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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, 2019  
or 
¨    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 
For the transition period from                      to                      
Commission File Number: 001-35908
 
ARMADA HOFFLER PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
 
Maryland
46-1214914
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
222 Central Park Avenue, Suite 2100
Virginia Beach, Virginia
23462
(Address of principal executive offices)
(Zip Code)
 
(757) 366-4000
(Registrant’s telephone number, including area code)
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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).    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
x 
Accelerated Filer
¨
Non-Accelerated Filer
¨
Smaller Reporting Company
¨
 
 
Emerging Growth Company
¨ 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  
¨ Yes     x  No
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, $0.01 par value per share
 
AHH
 
New York Stock Exchange
 As of May 6, 2019, the registrant had 52,418,695 shares of common stock, $0.01 par value per share, outstanding. In addition, as of May 6, 2019, Armada Hoffler, L.P., the registrant's operating partnership subsidiary, had 16,991,933 units of limited partnership interest ("OP Units") outstanding (other than OP Units held by the registrant).




Table of Contents

ARMADA HOFFLER PROPERTIES, INC.
 
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2019
 
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,
2019
 
December 31,
2018
 
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Real estate investments:
 
 
 
 
Income producing property
 
$
1,102,803

 
$
1,037,917

Held for development
 
2,994

 
2,994

Construction in progress
 
145,366

 
135,675

 
 
1,251,163

 
1,176,586

Accumulated depreciation
 
(196,518
)
 
(188,775
)
Net real estate investments
 
1,054,645

 
987,811

Real estate investments held for sale
 
929

 
929

Cash and cash equivalents
 
15,577

 
21,254

Restricted cash
 
3,382

 
2,797

Accounts receivable, net
 
18,297

 
19,016

Notes receivable
 
152,172

 
138,683

Construction receivables, including retentions
 
17,784

 
16,154

Construction contract costs and estimated earnings in excess of billings
 
317

 
1,358

Equity method investments
 

 
22,203

Lease right-of-use assets
 
32,242

 

Other assets
 
63,909

 
55,177

Total Assets
 
$
1,359,254

 
$
1,265,382

LIABILITIES AND EQUITY
 
 
 
 
Indebtedness, net
 
$
737,621

 
$
694,239

Accounts payable and accrued liabilities
 
15,904

 
15,217

Construction payables, including retentions
 
42,293

 
50,796

Billings in excess of construction contract costs and estimated earnings
 
3,622

 
3,037

Lease liabilities
 
41,697

 

Other liabilities
 
40,431

 
46,203

Total Liabilities
 
881,568

 
809,492

 
 
 
 
 
Stockholders’ equity:
 
 
 
 
Preferred stock, $0.01 par value, 100,000,000 shares authorized, none issued and outstanding as of March 31, 2019 and December 31, 2018, respectively
 

 

Common stock, $0.01 par value, 500,000,000 shares authorized, 52,326,803 and 50,013,731 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively
 
523

 
500

Additional paid-in capital
 
389,547

 
357,353

Distributions in excess of earnings
 
(88,949
)
 
(82,699
)
Accumulated other comprehensive loss
 
(1,981
)
 
(1,283
)
Total stockholders’ equity
 
299,140

 
273,871

Noncontrolling interests
 
178,546

 
182,019

Total Equity
 
477,686

 
455,890

Total Liabilities and Equity
 
$
1,359,254

 
$
1,265,382


See Notes to Condensed Consolidated Financial Statements.

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Table of Contents

ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statements of Comprehensive Income 
(In thousands, except per share data)
(Unaudited)
 
 
Three Months Ended 
 March 31,
 
 
2019
 
2018
Revenues
 
 
 
 
Rental revenues
 
$
30,909

 
$
28,699

General contracting and real estate services revenues
 
17,036

 
23,050

Total revenues
 
47,945

 
51,749

Expenses
 
 
 
 
Rental expenses
 
6,725

 
6,424

Real estate taxes
 
3,128

 
2,813

General contracting and real estate services expenses
 
16,286

 
22,414

Depreciation and amortization
 
9,904

 
9,278

General and administrative expenses
 
3,401

 
2,961

Acquisition, development and other pursuit costs
 
400

 
84

Total expenses
 
39,844

 
43,974

Operating income
 
8,101

 
7,775

Interest income
 
5,319

 
2,232

Interest expense
 
(5,886
)
 
(4,373
)
Equity in income of unconsolidated real estate entities
 
273

 

Change in fair value of interest rate derivatives
 
(1,463
)
 
969

Other income
 
60

 
114

Income before taxes
 
6,404

 
6,717

Income tax benefit
 
110

 
266

Net income
 
6,514

 
6,983

Net income attributable to noncontrolling interests
 
(1,630
)
 
(1,943
)
Net income attributable to stockholders
 
$
4,884

 
$
5,040

Net income attributable to stockholders per share (basic and diluted)
 
$
0.10

 
$
0.11

Weighted-average common shares outstanding (basic and diluted)
 
50,926

 
45,132

Comprehensive income:
 
 

 
 

Net income
 
$
6,514

 
$
6,983

Unrealized cash flow hedge losses
 
(1,003
)
 

Realized cash flow hedge losses reclassified to net income
 
72

 

Comprehensive income
 
5,583

 
6,983

Comprehensive income attributable to noncontrolling interests
 
(1,397
)
 
(1,943
)
Comprehensive income attributable to stockholders
 
$
4,186

 
$
5,040


See Notes to Condensed Consolidated Financial Statements.

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Table of Contents

ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statements of Equity
 
(In thousands, except share data)
(Unaudited)
 
 
 
Shares of common stock
 
Common Stock
 
Additional paid-in capital
 
Distributions in excess of earnings
 
Accumulated other comprehensive loss
 
Total stockholders' equity
 
Noncontrolling interests
 
Total Equity
Balance, December 31, 2018
 
50,013,731

 
$
500

 
$
357,353

 
$
(82,699
)
 
$
(1,283
)
 
$
273,871

 
$
182,019

 
$
455,890

Cumulative effect of accounting change(1)
 

 

 

 
(125
)
 

 
(125
)
 
(42
)
 
(167
)
Net income
 

 

 

 
4,884

 

 
4,884

 
1,630

 
6,514

Unrealized cash flow hedge losses
 

 

 

 

 
(752
)
 
(752
)
 
(251
)
 
(1,003
)
Realized cash flow hedge losses reclassified to net income
 

 

 

 

 
54

 
54

 
18

 
72

Net proceeds from sales of common stock
 
2,071,000

 
21

 
30,185

 

 

 
30,206

 

 
30,206

Restricted stock awards, net of tax withholding
 
124,013

 
1

 
754

 

 

 
755

 

 
755

Restricted stock award forfeitures
 
(412
)
 

 
(4
)
 

 

 
(4
)
 

 
(4
)
Redemption of operating partnership units
 
118,471

 
1

 
1,259

 

 

 
1,260

 
(1,260
)
 

Dividends and distributions declared ($0.21 per share and unit)
 

 

 

 
(11,009
)
 

 
(11,009
)
 
(3,568
)
 
(14,577
)
Balance, March 31, 2019
 
52,326,803

 
$
523

 
$
389,547

 
$
(88,949
)
 
$
(1,981
)
 
$
299,140

 
$
178,546

 
$
477,686


(1) Company recorded cumulative effect adjustments related to the new lease standard in the first quarter of 2019. See "Financial Statements — Note 2 — Significant Accounting Policies — Recent Accounting Pronouncements” for additional information.

