Centre.

Retail same store rental revenues, property expenses and NOI for the three months ended March 31, 2018 and 2017 were as follows:
 
 
Three Months Ended March 31,
 
 
 
 
2018
 
2017
 
Change
Rental revenues
 
$
15,424

 
$
15,222

 
$
202

Property expenses
 
3,807

 
3,579

 
228

Same Store NOI
 
$
11,617

 
$
11,643

 
$
(26
)
Non-Same Store NOI
 
754

 
18

 
736

Segment NOI
 
$
12,371

 
$
11,661

 
$
710

 
Retail same store NOI decreased 0.2% for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. This was a result of increases in real estate tax expense and snow removal expense.


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Table of Contents

Multifamily Segment Data
 
 
Three Months Ended March 31,
 
 
 
 
2018
 
2017
 
Change
Rental revenues
 
$
6,888

 
$
6,695

 
$
193

Property expenses
 
2,949

 
2,832

 
117

Segment NOI
 
$
3,939

 
$
3,863

 
$
76

 
Multifamily segment NOI increased slightly for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. The increase for the three months ended March 31, 2018 was primarily a result of activity for Johns Hopkins Village, which experienced higher occupancy during the three months ended March 31, 2018 compared to the three months ended March 31, 2017.
 
Multifamily Same Store Results
 
Multifamily same store results exclude new real estate development - specifically Johns Hopkins Village, which was placed into service in the third quarter of 2016. Multifamily same store results also exclude The Cosmopolitan, which is undergoing a redevelopment project that began on March 1, 2018.

 Multifamily same store rental revenues, property expenses and NOI for the three months ended March 31, 2018 and 2017 were as follows: 
 
 
Three Months Ended March 31,
 
 
 
 
2018
 
2017
 
Change
Rental revenues
 
$
2,854

 
$
2,837

 
$
17

Property expenses
 
1,157

 
1,151

 
6

Same Store NOI
 
$
1,697

 
$
1,686

 
$
11

Non-Same Store NOI
 
2,242

 
2,177

 
65

Segment NOI
 
$
3,939

 
$
3,863

 
$
76

 
Multifamily same store NOI for the three months ended March 31, 2018 increased 0.7% compared to the three months ended March 31, 2017. The increase is primarily the result of increased rental rates at Smith’s Landing offset by higher real estate tax expense at Liberty Apartments.

General Contracting and Real Estate Services Segment Data
 
 
 
Three Months Ended March 31,
 
 
 
 
2018
 
2017
 
Change
Segment revenues
 
$
23,050

 
$
63,519

 
$
(40,469
)
Segment expenses
 
22,414

 
61,196

 
(38,782
)
Segment gross profit
 
$
636

 
$
2,323

 
$
(1,687
)
Operating margin
 
2.8
%
 
3.7
%
 
(0.8
)%
 
General contracting and real estate services segment profit for the three months ended March 31, 2018 decreased $1.7 million or 72.6% compared to the three months ended March 31, 2017 as there were no significant new third-party contracts in late 2017 or in the first quarter of 2018.

 The changes in third party construction backlog for the three months ended March 31, 2018 and 2017 were as follows: 

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Three Months Ended March 31,
 
2018
 
2017
Beginning backlog
$
49,167

 
$
217,718

New contracts/change orders
4,569

 
3,441

Work performed
(23,003
)
 
(63,437
)
Ending backlog
$
30,733

 
$
157,722

 
As of March 31, 2018, we had $11.6 million in backlog on the City Center project and $9.9 million in backlog on the Dinwiddie Municipal Complex project.
   
Consolidated Results of Operations
 
The following table summarizes the results of operations for the three months ended March 31, 2018 and 2017
 
 
Three Months Ended March 31,
 
 
 
 
2018
 
2017
 
Change
Revenues
 
 

 
 

 
 

Rental revenues
 
$
28,699

 
$
27,232

 
$
1,467

General contracting and real estate services revenues
 
23,050

 
63,519

 
(40,469
)
Total revenues
 
51,749

 
90,751

 
(39,002
)
Expenses
 
 

 
 

 
 

Rental expenses
 
6,424

 
6,068

 
356

Real estate taxes
 
2,813

 
2,509

 
304

General contracting and real estate services expenses
 
22,414

 
61,196

 
(38,782
)
Depreciation and amortization
 
9,278

 
9,475

 
(197
)
General and administrative expenses
 
2,961

 
2,986

 
(25
)
Acquisition, development and other pursuit costs