 
 
Shares of common stock
 
Common Stock
 
Additional paid-in capital
 
Distributions in excess of earnings
 
Accumulated other comprehensive loss
 
Total stockholders' equity
 
Noncontrolling interests
 
Total Equity
Balance, December 31, 2017
 
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, net of tax withholding
 
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 ($0.20 per share and unit)
 

 

 

 
(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,
 
 
2019
 
2018
OPERATING ACTIVITIES
 
 
 
 
Net income
 
$
6,514

 
$
6,983

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation of buildings and tenant improvements
 
7,743

 
6,773

Amortization of leasing costs and in-place lease intangibles
 
2,161

 
2,505

Accrued straight-line rental revenue
 
(837
)
 
(562
)
Amortization of leasing incentives and above or below-market rents
 
(35
)
 
(56
)
Accrued straight-line ground rent expense
 
(3
)
 
84

Adjustment for uncollectable accounts
 
128

 
52

Noncash stock compensation
 
689

 
549

Noncash interest expense
 
304

 
326

Adjustment for Annapolis Junction purchase option (1)
 
(1,118
)
 

Change in fair value of interest rate derivatives
 
1,463

 
(969
)
Equity in income of unconsolidated real estate entities
 
(273
)
 

Changes in operating assets and liabilities:
 
 
 
 
Property assets
 
2,591

 
1,771

Property liabilities
 
(139
)
 
(3,484
)
Construction assets
 
(502
)
 
3,482

Construction liabilities
 
579

 
(11,183
)
Interest receivable
 
(3,186
)
 
(2,221
)
Net cash provided by operating activities
 
16,079

 
4,050

INVESTING ACTIVITIES
 
 
 
 
Development of real estate investments
 
(41,296
)
 
(26,438
)
Tenant and building improvements
 
(3,629
)
 
(2,246
)
Acquisitions of real estate investments, net of cash received
 
(25,792
)
 
(33,368
)
Notes receivable issuances
 
(9,668
)
 
(3,386
)
Notes receivable paydowns
 
1,692

 

Leasing costs
 
(575
)
 
(680
)
Contributions to equity method investments
 
(535
)
 
(1,410
)
Net cash used for investing activities
 
(79,803
)
 
(67,528
)
FINANCING ACTIVITIES
 
 
 
 
Proceeds from sales of common stock
 
30,609

 

Offering costs
 
(403
)
 

Common shares tendered for tax withholding
 
(344
)
 
(343
)
Debt issuances, credit facility and construction loan borrowings
 
100,327

 
111,498

Debt and credit facility repayments, including principal amortization
 
(57,690
)
 
(39,273
)
Debt issuance costs
 
(420
)
 
(201
)
Redemption of operating partnership units
 

 
(5
)
Dividends and distributions
 
(13,447
)
 
(11,808
)
Net cash provided by financing activities
 
58,632

 
59,868

Net decrease in cash and cash equivalents
 
(5,092
)
 
(3,610
)
Cash, cash equivalents, and restricted cash, beginning of period
 
24,051

 
22,916

Cash, cash equivalents, and restricted cash, end of period (2)
 
$
18,959

 
$
19,306


See Notes to Condensed Consolidated Financial Statements.

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ARMADA HOFFLER PROPERTIES, INC.
Condensed Consolidated Statements of Cash Flows (Continued)
(In thousands)(Unaudited)
 
 
Three Months Ended 
 March 31,
 
 
2019
 
2018
Supplemental Disclosures (noncash transactions):
 
 
 
 
Increase in dividends payable
 
$
1,130

 
$
744

Decrease in accrued capital improvements and development costs
 
(7,609
)
 
(4,434
)
Issuance of operating partnership units for acquisitions
 

 
1,702

Operating Partnership units redeemed for common shares
 
1,260

 
1,804

Equity method investment redeemed for real estate acquisition
 
23,011

 


(1) See 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, 2018. Borrower paid $5.0 million in exchange for the Company's purchase option. Recognition of income was initially deferrred and is being recognized as additional interest income on the note receivable over the one-year remaining term.
(2) The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the Condensed Consolidated Statements of Cash Flows (in thousands):
 
 
March 31, 2019
 
March 31, 2018
Cash and cash equivalents
 
$
15,577

 
$
15,804

Restricted cash (3)
 
3,382

 
3,502

Cash, cash equivalents, and restricted cash
 
$
18,959

 
$
19,306


(3) Restricted cash represents amounts held by lenders for real estate taxes, insurance, and reserves for capital improvements.

See Notes to Condensed Consolidated Financial Statements.


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

The Company is a real estate investment trust ("REIT"), the sole general partner of Armada Hoffler, L.P. (the "Operating Partnership") and, as of March 31, 2019, owned 75.5% of the economic interest in the Operating Partnership, of which 0.1% is held as general partnership units. The operations of the Company are carried on primarily through the Operating Partnership and the wholly owned subsidiaries of the Operating Partnership.
 
As of March 31, 2019, the Company's property portfolio consisted of 48 operating properties and 11 properties either under development or not yet stabilized.

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

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

The accompanying condensed consolidated financial statements were prepared in accordance with the requirements for interim financial information. Accordingly, these interim financial statements have not been audited and exclude certain disclosures required for annual financial statements. Also, the operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These interim financial statements should be read in conjunction with the audited consolidated financial statements of the Company included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
 
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

As discussed below, certain amounts previously reported in the consolidated financial statements have been reclassified in the accompanying consolidated financial statements to conform to the current period's presentation.

During the second quarter of 2018, the Company identified certain immaterial classification errors on the Company's Consolidated Statements of Cash Flows and determined that, in the Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 and future periodic reports, the Company would correct these classification errors. One classification error

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was corrected by including within the changes in operating assets and liabilities in the operating activities section a new line item for "Interest receivable." A corresponding adjustment was recorded to reduce the amount of "Notes receivable issuances" within investing activities on the Consolidated Statement of Cash Flows. These reclassifications totaled $2.2 million for the three months ended March 31, 2018. These reclassifications decreased "Net cash provided by operating activities" and "Net cash used for investing activities" by an equal and offsetting amount. These reclassifications did not have any impact on the Consolidated Balance Sheets, Consolidated Statements of Comprehensive Income, Consolidated Statements of Equity, or any other operating measure for the periods affected.

These amounts were previously presented as "Notes receivable issuances," a component of net cash used for investing activities on the Consolidated Statements of Cash Flows, resulting in overstatements in cash provided by operating activities and overstatements of cash used in investing activities. These amounts represent interest earned on mezzanine loans that were funded by additional borrowings as provided for in the mezzanine loan agreements. These amounts are now classified as changes in interest receivable, a non-cash adjustment to calculate net cash provided by operating activities.

The second classification error was corrected by including within financing activities on the Consolidated Statements of Cash Flows a new line item for "Common shares tendered for tax withholding." A corresponding adjustment was recorded to the "Changes in operating assets and liabilities: Property liabilities" within operating activities on the Consolidated Statements of Cash Flows. This reclassification totaled $0.3 million for the three months ended March 31, 2018. This reclassification increased "Net cash provided by operating activities" and decreased "Net cash provided by financing activities" by an equal and offsetting amount.
 
Recent Accounting Pronouncements

Leases

On February 25, 2016, the Financial Accounting Standards Board ("FASB") issued an Accounting Standards Update ("ASU") that requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets (ASU 2016-02—Leases (Topic 842)). The new standard also makes targeted changes to lessor accounting. The Company adopted the new standard on January 1, 2019, using the modified retrospective approach for all leases existing at, or entered into after, the beginning of the earliest comparative period presented as permitted in Accounting Standards Codification ("ASC") Topic 842.

In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company to not reassess whether any expired or existing contracts are or contain leases, not reassess the lease classification for any expired or existing leases, and not reassess initial direct costs for existing leases. As of March 31, 2019, Company does not have any leases classified as finance leases. The Company also elected a practical expedient that allowed it to not separate non-lease components from lease components and instead to account for each lease and non-lease component as a single lease component. The adoption of the new standard as of January 1, 2019 did not impact the Company's consolidated results of operations and had no impact on cash flows.

As a lessee, the Company has six ground leases on five properties with initial terms that range from 20 to 65 years and options to extend up to an additional 70 years in certain cases. The 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. The Company recognizes lease expense on a straight-line basis over the lease term. The Company's lease agreements do not contain any residual value guarantees or material restrictive covenants.

The long-term ground leases represent a majority of the Company's current operating lease payments. The Company recorded right-of-use assets totaling $32.2 million and lease liabilities totaling $41.4 million upon adopting this standard on January 1, 2019. The Company utilized a weighted average discount rate of 5.4% to measure its lease liabilities upon adoption.

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

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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.

The new standard includes new considerations regarding the recognition of rental revenue when collection is not probable. The Company changed its presentation and measurement of charges for uncollectable lease revenue associated with its office, retail, and residential leasing activity, reflecting those amounts as a component of rental income on the accompanying Condensed Consolidated Statement of Comprehensive Income for the three months ended March 31, 2019. However, in accordance with its prospective adoption of the standard, the Company did not adjust the prior year period presentation of charges for uncollectable lease revenue associated with its office, retail, and residential leasing activity as a component of operating expenses, excluding property taxes, on the accompanying Condensed Consolidated Statement of Comprehensive Income for the three months ended March 31, 2018. Instead, the Company recorded a combined adjustment of $0.2 million to the opening balances for distributions in excess of earnings and noncontrolling interest relating to receivables where collection of substantially all operating lease payments was not probable as of January 1, 2019.

Lease-related receivables, which include contractual amounts accrued and unpaid from tenants and accrued straight-line rents receivable, are reduced for credit losses. Such amounts are recognized as a reduction to real estate rental revenues. The Company evaluates the collectability of lease receivables using several factors, including a lessee’s creditworthiness. The Company recognizes a credit loss on lease-related receivables when, in the opinion of management, collection of substantially all lease payments is not probable. When collectability is determined not probable, any lease income subsequent to recognizing the credit loss is limited to the lesser of the lease income reflected on a straight-line basis or cash collected.

Credit losses

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses - Measurement of Credit Losses on Financial Instruments (Topic 326). ASU 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income.  The guidance will replace the "incurred loss" approach under existing guidance with an "expected loss" model for instruments measured at amortized cost such as our notes receivable. The guidance is effective for fiscal years beginning after December 15, 2019 and is to be adopted through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. While the Company is currently evaluating the impact ASU 2016-13 will have on the consolidated financial statements, the Company expects that the adoption could result in earlier recognition of a provision for loan losses on its notes receivable.

Other Accounting Policies

See the Company's Annual Report on Form 10-K for the year ended December 31, 2018 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, construction, and lending businesses.

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Net operating income of the Company’s reportable segments for the three months ended March 31, 2019 and 2018 was as follows (in thousands): 
 
 
Three Months Ended March 31,
 
 
2019
 
2018
 
 
(Unaudited)
Office real estate
 
 
 
 
Rental revenues
 
$
5,556

 
$
5,100

Rental expenses
 
1,486

 
1,446

Real estate taxes
 
526

 
502

Segment net operating income
 
3,544

 
3,152

Retail real estate
 
 
 
 
Rental revenues
 
17,257

 
16,711

Rental expenses
 
2,600

 
2,657

Real estate taxes
 
1,811

 
1,683

Segment net operating income
 
12,846

 
12,371

Multifamily residential real estate
 
 
 
 
Rental revenues
 
8,096

 
6,888

Rental expenses
 
2,639

 
2,321

Real estate taxes
 
791

 
628

Segment net operating income
 
4,666

 
3,939

General contracting and real estate services
 
 
 
 
Segment revenues
 
17,036

 
23,050

Segment expenses
 
16,286

 
22,414

Segment gross profit
 
750

 
636

Net operating income
 
$
21,806

 
$
20,098

 
Rental expenses represent costs directly associated with the operation and management of the Company’s real estate properties. Rental expenses include asset management fees, property management fees, repairs and maintenance, insurance, and utilities.

General contracting and real estate services revenues for the three months ended March 31, 2019 and 2018 exclude revenue related to intercompany construction contracts of $30.2 million and $25.9 million, respectively.

General contracting and real estate services expenses for the three months ended March 31, 2019 and 2018 exclude expenses related to intercompany construction contracts of $29.9 million and $25.6 million, respectively.

General contracting and real estate services expenses for the three months ended March 31, 2019 and 2018 include noncash stock compensation expense of $0.2 million and $0.1 million, respectively.



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The following table reconciles net operating income to net income, the most directly comparable GAAP measure, for the three months ended March 31, 2019 and 2018 (in thousands): 
 
 
Three Months Ended March 31,
 
 
2019
 
2018
 
 
(Unaudited)
Net operating income
 
$
21,806

 
$
20,098

Depreciation and amortization
 
(9,904
)
 
(9,278
)
General and administrative expenses
 
(3,401
)
 
(2,961
)
Acquisition, development, and other pursuit costs
 
(400
)
 
(84
)
Interest income
 
5,319

 
2,232

Interest expense
 
(5,886
)
 
(4,373
)
Equity in income of unconsolidated real estate entities
 
273

 

Change in fair value of interest rate derivatives
 
(1,463
)
 
969

Other income
 
60

 
114

Income tax benefit
 
110

 
266

Net income
 
$
6,514

 
$
6,983

 
General and administrative expenses represent costs not directly associated with the operation and management of the Company’s real estate properties and general contracting and real estate services businesses. General and administrative expenses include corporate office personnel salaries and benefits, bank fees, accounting fees, legal fees and other corporate office expenses. General and administrative expenses for the three months ended March 31, 2019 and 2018 include noncash stock compensation expense of $0.5 million and $0.5 million, respectively.

4. Leases

Lessee Disclosures

Operating lease cost and cash flow for the Company's operating leases for the three months ended March 31, 2019 and 2018 were as follows (in thousands):
 
 
Three Months Ended March 31, 2019
 
 
(Unaudited)
Operating lease cost
 
$
563

Cash paid for amounts included in the measurement of lease liabilities (operating cash flow)
 
500


Additional information related to leases as of March 31, 2019 and December 31, 2018 were as follows (in thousands):
 
 
March 31, 2019
 
 
(Unaudited)
Operating Leases
 
 
Lease right-of-use assets
 
$
32,242

Lease liabilities
 
41,697

 
 
 
Weighted Average Remaining Lease Term (years)
 
 
Operating leases
 
45.90

Weighted Average Discount Rate
 
 
Operating leases
 
5.4
%


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Maturities of lease liabilities as of March 31, 2019 were as follows (in thousands):
Year Ending December 31,
 
Operating Leases
2019 (excluding three months ended March 31, 2019)
 
$
1,580

2020
 
2,287

2021
 
2,296

2022
 
2,361

2023
 
2,400

Thereafter
 
105,961

Total lease liabilities
 
$
116,885

Less imputed interest
 
(75,188
)
Present value of lease liabilities
 
$
41,697


Lessor Disclosures

Rental revenue for the three months ended March 31, 2019 and 2018 comprised the following (in thousands):
 
 
Three Months Ended March 31, 2019
 
 
(Unaudited)
Base rent and tenant charges
 
$
29,925

Accrued straight-line rental adjustment
 
961

Lease incentive amortization
 
(184
)
Above/below market lease amortization
 
207

Total rental revenue
 
$
30,909


The Company's commercial tenant leases provide for minimum rental payments during each of the next five years and thereafter as follows (in thousands):
Year Ending December 31,
 
Operating Leases
2019 (excluding three months ended March 31, 2019)
 
$
82,018

2020
 
76,045

2021
 
69,142

2022
 
62,498

2023
 
54,208

Thereafter
 
255,791

Total
 
$
599,702


5. Real Estate Investment
 
Property Acquisitions
 
On February 6, 2019, the Company acquired an additional outparcel phase of Wendover Village in Greensboro, North Carolina for a contract price of $2.7 million plus capitalized acquisition costs of $0.1 million. This phase is leased by a single tenant.

On March 14, 2019, the Company acquired the office and retail portions of the One City Center project in exchange for a redemption of its 37% equity ownership in the joint venture with Austin Lawrence Partners, which totaled $23.0 million as of the acquisition date, and a cash payment of $22.9 million. The Company also incurred capitalized acquisition costs of $0.1 million. The Company obtained a new loan in the amount of $25.6 million in conjunction with this acquisition, which may be increased to $27.6 million subject to certain conditions.


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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, 2019 (in thousands):
 
 
Wendover Village additional outparcel
 
One City Center
Land
 
$
1,633

 
$
2,678

Site improvements
 
50

 
163

Building and improvements
 
888

 
28,039

In-place leases
 
101

 
15,140

Above-market leases
 
111

 

Net assets acquired
 
$
2,783

 
$
46,020


Subsequent to March 31, 2019

On April 1, 2019, the Company sold Waynesboro Commons for a sale price of $1.1 million. This property was classified as held for sale as of March 31, 2019.

On April 25, 2019, the Company exercised its option to purchase 79% of the partnership that owns 1405 Point in exchange for extinguishing its note receivable on the project and making a cash payment of $0.3 million. The project is subject to a loan payable of $64.9 million. The Company has also guaranteed payment on a portion of the loan payable. See Note 15 for additional discussion.

On April 29, 2019, the Company entered into contribution agreements with Venture Realty Group to acquire Red Mill Commons and Marketplace at Hilltop for consideration comprised of 4.1 million Class A Units (as defined below), the assumption of $36.0 million of mortgage debt, and $5.0 million in cash. The consideration to be paid was determined based on an estimated transaction price of $105.0 million. In connection with the acquisition, the Company and the Operating Partnership expect to enter into a tax protection agreement with the contributors pursuant to which such parties will agree, subject to certain exceptions, to indemnify the contributors for up to 10 years against certain tax liabilities incurred by them, if such liabilities result from a transaction involving a direct or indirect taxable disposition of either or both of these properties or if the Operating Partnership fails to maintain and allocate to the sellers for taxation purposes minimum levels of Operating Partnership liabilities.

6. Equity Method Investment

One City Center

On February 25, 2016, the Company acquired a 37% interest in One City Center, a joint venture with Austin Lawrence Partners, for purposes of developing a 22-story mixed use tower in Durham, North Carolina. During the three months ended March 31, 2019, the Company invested an additional $0.5 million in One City Center.
 
For the period from January 1, 2019 to March 13, 2019, One City Center had operating income of $0.3 million allocated to the Company. For the three months ended March 31, 2018, One City Center had no operating activity, and therefore the Company received no allocated income. 
 
On March 14, 2019, the Company acquired the office and retail portions of the One City Center project in exchange for its 37% equity ownership in the joint venture and a cash payment of $22.9 million. See Note 5 for additional discussion.


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Table of Contents

7. Notes Receivable

The Company had the following notes receivable outstanding as of March 31, 2019 and December 31, 2018 ($ in thousands):
 
 
Outstanding loan amount
 
Maximum loan commitment
 
Interest rate
 
Interest compounding
Development Project
 
March 31,
2019
 
December 31, 2018
 
1405 Point
 
$
30,939

 
$
30,238

 
$
31,032

 
8.0
%
 
Monthly
The Residences at Annapolis Junction
 
36,667

 
36,361

 
48,105

 
10.0
%
 
Monthly
North Decatur Square
 
19,159

 
18,521

 
29,673

 
15.0
%
 
Annually
Delray Plaza
 
10,417

 
7,032

 
15,000

 
15.0
%
 
Annually
Nexton Square
 
13,644

 
14,855

 
17,000

 
15.0
%
 
Monthly
Interlock Commercial
 
23,790

 
18,269

 
95,000

 
15.0
%
 
None
Solis Apartments at Interlock
 
15,624

 
13,821

 
41,100

 
13.0
%
 
Annually
Total mezzanine
 
150,240

 
139,097

 
$
276,910

 
 
 
 
Other notes receivable
 
1,294

 
1,275

 
 
 
 
 
 
Notes receivable guarantee premium
 
4,009

 
2,800

 
 
 
 
 
 
Notes receivable discount, net (a)
 
(3,371
)
 
(4,489
)
 
 
 
 
 
 
Total notes receivable
 
$
152,172

 
$
138,683

 
 
 
 
 
 
_______________________________________
(a) Represents the remaining unamortized portion of the $5.0 million option purchase fee for The Residences at Annapolis Junction paid by the borrower in November 2018.

Interest on the mezzanine loans is accrued and funded utilizing the interest reserves for each loan, which are components of the respective maximum loan commitments, and such accrued interest is added to the loan receivable balances. The Company recognized interest income for the three months ended March 31, 2019 and 2018 as follows (in thousands):
 
Three Months Ended March 31,
 
Development Project
2019
 
2018
 
1405 Point
$
610

 
$
453

 
The Residences at Annapolis Junction
2,024

 
1,084

(a)
North Decatur Square
638

 
461

 
Delray Plaza
310

 
223

 
Nexton Square
510

 

 
Interlock Commercial
743

 

 
Solis Apartments at Interlock
463

 

 
Total mezzanine
5,298

 
2,221

 
Other interest income
21

 
11

 
Total interest income
$
5,319

 
$
2,232

 
________________________________________
(a) Includes amortization of the $5.0 million option purchase fee paid by the borrower in November 2018.

As of March 31, 2019 and December 31, 2018, there was no allowance for loan losses. During the three months ended March 31, 2019 and 2018, there was no provision for loan losses recorded for any of the Company's notes receivable. The Company's management performs a quarterly analysis of the loan portfolio to determine if an impairment has occurred based on the progress of development activities, including leasing activities, projected development costs, and current and projected loan balances.

Delray Plaza

On January 8, 2019, the Delray Plaza loan was modified to increase the maximum amount of the loan to $15.0 million and increase the payment guarantee amount to $5.2 million.

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Nexton Square

On February 8, 2019, the developer of Nexton Square closed on a senior construction loan with a maximum borrowing capacity of $25.2 million. The developer used proceeds from its original draw in part to repay $2.1 million of the mezzanine loan. Upon the closing of this senior construction loan, the Company entered into a payment guarantee for $12.6 million of the senior loan.

Subsequent to March 31, 2019

On April 25, 2019, the Company exercised its option to purchase 79% of the partnership that owns 1405 Point in exchange for extinguishing its note receivable on the project and a cash payment of $0.3 million. The project is subject to a loan payable of $64.9 million. The Company has also guaranteed payment on a portion of the loan payable. See Note 15 for additional information.

8. 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, 2019 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 three months ended March 31, 2019 and 2018 (in thousands):
 
 
Three Months Ended 
 March 31, 2019
 
Three Months Ended 
 March 31, 2018
 
 
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
 
$
1,358

 
$
3,037

 
$
245

 
$
3,591

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

 
(3,037
)
 

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

 
3,859

 

 
2,313

Transferred to receivables
 
(1,358
)
 

 
(245
)
 

Construction contract costs and estimated earnings not billed during the period
 
17

 

 
315

 

Changes due to cumulative catch-up adjustment arising from changes in the estimate of the stage of completion
 
300

 
(237
)
 

 
(78
)
Ending balance
 
$
317

 
$
3,622

 
$
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 $1.5 million and $1.4 million were deferred as of March 31, 2019 and December 31, 2018, respectively. Amortization of pre-contract costs for the three months ended March 31, 2019 and 2018 totaled less than $0.1 million.
 
Construction receivables and payables include retentions, amounts that are generally withheld until the completion of the contract or the satisfaction of certain restrictive conditions such as fulfillment guarantees. As of March 31, 2019 and December 31, 2018, construction receivables included retentions of $3.4 million and $8.5 million, respectively. The Company expects to collect substantially all construction receivables as of March 31, 2019 during the next twelve months.

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Table of Contents

As of March 31, 2019 and December 31, 2018, construction payables included retentions of $18.0 million and $21.6 million, respectively. The Company expects to pay substantially all construction payables as of March 31, 2019 during the next twelve months.

The Company’s net position on uncompleted construction contracts comprised the following as of March 31, 2019 and December 31, 2018 (in thousands):
 
March 31, 2019
 
December 31, 2018
Costs incurred on uncompleted construction contracts
$
610,292

 
$
594,006

Estimated earnings
21,100

 
20,375

Billings
(634,697
)
 
(616,060
)
Net position
$
(3,305
)
 
$
(1,679
)
 
 
 
 
Construction contract costs and estimated earnings in excess of billings
$
317

 
$
1,358

Billings in excess of construction contract costs and estimated earnings
(3,622
)
 
(3,037
)
Net position
$
(3,305
)
 
$
(1,679
)

The Company’s balances and changes in construction contract price allocated to unsatisfied performance obligations (backlog) as of March 31, 2019 and 2018 were as follows (in thousands):
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Beginning backlog
 
$
165,863

 
$
49,167

New contracts/change orders
 
12,019

 
4,569

Work performed
 
(17,011
)
 
(23,003
)
Ending backlog
 
$
160,871

 
$
30,733


The Company expects to complete a majority of the uncompleted contracts as of March 31, 2019 during the next 12 to 18 months.
9. Indebtedness
 
Credit Facility
 
The Company has a senior credit facility that was modified on January 31, 2019 using the accordion feature to increase the maximum total commitments to $355.0 million, 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 $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.
 
The revolving credit facility bears interest at LIBOR (the London Inter-Bank Offered Rate) plus a margin ranging from 1.40% to 2.00% and the term loan facility bears interest at LIBOR plus a margin ranging from 1.35% to 1.95%, in each case depending on the Company's total leverage. The Company is also obligated to pay an unused commitment fee of 15 or 25 basis points on the unused portions of the commitments under the revolving credit facility, depending on the amount of borrowings under the credit facility.

As of March 31, 2019 and December 31, 2018, the outstanding balance on the revolving credit facility was $91.0 million and $126.0 million, respectively, and the outstanding balance on the term loan facility was $205.0 million and $180.0 million, respectively. As of March 31, 2019, the effective interest rates on the revolving credit facility and the term loan facility were 4.04% and 3.99%, respectively. The Company may, at any time, voluntarily prepay any loan under the credit facility in whole or in part without premium or penalty.

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Table of Contents


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, 2019

On May 6, 2019, borrowings under the revolving credit facility totaled $116.3 million.

Other 2019 Financing Activity
 
On January 31, 2019, the Company paid off North Point Center Note 1.

On March 11, 2019, the Company received $7.4 million of additional funding on the loan secured by Lightfoot Marketplace.

On March 14, 2019, the Company obtained a loan secured by One City Center in the amount of $25.6 million in conjunction with the acquisition of this property. This loan may be increased to $27.6 million subject to certain conditions.
The loan bears interest at a rate of LIBOR plus a spread of 1.85% and will mature on April 1, 2024.

During the three months ended March 31, 2019, the Company borrowed $31.1 million under its existing construction loans to fund new development and construction.

Subsequent to March 31, 2019

On April 25, 2019, the Company exercised its option to purchase 79% of the partnership that owns 1405 Point in exchange for extinguishing its note receivable on the project and a cash payment of $0.3 million. The project is subject to a loan payable of $64.9 million. The Company has also guaranteed payment on a portion of the loan payable. See Note 15 for additional discussion.

In April 2019, the Company borrowed $5.4 million on its construction loans to fund development activities.

10. 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 other liabilities in the condensed consolidated balance sheets. Gains and losses resulting from changes in the fair value of derivatives that are neither designated nor qualify as hedging instruments are recognized within the change in fair value of interest rate derivatives in the condensed consolidated statements of comprehensive income. For derivatives that qualify as cash flow hedges, the gain or loss is reported as a component of other comprehensive income (loss) and reclassified into earnings in the periods during which the hedged forecasted transaction affects earnings.

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Table of Contents


During the three months ended March 31, 2019, the Company had the following LIBOR interest rate caps ($ in thousands):
Origination Date
 
Expiration Date
 
Notional Amount
 
 Strike Rate
 
Premium Paid
2/7/2017
 
3/1/2019
 
$
50,000

 
1.50
%
 
$
187

6/23/2017
 
7/1/2019
 
50,000

 
1.50
%
 
154

9/18/2017
 
10/1/2019
 
50,000

 
1.50
%
 
199

11/28/2017
 
12/1/2019
 
50,000

 
1.50
%
 
359

3/7/2018
 
4/1/2020
 
50,000

 
2.25
%
 
310

7/16/2018
 
8/1/2020
 
50,000

 
2.50
%
 
319

12/11/2018
 
1/1/2021
 
50,000

 
2.75
%
 
210


On April 23, 2018, the Company 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 2.78%, an effective date of May 1, 2018, and a maturity date of May 1, 2023. This interest rate swap has not been designated as a hedge for accounting purposes.
 
On July 27, 2018, the Company entered into a LIBOR interest rate swap agreement that effectively fixes the interest rate of the new Johns Hopkins Village note payable at 4.19% with a maturity date of August 7, 2025. The Company designated the interest rate swap as a hedge for accounting purposes.

On October 12, 2018, the Company entered into a LIBOR interest rate swap agreement that effectively fixes the variable component on the interest rate of the initial $10.5 million tranche of new Lightfoot Marketplace note payable at 4.77% per annum until stabilization and 4.62% per annum thereafter. The swap matures on October 12, 2023. The Company designated the interest rate swap as a hedge for accounting purposes.

During the three months ended March 31, 2019, unrealized losses of $1.0 million were recorded to other comprehensive loss, and $0.1 million of realized losses were reclassified out of accumulated other comprehensive loss to interest expense due to payments made to the swap counterparty during the three months ended March 31, 2019. During the next 12 months, the Company anticipates reclassifying approximately $0.4 million of net hedging losses from accumulated other comprehensive loss into earnings to offset the variability of the hedged item during this period.

The Company’s derivatives were comprised of the following as of March 31, 2019 and December 31, 2018 (in thousands): 
 
 
March 31, 2019
 
December 31, 2018
 
 
(Unaudited)
 
 
 
 
 
 
 
 
Notional
Amount
 
Fair Value
 
Notional
Amount
 
Fair Value
 
 
 
 
Asset
 
Liability
 
 
 
Asset
 
Liability
Derivatives not designated as accounting hedges
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
$
100,000

 
$
175

 
$
(1,271
)
 
$
100,000

 
$
303

 
$
(749
)
Interest rate caps
 
300,000

 
977

 

 
350,000

 
1,790

 

Total derivatives not designated as accounting hedges
 
400,000

 
1,152

 
(1,271
)
 
450,000

 
2,093

 
(749
)
Derivatives designated as accounting hedges
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps
 
62,977

 

 
(2,656
)
 
63,208

 

 
(1,725
)
Total derivatives
 
$
462,977

 
$
1,152

 
$
(3,927
)
 
$
513,208

 
$
2,093

 
$
(2,474
)


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Table of Contents

The changes in the fair value of the Company’s derivatives during the three months ended March 31, 2019 and 2018 were comprised of the following (in thousands): 
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Interest rate swaps
 
$
(1,652
)
 
$
348

Interest rate caps
 
(814
)
 
621

Total change in fair value of interest rate derivatives
 
$
(2,466
)
 
$
969

Comprehensive income statement presentation:
 
 
 
 
Change in fair value of interest rate derivatives
 
$
(1,463
)
 
$
969

Unrealized cash flow hedge gains losses
 
(1,003
)
 

Total change in fair value of interest rate derivatives
 
$
(2,466
)
 
$
969


Subsequent to March 31, 2019

On April 4, 2019, the Company 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 2.26%, an effective date of April 1, 2019, and a maturity date of October 22, 2022.

On April 4, 2019, the Company entered into a floating-to-fixed interest rate swap attributable to one-month LIBOR indexed interest payments with an initial notional amount of $34.6 million. The interest rate swap has a fixed rate of 2.25%, an effective date of April 1, 2019, and a maturity date of August 10, 2023.

11. Equity
 
Stockholders’ Equity

As of March 31, 2019 and December 31, 2018, the Company’s authorized capital was 500 million shares of common stock and 100 million shares of preferred stock. The Company had 52,326,803 and 50,013,731 shares of common stock issued and outstanding as of March 31, 2019 and December 31, 2018, respectively. No shares of preferred stock were issued and outstanding as of March 31, 2019 or December 31, 2018.
 
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, 2019, the Company sold an aggregate of 2,071,000 shares of common stock at a weighted average price of $14.78 per share under the ATM Program, receiving net proceeds, after offering costs and commissions, of $30.2 million.
 
Noncontrolling Interests
 
As of March 31, 2019 and December 31, 2018, the Company held a 75.5% and 74.5% 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 75.5% of the net income of the Operating Partnership. As the primary beneficiary, the Company consolidates the financial position and results of operations of the Operating Partnership. Noncontrolling interests in the Company represent units of limited partnership interest in the Operating Partnership not held by the Company. As of March 31, 2019, there were 16,991,933 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 these consolidated real estate entities was zero as of March 31, 2019 and December 31, 2018.

On January 2, 2019, due to the holders of Class A Units tendering an aggregate of 118,471 Class A Units for redemption by the Operating Partnership, the Company elected to satisfy the redemption requests through the issuance of an equal number of shares of common stock.


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Table of Contents

Common Stock Dividends and Class A Unit Distributions
 
On January 3, 2019, the Company paid cash dividends of $10.0 million to common stockholders and the Operating Partnership paid cash distributions of $3.4 million to holders of Class A Units.

On February 21, 2019, the Board of Directors declared a cash dividend and distribution of $0.21 per share and Class A Unit payable on April 4, 2019 to stockholders and unitholders of record on March 27, 2019.

Subsequent to March 31, 2019

On April 4, 2019, the Company paid cash dividends of $11.0 million to common stockholders and the Operating Partnership paid cash distributions of $3.6 million to holders of Class A Units.

In April 2019, the Company sold an aggregate of 91,924 shares of common stock at a weighted average price of $15.72 per share under the ATM Program, receiving net proceeds, after offering costs and commissions, of $1.4 million.

On May 7, 2019, the Board of Directors declared a cash dividend and distribution of $0.21 per share and unit payable on July 3, 2019 to stockholders and unitholders of record on June 26, 2019.

12. 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 March 31, 2019, there were 911,625 shares available for issuance under the Equity Plan.

During the three months ended March 31, 2019, the Company granted an aggregate of 135,849 shares of restricted stock to employees and non-employee directors with a weighted average grant date fair value of $15.20 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. Unvested restricted stock awards are entitled to receive dividends from their grant date.
 
During the three months ended March 31, 2019, 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, 2019, 10,755 shares were issued with a grant date fair value of $15.42 per share due to the partial vesting of performance units awarded to certain employees in 2016.

During the three months ended March 31, 2019 and 2018, the Company recognized $1.1 million and $0.9 million, respectively, of stock-based compensation cost, of which $0.4 million and $0.3 million, respectively, was capitalized as part of the Company's development projects. As of March 31, 2019, there were 147,961 nonvested restricted shares outstanding; the total unrecognized compensation expense related to nonvested restricted shares was $1.6 million, which the Company expects to recognize over the next 18 months.
 
13. 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

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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 March 31, 2019 and December 31, 2018 were as follows (in thousands): 
 
 
March 31, 2019
 
December 31, 2018
 
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
 
(Unaudited)
 
 
 
 
Indebtedness
 
$
737,621

 
$
737,340

 
$
694,239

 
$
688,437

Notes receivable
 
152,172

 
151,534

 
138,683

 
138,683

Interest rate swap liabilities
 
3,927

 
3,927

 
2,474

 
2,474

Interest rate swap and cap assets
 
1,152

 
1,152

 
2,093

 
2,093

 
14. Related Party Transactions
 
The Company provides general contracting and real estate 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 March 31, 2018 was $1.2 million, and gross profit from these contracts was $0.2 million. There was no such revenue or gross profit for the three months ended March 31, 2019.

Real estate services fees from affiliated entities of the Company were not significant for the three months ended March 31, 2019 or 2018. 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, 2019 and 2018
 
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.

15. 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

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that the ultimate outcome of these matters, either individually or in the aggregate, could have a material adverse effect on the Company’s financial position or results of operations; however, litigation is subject to inherent uncertainties.
 
Under the Company’s leases, tenants are typically obligated to indemnify the Company from and against all liabilities, costs, and expenses imposed upon or asserted against it as owner of the properties due to certain matters relating to the operation of the properties by the tenant.

Guarantees

In connection with the Company's mezzanine lending activities, the Company has made guarantees to pay portions of certain senior loans of third parties associated with the development projects. The following table summarizes the guarantees made by the Company as of March 31, 2019 (in thousands):
Development project
 
Payment guarantee amount
 
1405 Point
 
$
25,000

(a)
The Residences at Annapolis Junction
 
8,300

 
Delray Plaza
 
5,180

 
Nexton Square
 
12,600

 
Interlock Commercial
 

(b)
Total
 
$
51,080

 
________________________________________
(a) On April 25, 2019, the Company exercised its option to purchase 79% of the partnership that owns 1405 Point.
(b) As of March 31, 2019, this $30.7 million payment guarantee was not yet effective because the senior construction loan had not yet been executed. On April 19, 2019, the senior construction loan was executed, and the payment guarantee became effective. The Company now also guarantees completion of the development project to the senior lender. The Company has also guaranteed completion of the development project to Georgia Tech, the ground lessor.

There is no payment guarantee for the senior construction loan for the Solis Apartments at Interlock project. The Company has guaranteed completion of the development project to the senior lender contingent upon senior loan funding.

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 $29.5 million and $34.8 million as of March 31, 2019 and December 31, 2018, respectively.
 
The Company has entered into standby letters of credit using the available capacity under the credit facility. The letters of credit relate to the guarantee of future performance on certain of the Company’s construction contracts. Letters of credit generally are available for draw down in the event the Company does not perform. As of March 31, 2019 and December 31, 2018, the Operating Partnership had total outstanding letters of credit of $2.4 million and $2.1 million, respectively. The letters of credit outstanding at March 31, 2019 included a $2.1 million letter of credit relating to the guarantee on the 1405 Point senior construction loan. This letter of credit was released on April 25, 2019.

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

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conflicts of interests with our officers and directors; 
lack or insufficient amounts of insurance; 
environmental uncertainties and risks related to adverse weather conditions and natural disasters; 
other factors affecting the real estate industry generally; 
our failure to maintain our qualification as a real estate investment trust ("REIT") for U.S. federal income tax purposes; 
limitations imposed on our business and our ability to satisfy complex rules in order for us to maintain our qualification as a REIT for U.S. federal income tax purposes;
changes in governmental regulations or interpretations thereof, such as real estate and zoning laws and increases in real property tax rates and taxation of REITs; and
potential negative impacts from the recent changes to the U.S. tax laws.
 
While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events, or other changes after the date of this 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 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, 2019, 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
%
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
%

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Property
 
Segment
 
Location
 
Ownership Interest
Harrisonburg Regal
 
Retail
 
Harrisonburg, Virginia
 
100
%
Indian Lakes Crossing
 
Retail
 
Virginia Beach, Virginia
 
100
%
Lexington Square
 
Retail
 
Lexington, South Carolina
 
100
%
Lightfoot Marketplace (1)
 
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
%
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 9% on our investment in Lightfoot Marketplace.
* Located in the Town Center of Virginia Beach


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As of March 31, 2019, the following properties that we consolidate for financial reporting purposes were either under development or not yet stabilized: 
Property
    
Segment
    
Location
 
Ownership Interest
Brooks Crossing Office (1)
 
Office
 
Newport News, Virginia
 
65
%
One City Center
 
Office
 
Durham, North Carolina
 
100
%
Wills Wharf
 
Office
 
Baltimore, Maryland
 
100
%
Brooks Crossing Retail (1)
 
Retail
 
Newport News, Virginia
 
65
%
Lightfoot Outparcel (2)
 
Retail
 
Williamsburg, Virginia
 
70
%
Market at Mill Creek (3)
 
Retail
 
Mount Pleasant, South Carolina
 
70
%
Premier Retail (Town Center Phase VI)
 
Retail
 
Virginia Beach, Virginia*
 
100
%
Greenside (Harding Place) (4)
 
Multifamily
 
Charlotte, North Carolina
 
80
%
Hoffler Place (King Street)
 
Multifamily
 
Charleston, South Carolina
 
92.5
%
Premier Apartments (Town Center Phase VI)
 
Multifamily
 
Virginia Beach, Virginia*
 
100
%
Summit Place (Meeting Street)
 
Multifamily
 
Charleston, South Carolina
 
90
%

(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 Outparcel.
(3) We are entitled to a preferred return of up to 10% on our investment in Market at Mill Creek.
(4) We are entitled to a preferred return of 9% on a portion of our investment in Harding Place.
*Located in the Town Center of Virginia Beach

Acquisitions

On February 6, 2019, we acquired an additional outparcel phase of Wendover Village in Greensboro, North Carolina for a contract price of $2.7 million. This phase is leased by a single tenant.

On March 14, 2019, we acquired the office and retail portions of the One City Center project in exchange for a redemption of its 37% equity ownership in the joint venture with Austin Lawrence Partners, which totaled $23.0 million as of the acquisition date, and a cash payment of $22.9 million. We obtained a new loan in the amount of $25.6 million in conjunction with this acquisition, which may be increased to $27.6 million subject to certain conditions.

On April 25, 2019, we purchased a 79% controlling interest in 1405 Point, a 17-story luxury high-rise apartment building located in the emerging Harbor Point area of the Baltimore waterfront in exchange for extinguishing our note receivable on the project and a cash payment of $0.3 million. The project is subject to a loan payable of $64.9 million.

On April 29, 2019, we entered into contribution agreements with Venture Realty Group to acquire Red Mill Commons and Marketplace at Hilltop with Venture Realty Group for aggregate consideration of $105.0 million, comprised of 4.1 million Class A units of limited partnership interest in the operating partnership ("Class A Units") valued at $15.55 per unit, the assumption of $36.0 million of mortgage debt, and $5.0 million in cash. In connection with the acquisition, we expect to enter into a tax protection agreement with the contributors pursuant to which the we will agree, subject to certain exceptions, to indemnify the contributors for up to 10 years against certain tax liabilities incurred by them, if such liabilities result from a transaction involving a direct or indirect taxable disposition of either or both of these properties or if the Operating Partnership fails to maintain and allocate to the sellers for taxation purposes minimum levels of Operating Partnership liabilities.

Dispositions

On April 1, 2019, we sold Waynesboro Commons for a sale price of $1.1 million.


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First Quarter 2019 and Recent Highlights
 
The following highlights our results of operations and significant transactions for the three months ended March 31, 2019 and other recent developments:
 
Net income of $6.5 million, or $0.10 per diluted share, compared to $7.0 million, or $0.11 per diluted share, for the three months ended March 31, 2018

Funds from operations ("FFO") of $16.6 million, or $0.25 per diluted share, compared to $16.3 million, or $0.26 per diluted share, for the three months ended March 31, 2018. See "Non-GAAP Financial Measures." 

Normalized funds from operations ("Normalized FFO") of $18.5 million, or $0.27 per diluted share, compared to $15.4 million, or $0.25 per diluted share, for the three months ended March 31, 2018. See "Non-GAAP Financial Measures."

Increased the first quarter 2019 cash dividend by 5% over the prior quarter's cash dividend to $0.21 per common share. This marks the fifth increase in five years and represents cumulative dividend growth of over 31%.

Completed the acquisition and refinancing of the commercial office and retail components of our One City Center development project in downtown Durham, North Carolina from the joint venture partnership.

Exercised our purchase option to acquire a 79% controlling interest in 1405 Point, the 17-story luxury high-rise apartment building located in the Harbor Point area of the Baltimore waterfront, in exchange for the Company's mezzanine loan investment and the assumption of existing debt.

Agreed to acquire Red Mill Commons and Marketplace at Hilltop in exchange for 4.1 million Class A Units valued at $15.55 per unit, the assumption of $36.0 million of debt, and $5.0 million in cash.

Raised $30.6 million of gross proceeds through our at-the-market equity offering program at an average price of $14.78 per share during the quarter ended March 31, 2019.

Segment Results of Operations
 
As of March 31, 2019, 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 the earlier of: (i) the quarter after the property reaches 80% occupancy or (ii) the thirteenth quarter after the property receives its certificate of occupancy. Additionally, any property that is fully or partially taken out of service for the purpose of redevelopment is no longer considered stabilized until the redevelopment activities are complete, the asset is placed back into service, and the occupancy criterion above is again met. A property may also be fully or partially taken out of service as a result of a partial disposition, depending on the significance of the portion of the property disposed. Finally, any property classified as held for sale is taken out of service for the purpose of computing same store operating results.


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Office Segment Data 

Office rental revenues, property expenses, and NOI for the three months ended March 31, 2019 and 2018 were as follows (in thousands): 
 
 
Three Months Ended March 31,
 
 
 
 
2019
 
2018
 
Change
 
 
(Unaudited)
Rental revenues
 
$
5,556

 
$
5,100

 
$
456

Property expenses
 
2,012

 
1,948

 
64

Segment NOI
 
$
3,544

 
$
3,152

 
$
392

 
Office segment NOI for the three months ended March 31, 2019 increased 12.4% compared to the three months ended March 31, 2018. The increase relates primarily to the acquisition of One City Center and higher occupancy across the rest of the office portfolio.

Office Same Store Results

Office same store results for the three months ended March 31, 2019 and 2018 exclude One City Center.

Office same store rental revenues, property expenses and NOI for the three months ended March 31, 2019 and 2018 were as follows: